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
We have not generated any revenues to date. We generated our first Mobile
Generation order during the quarter ended June 30, 2014 and received a partial
deposit in advance of completing the sale. On June 9, 2017, the Company received
a purchase order for 10 MG systems from Craftsmen Industries. As Craftsmen
builds custom vehicles designed to the individual specifications of their
customers whose businesses and technical requirements vary widely, it is
impossible to estimate when the order will be fulfilled. A 50% down payment will
be received from Craftsmen at the time of customer acceptance.
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We believe the benefits of our mobile power generation systems are quickly
realized once potential customers see it in operation. Public demonstrations of
the MG 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 a third demonstration in March 2019. Even more officials
and growers followed -- flying to St. Louis for a review in May 2019.
In November 2017, the Company received a purchase commitment for 234 MG systems
from a Mexican Producers' Union. That was followed by a purchase commitment for
24 to 50 MG units from a second Mexican Producers' Union in December 2017. On
April 9, 2018, the first Mexican Producers' Union executed a purchase order with
the Company for 10 Ford F350s with MG80 kVA systems installed. On May 7, 2019,
Turkish technology company Belirti Teknoloji, A.S. delivered a purchase order
for six hundred MG80, MG125 and MG200 Mobile Generation systems. As of the May
1, 2020, the Company does not have the funds available to fulfill the orders.
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. In the meantime, we primarily incur expenses to
commercialize our products, which include costs for research and development,
professional fees and general operations.
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, with Aon Risk Services Central, Inc. We see
this as the best path forward for non-dilutive funding.
The funding 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 partners. As of the filing date, it is
uncertain whether COVID 19 will have a significant impact on production and
distribution of Company products.
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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Amendment of Articles of Incorporation
We filed an amendment to our Articles of Incorporation with the Secretary of
State of the State of Nevada increasing our authorized shares of common stock,
from 140,000,000 shares to 350,000,000 shares, effective March 22, 2017. We
filed a second amendment to our Articles of Incorporation with the Secretary of
State of the State of Nevada increasing our authorized shares of common stock,
from 350,000,000 shares to 500,000,000 shares, effective October 28, 2019.
On February 13, 2020, stockholders holding shares that entitled them to exercise
at least a majority of the voting power, voted in favor of increasing the number
of authorized shares of common stock, from 500,000,000 shares to 1,000,000,000
shares. The vote marked the first step in the process to amend the articles
again.
Craftsmen Industries, Inc.
As a consequence of the first public demonstration of the MG 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 MG 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 100 current and prospective Craftsmen
customers were in the audience for the demonstrations.
On June 9, 2017, the Company received a purchase order for 10 MG systems from
Craftsmen, each in the amount of $29,500 with 50% paid as a down payment at the
time of customer acceptance.
Furthermore, Craftsmen has agreed to produce the MG systems for the Company's
initial orders from Jatropha and Veracruz (See below). Since October 2018 we
have been ordering components for the initial pilot production run which was
completed in the first quarter of 2019 and showcased on March 27, 2019. In
parallel, purchase orders will be placed for components to support increased
production in the months that follow.
Veteran Technology Group
On May 26, 2017, the Company entered into a five-year strategic alliance
agreement with Veteran Technology Group LLC ("Vet Tech"), a developer of
artificial intelligence ("AI") software for advanced troubleshooting of complex
systems. The agreement automatically renews for successive one-year terms unless
terminated by either party 30 days prior to its expiration. The agreement may be
terminated earlier by either party upon 60 days prior notice. The parties agreed
not to solicit the other parties' employees or contractors for six months after
the expiration or termination of the agreement.
The agreement provides that the Company market and provide its MG product and
services to customers referred by Vet Tech and Vet Tech will market and provide
GAIT software and other AI services for clients referred by the Company.
National Union of Jatropha Producers
In November 2017, the Company received a purchase commitment for 234 MG systems
from the National Union of Producers of Jatropha in Mexico (Jatropha).
Jatropha has established a center for processing oil from Jatropha seeds for
biofuel production. Through their union of producers, Jatropha plans to
introduce the MG and promote the product to their supplier network.
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The purchase commitment stipulates that CoolTech will furnish Jatropha with an
MG80 retro-fitted onto a Ford F-350 truck within 60 business days. To ensure the
system is optimized to meet Jatropha's needs, CoolTech set the terms of the
agreement to allow both teams to gather data and provide performance feedback
another 30 to 60 days. Upon completion of this period, Jatropha will release the
balance of the order for 233 units. Payment terms require 50% down and 50% at
time of shipment, FOB (Freight on Board) from Cool Technologies' dock.
