0001683168-16-000530.txt : 20161109 0001683168-16-000530.hdr.sgml : 20161109 20161109160134 ACCESSION NUMBER: 0001683168-16-000530 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 54 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161109 DATE AS OF CHANGE: 20161109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QS Energy, Inc. CENTRAL INDEX KEY: 0001103795 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 522088326 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29185 FILM NUMBER: 161984167 BUSINESS ADDRESS: STREET 1: 735 STATE STREET #500 CITY: SANTA BARBARA STATE: CA ZIP: 93101 BUSINESS PHONE: 805-845-3581 MAIL ADDRESS: STREET 1: 735 STATE STREET #500 CITY: SANTA BARBARA STATE: CA ZIP: 93101 FORMER COMPANY: FORMER CONFORMED NAME: SAVE THE WORLD AIR INC DATE OF NAME CHANGE: 20000120 10-Q 1 qsenergy_10q-093016.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒       QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

or

 

☐       TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number 0-29185

 

QS ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 52-2088326

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

5266 Hollister Avenue, Suite 219 Santa Barbara, California 93111

(Address, including zip code, of principal executive offices)

 

(805)-845-3561

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

 

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value.

 

Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☒   No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer     
   
Non-accelerated filer       (Do not check if a smaller reporting company) Smaller reporting company     

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐    No  

 

The number of shares of the Registrant’s Common Stock outstanding as of November 4, 2016 was 199,045,026.

 

 

 

   

 

 

QS ENERGY, INC.
FORM 10-Q

 

INDEX

 

  Page
PART I – FINANCIAL INFORMATION 3
   
Item 1.  Unaudited Condensed Consolidated Financial Statements 3
   
CONDENSED CONSOLIDATED BALANCE SHEET 3
   
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS, UNAUDITED 4
   
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT, UNAUDITED 5
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED 6
   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
   
Item 3.   Quantitative and Qualitative Disclosure about Market Risk 23
   
Item 4.   Controls and Procedures 24
   
PART II – OTHER INFORMATION 25
   
Item 1.   Legal Proceedings 25
   
Item 1A.   Risk Factors 25
   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 25
   
Item 3.   Defaults Upon Senior Securities 25
   
Item 4.   Mine Safety Disclosures 25
   
Item 5.   Other Information 25
   
Item 6.   Exhibits 26
   
SIGNATURES 27
   
EXHIBIT 31.1  
   
EXHIBIT 31.2  
   
EXHIBIT 32  

 

 

 

 

 2 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

QS ENERGY, INC.

Condensed Consolidated Balance SheetS

 

   September 30     
   2016   December 31 
   (unaudited)   2015 
ASSETS          
Current assets:          
Cash  $385,360   $349,186 
Prepaid expenses and other current assets   35,389    50,596 
Total current assets   420,749    399,782 
Property and equipment, net of accumulated depreciation of $30,627 and $60,242 at September 30, 2016 and December 31, 2015, respectively   18,490    21,798 
Other assets   7,180    6,480 
Total assets  $446,419   $428,060 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable-license agreements  $730,626   $590,001 
Accounts payable and accrued expenses   209,888    182,334 
Accrued expenses and accounts payable-related parties   143,151    190,750 
Deposits and other current liabilities   4,500    25,000 
Convertible debentures, net of discounts of $254,116 and $100,833 at September 30, 2016 and December 31, 2015, respectively   304,744    222,195 
Total current liabilities   1,392,909    1,210,280 
           
Commitments and contingencies          
           
Stockholders’ deficit          
Common stock, $.001 par value: 300,000,000 shares authorized 197,802,026 and 183,831,577 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively   197,802    183,832 
Additional paid-in capital   103,509,548    100,308,100 
Accumulated deficit   (104,653,840)   (101,274,152)
Total stockholders’ deficit   (946,490)   (782,220)
Total liabilities and stockholders’ deficit  $446,419   $428,060 

 

See notes to condensed consolidated financial statements.

 

 

 

 3 

 

 

QS ENERGY, INC.

Condensed Consolidated StatementS of Operations, Unaudited

 

   Three months ended   Nine months ended 
   September 30   September 30 
   2016   2015   2016   2015 
Revenues  $   $   $   $ 
Costs and expenses                    
Operating expenses   467,579    727,587    1,728,129    2,409,551 
Research and development expenses   51,595    80,082    199,772    500,517 
Loss before other income (expense)   (519,174)   (807,669)   (1,927,901)   (2,910,068)
Other income (expense)                    
Other income   690    7,858    1,150    10,858 
Interest and financing expense   (516,712)   (25,986)   (1,449,594)   (643,868)
Loss on disposition of equipment           (3,343)    
Net Loss  $(1,035,196)  $(825,797)  $(3,379,688)  $(3,543,078)
                     
Net loss per common share, basic and diluted  $(0.01)  $(0.00)  $(0.02)  $(0.02)
                     
Weighted average common shares outstanding, basic and diluted   195,342,504    183,128,577    190,874,796    181,943,768 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 4 

 

 

QS ENERGY, INC.

Condensed Consolidated Statement of Stockholders’ Deficit, Unaudited

For the NINE months ended September 30, 2016

 

           Additional       Total 
   Common Stock   Paid-in   Accumulated   Stockholders’ 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, January 1, 2016   183,831,577   $183,832   $100,308,100   $(101,274,152)  $(782,220)
                          
Common stock issued on conversion of notes payable   13,670,449    13,670    1,353,374         1,367,044 
                          
Fair value of common stock issued for services   300,000    300    47,700         48,000 
                          
Fair value of warrants and beneficial conversion feature of issued convertible notes             1,442,769         1,442,769 
                          
Fair value of options and warrants issued as compensation             357,605         357,605 
                          
Net loss                  (3,379,688)   (3,379,688)
                          
Balance, September 30, 2016   197,802,026   $197,802   $103,509,548   $(104,653,840)  $(946,490)

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 5 

 

 

  

QS ENERGY, INC.

Condensed Consolidated Statements of Cash Flows
Unaudited

 

   Nine months ended 
   September 30, 
   2016   2015 
Cash flows from Operating Activities          
Net loss  $(3,379,688)  $(3,543,078)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation expense   405,605    593,732 
Amortization of debt discount   1,433,763    643,868 
Accrued interest on convertible notes   15,831     
Loss on disposition of assets   3,343     
Depreciation and amortization   5,249    9,803 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   14,507    14,414 
Accounts payable and accrued expenses   27,554    (4,403)
Accounts payable – license agreements   140,625    137,813 
Accounts payable and accrued expenses – related parties   (47,599)   (52,610)
Deposits and other current liabilities   (20,500)    
Net cash used in operating activities   (1,401,310)   (2,200,461)
Cash flows from investing activities          
Purchase of equipment   (5,285)   (12,914)
Net cash used in investing activities   (5,285)   (12,914)
Cash flows from financing activities          
Net proceeds from issuance of convertible notes and warrants   1,442,769    475,500 
Net proceeds from exercise of warrants and options       50,000 
Net cash provided by financing activities   1,442,769    525,500 
Net increase (decrease) in cash   36,174    (1,687,875)
Cash, beginning of period   349,186    2,247,557 
Cash, end of period  $385,360   $559,682 
           
Supplemental disclosures of cash flow information          
Cash paid during the year for:          
Interest  $   $ 
Income Taxes  $   $ 
Non-cash investing and financing activities          
Conversion of convertible debentures to common stock   1,367,044    602,800 
Fair value of warrants and beneficial conversion feature associated with issued convertible notes   1,442,769    470,945 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 6 

 

 

QS ENERGY, INC.
Notes to Condensed Consolidated Financial Statements, Unaudited

NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

 

1. Description of Business

 

QS Energy, Inc. (“QS Energy”, “Company”) (formerly known as Save the World Air, Inc.) was incorporated on February 18, 1998, as a Nevada Corporation under the name Mandalay Capital Corporation. The Company changed its name to Save the World Air, Inc. on February 11, 1999. Effective August 11, 2015, the Company changed its name to QS Energy, Inc. The Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter Bulletin Board. More information including the Company’s fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.

 

QS Energy develops and commercializes energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual properties include a portfolio of domestic and international patents and patents pending, a substantial portion of which have been developed in conjunction with and exclusively licensed from Temple University of Philadelphia, PA (“Temple”). QS Energy's primary technology is called Applied Oil Technology™ (AOT), a commercial-grade crude oil pipeline transportation flow-assurance product. Engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements, AOT is a 100% solid-state system that reduces crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. The AOT product has transitioned from the research and development stage to initial production for continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

 

2. Summary of Significant Accounting Policies

 

Consolidation Policy

 

The accompanying consolidated financial statements of QS Energy Inc. include the accounts of QS Energy Inc. (the Parent) and its wholly owned subsidiaries, QS Energy Pool, Inc. and STWA Asia Pte. Limited. Intercompany transactions and balances have been eliminated in consolidation.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the nine-months ended September 30, 2016, the Company incurred a net loss of $3,379,688, used cash in operations of $1,401,310 and had a stockholders’ deficit of $946,490 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2015 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 

 

 

 7 

 

 

At September 30, 2016, the Company had cash on hand in the amount of $385,360. Management estimates that the current funds on hand will be sufficient to continue operations through January 2017. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with the license and research and development agreements with Temple; costs associated with product development and commercialization of the AOT technology; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments, including without limitation, payment of license and other fees to Temple University, salaries to our executive officers pursuant to employment agreements, certain payments to a former officer and consulting fees, during the remainder of 2016 and beyond.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders in case of equity financing.

 

Basic and Diluted Income (loss) per share

 

Our computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. Potential common shares that have an antidilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted (loss) per common share is the same for periods in which the Company reported an operating loss because all warrants and stock options outstanding are anti-dilutive. At September 30, 2016 and 2015, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock as their effect would have been anti-dilutive.

 

   September 30, 2016   September 30, 2015 
Options   23,624,256    21,706,512 
Warrants   12,451,892    3,677,704 
Common stock issuable upon conversion of notes payable   3,776,792    399,667 
Total   39,852,940    25,783,883 

 

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

 

 

 

 

 8 

 

 

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to assumptions used in valuing equity instruments issued for financing and services. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

Effective January 1, 2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.

 

Level 3—Unobservable inputs based on the Company's assumptions.

 

The Company is required to use observable market data if such data is available without undue cost and effort. At September 30, 2016, the carrying amounts for cash, accounts payable, accrued expenses and convertible debentures approximate their fair value due to their short-term nature.

 

Patent Costs

 

Patent costs consist of patent-related legal and filing fees. Due to the uncertainty associated with the successful development of our AOT and Joule Heat products, all patent costs are expensed as incurred. During the nine-month periods ended September 30, 2016 and 2015, patent costs were $49,265 and $35,379, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations. During the three-month periods ended September 30, 2016 and 2015, patent costs were $18,891 and $5,525, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

 

 

 9 

 

 

In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statement presentation or disclosures.

 

3. Certain Relationships and Related Transactions

 

As of September, 30, 2016 and December 31, 2015, the Company had accrued expenses and accounts payable to related parties in the amount of $143,151 and $190,750, respectively. Included in these amounts at September 30, 2016 and December 31, 2015 were unpaid salaries due to our former President and current member of the Company’s Board of Directors of $30,429 and $75,429, respectively. The Company agreed to pay the former President $5,000 per month until the unpaid salary is fully settled. Also included in these amounts at September 30, 2016 and December 31, 2015 are accrued directors’ fees of $76,089.

 

4. Property and Equipment

 

At September 30, 2016 and December 31, 2015, property and equipment consists of the following:

 

   September 30, 2016   December 31, 2015 
    (unaudited)      
Office equipment  $28,040   $65,051 
Furniture and fixtures   2,880    4,075 
Testing equipment   18,197    12,914 
Subtotal   49,117    82,040 
Less accumulated depreciation   (30,627)   (60,242)
Total  $18,490   $21,798 

 

Depreciation expense for the nine-month periods ended September 30, 2016 and 2015 was $5,249 and $9,803, respectively. During the period ended September 30, 2016, the Company disposed certain property and equipment with aggregate costs of $38,206 and accumulated depreciation of $34,863 which resulted in a loss of $3,343.

