DERIVATIVE LIABILITY

9 Months Ended

Sep. 30, 2024

NOTE 5 – DERIVATIVE LIABILITY

We measure the fair value of our assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

We identified conversion features embedded within convertible debt issued. We have determined that the features associated with the embedded conversion option should be accounted for at fair value as a derivative liability. We have elected to account for these instruments together with fixed conversion price instruments as derivative liabilities as we cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions. We value the derivative liabilities using a binomial option pricing-valuation model. The derivative liabilities are valued at each reporting date and the change in fair value is reflected as change in fair value of derivative liability.

Following is a description of the valuation methodologies used to determine the fair value of our financial liabilities, including the general classification of such instruments pursuant to the valuation hierarchy:

Fair Value

Quoted market prices

for identical

assets/liabilities

(Level 1)

Significant other

observable inputs

(Level 2)

Significant

unobservable inputs

(Level 3)

Derivative Liability, September 30, 2024

10,143,967

Derivative Liability, December 31, 2023

12,404,707

The reconciliation of the derivative liability for the nine months ended September 30, 2024 and 2023 is as follows:

	For the Nine Months Ended September 30,
	2024			2023
Derivative liability as of December 31	$	12,404,707		$	6,998,262
Addition to derivative instruments		-			-
Derivative liability extinguished upon conversion of notes payable		-			(2,602	)
Change in fair value of derivative liability*		(2,091,934	)		336,141,902
Derivative liability as of September 30	$	10,143,967		$	343,137,562

The fair value of the derivative liability was estimated using the Black-Scholes option-valuation model. The fair values at the commitment and remeasurement dates for our derivative liabilities were based upon the following management assumptions:

	For the Nine Months Ended September 30,
	2024			2023
Expected dividends		0	%		0	%
Expected volatility	118%-603		%	187%-994		%
Risk free interest rate	4.73%-5.48		%	4.64%-5.55		%
Expected term (in years)	0.25– 1 years			0.02– 1 years

The fair value at the remeasurement date is equal to the carrying value on the balance sheet.

Ocean Thermal Energy Corp 10-Q