On February 6, 2019, Jatropha signed an agreement to amend their previous
purchase agreement. It eliminates the 60 business day deadline for the truck to
be shipped to Mexico. Under the new agreement, representatives from Jatropha
will come to Colorado for an inspection and live performance demonstration. If
approved, the generator-equipped trucks will go into production as specified in
the original purchase agreement.
A representative of the National Union of Jatropha Producers approved the
generator-equipped truck. It will go into production as the Company secures
final funding.
The value of the purchase commitment is expected to be between $17,000,000 and
$22,000,000. On April 9, 2018, Jatropha executed a purchase order with the
Company for 10 Ford F-350s with MG80 kVA systems installed. The value of the
initial order is in excess of one million dollars.
National Union of Producers in Mexico for the state of Veracruz
In December 2017, the Company received a purchase commitment for 24 to 50 MG
units from the National Union of Producers in Mexico for the state of Veracruz.
Depending on the respective numbers of MG55 and MG80 kVA systems ordered, the
Company expects the value of the commitment to range between $1,200,000 and
$3,750,000.
The union represents farmers who grow labor and energy intensive crops such as
sugar cane, tobacco, bananas, coffee, rice and vanilla. It expects that the MG
systems will increase yields, exports and income for its members and their
communities.
According to the contract, the Company will deliver an MG 80 retro-fitted onto a
Ford F-350 truck within 60 business days. Then, to ensure the system fully
addresses the application requirements, CoolTech, as a best practice of Six
Sigma quality, will gather data and performance feedback. When CoolTech is
satisfied that optimal performance has been achieved, the union will release the
balance of the order and production begins.
On February 23, 2018, Veracruz signed an agreement to amend their previous
purchase agreement. It eliminates the 60 business day deadline for the truck to
be shipped to Mexico. Under the new agreement, representatives from Veracruz
will come to Colorado for an inspection and live performance demonstration. If
approved, the generator-equipped trucks will go into production as specified in
the original purchase agreement.
A representative of the National Union of Jatropha Producers approved the
generator-equipped truck. It will go into production as the Company secures
final funding.
Payment terms require 50% down and 50% at time of shipment, each payable with a
bank letter of credit. Product delivery will be considered FOB (Freight on
Board) from Cool Technologies' shipping dock.
The value of the purchase commitment is expected to commitment to range between
$1.2M and $3.9M USD.
Panasonic System Communications Company of North America.
In January 2018, the Company announced that its Mobile Generation systems will
incorporate Panasonic Toughpad tablets to run CoolTech's software.
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The association between the two companies dates back to April 2017 when Cool
Technologies demonstrated its Mobile Generation (MG) system at Craftsman
Industries in St. Louis. In attendance was the Executive Director of Product
Planning Strategy and Innovation at the Silicon Valley Center of Panasonic
Corporation of North America. He received a demonstration of the MG technology
as well as an overview of CoolTech's thermal dispersion technologies. That led
to several conversations and meetings regarding the ways in which the two
companies could pursue joint initiatives and opportunities.
The first initiative resulted in CoolTech's use of the Panasonic Toughpad tablet
to provide a rugged touchscreen interface for field technicians to control and
calibrate the Mobile Generation systems. The Toughpad will be deployed in the
trucks' cabs.
Aon Risk Services Central, Inc and Lee and Hayes, PLLC
In 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 MG80 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 of the National Union of Jatropha Producers 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 15th. It will be used for the installation
and refinement of the MG 80 kVA system. A second F-450 will be used for the MG
125 kVA system.
Order of Parts and Components
During the week of October 7, 2018, the Company placed orders for System
Controllers, 80 and 125 kVA Generators, Voltage Regulators, Panasonic Toughpads,
Power Take-Offs (PTO) and Split Shaft PTOs.
CALSTART, Inc.
CoolTech joined CALSTART, Inc. ("CALSTART") a non-profit, clean transportation
technology coalition in November 2018. The coalition works with member companies
and agencies to foster a high-tech clean-transportation industry by accelerating
the adoption of emerging technologies and helping build markets.
Since then, the Company has been in contact with 4 utilities, 3 telecoms, 2
truck upfitters and 3 hybrid truck manufacturers. Proposals have been made for 3
MG systems of differing power to be installed on California Air Resources Board
(CARB) certified vehicles, an MG No-idle system and an MG truck with a
hydrogen-infused fuel system.
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On Thursday, January 17, 2019, a representative of the Company attended a
meeting of the CALSTART Leadership Circle at Porsche Cars North American
Headquarters, in Atlanta. Among the topics covered were the infrastructure
pathway for electric vehicles and electric vehicle market growth. At the event,
the Company met with representatives from Southern Company, Duke Energy and
Altec, Inc.