 

5. Convertible Notes

 

   September 30, 2016   December 31, 2015 
    (unaudited)      
Balance due on convertible notes  $541,024   $321,024 
Accrued interest   17,836    2,004 
Subtotal   558,860    323,028 
Unamortized note discount   (254,116)   (100,833)
Balance on convertible notes, net of note discount  $304,744   $222,195 

 

During 2014 and 2015, the Company conducted a private placement and issued approximately $1 million of its unsecured convertible notes for proceeds of $920,900 or an original issue discount (“OID”) of $85,490. The notes do not bear any interest: however, the implied interest rate used was 10% because the notes were issued for a purchase price of 10% less than their face value. The notes are unsecured and mature in twelve months from issuance. The notes are convertible, at the option of the note holder, into the Company’s common stock at conversion prices ranging from $0.10 per share through $0.48 per share. In addition, each note holder also received a warrant to purchase common stock equivalent to 25% of the number of shares the notes are convertible into or a total of 1,942,704 shares of common stock. Each warrant is exercisable on a cash basis only at prices ranging from $0.10 through $0.48 per share. The warrants vest immediately upon issuance, and are exercisable for one year from the date of issuance.

 

 

 

 10 

 

 

As a result, in prior periods, the Company recorded a note discount of $842,105 to account for the relative fair value of the warrants, the notes’ beneficial conversion feature (“BCF”), and OID. The note discounts are being amortized over the life of the note or will be amortized in full upon the conversion of the corresponding notes to common stock. At December 31, 2015, total outstanding notes payable amounted to $321,024 and unamortized note discount was $100,833.

 

During the nine-month period ended September 30, 2016, the Company issued similar convertible promissory notes in the amount of $1,587,045 for cash proceeds of $1,442,769 or a discount of $144,276. The notes do not bear any interest; however, the implied interest rate used was 10% because the notes were issued for purchase prices of 10% less than their face value. The notes are unsecured, mature in twelve months from issuance and are convertible at $0.10 per share. In addition, the Company also granted these note holders warrants to purchase 7,935,225 shares of the Company’ common stock. The warrants are fully vested, exercisable at $0.10 per share and will expire in one year from the date of their issuance. As a result, the Company recorded a note discount of $1,587,045 to account for the relative fair value of the warrants, the notes’ BCF and OID. The note discounts are being amortized over the life of the note on the effective interest method.

 

During the nine-month period ended September 30, 2016, a total of $1,367,044 of notes payable were converted into 13,670,449 shares of common stock and amortized note discount of $1,433,763 was recorded as interest expense.

 

As of September 30, 2016, total outstanding notes payable amounted to $541,024 and an unamortized note discount of $254,116. Included in the Company’s outstanding notes payable are three notes in the aggregate of $211,024 that had reached maturity without conversion and are past maturity and are currently due with accrued interest in the amount of $17,836. During the nine-month period ending September 30, 2016, the Company accrued interest of $15,831 pursuant to the terms of the notes. As of September 30, 2016, these notes were convertible to 3,776,792 shares of common stock in aggregate.

 

6. Research and Development

 

Research and development costs consist of costs of construction, development and testing of the AOT and Joule Heat technologies with internal resources and through the assistance of various third party entities. Costs incurred and expensed include fees such as testing fees, purchase of test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT and Joule Heat prototypes. In addition, research and development costs also include licensing fees and research and development fees due to Temple University.

 

For the nine-month periods ended September 30, 2016 and 2015, our research and development expenses were $199,772 and $500,517 respectively. For the three-month periods ended September 30, 2016 and 2015, our research and development expenses were $51,595 and $80,082 respectively.

 

AOT Product Development and Testing

 

In 2014, the Company entered into a lease agreement with Kinder Morgan Crude & Condensate, LLC for the manufacture and delivery of our AOT Prototype Equipment. The AOT Prototype Equipment is currently undergoing testing at a Kinder Morgan facility. See Note 7 for further discussion.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $58,947 and $110,439, respectively, in the manufacture, delivery and testing of the AOT prototype equipment. During the three-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $4,720 and $31,843, respectively. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statements of operations.

 

Joule Heat Product Development and Testing

 

On October 15, 2014, the Company entered into a Joint Development Agreement with Newfield Pipeline Exploration Company (“Newfield”) to test the effectiveness of the Company’s Joule Heat technology under operating conditions on Newfield’s oil pipeline. The Company’s first Joule Heat prototype unit was delivered to Newfield in May 2015 for further testing.

 

In December 2015, we temporarily suspended development activities for the Joule Heat technology in order to focus the Company resources on finalizing the commercial development of the AOT technology. We currently plan to resume Joule Heat development in 2017 depending on the availability of sufficient capital and other resources.

 

 

 

 11 

 

 

During the nine-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $200 and $184,765, respectively, in the manufacture, delivery and testing of the Joule Heat prototype equipment. During the three-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $0 and $1,364, respectively, in the manufacture, delivery and testing of the Joule Heat prototype equipment. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations.

 

Temple University Licensing Agreements

 

On August 1, 2011, the Company and Temple University (“Temple”) entered into two (2) Exclusive License Agreements (collectively, the “License Agreements”) relating to Temple’s patent applications, patents and technical information pertaining to technology associated with an electric and/or magnetic field assisted fuel injector system (the “First Temple License”), and to technology to reduce crude oil viscosity (the “Second Temple License”). The License Agreements are exclusive and the territory licensed to the Company is worldwide and replace previously issued license agreements.

 

Pursuant to the two License Agreements, the Company agreed to pay Temple the following: (i) non-refundable license maintenance fee of $300,000; (ii) annual maintenance fees of $187,500; (iii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements; and (iv) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. Temple also agreed to defer $37,500 of the amount due if the Company agreed to fund at least $250,000 in research or development of Temple’s patent rights licensed to the Company. The term of the licenses commenced in August 2011 and will expire upon the expiration of the patents. The agreement can also be terminated by either party upon notification under terms of the Licensing Agreements or if the Company ceases the development of the patent or failure to commercialize the patent rights.

 

Total expenses recognized during each nine-month period ended September 30, 2016 and 2015 pursuant to these two agreements amounted to $140,625. Total expenses recognized during each three-month period ended September 30, 2016 and 2015 pursuant to these two agreements amounted to $46,875. These expenses have been reflected in Research and Development expenses on the accompanying consolidated statements of operations.

 

As of September 30, 2016 and December 31, 2015, total unpaid fees due to Temple pursuant to these agreements amounted to $601,250 and $460,625, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. As of September 30, 2016, $193,750 of the $601,250 payable has been deferred until the Licensing Agreements are terminated and $407,500 is deemed past due. The Company is currently in negotiations with Temple to settle this amount.

 

There were no revenues generated from these two licenses during the nine-month periods ended September 30, 2016 and 2015.

 

Temple University Sponsored Research Agreement

 

On March 19, 2012, the Company entered into a Sponsored Research Agreement (“Research Agreement”) with Temple University (“Temple”), whereby Temple, under the direction of Dr. Rongjia Tao, performed research related to the Company’s AOT device (the “Project”), for the period April 1, 2012, through April 1, 2014. All rights and title to intellectual property resulting from Temple’s work related to the Project were subjected to the Exclusive License Agreements between Temple and the Company, dated August 1, 2011. In exchange for Temple’s research efforts on the Project, the Company has agreed to pay Temple $500,000, payable in quarterly installments of $62,500. The agreement expired in August 2015.

 

During the nine-month period ended September 30, 2015, the Company recognized a total expense of $64,688 pursuant to this agreement. During the three-month period ended September 30, 2015, the Company recognized a total expense of $0 pursuant to this agreement. These costs have been reflected in Research and Development expenses on the accompanying consolidated statements of operations. There was no such cost recorded during 2016 as a result of the expiration of the agreement in August 2015.

 

As of September 30, 2016 and December 31, 2015, total unpaid fees due to Temple pursuant to this agreement amounted to $129,376, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. As of September 30, 2016, the entire $129,377 is deemed past due. The Company is currently in negotiations with Temple to settle this amount.

 

 

 

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7. Kinder Morgan Crude & Condensate, LLC Lease

 

On July 15, 2014, the Company entered into an Equipment Lease/Option to Purchase Agreement (“Lease”) with Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”). In accordance with the terms and conditions of the agreement, Kinder Morgan agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute.

 

The initial term (“Initial Term”) of the Lease is four months, with an option to extend the Lease for up to a maximum of 84 months. During the Initial Term, either the Company or Kinder Morgan may terminate the Agreement for any reason on 45 days’ written notice. Lease payments shall be $20,000 per month; provided however, that in the event the Equipment is removed from service at its initial location during the Initial Term, the monthly lease payments shall be reduced to $5,000 until the Equipment is placed back in service at its new location, at which time the Lease payments shall resume at $20,000 per month. The agreement further provides that Kinder Morgan shall have an option to purchase the Equipment during the term of the Lease for a fixed price of between $600,000 and $1,200,000, depending upon the date of purchase.

 

The AOT equipment was delivered to Kinder Morgan in December 2014 and installed in March 2015. In April 2015, the AOT equipment experienced technical issues that needed further modifications. In February 2016, the AOT equipment was re-installed at Kinder Morgan’s facility. The Company and Kinder Morgan are continuing to work to finalize installation and acceptance of the equipment under the lease.

 

8. Common Stock

 

During the nine months ended September 30, 2016, the Company issued 13,670,449 shares of its common stock upon the conversion of $1,367,044 in convertible notes at $0.10 per share. In addition, the Company also issued 300,000 shares of common stock to consultants for services rendered with a fair value of $48,000 which is included as part of Operating Expenses in the attached consolidated statements of operations. The shares were valued at the trading price at the date of issuance.

 

9. Stock Options and Warrants

 

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs.  Options vest and expire according to terms established at the grant date.

 

Options

 

Employee options vest according to the terms of the specific grant and expire from 2 to 10 years from date of grant. The weighted-average, remaining contractual life of employee and non-employee options outstanding at September 30, 2016 was 5.0 years. Stock option activity for the period January 1, 2016 up to September 30, 2016, was as follows:

 

    Options   Weighted Avg.
Exercise Price
 
 January 1, 2016    21,535,148   $0.30 
 Granted    2,250,527    0.19 
 Exercised         
 Forfeited    (161,419)   0.77 
 Outstanding, September 30, 2016    23,624,256   $0.28 
 Exercisable, September 30, 2016    21,373,729   $0.29 

 

 

 

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The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of September 30, 2016 were as follows:

 

      Outstanding Options    Exercisable Options 
 Option
Exercise Price
Per Share
    Shares    Life
(Years)
    Weighted
Average Exercise
Price
    Shares    Weighted
Average Exercise
Price
 
 $ 0.21 - $ 0.99    23,473,810    5.0   $0.28    21,223,283   $0.29 
 $ 1.00 - $ 1.99    150,446    6.8   $1.18    150,446   $1.18 
      23,624,256    5.0   $0.28    21,373,729   $0.29 

 

During the nine-month period ending September 30, 2016 the Company granted options to purchase 1,710,527 shares of common stock to members of the Company’s Board of Directors. The options are exercisable at $0.19 per share, vest monthly over a twelve-month period, and expire ten years from the date granted. Total fair value of these options at grant date was $273,683 using the Black-Scholes Option Pricing model with the following assumptions: life of 5.5 years; risk free interest rate of 1.73%; volatility of 119% and dividend yield of 0%. The fair value will be amortized over the vesting period.

 

During the nine-month period ending September 30, 2016 the Company granted options to purchase 540,000 shares of common stock to employees of the Company. The options are exercisable at $0.18 per share, vest over periods of twelve and twenty-four months, and expire ten years from the date granted. Total fair value of these options at grant date was $83,500 using the Black-Scholes Option Pricing model with the following assumptions: life of 5.5 to 6 years; risk free interest rate of 1.23%; volatility of 121% and dividend yield of 0%. The fair value will be amortized over the vesting period.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs based on the fair value of options that vested of $265,448 and $548,619 respectively, which is included in Operating expenses in the Company’s statement of operations. During the three-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs based on the fair value of options that vested of $84,293 and $162,744 respectively, which is included in Operating expenses in the Company’s statement of operations.

 

At September 30, 2016, the Company’s closing stock price was $0.15 per share. As all outstanding options had an exercise price greater than $0.15 per share, the aggregate intrinsic value of the options outstanding at September 30, 2016 was $0. Future unamortized compensation expense on the unvested outstanding options at September 30, 2016 is $125,462 to be recognized through May 2018.

 

Warrants

 

The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting January 1, 2016 up to September 30, 2016.

 

    Warrants   Weighted Avg.  
Exercise Price
 
 January 1, 2016    4,411,667   $0.31 
 Granted    8,735,225    0.11 
 Exercised         
 Cancelled    (695,000)   0.49 
 September 30, 2016    12,451,892   $0.16 

 

 

 

 14 

 

 

The weighted average exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of September 30, 2016 were as follows:

 

      Outstanding Warrants    Exercisable Warrants 
 Warrant
Exercise Price Per Share
    Shares    Life
(Years)
    Weighted
Average Exercise
Price
    Shares    Weighted
Average
Exercise
Price
 
 $ 0.01 - $ 0.14    9,015,225    0.3   $0.10    8,915,225   $0.10 
 $ 0.15 - $ 1.99    3,436,667    3.4   $0.30    3,436,667   $0.30 
      12,451,892    1.6   $0.16    12,451,892   $0.16 

 

During the nine-month period ending September 30, 2016, pursuant to terms of convertible notes issued, the Company granted warrants to purchase 7,935,225 shares of common stock with an exercise price of $0.10 per share, vesting immediately upon grant and expiring one year from the date of grant (see Note 5).

 

During the nine-month period ending September 30, 2016 the Company granted warrants to purchase 800,000 shares of common stock to consultants. The options are exercisable starting at $0.12 per share to $0.18 per share, vested upon issuance, and expire in one to three years from the date granted. The fair value of these warrants were computed using the Black-Scholes Option Pricing model with the following assumptions: life of 1 year through 10 years; average stock price of $0.16 per share, average risk free interest rate of 0.82%; average volatility of 110% and dividend yield of 0%. The fair value will be amortized over the vesting period.

 

During the nine-month period ending September 30, 2016, the Company amended the terms of a warrant issued in 2015, extending the expiration date of the warrant by twelve months. The fair value of this warrant at the date of the amendment was $32,083, computed using the Black-Scholes Option Pricing model with the following assumptions: life of 1 year; stock price of $0.17 per share, average risk free interest rate of 0.81%; average volatility of 97% and dividend yield of 0%.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs of $92,157 and $45,113, respectively, based on the fair value of warrants that vested, which is included in Operating expenses in the Company’s statement of operations. During the three-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs of $21,396 and $3,816, respectively, based on the fair value of warrants that vested, which is included in Operating expenses in the Company’s statement of operations.

 

At September 30, 2016, the aggregate intrinsic value of the warrants outstanding was $444,761. Future unamortized compensation expense on the unvested outstanding warrants at September 30, 2016 is $12,104 to be recognized through July 2018.

 

 

 

 

 15 

 

 

10. Contractual Obligations

 

The Company has certain contractual commitments as of September 30, 2016 for future periods, including office leases, minimum guaranteed compensation payments and other agreements as described in the following table and associated footnotes:

 

        Research and         
Year ending   Office   License   Compensation   Total 
December 31,   Lease (1)   Agreements (2)   Agreements (3)   Obligations 
 2016   $17,490   $46,875   $87,500   $151,865 
 2017    69,960    187,500    305,429    562,889 
 2018    40,810    187,500    290,000    518,310 
 2019        187,500    54,375    241,875 
 2020        187,500        187,500 
 Total   $128,260   $796,875   $737,304   $1,662,439 

 

________________________________

  (1) Consists of rent for the Company’s Santa Barbara Facility expiring on July 31, 2018.

 

  (2) Consists of license maintenance fees to Temple University in the amount of $187,500 paid annually through the life of the underlying patents or until otherwise terminated by either party.

 

  (3) Consists of base salary and certain contractually-provided benefits, to i) an executive officer, pursuant to an employment agreement at a base salary of $290,000 per year and, as amended by the Board on March 10, 2016, expires on March 8, 2019; and ii) and a severance agreement of a former officer in the amount of $45,429.

 

Effective May 1, 2016, the Company vacated the Santa Barbara Facility and subleased the space through the term of the master lease, terminating July 31, 2018. Under the master lease, the Company is committed to pay $5,830 per month. This expense is offset by sublease income of $4,500 per month, for a net monthly expense of $1,330, totaling $35,910 over the remaining 27-month term of the master lease. At September 30, 2016, the Company accrued $29,260 to account for the estimated loss in the Santa Barbara Facility lease agreement which is reflected in as part of Accounts Payable and accrued expense on the accompanying consolidated balance sheet.

 

Effective June 1, 2016, the Company relocated its Santa Barbara office to an office space located at 5266 Hollister Avenue, Suite 219, Santa Barbara, CA 93111, under a twelve-month lease at a lease rate of $751 per month. This expense is reflected in Operating Expenses on the accompanying consolidated statements of operations.

 

11. Subsequent Events

 

Increase in Outstanding Shares

 

From October 1, 2016 through November 4, 2016, the Company issued 1,243,000 shares of common stock upon conversion of previously issued convertible notes in aggregate value of $124,300.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and supplementary data referred to in this Form 10-Q.

 

This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue sources and concentration, selling, general and administrative expenses, research and development expenses, capital resources, additional financings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-Q, particularly in “Risk Factors,” that could cause actual results to differ materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-Q is as of September 30, 2016, and we undertake no duty to update this information.

 

Overview

 

QS Energy develops and commercializes energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual properties include a portfolio of domestic and international patents and patents pending, a substantial portion of which have been developed in conjunction with and exclusively licensed from Temple University of Philadelphia, PA (“Temple”). QS Energy's primary technology is called Applied Oil Technology™ (AOT), a commercial-grade crude oil pipeline transportation flow-assurance product. Engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements, AOT is a 100% solid-state system that reduces crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. AOT technology delivers reductions in crude oil viscosity and pipeline pressure loss as demonstrated in independent third-party tests performed by the U.S. Department of Energy, the PetroChina Pipeline R&D Center, and ATS RheoSystems, a division of CANNON™, at full-scale test facilities in the U.S. and China, and under commercial operating conditions on one of North America’s largest high-volume crude oil pipelines. The AOT product has transitioned from laboratory testing and ongoing research and development to initial production and continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace.

 

Our Company was incorporated on February 18, 1998, as a Nevada Corporation under the name Mandalay Capital Corporation. The Company changed its name to Save the World Air, Inc. on February 11, 1999. Effective August 11, 2015, the Company changed its name to QS Energy, Inc. The name change was effected through a short-form merger pursuant to Section 92A.180 of the Nevada Revised Statutes. Additionally, QS Energy Pool, Inc., a California corporation, was formed as a wholly-owned subsidiary of the Company on July 6, 2015 to serve as a vehicle for the Company to explore, review and consider acquisition opportunities. The Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter Bulletin Board. More information including the Company’s fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.

 

In 2014, we reached a major milestone in the Company’s evolution, generating revenues from our AOT technology for the first time since our inception in February 1998. We continue to devote the bulk of our efforts to the promotion, design, testing and the commercial manufacturing and operations of our crude oil pipeline products in the upstream and midstream energy sector. We anticipate that these efforts will continue during 2016 and 2017.

 

Between 2011 and 2012, the Company transitioned from prototype testing of its AOT technology at the U.S. Department of Energy Rocky Mountain Oilfield Testing Center, Midwest, Wyoming (“RMOTC”), to the design and production of full-scale commercial prototype units. The Company worked in a collaborative engineering environment with multiple energy industry companies to refine the AOT Midstream commercial design to comply with the stringent standards and qualification processes as dictated by independent engineering audit groups and North American industry regulatory bodies. In May 2013, the Company’s first commercial prototype unit known as AOT Midstream, was completed.

 

In 2013, the Company entered into an Equipment Lease/Option to Purchase Agreement (“TransCanada Lease”) with TransCanada Keystone Pipeline, L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") which agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. As previously reported in our 10-K report filed with the SEC on March 16, 2015, in June 2014, the equipment was accepted by TransCanada and the lease commenced and the first full test of the AOT equipment on the Keystone pipeline was performed in July 2014 by Dr. Rongjia Tao of Temple University, with subsequent testing performed by an independent laboratory, ATS RheoSystems, a division of CANNON™ (“ATS”) in September 2014. Upon review of the July 2014 test results and preliminary report by Dr. Tao, QS Energy and TransCanada mutually agreed that this initial test was flawed due to, among other factors, the short term nature of the test, the inability to isolate certain independent pipeline operating factors such as fluctuations in upstream pump station pressures, and limitations of the AOT device to produce a sufficient electric field to optimize viscosity reduction. Subsequent testing by ATS in September 2014 demonstrated viscosity reductions of 8% to 23% depending on flow rates and crude oil types in transit. In its summary report, ATS concluded that i) data indicated a decrease in viscosity of crude oil flowing through the TransCanada pipeline due to AOT treatment of the crude oil; and ii) the power supply installed on our equipment would need to be increased to maximize reduction in viscosity and take full advantage of the AOT technology. While more testing is required to establish the efficacy of our AOT technology, we are encouraged by the findings of these field tests performed under commercial operating conditions. The TransCanada Lease was terminated by TransCanada, effective October 15, 2014. Upon termination of the TransCanada Lease, all equipment was uninstalled, returned, inspected and configured for re-deployment.

 

 

 

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On July 15, 2014, the Company entered into an Equipment Lease/Option to Purchase Agreement (“Kinder Morgan Lease”) with Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”) under which Kinder Morgan agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The equipment was delivered to Kinder Morgan in December 2014 and installed in March 2015. In April 2015, during pre-start testing, low electrical impedance was measured in the unit, indicating an electrical short. A replacement unit was installed May 2015. The second unit also presented with low impedance when flooded with crude condensate from Kinder Morgan’s pipeline. Subsequent to design modifications, a remanufactured AOT unit was installed and tested at Kinder Morgan’s pipeline facility in in August 2015. Initial results were promising, with the unit operating generally as expected. However, voltage dropped as preliminary tests continued, indicating decreased impedance within the AOT pressure vessel. QS Energy personnel and outside consultants performed a series of troubleshooting assessments and determined that, despite modifications made to the AOT, conductive materials present in the crude oil condensate continued to be the root cause of the decreased impedance. Based on these results, QS Energy and Kinder Morgan personnel mutually agreed to hold on final acceptance of equipment under the lease and temporarily suspend in-field testing to provide time to re-test crude oil condensate in a laboratory setting, and thoroughly review and test selected AOT component design and fabrication. Subsequent analysis and testing led to changes in electrical insulation, inlet flow improvements and other component modifications. These design changes were implemented and tested by Industrial Screen and Maintenance (ISM), one of QS Energy's supply chain partners in Casper, Wyoming. Test performed by ISM at its Wyoming facility indicated significant improvements to system impedance and efficiency of electric field generation.

 

In February 2016, the modified AOT equipment was installed at Kinder Morgan’s facility. Pre-acceptance testing was performed in April 2016, culminating in more than 24 hours of continuous operations. In-field viscosity measurements and pipeline data collected during this test indicate the AOT equipment is operating as expected, resulting in viscosity reductions equivalent to those measured under laboratory conditions. Supervisory Control And Data Acquisition (“SCADA”) pipeline operating data collected by Kinder Morgan during this test indicated a pipeline pressure drop reduction consistent with expectations. Kinder Morgan has provided the Company with a number of additional crude oil samples to be tested in the laboratory for future test correlation and operational planning purposes. Subject to final review, Kinder Morgan and QS Energy will determine next steps which may include integration of Kinder Morgan’s SCADA system with the AOT control system, 30 days of continued operation during batched pipeline flow, and final installation and acceptance of the equipment under the lease.

 

Southern Research Institute (SRI) was engaged by QS Energy in 2015 to investigate the root cause of the crude oil condensate impedance issue by replicating conditions experienced in the field utilizing a laboratory-scaled version of the AOT and crude oil condensate samples provided by Kinder Morgan. In addition, QS Energy retained an industry expert petroleum pipeline engineer to review the AOT design and suggest design modifications to resolve the crude oil condensate impedance issue. This engineer has studied design details, staff reports and forensic photographs of each relevant AOT installation and test. Based on these investigations, specific modifications were proposed to resolve the impedance issue, and improve the overall efficiency of the AOT device, resulting in a new value-engineered design of certain AOT internal components.