Creation and Delivery of Business Proposals
The Company has been active in putting forth new business proposals in line with
our strategy to target specific industry markets. We regularly review relevant
press releases, major media articles and trade publications from various
industries to keep up with trends and uncover opportunities. We also attend
seminars and conferences to meet and network with prospective clients. Since the
beginning of the year, we have delivered proposals to major utilities (Southern
Company, Duke Energy) and car manufacturers (Porsche) covering electric vehicle
charging for dealers and customers.
TARDEC
On February 26, 2019, a representative of the Company attended a Collaboration
Day with the U.S. Army's Tank Automotive Research Development and Engineering
Center (TARDEC) at Marine Corps Air Station, Miramar. TARDEC is the U.S. Army's
Research, Development and Engineering Center for all Ground Vehicles and Ground
Vehicle Systems technology and integration, as well as Fuels and Lubricants,
Water Supply and Wastewater Treatment, Tactical Military Bridging, Construction
Equipment, Material Handling Equipment, and Army Watercraft. The Company
participated in one-on-one sessions with members from the Ground Vehicle Power
and Mobility team which pursues advanced technologies to increase fleet energy
flexibility and efficiency with the goal of providing more power output without
adding weight that degrades system performance.
On February 27, 2019, the Company participated in TARDEC's Vehicle
Electrification Forum which serves to advance electrification of Army combat and
tactical systems by enabling industry to innovate products that meet Army needs
and requirements. The Forum is a mechanism for industry to contribute to the
formation of TARDEC's Vehicle Electrification Strategy. A representative from
the Company participated in a session covering electric recharging and issues
related to future powertrain configurations including improved system
efficiency; requirements for hybrid, electric, and fuel cell configurations;
energy storage; vehicle-to-grid and vehicle-to-vehicle capabilities; and
engine/transmission improvements.
Unveiling of Initial Production Run Vehicle
On March 27, 2019, the Company unveiled the initial production run of its Mobile
Generation (MG) 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 MG 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.
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 MG80 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 20th, 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.
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Introduction of new options
During the fourth quarter of 2019, the Company has introduced new options, which
include an MG System that generates up to 200 kVA of electric power, water
purification and desalination systems.
The truck mounted water purification and desalination units can produce from
2,800 to 10,000 gallons of fresh water every day. Assuming the average person
needs 2 liters per day, 10,000 gallons is enough for 18,927 people.
A 30 kVA MG system could power any size unit as well as the pumps to deliver the
water or five units at once which would conceivably be enough to keep the
population of Santa Barbara hydrated. It could even tow a 1,250 gallon water
tanker, if needed.
The purification and desalinization units feature fully automated controls and
monitoring. When combined with the optional telematics offered in the vehicles,
each unit could be remotely controlled and monitored from distant locations.
Belirti Teknoloji
On May 7, 2019, the Company entered into a joint venture agreement ("JV") with
Turkish technology company Belirti Teknoloji, A.S. ("BelirtiTech"). To launch
the business, BelirtiTech awarded Cool Technologies a purchase order for up to
$42 million USD for the purchase of several different models of its Mobile
Generation kits. The purchase order will supply the JV with its initial
inventory for resale into the Middle East and some African nations. The Company
is actively working with the customer's bank in addition to insurance companies
and other financial entities to facilitate the financing of the orders. As of
the date of this filing, the funds to fulfill the orders are not in place.
The initial purchase order is for six hundred MG80, MG125 and MG200 Mobile
Generation systems. The MG systems will be integrated into the end customer's
choice of vehicles.
The order also includes an additional MG80 installed in a Ford F-450 with the
2,500 gallon per day mobile water desalinization option included.
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 Generation systems ("MG"), 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 negotiation.
CoolTech's MG platform makes the companies' product offering 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 MG 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 3 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 MG 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 the 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 MG systems both backup and supplement
one another to provide consistent, uninterrupted primary power even during
severe weather or other emergency situations.
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.
New Sales Agent:
In early December 2019, the Company entered into an agreement with Gaia Energy
of Gdansk, Poland to act as an independent agent for the Company by 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."
Team members of Gaia Energy 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 diplomat introduced CoolTech products at a recent African technical summit
attended by representatives from 54 countries.
Request for Collaboration Sent to US Government Officials
On December 11, 2019, letters signed by 13 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.
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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.
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.
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, 2019 and 2018 that includes an
explanatory paragraph describing the uncertainty as to our ability to continue
as a going concern. As of December 31, 2019, 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 31,2019, we have $15,306 in cash and we owe
$314,2018 and $3,227,215 for convertible and promissory notes, respectively We
are pursuing various financing alternatives to address the payment of
outstanding debt and to support the sales, component acquisitionand 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.
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 December 31,
2019 2018 Change %
Revenues $ -- $ -- N/A N/A
Operating expenses
Payroll and related expenses 657,178 591,858 65,320 11.0 %
Consulting 331,107 433,978 (102,871 ) (23.7 )%
Professional fees 226,859 305,778 (78,919 ) (25.8 )%
Research and development 296,800 501,342 (204,542 ) (40.8 )%
General and administrative 242,994 426,665 (183,671 ) (43.0 )%
Total operating expenses 1,754,938 2,259,621 (504,683 ) (22.3 )%
Interest expense, net (2,027,030 ) (2,336,442 ) 309,412 13.2 %
Change in fair value of
derivative liability 330,728 83,963 246,765 293.9 %
Loss on extinguishment of debt 208,328 (120,016 ) 328,344 273.6 %
Gain on fixed asset disposal
-- 11,231 11,231 N/A
Net loss (3,242,912 ) (4,620,885 ) 1,377,973 29.8 %
Less: Non-controlling interest (1,600 ) (2,497 ) 897 (35.9 )%
Net loss to shareholders $ (3,241,312 ) $ (4,618,388 ) 1,377,076 29.8 %
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Revenues
During the years ended December 31, 2019 and 2018, and since inception, we have
not generated any revenues. We generated our first Mobile Generation order
during the quarter 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 along with other existing orders.
Operating Expenses
Operating expenses decreased during the year ended December 31, 2019 compared to
the year ended December 31, 2018, due to reductions in consulting costs,
professional fees, research and development as well as general and
administrative. During the year ended December 31, 2019, payroll and related
expenses increased by $65,320 due to bonuses awarded for new Company patents.
The decrease in professional fees was due primarily to the reduced requirements
for accounting and legal. The decrease in research and development was due to
the focus on commercialization of the Company's MG system. The decrease in
general and administrative costs was due to limited funds.
Other Income and Expense
Interest expenses during the years ended December 31, 2019 and 2018 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 May 2019, June 2019, July 2019, August 2019,
October 2019, November 2019 and December 2019, and also includes the change in
fair value of common share equivalents that were previously reclassified to
derivative liability as a result of insufficient authorized but unissued shares.
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. At
December 31, 2019, we had cash and cash equivalents of $15,306.
Working capital is the amount by which current assets exceed current
liabilities. We had negative working capital of $6,821,643 and $4,643,956 at
December 31, 2019 and 2018, respectively. The decrease in working capital was
due to large increases in accounts payable, accrued liabilities - related party,
current debt and derivative liability.To that end, we owe approximately $449,968
for convertible notes that mature in the next six months and we owe another
$2,400,000 in notes payable. 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.
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August 2016 Convertible Note - In August 2016, the Company entered into a senior
convertible note agreement with KHIC. We received $400,0000, bearing interest at
3%, with principal and interest payable on August 24, 2018.
The note may be converted at any time into shares of the common stock at the
conversion price pursuant to the terms of the note. We determined that the
conversion feature meets the requirements for derivative treatment and have
recorded a derivative liability and a corresponding debt discount on the
condensed consolidated balance sheet.
On April 8, 2018, KHIC was issued 2,025,000 shares of common stock after
converting $50,625 in debt at $0.025 per share.
An amendment was signed on August 24, 2018 which extended the maturity date of
the note to December 15, 2018. In exchange, the outstanding balance of the note
was increased to $455,544.
An amendment was signed on December 10, 2018 which extended the maturity date of
the note to December 28, 2018. In exchange, the outstanding balance of the note
was increased to $460,095 and a partial payment of $250,000 was made on the
balance. On December 28, 2018, the outstanding balance of $210,095 was wired to
KHIC and the note was retired.
September 2016 Promissory Notes - On September 30, 2016, we sold a promissory
note in the principal amount of $180,000. The note bears the terms: 5% interest
per annum with a maturity date of June 30, 2017. In the event of a default, the
interest rate will increase to 18%. On November 10, 2016, we issued 800,000
shares of our common stock as partial consideration for the note to Gemini
Master Fund, Ltd.
On June 30, 2017, the promissory note holder signed an extension agreement that
extended the maturity date of the promissory notes to September 30, 2017 and
then again until November 30, 2017. The terms and conditions remain the same.
On November 13, 2017, Lucas Hoppel purchased the note for $226,325 which
included accrued and unpaid interest as well as additional charges.
On November 20, 2017, Lucas Hoppel signed an amendment to the note which
extended the maturity date to December 31, 2017. In addition, the note was
changed from promissory to convertible with a conversion price of $0.05 per
share. On December 29, 2017, the note was amended, and the maturity date was
extended to February 16, 2017. In exchange the conversion price was reduced to
$0.04.