 

The Company is actively seeking new deployments of its AOT technology. In August, 2015, QS Energy was invited to an offshore oil transfer platform in the Gulf of Mexico. This offshore platform was assessed by QS Energy personnel for a potential deployment of the AOT viscosity reduction technology as a solution for super-heavy crude oil flow assurance issues. Following the site visit, subject to non-disclosure agreements executed by all parties, laboratory testing was performed on crude oil samples provided by the operator, which demonstrated significant AOT viscosity reductions. Detailed hydraulic analysis based on laboratory results and pipeline operating parameters was presented to the operator demonstrating potential benefits of AOT technology within the operator’s specified infrastructure. Based on this analysis, the Company was directed by the operator to prepare a preliminary configuration for AOT units optimized for the operator’s high-volume, space-constrained operations. Company engineers and supply chain partners have prepared an optimized configuration and production budget. Based on this optimized configuration, the operator is considering an onsite pilot test with full scale AOT equipment for deployment in late 2017.

 

In June 2015, the Company formed a strategic alliance with Norrønt, AS (“Norrønt”), located in Oslo, Norway. Through its affiliation with Norrønt, the Company is currently in the process of negotiating a collaboration agreement with three Norwegian based oil companies as well as a potential research grant with the Norwegian Research Council. Under a strategic alliance formed in 2013, Energy Tech Premier Group is actively marketing AOT technology in Africa and the Middle East. During the first and second quarters of 2015, oil samples from a Middle Eastern oil company were provided to Temple University for testing. These tests demonstrated AOT viscosity reductions of 20% to 35% in a laboratory setting. Discussions with this Middle East oil company are ongoing. Effective May 2016, the Company executed a non-disclosure agreement with a second large Middle East oil company in consideration and evaluation of potential transactions and joint development activities. Effective July 26, 2016, the Company executed a non-disclosure agreement with a significant crude oil pipeline manufacturing and installation company located in Beijing, China, for the purpose of developing a potential sales and distribution relationship targeting the China market.

 

 

 

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During the third quarter 2016, the Company developed a new onsite testing program designed to accelerate the AOT sales cycle. This program utilizes a fully functional laboratory-scale AOT device designed and developed by the Company in 2015, and tested at the Southern Research Institute. Under this new program, Company engineers will set up a temporary lab at the customer’s site to test a full range of crude oils. Fees charged for providing this service will be dependent on scope of services, crude oil sample to be tested, and onsite time requirements. This program has received a positive response from potential customers. We plan to initiate this onsite testing program in the fourth quarter 2016, with first tests performed in December 2016 or early 2017.

 

In 2014, the Company began development of a new suite of products based around the new electrical heat system which reduces oil viscosity through a process known as joule heat (“Joule Heat”). The Company is designing and optimizing the Joule Heat technology for the upstream oil transportation market. The Company filed two provisional patents related to the technology’s method and apparatus in the second quarter and fourth quarter of 2013, respectively. The first of the two provisional patents was finalized and submitted to non-provisional status on April 29, 2014. The second of the two provisional patents was finalized and submitted to non-provisional status at the end of the third quarter 2014.

 

In October 2014, QS Energy entered into a Joint Development Agreement with Newfield Exploration Company (“Newfield”) to test a prototype of QS Energy Joule Heat equipment, and combined Joule Heat and AOT technology, on a crude oil pipeline serving the Greater Monument Butte oilfield located in the Uintah Basin of Utah. This test of the Joule Heat technology provides ideal conditions to demonstrate efficiency and efficacy. The Uintah Basin is 5,000 to 10,000 feet above sea level with average low winter temperatures of 16ºF. Crude oil pumped from the region is highly paraffinic with the consistency of shoe polish at room temperature. Uintah's black wax crude must remain at a minimum of 95ºF and yellow wax above 115ºF and therefore requires a substantial amount of heat to keep it above its high pour point. Operators in the upstream market often run at temperatures of 140ºF to 160ºF. Newfield, like many other companies in the region, incurs significant operating expense in the form of fuel and power used to heat the waxy crude and counter the cold climate conditions characteristic of Utah. The Company’s first Joule Heat prototype was installed for testing purposes at the Newfield facility in June 2015 and the system is operational; however, changes to the prototype configuration will be required to determine commercial effectiveness of this unit. During the third and fourth quarters of 2015, we worked with Newfield and Dr. Carl Meinhart to modify the prototype configuration based on observed pipeline and Joule Heat operating factors. In addition, QS Energy provided a scaled-down version of the Joule Heat unit for static and flow-through testing at SRI. Testing performed by SRI in September 2015 on a laboratory-scale Joule Heat unit demonstrated the ability of the Joule Heat technology to deliver temperature increases in the laboratory setting.

 

In 2015, the Company worked in collaboration with Newfield, SRI, Dr. Carl Meinhart, and our manufacturing partner to design and build an AOT prototype unit, for operations in the upstream crude oil pipeline market (“AOT Upstream”), specifically configured for pipeline operating factors observed at Newfield’s Utah site. Our original plan was to retrofit an earlier prototype device previously tested at RMOTC; however, after multiple site visits and discussions with Newfield, it was determined a new, smaller unit, specifically optimized for Newfield operations would be more appropriate for this field test opportunity. We plan to jointly test the AOT Upstream prototype unit under typical upstream commercial pipeline conditions on Newfield’s pipeline in conjunction with the previously installed Joule Heat unit.

 

In December 2015, we temporarily suspended Joule Heat and AOT Upstream development activities to focus Company resources on finalizing commercial development of the AOT Midstream. Testing terminated at SRI and all prototype equipment was returned to the Company. We currently plan to resume Joule Heat and AOT Upstream development in 2017 depending on the availability of sufficient capital and other resources.

 

In July 2015, the Company formed QS Energy Pool, Inc., a wholly owned subsidiary of QS Energy, Inc., for the sole purpose of taking advantage of asset acquisition opportunities in the oil and gas operations market. QS Energy Pool is specifically targeting the acquisition of one or more operating companies or properties with proven positive cash flow, providing operating income and bottom line revenue which are both accretive to and synergistic with QS Energy, Inc.’s current operations. QS Energy has identified multiple attractive opportunities to acquire producing oil and gas field operations. Our strategy is to acquire producing oil and gas fields with production profiles of at least ten years, proven long-term development rights, and demonstrated positive cash flow at commodity prices as low as $25/barrel of oil and $2.00/MCF of gas. Any such acquisitions would be subject on our ability to obtain acquisition financing under acceptable terms and conditions. To date, we have not acquired any oil and gas properties, and there can be no assurances that we will do so in the future. We can provide no assurances that acquisition financing would be available to us.

 

Our expenses to date have been funded primarily through the sale of shares of common stock and convertible debt, as well as proceeds from the exercise of stock purchase warrants and options. We will need to raise substantial additional capital through 2016, and beyond, to fund our sales and marketing efforts, continuing research and development, and certain other expenses, until our revenue base grows sufficiently.

 

 

 

 19 

 

 

There are significant risks associated with our business, our Company and our stock. See “Risk Factors” in Part II, Item 1A below.

 

Results of Operation for Nine and Three-month periods ended September 30, 2016 and 2015

 

I. Nine months ended September 30, 2016 and 2015

 

   Nine months ended 
   September 30 
   2016   2015   Change 
Revenues  $   $   $ 
Costs and expenses               
Operating expenses   1,728,129    2,409,551    (681,422)
Research and development expenses   199,772    500,517    (300,745)
Loss before other income (expense)   (1,927,901)   (2,910,068)   982,167 
Other income (expense)               
Other income   1,150    10,858    (9,708)
Interest and financing expense   (1,449,594)   (643,868)   (805,726)
Loss on disposition of equipment   (3,343)       (3,343)
Net Loss  $(3,379,688)  $(3,543,078)  $163,390 

 

The Company had no revenues in the nine-month periods ended September 30, 2016 and 2015.

 

Operating expenses were $1,728,129 for the nine-month period ended September 30, 2016, compared to $2,409,551 for the nine-month period ended September 30, 2015, a decrease of $681,422. This is due to decreases in non-cash expenses of $192,681, and in cash expenses of $488,741. Specifically, the decrease in non-cash expenses are attributable to decreases in depreciation of $4,544 and stock compensation expenses attributable to the fair value of options granted to directors and employees of $283,171, offset by increases in stock compensation expenses attributable to the fair value of warrants granted to consultants and others of $95,044. The decrease in cash expense is attributable to decreases in salaries and benefits of $182,364, legal and accounting of $86,834, travel and related expenses of $181,125, corporate expenses of $32,846, insurance of $8,829, and other expenses of $9,988, offset by increases in consulting fees of $332, and rents of $12,932. The increase in rents is due in part to a one-time expense of $35,910 recognized upon vacating the Santa Barbara Facility in May, 2016 as detailed in Note 10 of the accompanying Condensed Consolidated Financial Statements.

 

Research and development expenses were $199,772 for the nine-month period ended September 30, 2016, compared to $500,517 for the nine-month period ended September 30, 2015, a decrease of $300,745. This decrease is attributable to decreases in prototype product development costs of $210,482, and product testing, research, patents and other costs of $90,263.

 

Other income and expense were $1,451,787 expense for the nine-month period ended September 30, 2016, compared to $633,010 expense for the nine-month period ended September 30, 2015, a net increase in other expenses of $818,777. This increase is attributable to an increase in non-cash other expenses of $805,726 and an increase in other expenses of $13,051. The increase in non-cash other expense is due to an increase in expense attributable to interest, beneficial conversion features and warrants associated with convertible notes issued in the amount of $805,726. The decrease in other income is due to a decrease in income from sale fixed assets in the amount of 9,708, and an increase in loss on the disposition of assets in the amount of $3,343.

 

The Company had a net loss of $3,379,688, or $0.02 per share, for the nine-month period ended September 30, 2016, compared to a net loss of $3,543,078, or $0.02 per share, for the nine-month period ended September 30, 2015.

 

 

 

 20 

 

 

II. Three months ended September 30, 2016 and 2015

 

   Three months ended 
   September 30 
   2016   2015   Change 
Revenues  $   $   $ 
Costs and expenses               
Operating expenses   467,579    727,587    (260,008)
Research and development expenses   51,595    80,082    (28,487)
Loss before other income (expense)   (519,174)   (807,669)   288,495 
Other income (expense)               
Other income   690    7,858    (7,168)
Interest and financing expense   (516,712)   (25,986)   (490,726)
Loss on disposition of equipment            
Net Loss  $(1,035,196)  $(825,797)  $(209,399)

 

The Company had no revenues in the three month-periods ended September 30, 2016 and 2015.

 

Operating expenses were $467,579 for the three-month period ended September 30, 2016, compared to $727,587 for the three-month period ended September 30, 2015, a decrease of $260,008. This is due to decreases in non-cash expenses of $62,560, and in cash expenses of $197,448. Specifically, the decrease in non-cash expenses are attributable to decreases in depreciation of $1,689 and stock compensation expenses attributable to the fair value of options granted to directors and employees of 78,451, offset by increases in stock compensation expenses attributable to the fair value of warrants granted to consultants and others of $17,580. The decrease in cash expense is attributable to decreases in salaries and benefits of $84,921, consulting fees of $4,090, corporate expenses of $9,298, insurance of $14,513 and travel and related expenses of $69,481, rents of $15,561 and other expenses of $93, offset by increases in legal and accounting of $509.

 

Research and development expenses were $51,595 for the three-month period ended September 30, 2016, compared to $80,082 for the three-month period ended September 30, 2015, a decrease of $28,487. This decrease is attributable to decreases in prototype product development costs of $28,487.

 

Other income and expense were $516,022 expense for the three-month period ended September 30, 2016, compared to $18,128 expense for the three-month period ended September 30, 2015, a net increase in other expenses of $497,894. This increase is attributable to an increase decrease in non-cash other expenses of $490,726 and decrease in other income of $7,168. The increase in non-cash other expense is due to an increase in expense attributable to interest, beneficial conversion features and warrants associated with convertible notes issued in the amount of $490,726. The decrease in other income is due to a decrease in income from sale fixed assets in the amount of $7,168.