On February 19, 2018, the Company signed an amendment to a convertible note for
$226,325 originally issued on September 3, 2017. The amendment extended the
maturity dated extended to March 31, 2018. In exchange, the conversion price was
reduced from $0.04 to $0.025.
From December 7, 2017 to February 20, 2018, a total of $185,000 were converted
into 4,750,000 shares of common stock. On March 5, 2018, the buyer converted
$41,325 into 1,653,000 shares of common stock and the $226,325 note was retired.
August Convertible Note - On August 25, 2017, the Company entered into a
convertible note agreement. We issued 300,000 inducement shares of restricted
common stock and received $150,000, with an original issue discount of $15,000
in lieu of interest, for a total amount of $165,000 due on March 25, 2018. At
the holder's option, a portion or all of the unpaid principal and interest may
be converted into shares of our common stock at $0.10 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.
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On February 19, 2018, the Company signed an amendment to a convertible note for
$165,000. The amendment extended the maturity dated extended to April 30, 2018.
In exchange, the conversion price was reduced from $0.05 to $0.025.
From March 23 to April 18, 2018, a total of $87,500 was converted into 3,500,000
shares of common stock.
On April 27, 2018, a second amendment was signed extending the maturity date
until May 30, 2018. On May 23, 2018, we issued 3,298,000 shares on conversion of
$82,450 and the note was retired.
January Convertible Note - On January 26, 2018, the Company entered into a
convertible note agreement. We issued 800,000 inducement shares of restricted
common stock and received $200,000, with an original issue discount of $20,000
in lieu of interest, for a total amount of $220,000 due on August 26, 2018. At
the holder's option, a portion or all of the unpaid principal and interest may
be converted into shares of our common stock at $0.05 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 May 22, 2018, Lucas Hoppel signed an amendment to the note which extended the
maturity date to October 1, 2018. In exchange, the note was changed from
promissory to convertible with a conversion price of $0.025 per share.
On September 25, 2018, the Company issued 2,000,000 shares on conversion of
$50,000 in debt. On October 1, 2018, Lucas Hoppel signed an amendment to the
note which extended the maturity date to January 1, 2019. From October 25 to
November 13, 2018, the Company a total of $112,500 in debt was converted into
4,500,000 shares of common stock.
On October 26, 2018, Lucas Hoppel signed an amendment to the note which extended
the maturity date to January 1, 2019. All other terms and conditions remained
the same. On January 1, 2019, Lucas Hoppel signed an amendment to the note which
extended the maturity date to May 1, 2019. In exchange, the conversion price was
reduced from $0.025 to $0.0125. On February 2, 2019, the Company issued
5,128,000 shares upon final conversion of $64,100 of debt and the note was
retired.
February Convertible Note - On February 19, 2018, the Company entered into a
convertible note agreement. We issued 2,000,000 inducement shares of restricted
common stock and received $350,000, with an original issue discount of $35,000
in lieu of interest, for a total amount of $385,000 due on September 19, 2018.
At the holder's option, a portion or all of the unpaid principal and interest
may be converted into shares of our common stock at $0.05 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 May 22, 2018, Lucas Hoppel signed an amendment to the note which extended the
maturity date to November 1, 2018. In exchange, the note was changed from
promissory to convertible with a conversion price of $0.025 per share.
On September 14, 2018, the Company issued 2,000,000 shares on conversion of
$50,000 in debt. On October 26, 2018, Lucas Hoppel signed an amendment to the
note which extended the maturity date to January 1, 2019. On October 31, 2018,
the Company issued 2,000,000 shares on conversion of $50,000 in debt.
On January 1, 2019, Lucas Hoppel signed an amendment to the note which extended
the maturity date to May 1, 2019. In exchange, the conversion price was changed
from $0.025 to $0.0125 per share. On February 26, 2019, CoolTech issued
7,500,000 shares of common stock to Lucas Hoppel upon partial conversion of
$93,750 in debt. On April 25, 2019, Cool Technologies issued 7,500,000 shares of
common stock to Lucas Hoppel upon conversion of $93,750 in debt.
On May 1, 2019, Lucas Hoppel signed an amendment to the note which extended the
maturity date to August 1, 2019. All other terms and conditions remained the
same. On July 30, 2019, he signed an amendment to the note which extended the
maturity date to November 1, 2019.
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From July 31 to September 11, 2019, the Company issued 6,500,000 shares of
common stock to Lucas Hoppel upon partial conversion of $81,250 in debt.
On October 31, 2019, he signed an amendment which extended the maturity date to
December 31, 2019. All other terms and conditions remained the same. On December
2, 2019, Cool Technologies issued 2,224,000 shares of common stock to Lucas
Hoppel upon final conversion of $27,800 of debt and the note was retired.
April Convertible Note -- On April 26, 2018, the Company entered into a
convertible note agreement. We received $128,000 with an original issue discount
of $12,800 in lieu of interest, for a total amount of $140,800 due on July 25,
2019. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of our common stock at a 29%
discount to the average of the three lowest Volume Weighted Average Prices
(VWAP) during the 10 trading days preceding the conversion date. In the event of
default, the interest rate will be 22% per annum and require the Company to
redeem all or any portion of the note at a premium of 150%. On October 18, 2018,
the Company wired $189,940 to the holder and the note was retired.
May Convertible Note - On May 22, 2018, the Company entered into a convertible
note agreement. We issued 400,000 inducement shares of restricted common stock
and received $110,000, with an original issue discount of $10,000 in lieu of
interest, for a total amount of $100,000 due on December 22, 2018. At the
holder's option, a portion or all of the unpaid principal and interest may be
converted into shares of our common stock at $0.05 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 December 5, 2018, the Company issued 2,000,000 shares on conversion of
$50,000 in debt. On December 6, 2018, the Company issued 2,532,000 shares on
conversion of $63,300 in debt and the note was retired.
May Convertible Note -- On May 31, 2018, the Company entered into a convertible
note agreement. We received $53,000 with an original issue discount of $5,300 in
lieu of interest, for a total amount of $58,300 due on May 31, 2019. After 180
days, at the holder's option, a portion or all of the unpaid principal and
interest may be converted into shares of our common stock at a 29% discount to
the average of the three lowest Volume Weighted Average Prices (VWAP) during the
10 trading days preceding the conversion date. In the event of default, the
interest rate will be 22% per annum, require the Company to (i) redeem all or
any portion of the note at a premium of 150%. On November 13, 2018, the company
wired $78,564 to the holder and the note was retired.
July Promissory Note - On July 5, 2018, the Company entered into a Promissory
Note Agreement with a private individual. We received $100,000 in financing and
promised to pay the principal amount on or before the one year anniversary.
Furthermore, the Company committed to immediately pay the principal amount upon
the receipt of funds from debt or surety bond financing, a bridge loan or
payments received from product invoices or purchase contracts. In exchange, we
issued cashless warrants to purchase 200,000 shares of common stock at an
exercise price of $0.065. The warrants expire after five years. On September 28,
2018, the note was paid in full and retired.
August Convertible Note -- On August 17, 2018, the Company entered into a
convertible note agreement. We received $63,000 with an original issue discount
of $6,300 in lieu of interest, for a total amount of $58,300 due on August 17,
2019. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of our common stock at a 29%
discount to the average of the three lowest Volume Weighted Average Prices
(VWAP) during the 10 trading days preceding the conversion date. In the event of
default, the interest rate will be 22% per annum and require the Company to
redeem all or any portion of the note at a premium of 150%.
On February 14, 2019, the outstanding balance of $93,565 was paid in full and
the note was retired.
December Convertible Note -- On December 10, 2018, the Company entered into a
convertible note agreement. We received $152,000 with an original issue discount
of $14,000.00 in lieu of interest, for a total amount of $138,000 due on
December 10, 2019. After 180 days, at the holder's option, a portion or all of
the unpaid principal and interest may be converted into shares of our common
stock at a 28% discount to the lowest Volume Weighted Average Prices (VWAP)
during the 10 trading days preceding the conversion date. In the event of
default, the interest rate will be 22% per annum, require the Company to (i)
redeem all or any portion of the note at a premium of 150%.
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On June 5, 2019, the outstanding balance of $203,643 was paid in full and the
note was retired.
February Convertible Note -- On February 11, 2019, the Company entered into a
convertible note agreement. It received $140,000 with an original issue discount
of $8,400 in lieu of interest, for a total amount of $132,500 due on February
11, 2020. After 180 days, at the holder's option, a portion or all of the unpaid
principal and interest may be converted into shares of CoolTech's common stock
at a 29% discount to the lowest Volume Weighted Average Price (VWAP) during the
10 trading days preceding the conversion date. In the event of default, the
interest rate will be 22% per annum and require the Company to redeem all or any
portion of the note at a premium of 150%.