 

The Company had a net loss of $1,035,196, or $0.01 per share, for the three-month period ended September 30, 2016, compared to a net loss of $825,797, or $0.00 per share, for the three-month period ended September 30, 2015.

 

Liquidity and Capital Resources

 

General

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the nine-months ended September 30, 2016, the Company incurred a net loss of $3,379,688, used cash in operations of $1,401,310 and had a stockholders’ deficit of $946,490 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2015 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 

At September 30, 2016, the Company had cash on hand in the amount of $385,360. Management estimates that the current funds on hand will be sufficient to continue operations through January 2017. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with the license and research and development agreements with Temple; costs associated with product development and commercialization of the AOT and Joule Heat technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements, certain payments to a former officer and consulting fees, during the remainder of 2016 and beyond.

 

 

 

 21 

 

 

Summary

 

During the period ended September 30, 2016, we received cash totaling $1,442,769 from issuance of our convertible notes payable and used cash in operations of $1,401,310. At September 30, 2016, we had cash on hand in the amount of $385,360. We will need additional funds to operate our business, including without limitation the expenses we will incur in connection with the license and research and development agreements with Temple University; costs associated with product development and commercialization of the AOT and related technologies; costs to manufacture and ship our products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed above, we have substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements, certain severance payments to a former officer and consulting fees, during the remainder of 2016 and beyond.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company.

 

Licensing Fees to Temple University

 

For details of the licensing agreements with Temple University, see Financial Statements attached hereto, Note 6 (Research and Development).

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

 

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of a company’s financial condition and results of operations and those that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation. For a more detailed discussion of the accounting policies of the Company, see Note 2 of the Notes to the Condensed Consolidated Financial Statements, “Summary of Significant Accounting Policies”.

 

We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Estimates

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our consolidated financial statements as described in Note 2 to Notes to the Condensed Consolidated Financial Statements. Actual results could differ from those estimates.

 

 

 

 22 

 

 

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company's common stock option grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

 

Recent Accounting Polices

 

See Note 2 in the accompanying financial statements for a discussion of recent accounting policies.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

We issue from time to time fixed rate discounted convertible notes. Our convertible notes and our equity securities are exposed to risk as set forth below, in Part II Item 1A, “Risk Factors.” Please also see Item 2, above, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 4. Controls and Procedures

 

1. Disclosure Controls and Procedures

 

The Company's management, with the participation of the Company's chief executive officer and chief financial officer, evaluated, as of September 30, 2016, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of September 30, 2016, management, the chief executive officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.

 

(a)       Changes in Internal Control over Financial Reporting

 

No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the nine-month period ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

 

 23 

 

 

PART II – OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

There is no litigation of any significance with the exception of the matters that have arisen under, and are being handled in, the normal course of business.

 

Item 1A.  Risk Factors

 

There have been no material changes in the risk factors previously disclosed in Form 10-K for the period ended December 31, 2015, which we filed with the SEC on March 15, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuances

 

In private offerings exempt from registration, during the nine months ended September 30, 2016, the Company issued 13,670,449 shares of its common stock upon the conversion of $1,367,044 in convertible notes at $0.10 per share.

 

As reported in our Form 8-K filed on April 25, 2016, from January 1, 2016 through April 20, 2016, the Company issued convertible promissory notes in the aggregate of $868,745 for cash proceeds of $789,769 or a discount of $78,976. The notes do not bear any interest; however, the implied interest rate used was 10% because the notes were issued for purchase prices of 10% less than their face value. The notes are unsecured, mature in twelve months from issuance and are convertible at $0.10 per share. In addition, the Company also granted these note holders warrants to purchase 4,343,725 shares of the Company’ common stock. The warrants are fully vested, exercisable at $0.10 per share and will expire in one year from the date of their issuance.

 

From April 21, 2016, through September 30, 2016, the Company issued additional convertible promissory notes under the same terms as those described in our Form 8-K filed on April 25, 2016, in the aggregate of $718,300 for cash proceeds of $653,000 or a discount of $65,300. The notes do not bear any interest; however, the implied interest rate used was 10% because the notes were issued for purchase prices of 10% less than their face value. The notes are unsecured, mature in twelve months from issuance and are convertible at $0.10 per share. In addition, the Company also granted these note holders warrants to purchase 3,561,500 shares of the Company’ common stock. The warrants are fully vested, exercisable at $0.10 per share and will expire in one year from the date of their issuance.

 

The offering was made to non U.S. investors and to U.S. “accredited investors,” as the term is defined in Regulation D under the Securities Act of 1933, as amended (the “Securities Act”), and were made without general advertising or solicitation. The securities sold in the offering were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on exemptions from registration including the exemption from registration afforded by Section 4(a)(2) of the Securities Act and Regulation S promulgated under the Securities Act, and corresponding provisions of state securities law, which, respectively, exempt transactions by an issuer not involving any public offering or transactions with non U.S. Investors.

 

The Company issued 300,000 shares of common stock as compensation to consultants during the nine months ended September 30, 2016.

 

The proceeds received by the Company in connection with the above issuances of shares were used for general corporate purposes.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

Increase in Outstanding Shares

 

In addition to the issuances of securities described in Item 2 above, from October 1, 2016 through November 4, 2016, the Company issued 1,243,000 shares of common stock upon conversion of previously issued convertible notes in aggregate value of $124,300. These shares were issued in private offerings exempt from registration.

 

 

 

 24 

 

 

Item 6. Exhibits

 

Exhibit No.   Description
       
  31.1   Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)
       
  31.2   Certification of Chief Financial Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)
       
  32   Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.  Section 1350
       
  101.INS   XBRL Instance Document
       
  101.SCH   XBRL Schema Document
       
  101.CAL   XBRL Calculation Linkbase Document
       
  101.LAB   XBRL Label Linkbase Document
       
  101.PRE   XBRL Presentation Linkbase Document
       
  101.DEF   XBRL Definition Linkbase Document

 

 

 

 

 25 

 

 

SIGNATURES

 

 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

  QS ENERGY, INC.    
     
       
Date: November 9, 2016 By: /s/ Greggory M. Bigger  
    Greggory M. Bigger  
    Chief Financial Officer   

 

 

 

 

 

 

 

 

 

 

 26 

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
       
  31.1   Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)
       
  31.2   Certification of Chief Financial Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e)
       
  32   Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C.  Section 1350
       
  101.INS   XBRL Instance Document
       
  101.SCH   XBRL Schema Document
       
  101.CAL   XBRL Calculation Linkbase Document
       
  101.LAB   XBRL Label Linkbase Document
       
  101.PRE   XBRL Presentation Linkbase Document
       
  101.DEF   XBRL Definition Linkbase Document 

 

 

 

 

 

 

 

 

 

 

 27 

EX-31.1 2 qsenergy_10q-ex3101.htm CERTIFICATION

EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

AND RULES 13A-14 AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

I, Greggory M. Bigger, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of QS Energy, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)  and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(d)-15(f) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its condensed consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting  principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

 

2. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2016 /s/ Greggory M. Bigger  
Greggory M. Bigger  
Chief Executive Officer  

 

 

 

   

 

EX-31.2 3 qsenergy_10q-ex3102.htm CERTIFICATION

EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

AND RULES 13A-14 AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

I, Greggory M. Bigger, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of QS Energy, Inc.; 

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(d)-15(f) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its condensed consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting  principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2016 /s/ Greggory M. Bigger  
Greggory M. Bigger  
Chief Financial Officer   

 

 

 

   

 

EX-32 4 qsenergy_10q-ex3200.htm CERTIFICATION

EXHIBIT 32

 

CERTIFICATION OF PERIODIC FINANCIAL REPORT BY THE CHIEF EXECUTIVE

OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Acting Chief Executive Officer and the Chief Financial Officer of QS Energy, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

Date: November 9, 2016 /s/ Greggory M. Bigger
Greggory M. Bigger
Chief Executive Officer 
 
Date: November 9, 2016 /s/ Greggory M. Bigger
Greggory M. Bigger
Chief Financial Officer 

 

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Document and Entity Information - shares
9 Months Ended
Sep. 30, 2016
Nov. 04, 2016
Document And Entity Information    
Entity Registrant Name QS ENERGY, INC.  
Entity Central Index Key 0001103795  
Document Type 10-Q  
Document Period End Date Sep. 30, 2016  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Is Entity a Well-known Seasoned Issuer? No  
Is Entity a Voluntary Filer? No  
Is Entity's Reporting Status Current? Yes  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   199,045,026
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2016  
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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Current assets:    
Cash $ 385,360 $ 349,186
Prepaid expenses and other current assets 35,389 50,596
Total current assets 420,749 399,782
Property and equipment, net of accumulated depreciation of $30,627 and $60,242 at September 30, 2016 and December 31, 2015, respectively 18,490 21,798
Other assets 7,180 6,480
Total assets 446,419 428,060
Current liabilities:    
Accounts payable-license agreements 730,626 590,001
Accounts payable and accrued expenses 209,888 182,334
Accrued expenses and accounts payable-related parties 143,151 190,750
Deposits and other current liabilities 4,500 25,000
Convertible debentures, net of discounts of $254,116 and $100,833 at September 30, 2016 and December 31, 2015, respectively 304,744 222,195
Total current liabilities 1,392,909 1,210,280
Commitments and contingencies
Stockholders' deficit    
Common stock, $.001 par value: 300,000,000 shares authorized 197,802,026 and 183,831,577 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively 197,802 183,832
Additional paid-in capital 103,509,548 100,308,100
Accumulated deficit (104,653,840) (101,274,152)
Total stockholders' deficit (946,490) (782,220)
Total liabilities and stockholders' deficit $ 446,419 $ 428,060
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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]    
Accumulated depreciation $ 30,627 $ 60,242
Discounts on convertible debentures $ 254,116 $ 100,833
Common stock, par value $ .001 $ 0.001
Common stock, shares authorized 300,000,000 300,000,000
Common stock, shares issued 197,802,026 183,831,577
Common stock, shares outstanding 197,802,026 183,831,577
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Income Statement [Abstract]        
Revenues $ 0 $ 0 $ 0 $ 0
Costs and Expenses        
Operating expenses 467,579 727,587 1,728,129 2,409,551
Research and development expenses 51,595 80,082 199,772 500,517
Loss before other income (expense) (519,174) (807,669) (1,927,901) (2,910,068)
Other income (expense)        
Other income 690 7,858 1,150 10,858
Interest and financing expense (516,712) (25,986) (1,449,594) (643,868)
Loss on disposition of equipment 0 0 (3,343) 0
Net loss $ (1,035,196) $ (825,797) $ (3,379,688) $ (3,543,078)
Net loss per common share, basic and diluted $ (.01) $ 0.00 $ (.02) $ (.02)
Weighted average common shares outstanding, basic and diluted 195,342,504 183,128,577 190,874,796 181,943,768
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Unaudited) - 9 months ended Sep. 30, 2016 - USD ($)
Common Stock [Member]
Additional Paid-in Capital [Member]
Deficit Accumulated [Member]
Total
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Beginning balance, value at Dec. 31, 2015 $ 183,832 $ 100,308,100 $ (101,274,152) $ (782,220)
Common stock issued on conversion of notes payable, shares issued 13,670,449      
Common stock issued on conversion of notes payable, value $ 13,670 1,353,374   1,367,044
Fair value of stock issued for services, shares issued 300,000      
Fair value of stock issued for services, value $ 300 47,700   48,000
Fair value of warrants and beneficial conversion feature of issued convertible notes   1,442,769   1,442,769
Fair value of options and warrants issued as compensation   357,605   357,605
Net loss     (3,379,688) (3,379,688)
Ending balance, shares at Sep. 30, 2016 197,802,026      
Ending balance, value at Sep. 30, 2016 $ 197,802 $ 103,509,548 $ (104,653,840) $ (946,490)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities    
Net Loss $ (3,379,688) $ (3,543,078)
Adjustments to reconcile net loss to net cash used in operating activities:    
Stock based compensation expense 405,605 593,732
Amortization of debt discount 1,433,763 643,868
Accrued interest on convertible notes 15,831  
Loss on disposition of assets 3,343 0
Depreciation and amortization 5,249 9,803
Changes in operating assets and liabilities:    
Prepaid expenses and other current assets 14,507 14,414
Accounts payable and accrued expenses 27,554 (4,403)
Accounts payable - license agreements 140,625 137,813
Accounts payable and accrued expenses - related parties (47,599) (52,610)
Deposits and other current liabiilities (20,500) 0
Net cash used in operating activities (1,401,310) (2,200,461)
Cash flows from investing activities    
Purchase of equipment (5,285) (12,914)
Net cash used in investing activities (5,285) (12,914)
Cash flows from financing activities    
Net proceeds from issuance of convertible notes and warrants 1,442,769 475,500
Net proceeds from exercise of warrants and options 0 50,000
Net cash provided by financing activities 1,442,769 525,500
Net increase (decrease) in cash 36,174 (1,687,875)
Cash, beginning of period 349,186 2,247,557
Cash, end of period 385,360 559,682
Supplemental disclosures of cash flow information    
Cash paid during the year for: Interest 0 0
Cash paid during the year for: Income taxes 0 0
Non-cash investing and financing activities    
Conversion of convertible debentures to common stock 1,367,044 602,800
Fair value of warrants and beneficial conversion feature associated with issued convertible notes $ 1,442,769 $ 470,945
XML 17 R7.htm IDEA: XBRL DOCUMENT v3.5.0.2
1. Description of Business
9 Months Ended
Sep. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business

QS Energy, Inc. (“QS Energy”, “Company”) (formerly known as Save the World Air, Inc.) was incorporated on February 18, 1998, as a Nevada Corporation under the name Mandalay Capital Corporation. The Company changed its name to Save the World Air, Inc. on February 11, 1999. Effective August 11, 2015, the Company changed its name to QS Energy, Inc. The Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter Bulletin Board. More information including the Company’s fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.