On August 13, 2019, the Company issued 423,729 shares of common stock to PowerUp
Lending Group Ltd. upon partial conversion of $15,000 in debt. On August 23,
2019, the Company issued 545,455 shares of common stock to PowerUp Lending Group
Ltd. upon partial conversion of $15,000 in debt. On August 29, 2019, the Company
issued 604,839 shares of common stock to PowerUp Lending Group Ltd. upon partial
conversion of $15,000 in debt. On September 3, 2019, the Company issued 819,672
shares of common stock to PowerUp Lending Group Ltd. upon partial conversion of
$20,000 in debt. On September 5, 2019, the Company issued 833,333 shares of
common stock to PowerUp Lending Group Ltd. upon partial conversion of $20,000 in
debt. On September 11, 2019, the Company issued 1,005,025 shares of common stock
to PowerUp Lending Group Ltd. upon partial conversion of $20,000 in debt. On
September 17, 2019, the Company issued 1,005,025 shares of common stock to
PowerUp Lending Group Ltd. upon partial conversion of $20,000 in debt. On
September 24, 2019, the Company issued 1,119,558 shares of common stock to
PowerUp Lending Group Ltd. upon final conversion of $15,000 in debt and the note
was retired.
March Convertible Note -- On March 13, 2019, the Company entered into a
convertible note agreement. It received $140,000 with an original issue discount
of $7,500 in lieu of interest, for a total amount of $131,600 due on February
11, 2020. 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 Volume Weighted Average Price (VWAP) during the 10
trading days preceding the conversion date. In the event of default, the
interest rate will be 18% per annum, require the Company to (i) pay the product
of the then outstanding principal amount, plus accrued interest and default
interest, divided by the conversion price multiplied by the highest price at
which the common stock traded at any time between the issuance date and the date
of the event of default.
On September 16, 2019, the Company issued 2,012,072 shares of common stock to
JSJ Investments, Inc. upon partial conversion of $40,000 in debt. On October 1,
2019, the Company issued 2,695,599 shares of common stock to JSJ Investments,
Inc. upon partial conversion of $40,000 in debt. On October 14, 2019, the
Company issued 2,859,758 shares of common stock to JSJ Investments, Inc. upon
partial conversion of $40,000 in debt. On November 12, 2019, the Company issued
2,886,674 shares of common stock to JSJ Investments, Inc. upon final conversion
of $20,000 in debt and the note was retired.
May Convertible Note -- On May 13, 2019, the Company entered into a convertible
note agreement. It received $150,000 after an original issue discount of $15,000
in lieu of interest, for a total amount of $165,000 due on December 13, 2019.
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 Volume Weighted Average Price (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 penalty of $100 will accrue until the default
is remedied.
The note also included a clause which stated that if the effective conversion
price is less than $0.01 at any time, the principal amount of the note shall
increase by $10,000 and that the conversion price will be permanently redefined
to equal 40% of the lowest traded price that occurred during the 15 consecutive
trading days immediately preceding the date on which the note holder elects to
convert all or part of the note. On December 20, 2019, the effective conversion
price reached sub-penny threshold. The principal amount and the subsequent
conversion price were adjusted as noted above.
On January 6, 2020, the Company issued 5,000,000 shares of common stock to LGH
Investments, LLC upon partial conversion of $17,920 in debt. On January 24,
2020, the Company issued 10,000,000 shares of common stock to LGH Investments,
LLC upon partial conversion of $22,400 in debt. On February 24, 2020, the
Company issued 15,000,000 shares of common stock to LGH Investments, LLC upon
partial conversion of $17,400 in debt. On March 6, 2020, the Company issued
6,500,000 shares of common stock to LGH Investments, LLC upon partial conversion
of $8,840 in debt. On March 25, 2020, the Company issued 8,500,000 shares of
common stock to LGH Investments, LLC upon partial conversion of $23,120 in debt.
After the conversion, the principal balance remaining totals $90,270.
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June Convertible Note -- On June 6, 2019, the Company entered into a convertible
note agreement. It received $130,000 with an original issue discount of $13,000
and an annual interest rate of 8%. The principal ($143,000) and interest will be
due on June 6, 2020. 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 Volume Weighted Average Price (VWAP) during the
10 trading days preceding the conversion date. In the event of default, the
interest rate will be 24% per annum, require the Company to (i) pay the product
of the then outstanding principal amount, plus accrued interest and default
interest, divided by the conversion price multiplied by the highest price at
which the common stock traded at any time between the issuance date and the date
of the event of default.
On December 19, 2019, Cool Technologies issued 1,128,687 shares of common stock
to Eagle Equities upon partial conversion of $10,418 in debt. On December 24,
2019, the Company issued 2,674,064 shares of common stock to Eagle Equities upon
partial conversion of $20,884 in debt. On January 13, 2020, the Company issued
4,220,881 shares of common stock to Eagle Equities, LLC upon partial conversion
of $20,978.in debt. On January 27, 2020, the Company issued 6,173,709 shares of
common stock to Eagle Equities, LLC upon partial conversion of $21,040 in debt.
On February 3, 2020, the Company issued 9,573,426 shares of common stock to
Eagle Equities, LLC upon partial conversion of $21,071. in debt. On February 13,
2020, the Company issued 11,992,022 shares of common stock to Eagle Equities,
LLC upon partial conversion of $26,394 in debt. On March 2, 2020, the Company
issued 9,820,030 shares of common stock to Eagle Equities, LLC upon partial
conversion of $26,494 in debt.
July Convertible Note - On July 3, 2019, the Company entered into a convertible
note agreement. It received $150,000 with an original issue discount of $15,300
in lieu of interest, for a total amount of $168,300 plus 8% annual interest due
on July 3, 2020. After 180 days, at the holder's option, a portion or all of the
unpaid principal and interest may be converted into shares of CoolTech's common
stock at a 29% discount to the lowest Volume Weighted Average Price (VWAP)
during the 10 trading days preceding the conversion date. In the event of
default, the interest rate will be 22% per annum, require the Company to (i)
redeem all or any portion of the note at a premium of 150%.
On January 3, 2020, Cool Technologies issued 2,238,805 shares of common stock to
PowerUp Lending Group, Ltd. upon partial conversion of $15,000 in debt. On
January 8, 2020, the Company issued 3,174,603 shares of common stock to PowerUp
Lending Group, Ltd. upon partial conversion of $20,000 in debt. On January 14,
2020, the Company issued 3,921,569 shares of common stock to PowerUp Lending
Group, Ltd. upon partial conversion of $20,000 in debt. On January 16, 2020, the
Company issued 4,444,444 shares of common stock to PowerUp Lending Group, Ltd.
upon partial conversion of $20,000 in debt. On January 21, 2020, the Company
issued 5,111,111 shares of common stock to PowerUp Lending Group, Ltd. upon
partial conversion of $23,000 in debt. On January 30, 2020, the Company issued
7,142,857 shares of common stock to PowerUp Lending Group, Ltd. upon partial
conversion of $20,000 in debt. On March 3, 2020, wired $72,000 to PowerUp
Lending Group and the note was retired.
August Convertible Note -- On August 28, 2019, the Company entered into a
convertible note agreement. It received $115,000 with an original issue discount
of $11,500 and an annual interest rate of 8%. The principal ($126,500) and
interest will be due on August 28, 2020. 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 Volume Weighted Average
Price (VWAP) during the 10 trading days preceding the conversion date. In the
event of default, the interest rate will be 24% per annum or the highest rate of
interest permitted by law.
On March 10, 2020, Cool Technologies issued 10,282,003 shares of common stock to
Eagle Equities, LLC upon partial conversion of $40,151 on convertible debt of
$126,500
October Convertible Note -- On October 3, 2019, the Company entered into a
convertible note agreement. It issued 350,000 inducement shares of restricted
common stock and received $115,000 with an original issue discount of $11,500
and an annual interest rate of 8%. The principal ($126,500) and interest will be
due on October 2, 2020. 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 closing price during the 10 trading days
preceding the conversion date. In the event of default, the interest rate will
be 24% per annum or the highest rate of interest permitted by law.
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November Convertible Note -- On November 9, 2019, the Company entered into a
convertible note agreement. It received $126,000 with an original issue discount
of $13,000 and an annual interest rate of 8%. The principal ($141,000) and
interest will be due on November 6, 2020. 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 closing price during
the 10 trading days preceding the conversion date. In the event of default, the
interest rate will be 24% per annum or the highest rate of interest permitted by
law.
December Convertible Note -- On December 5, 2019, the Company entered into a
convertible note agreement. It received $103,000 with an original issue discount
of $6,000 and an annual interest rate of 8%. The principal ($109,000) and
interest will be due on December 5, 2020. 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 Volume Weighted
Average Price (VWAP) during the 10 trading days preceding the conversion date.
In the event of default, the interest rate will be 18% per annum or the highest
rate of interest permitted by law.
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,
2019 2018
Net cash used in operating activities $ (1,352,953 ) $ (2,402,282 )
Net cash used in investing activities
(51,622 ) (22,486 )
Net cash provided by financing activities 1,012,674 2,275,860
Net cash used in operating activities increased due to changes in other current
assets and other current liabilities and was primarily attributable to an
increase in outstanding accounts payable. Our investing activity relates to the
development of patents, which has remained steady since inception, and the
purchase of test vehicles. Net cash provided by financing activities increased
primarily due to debt borrowings.
The Company's capital requirements for the next 12 months will consist of $3.4
million with anticipated expenses of $1.4 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 meet 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.
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.
42
Table of Contents
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 possible 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
ultimately 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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