 

QS Energy develops and commercializes energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual properties include a portfolio of domestic and international patents and patents pending, a substantial portion of which have been developed in conjunction with and exclusively licensed from Temple University of Philadelphia, PA (“Temple”). QS Energy's primary technology is called Applied Oil Technology™ (AOT), a commercial-grade crude oil pipeline transportation flow-assurance product. Engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements, AOT is a 100% solid-state system that reduces crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. The AOT product has transitioned from the research and development stage to initial production for continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

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2. Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2016
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

Consolidation Policy

 

The accompanying consolidated financial statements of QS Energy Inc. include the accounts of QS Energy Inc. (the Parent) and its wholly owned subsidiaries, QS Energy Pool, Inc. and STWA Asia Pte. Limited. Intercompany transactions and balances have been eliminated in consolidation.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the nine-months ended September 30, 2016, the Company incurred a net loss of $3,379,688, used cash in operations of $1,401,310 and had a stockholders’ deficit of $946,490 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2015 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 

At September 30, 2016, the Company had cash on hand in the amount of $385,360. Management estimates that the current funds on hand will be sufficient to continue operations through January 2017. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with the license and research and development agreements with Temple; costs associated with product development and commercialization of the AOT technology; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments, including without limitation, payment of license and other fees to Temple University, salaries to our executive officers pursuant to employment agreements, certain payments to a former officer and consulting fees, during the remainder of 2016 and beyond.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders in case of equity financing.

 

Basic and Diluted Income (loss) per share

 

Our computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. Potential common shares that have an antidilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted (loss) per common share is the same for periods in which the Company reported an operating loss because all warrants and stock options outstanding are anti-dilutive. At September 30, 2016 and 2015, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock as their effect would have been anti-dilutive.

 

   September 30, 2016   September 30, 2015 
Options   23,624,256    21,706,512 
Warrants   12,451,892    3,677,704 
Common stock issuable upon conversion of notes payable   3,776,792    399,667 
Total   39,852,940    25,783,883 

 

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

 

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to assumptions used in valuing equity instruments issued for financing and services. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

Effective January 1, 2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.

 

Level 3—Unobservable inputs based on the Company's assumptions.

 

The Company is required to use observable market data if such data is available without undue cost and effort. At September 30, 2016, the carrying amounts for cash, accounts payable, accrued expenses and convertible debentures approximate their fair value due to their short-term nature.

 

Patent Costs

 

Patent costs consist of patent-related legal and filing fees. Due to the uncertainty associated with the successful development of our AOT and Joule Heat products, all patent costs are expensed as incurred. During the nine-month periods ended September 30, 2016 and 2015, patent costs were $49,265 and $35,379, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations. During the three-month periods ended September 30, 2016 and 2015, patent costs were $18,891 and $5,525, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statement presentation or disclosures.

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3. Certain Relationships and Related Transactions
9 Months Ended
Sep. 30, 2016
Related Party Transactions [Abstract]  
Certain Relationships and Related Transactions

As of September, 30, 2016 and December 31, 2015, the Company had accrued expenses and accounts payable to related parties in the amount of $143,151 and $190,750, respectively. Included in these amounts at September 30, 2016 and December 31, 2015 were unpaid salaries due to our former President and current member of the Company’s Board of Directors of $30,429 and $75,429, respectively. The Company agreed to pay the former President $5,000 per month until the unpaid salary is fully settled. Also included in these amounts at September 30, 2016 and December 31, 2015 are accrued directors’ fees of $76,089.

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4. Property and Equipment
9 Months Ended
Sep. 30, 2016
Property, Plant and Equipment [Abstract]  
Property and Equipment

At September 30, 2016 and December 31, 2015, property and equipment consists of the following:

 

   September 30, 2016   December 31, 2015 
    (unaudited)      
Office equipment  $28,040   $65,051 
Furniture and fixtures   2,880    4,075 
Testing equipment   18,197    12,914 
Subtotal   49,117    82,040 
Less accumulated depreciation   (30,627)   (60,242)
Total  $18,490   $21,798 

 

Depreciation expense for the nine-month periods ended September 30, 2016 and 2015 was $5,249 and $9,803, respectively. During the period ended September 30, 2016, the Company disposed certain property and equipment with aggregate costs of $38,206 and accumulated depreciation of $34,863 which resulted in a loss of $3,343.

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5. Convertible Notes
9 Months Ended
Sep. 30, 2016
Debt Disclosure [Abstract]  
Convertible Notes

   September 30, 2016   December 31, 2015 
    (unaudited)      
Balance due on convertible notes  $541,024   $321,024 
Accrued interest   17,836    2,004 
Subtotal   558,860    323,028 
Unamortized note discount   (254,116)   (100,833)
Balance on convertible notes, net of note discount  $304,744   $222,195 

 

During 2014 and 2015, the Company conducted a private placement and issued approximately $1 million of its unsecured convertible notes for proceeds of $920,900 or an original issue discount (“OID”) of $85,490. The notes do not bear any interest: however, the implied interest rate used was 10% because the notes were issued for a purchase price of 10% less than their face value. The notes are unsecured and mature in twelve months from issuance. The notes are convertible, at the option of the note holder, into the Company’s common stock at conversion prices ranging from $0.10 per share through $0.48 per share. In addition, each note holder also received a warrant to purchase common stock equivalent to 25% of the number of shares the notes are convertible into or a total of 1,942,704 shares of common stock. Each warrant is exercisable on a cash basis only at prices ranging from $0.10 through $0.48 per share. The warrants vest immediately upon issuance, and are exercisable for one year from the date of issuance.

 

As a result, in prior periods, the Company recorded a note discount of $842,105 to account for the relative fair value of the warrants, the notes’ beneficial conversion feature (“BCF”), and OID. The note discounts are being amortized over the life of the note or will be amortized in full upon the conversion of the corresponding notes to common stock. At December 31, 2015, total outstanding notes payable amounted to $321,024 and unamortized note discount was $100,833.

 

During the nine-month period ended September 30, 2016, the Company issued similar convertible promissory notes in the amount of $1,587,045 for cash proceeds of $1,442,769 or a discount of $144,276. The notes do not bear any interest; however, the implied interest rate used was 10% because the notes were issued for purchase prices of 10% less than their face value. The notes are unsecured, mature in twelve months from issuance and are convertible at $0.10 per share. In addition, the Company also granted these note holders warrants to purchase 7,935,225 shares of the Company’ common stock. The warrants are fully vested, exercisable at $0.10 per share and will expire in one year from the date of their issuance. As a result, the Company recorded a note discount of $1,587,045 to account for the relative fair value of the warrants, the notes’ BCF and OID. The note discounts are being amortized over the life of the note on the effective interest method.

 

During the nine-month period ended September 30, 2016, a total of $1,367,044 of notes payable were converted into 13,670,449 shares of common stock and amortized note discount of $1,433,763 was recorded as interest expense.

 

As of September 30, 2016, total outstanding notes payable amounted to $541,024 and an unamortized note discount of $254,116. Included in the Company’s outstanding notes payable are three notes in the aggregate of $211,024 that had reached maturity without conversion and are past maturity and are currently due with accrued interest in the amount of $17,836. During the nine-month period ending September 30, 2016, the Company accrued interest of $15,831 pursuant to the terms of the notes. As of September 30, 2016, these notes were convertible to 3,776,792 shares of common stock in aggregate.

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6. Research and Development
9 Months Ended
Sep. 30, 2016
Research and Development [Abstract]  
Research and Development

Research and development costs consist of costs of construction, development and testing of the AOT and Joule Heat technologies with internal resources and through the assistance of various third party entities. Costs incurred and expensed include fees such as testing fees, purchase of test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT and Joule Heat prototypes. In addition, research and development costs also include licensing fees and research and development fees due to Temple University.

 

For the nine-month periods ended September 30, 2016 and 2015, our research and development expenses were $199,772 and $500,517 respectively. For the three-month periods ended September 30, 2016 and 2015, our research and development expenses were $51,595 and $80,082 respectively.

 

AOT Product Development and Testing

 

In 2014, the Company entered into a lease agreement with Kinder Morgan Crude & Condensate, LLC for the manufacture and delivery of our AOT Prototype Equipment. The AOT Prototype Equipment is currently undergoing testing at a Kinder Morgan facility. See Note 7 for further discussion.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $58,947 and $110,439, respectively, in the manufacture, delivery and testing of the AOT prototype equipment. During the three-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $4,720 and $31,843, respectively. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statements of operations.

 

Joule Heat Product Development and Testing

 

On October 15, 2014, the Company entered into a Joint Development Agreement with Newfield Pipeline Exploration Company (“Newfield”) to test the effectiveness of the Company’s Joule Heat technology under operating conditions on Newfield’s oil pipeline. The Company’s first Joule Heat prototype unit was delivered to Newfield in May 2015 for further testing.

 

In December 2015, we temporarily suspended development activities for the Joule Heat technology in order to focus the Company resources on finalizing the commercial development of the AOT technology. We currently plan to resume Joule Heat development in 2017 depending on the availability of sufficient capital and other resources.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $200 and $184,765, respectively, in the manufacture, delivery and testing of the Joule Heat prototype equipment. During the three-month periods ended September 30, 2016 and 2015, the Company incurred total expenses of $0 and $1,364, respectively, in the manufacture, delivery and testing of the Joule Heat prototype equipment. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations.

 

Temple University Licensing Agreement

 

On August 1, 2011, the Company and Temple University (“Temple”) entered into two (2) Exclusive License Agreements (collectively, the “License Agreements”) relating to Temple’s patent applications, patents and technical information pertaining to technology associated with an electric and/or magnetic field assisted fuel injector system (the “First Temple License”), and to technology to reduce crude oil viscosity (the “Second Temple License”). The License Agreements are exclusive and the territory licensed to the Company is worldwide and replace previously issued license agreements.

 

Pursuant to the two License Agreements, the Company agreed to pay Temple the following: (i) non-refundable license maintenance fee of $300,000; (ii) annual maintenance fees of $187,500; (iii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements; and (iv) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. Temple also agreed to defer $37,500 of the amount due if the Company agreed to fund at least $250,000 in research or development of Temple’s patent rights licensed to the Company. The term of the licenses commenced in August 2011 and will expire upon the expiration of the patents. The agreement can also be terminated by either party upon notification under terms of the Licensing Agreements or if the Company ceases the development of the patent or failure to commercialize the patent rights.

 

Total expenses recognized during each nine-month period ended September 30, 2016 and 2015 pursuant to these two agreements amounted to $140,625. Total expenses recognized during each three-month period ended September 30, 2016 and 2015 pursuant to these two agreements amounted to $46,875. These expenses have been reflected in Research and Development expenses on the accompanying consolidated statements of operations.

 

As of September 30, 2016 and December 31, 2015, total unpaid fees due to Temple pursuant to these agreements amounted to $601,250 and $460,625, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. As of September 30, 2016, $193,750 of the $601,250 payable has been deferred until the Licensing Agreements are terminated and $407,500 is deemed past due. The Company is currently in negotiations with Temple to settle this amount.

 

There were no revenues generated from these two licenses during the nine-month periods ended September 30, 2016 and 2015.

 

Temple University Sponsored Research Agreement

 

On March 19, 2012, the Company entered into a Sponsored Research Agreement (“Research Agreement”) with Temple University (“Temple”), whereby Temple, under the direction of Dr. Rongjia Tao, performed research related to the Company’s AOT device (the “Project”), for the period April 1, 2012, through April 1, 2014. All rights and title to intellectual property resulting from Temple’s work related to the Project were subjected to the Exclusive License Agreements between Temple and the Company, dated August 1, 2011. In exchange for Temple’s research efforts on the Project, the Company has agreed to pay Temple $500,000, payable in quarterly installments of $62,500. The agreement expired in August 2015.

 

During the nine-month period ended September 30, 2015, the Company recognized a total expense of $64,688 pursuant to this agreement. During the three-month period ended September 30, 2015, the Company recognized a total expense of $0 pursuant to this agreement. These costs have been reflected in Research and Development expenses on the accompanying consolidated statements of operations. There was no such cost recorded during 2016 as a result of the expiration of the agreement in August 2015.

 

As of September 30, 2016 and December 31, 2015, total unpaid fees due to Temple pursuant to this agreement amounted to $129,376, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. As of September 30, 2016, the entire $129,377 is deemed past due. The Company is currently in negotiations with Temple to settle this amount.

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7. Kinder Morgan Crude & Condensate, LLC Leases
9 Months Ended
Sep. 30, 2016
Leases [Abstract]  
Kinder Morgan Crude & Condensate, LLC Lease

On July 15, 2014, the Company entered into an Equipment Lease/Option to Purchase Agreement (“Lease”) with Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”). In accordance with the terms and conditions of the agreement, Kinder Morgan agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute.

 

The initial term (“Initial Term”) of the Lease is four months, with an option to extend the Lease for up to a maximum of 84 months. During the Initial Term, either the Company or Kinder Morgan may terminate the Agreement for any reason on 45 days’ written notice. Lease payments shall be $20,000 per month; provided however, that in the event the Equipment is removed from service at its initial location during the Initial Term, the monthly lease payments shall be reduced to $5,000 until the Equipment is placed back in service at its new location, at which time the Lease payments shall resume at $20,000 per month. The agreement further provides that Kinder Morgan shall have an option to purchase the Equipment during the term of the Lease for a fixed price of between $600,000 and $1,200,000, depending upon the date of purchase.

 

The AOT equipment was delivered to Kinder Morgan in December 2014 and installed in March 2015. In April 2015, the AOT equipment experienced technical issues that needed further modifications. In February 2016, the AOT equipment was re-installed at Kinder Morgan’s facility. The Company and Kinder Morgan are continuing to work to finalize installation and acceptance of the equipment under the lease.

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8. Common Stock
9 Months Ended
Sep. 30, 2016
Stockholders' Equity Note [Abstract]  
Common Stock

During the nine months ended September 30, 2016, the Company issued 13,670,449 shares of its common stock upon the conversion of $1,367,044 in convertible notes at $0.10 per share. In addition, the Company also issued 300,000 shares of common stock to consultants for services rendered with a fair value of $48,000 which is included as part of Operating Expenses in the attached consolidated statements of operations. The shares were valued at the trading price at the date of issuance.

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9. Stock Options and Warrants
9 Months Ended
Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]  
Stock Options and Warrants

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs.  Options vest and expire according to terms established at the grant date.

 

Options

 

Employee options vest according to the terms of the specific grant and expire from 2 to 10 years from date of grant. The weighted-average, remaining contractual life of employee and non-employee options outstanding at September 30, 2016 was 5.0 years. Stock option activity for the period January 1, 2016 up to September 30, 2016, was as follows:

 

    Options   Weighted Avg.
Exercise Price
 
 January 1, 2016    21,535,148   $0.30 
 Granted    2,250,527    0.19 
 Exercised         
 Forfeited    (161,419)   0.77 
 Outstanding, September 30, 2016    23,624,256   $0.28 
 Exercisable, September 30, 2016    21,373,729   $0.29 

 

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of September 30, 2016 were as follows:

 

      Outstanding Options    Exercisable Options 
 Option
Exercise Price
Per Share
    Shares    Life
(Years)
    Weighted
Average Exercise
Price
    Shares    Weighted
Average Exercise
Price
 
 $ 0.21 - $ 0.99    23,473,810    5.0   $0.28    21,223,283   $0.29 
 $ 1.00 - $ 1.99    150,446    6.8   $1.18    150,446   $1.18 
      23,624,256    5.0   $0.28    21,373,729   $0.29 

 

During the nine-month period ending September 30, 2016 the Company granted options to purchase 1,710,527 shares of common stock to members of the Company’s Board of Directors. The options are exercisable at $0.19 per share, vest monthly over a twelve-month period, and expire ten years from the date granted. Total fair value of these options at grant date was $273,683 using the Black-Scholes Option Pricing model with the following assumptions: life of 5.5 years; risk free interest rate of 1.73%; volatility of 119% and dividend yield of 0%. The fair value will be amortized over the vesting period.

 

During the nine-month period ending September 30, 2016 the Company granted options to purchase 540,000 shares of common stock to employees of the Company. The options are exercisable at $0.18 per share, vest over periods of twelve and twenty-four months, and expire ten years from the date granted. Total fair value of these options at grant date was $83,500 using the Black-Scholes Option Pricing model with the following assumptions: life of 5.5 to 6 years; risk free interest rate of 1.23%; volatility of 121% and dividend yield of 0%. The fair value will be amortized over the vesting period.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs based on the fair value of options that vested of $265,448 and $548,619 respectively, which is included in Operating expenses in the Company’s statement of operations. During the three-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs based on the fair value of options that vested of $84,293 and $162,744 respectively, which is included in Operating expenses in the Company’s statement of operations.

 

At September 30, 2016, the Company’s closing stock price was $0.15 per share. As all outstanding options had an exercise price greater than $0.15 per share, the aggregate intrinsic value of the options outstanding at September 30, 2016 was $0. Future unamortized compensation expense on the unvested outstanding options at September 30, 2016 is $125,462 to be recognized through May 2018.

 

Warrants

 

The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting January 1, 2016 up to September 30, 2016.

 

    Warrants   Weighted Avg.  
Exercise Price
 
 January 1, 2016    4,411,667   $0.31 
 Granted    8,735,225    0.11 
 Exercised         
 Cancelled    (695,000)   0.49 
 September 30, 2016    12,451,892   $0.16 

 

The weighted average exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of September 30, 2016 were as follows:

 

      Outstanding Warrants    Exercisable Warrants 
 Warrant
Exercise Price Per Share
    Shares    Life
(Years)
    Weighted
Average Exercise
Price
    Shares    Weighted
Average
Exercise
Price
 
 $ 0.01 - $ 0.14    9,015,225    0.3   $0.10    8,915,225   $0.10 
 $ 0.15 - $ 1.99    3,436,667    3.4   $0.30    3,436,667   $0.30 
      12,451,892    1.6   $0.16    12,451,892   $0.16 

 

During the nine-month period ending September 30, 2016, pursuant to terms of convertible notes issued, the Company granted warrants to purchase 7,935,225 shares of common stock with an exercise price of $0.10 per share, vesting immediately upon grant and expiring one year from the date of grant (see Note 5).

 

During the nine-month period ending September 30, 2016 the Company granted warrants to purchase 800,000 shares of common stock to consultants. The options are exercisable starting at $0.12 per share to $0.18 per share, vested upon issuance, and expire in one to three years from the date granted. The fair value of these warrants were computed using the Black-Scholes Option Pricing model with the following assumptions: life of 1 year through 10 years; average stock price of $0.16 per share, average risk free interest rate of 0.82%; average volatility of 110% and dividend yield of 0%. The fair value will be amortized over the vesting period.

 

During the nine-month period ending September 30, 2016, the Company amended the terms of a warrant issued in 2015, extending the expiration date of the warrant by twelve months. The fair value of this warrant at the date of the amendment was $32,083, computed using the Black-Scholes Option Pricing model with the following assumptions: life of 1 year; stock price of $0.17 per share, average risk free interest rate of 0.81%; average volatility of 97% and dividend yield of 0%.

 

During the nine-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs of $92,157 and $45,113, respectively, based on the fair value of warrants that vested, which is included in Operating expenses in the Company’s statement of operations. During the three-month periods ended September 30, 2016 and 2015, the Company recognized compensation costs of $21,396 and $3,816, respectively, based on the fair value of warrants that vested, which is included in Operating expenses in the Company’s statement of operations.

 

At September 30, 2016, the aggregate intrinsic value of the warrants outstanding was $444,761. Future unamortized compensation expense on the unvested outstanding warrants at September 30, 2016 is $12,104 to be recognized through July 2018.

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10. Contractual Obligations
9 Months Ended
Sep. 30, 2016
Commitments and Contingencies Disclosure [Abstract]  
Contractual Obligations

The Company has certain contractual commitments as of September 30, 2016 for future periods, including office leases, minimum guaranteed compensation payments and other agreements as described in the following table and associated footnotes:

 

        Research and         
Year ending   Office   License   Compensation   Total 
December 31,   Lease (1)   Agreements (2)   Agreements (3)   Obligations 
 2016   $17,490   $46,875   $87,500   $151,865 
 2017    69,960    187,500    305,429    562,889 
 2018    40,810    187,500    290,000    518,310 
 2019        187,500    54,375    241,875 
 2020        187,500        187,500 
 Total   $128,260   $796,875   $737,304   $1,662,439 

 

________________________________

  (1) Consists of rent for the Company’s Santa Barbara Facility expiring on July 31, 2018.

 

  (2) Consists of license maintenance fees to Temple University in the amount of $187,500 paid annually through the life of the underlying patents or until otherwise terminated by either party.

 

  (3) Consists of base salary and certain contractually-provided benefits, to i) an executive officer, pursuant to an employment agreement at a base salary of $290,000 per year and, as amended by the Board on March 10, 2016, expires on March 8, 2019; and ii) and a severance agreement of a former officer in the amount of $45,429.

 

Effective May 1, 2016, the Company vacated the Santa Barbara Facility and subleased the space through the term of the master lease, terminating July 31, 2018. Under the master lease, the Company is committed to pay $5,830 per month. This expense is offset by sublease income of $4,500 per month, for a net monthly expense of $1,330, totaling $35,910 over the remaining 27-month term of the master lease. At September 30, 2016, the Company accrued $29,260 to account for the estimated loss in the Santa Barbara Facility lease agreement which is reflected in as part of Accounts Payable and accrued expense on the accompanying consolidated balance sheet.

 

Effective June 1, 2016, the Company relocated its Santa Barbara office to an office space located at 5266 Hollister Avenue, Suite 219, Santa Barbara, CA 93111, under a twelve-month lease at a lease rate of $751 per month. This expense is reflected in Operating Expenses on the accompanying consolidated statements of operations.

XML 27 R17.htm IDEA: XBRL DOCUMENT v3.5.0.2
11. Subsequent Events
9 Months Ended
Sep. 30, 2016
Subsequent Events [Abstract]  
Subsequent Events

Increase in Outstanding Shares

 

From October 1, 2016 through November 4, 2016, the Company issued 1,243,000 shares of common stock upon conversion of previously issued convertible notes in aggregate value of $124,300.

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2. Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2016
Accounting Policies [Abstract]  
Description of business

1. Description of Business

 

QS Energy, Inc. (“QS Energy”, “Company”) (formerly known as Save the World Air, Inc.) was incorporated on February 18, 1998, as a Nevada Corporation under the name Mandalay Capital Corporation. The Company changed its name to Save the World Air, Inc. on February 11, 1999. Effective August 11, 2015, the Company changed its name to QS Energy, Inc. The Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter Bulletin Board. More information including the Company’s fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.

 

QS Energy develops and commercializes energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual properties include a portfolio of domestic and international patents and patents pending, a substantial portion of which have been developed in conjunction with and exclusively licensed from Temple University of Philadelphia, PA (“Temple”). QS Energy's primary technology is called Applied Oil Technology™ (AOT), a commercial-grade crude oil pipeline transportation flow-assurance product. Engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements, AOT is a 100% solid-state system that reduces crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. The AOT product has transitioned from the research and development stage to initial production and continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of fiscal year-end results.

Consolidation policy

Consolidation Policy

 

The accompanying consolidated financial statements of QS Energy Inc. include the accounts of QS Energy Inc. (the Parent) and its wholly owned subsidiaries, QS Energy Pool, Inc. and STWA Asia Pte. Limited. Intercompany transactions and balances have been eliminated in consolidation.

Going concern

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the nine-months ended September 30, 2016, the Company incurred a net loss of $3,379,688, used cash in operations of $1,401,310 and had a stockholders’ deficit of $946,490 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2015 consolidated financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 

At September 30, 2016, the Company had cash on hand in the amount of $385,360. Management estimates that the current funds on hand will be sufficient to continue operations through January 2017. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with the license and research and development agreements with Temple; costs associated with product development and commercialization of the AOT technology; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments, including without limitation, payment of license and other fees to Temple University, salaries to our executive officers pursuant to employment agreements, certain payments to a former officer and consulting fees, during the remainder of 2016 and beyond.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders in case of equity financing.

Basic and Diluted Income (loss) per share

Basic and Diluted Income (loss) per share

 

Our computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants. Potential common shares that have an antidilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

 

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted (loss) per common share is the same for periods in which the Company reported an operating loss because all warrants and stock options outstanding are anti-dilutive. At September 30, 2016 and 2015, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock as their effect would have been anti-dilutive.

 

   September 30, 2016   September 30, 2015 
Options   23,624,256    21,706,512 
Warrants   12,451,892    3,677,704 
Common stock issuable upon conversion of notes payable   3,776,792    399,667 
Total   39,852,940    25,783,883 

Stock-Based Compensation

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.

Estimates

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related to assumptions used in valuing equity instruments issued for financing and services. Actual results could differ from those estimates.

Fair value of financial instruments

Fair Value of Financial Instruments

 

Effective January 1, 2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.

 

Level 3—Unobservable inputs based on the Company's assumptions.

 

The Company is required to use observable market data if such data is available without undue cost and effort. At September 30, 2016, the carrying amounts for cash, accounts payable, accrued expenses and convertible debentures approximate their fair value due to their short-term nature.

Patent costs

Patent Costs

 

Patent costs consist of patent-related legal and filing fees. Due to the uncertainty associated with the successful development of our AOT and Joule Heat products, all patent costs are expensed as incurred. During the nine-month periods ended September 30, 2016 and 2015, patent costs were $49,265 and $35,379, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations. During the three-month periods ended September 30, 2016 and 2015, patent costs were $18,891 and $5,525, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statement presentation or disclosures.

XML 29 R19.htm IDEA: XBRL DOCUMENT v3.5.0.2
2. Summary of Significant Accounting Policies (Tables)
9 Months Ended
Sep. 30, 2016
Accounting Policies [Abstract]  
Antidilutive shares
   September 30, 2016   September 30, 2015 
Options   23,624,256    21,706,512 
Warrants   12,451,892    3,677,704 
Common stock issuable upon conversion of notes payable   3,776,792    399,667 
Total   39,852,940    25,783,883 
XML 30 R20.htm IDEA: XBRL DOCUMENT v3.5.0.2
4. Property and Equipment (Tables)
9 Months Ended
Sep. 30, 2016
Property, Plant and Equipment [Abstract]  
Property and equipment
   September 30, 2016   December 31, 2015 
    (unaudited)      
Office equipment  $28,040   $65,051 
Furniture and fixtures   2,880    4,075 
Testing equipment   18,197    12,914 
Subtotal   49,117    82,040 
Less accumulated depreciation   (30,627)   (60,242)
Total  $18,490   $21,798 
XML 31 R21.htm IDEA: XBRL DOCUMENT v3.5.0.2
5. Convertible Notes (Tables)
9 Months Ended
Sep. 30, 2016
Debt Disclosure [Abstract]  
Convertible Notes and Warrants
   September 30, 2016   December 31, 2015 
    (unaudited)      
Balance due on convertible notes  $541,024   $321,024 
Accrued interest   17,836    2,004 
Subtotal   558,860    323,028 
Unamortized note discount   (254,116)   (100,833)
Balance on convertible notes, net of note discount  $304,744   $222,195 
XML 32 R22.htm IDEA: XBRL DOCUMENT v3.5.0.2
9. Stock Options and Warrants (Tables)
9 Months Ended
Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award, Options, Additional Disclosures [Abstract]  
Stock options outstanding
    Options   Weighted Avg.
Exercise Price
 
 January 1, 2016    21,535,148   $0.30 
 Granted    2,250,527    0.19 
 Exercised         
 Forfeited    (161,419)   0.77 
 Outstanding, September 30, 2016    23,624,256   $0.28 
 Exercisable, September 30, 2016    21,373,729   $0.29 
Options outstanding by Per Share Price
      Outstanding Options    Exercisable Options 
 Option
Exercise Price
Per Share
    Shares    Life
(Years)
    Weighted
Average Exercise
Price
    Shares    Weighted
Average Exercise
Price
 
 $ 0.21 - $ 0.99    23,473,810    5.0   $0.28    21,223,283   $0.29 
 $ 1.00 - $ 1.99    150,446    6.8   $1.18    150,446   $1.18 
      23,624,256    5.0   $0.28    21,373,729   $0.29 
Warrants outstanding
    Warrants   Weighted Avg.  
Exercise Price
 
 January 1, 2016    4,411,667   $0.31 
 Granted    8,735,225    0.11 
 Exercised         
 Cancelled    (695,000)   0.49 
 September 30, 2016    12,451,892   $0.16 
Warrants outstanding by Per Share Price
      Outstanding Warrants    Exercisable Warrants 
 Warrant
Exercise Price Per Share
    Shares    Life
(Years)
    Weighted
Average Exercise
Price
    Shares    Weighted
Average
Exercise
Price
 
 $ 0.01 - $ 0.14    9,015,225    0.3   $0.10    8,915,225   $0.10 
 $ 0.15 - $ 1.99    3,436,667    3.4   $0.30    3,436,667   $0.30 
      12,451,892    1.6   $0.16    12,451,892   $0.16 
XML 33 R23.htm IDEA: XBRL DOCUMENT v3.5.0.2
10. Contractual Obligations (Tables)
9 Months Ended
Sep. 30, 2016
Commitments and Contingencies Disclosure [Abstract]  
Contractual Obligations
        Research and         
Year ending   Office   License   Compensation   Total 
December 31,   Lease (1)   Agreements (2)   Agreements (3)   Obligations 
 2016   $17,490   $46,875   $87,500   $151,865 
 2017    69,960    187,500    305,429    562,889 
 2018    40,810    187,500    290,000    518,310 
 2019        187,500    54,375    241,875 
 2020        187,500        187,500 
 Total   $128,260   $796,875   $737,304   $1,662,439 
XML 34 R24.htm IDEA: XBRL DOCUMENT v3.5.0.2
2. Summary of Significant Accounting Policies (Details) - shares
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Total shares that would have been anti-dilutive 39,852,940 25,783,883
Options [Member]    
Total shares that would have been anti-dilutive 23,624,256 21,706,512
Warrants [Member]    
Total shares that would have been anti-dilutive 12,451,892 3,677,704
Convertible Notes [Member]    
Total shares that would have been anti-dilutive 3,776,792 399,667
XML 35 R25.htm IDEA: XBRL DOCUMENT v3.5.0.2
2. Summary of Significant Accounting Policies (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Accounting Policies [Abstract]            
Net loss $ (1,035,196) $ (825,797) $ (3,379,688) $ (3,543,078)    
Cash flow from operations     (1,401,310) (2,200,461)    
Stockholders' deficit (946,490)   (946,490)   $ (782,220)  
Cash on Hand 385,360 559,682 385,360 559,682 $ 349,186 $ 2,247,557
Patent costs $ 18,891 $ 5,525 $ 49,265 $ 35,379    
XML 36 R26.htm IDEA: XBRL DOCUMENT v3.5.0.2
3. Certain Relationships and Related Transactions (Details Narrative) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Accrued expenses and accounts payable to related parties $ 143,151 $ 190,750
Accrued Directors' Fees [Member]    
Accrued expenses and accounts payable to related parties 76,089 76,089
Former President | Unpaid Salaries [Member]    
Accrued expenses and accounts payable to related parties $ 30,429 $ 75,429
XML 37 R27.htm IDEA: XBRL DOCUMENT v3.5.0.2
4. Property and Equipment (Details) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Property and equipment, gross $ 49,117 $ 82,040
Less: accumulated depreciation (30,627) (60,242)
Property and equipment, net 18,490 21,798
Office equipment [Member]    
Property and equipment, gross 28,040 65,051
Furniture and fixtures [Member]    
Property and equipment, gross 2,880 4,075
Testing equipment [Member]    
Property and equipment, gross $ 18,197 $ 12,914
XML 38 R28.htm IDEA: XBRL DOCUMENT v3.5.0.2
4. Property and Equipment (Details Narrative) - USD ($)
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Depreciation expense $ 5,249 $ 9,803  
Property and equipment, gross 49,117   $ 82,040
Less: accumulated depreciation 30,627   $ 60,242
Loss on disposal of equipment (3,343) $ 0  
Property Disposed [Member]      
Property and equipment, gross 38,206    
Less: accumulated depreciation $ 34,863    
XML 39 R29.htm IDEA: XBRL DOCUMENT v3.5.0.2
5. Convertible Notes (Details) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Debt Disclosure [Abstract]    
Balance due on convertible notes $ 541,024 $ 321,024
Accrued Interest 17,836 2,004
Subtotal 558,860 323,028
Unamortized note discount (254,116) (100,833)
Balance on convertible notes, net of note discount $ 304,744 $ 222,195
XML 40 R30.htm IDEA: XBRL DOCUMENT v3.5.0.2
5. Convertible Notes (Details Narrative) - USD ($)
9 Months Ended 24 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Convertible notes issued $ 1,587,045    
Proceeds from convertible notes 1,442,769 $ 475,500  
Discount on notes issued $ 144,276    
Warrants issued with notes 7,935,225    
Discount on fair value of warrants, BCF and OID $ 1,587,045    
Notes payable balance 541,024   $ 321,024
Unamortized discount 254,116   100,833
Debt converted during year $ 1,367,044    
Debt converted, shares issued 13,670,449    
Interest expense $ 1,433,762    
Accrued interest payable 17,836   2,004
Notes Convertible to common stock $ 3,776,792    
Common stock that could be issued upon conversion of remaining notes 39,852,940 25,783,883  
Convertible Notes [Member]      
Common stock that could be issued upon conversion of remaining notes 3,776,792 399,667  
Three Convertible Notes [Member]      
Notes payable balance $ 211,024    
Interest expense 15,831    
Accrued interest payable $ 17,836    
Private Placement [Member]      
Convertible notes issued     1,000,000
Proceeds from convertible notes     920,900
Discount on notes issued     $ 85,490
Warrants issued with notes     1,942,704
Discount on fair value of warrants, BCF and OID     $ 842,105
Notes payable balance     321,024
Unamortized discount     $ 100,833
XML 41 R31.htm IDEA: XBRL DOCUMENT v3.5.0.2
6. Research and Development (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Research and development expenses incurred $ 51,595 $ 80,082 $ 199,772 $ 500,517  
Accounts payable - licensing agreement 730,626   730,626   $ 590,001
License revenue generated 0 0 0 0  
AOT Prototypes [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Research and development expenses incurred 4,720 31,843 58,947 110,439  
Joule Heat Prototype [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Research and development expenses incurred 0 1,364 200 184,765  
Temple University License Agreements [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Research and development expenses incurred 46,875 46,875 140,625 140,625  
Accounts payable - licensing agreement 601,250   601,250   460,625
License revenue generated     0 0  
Temple University License Agreements [Member] | Accounts payable deferred [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Accounts payable - licensing agreement 193,750   193,750    
Temple University License Agreements [Member] | Accounts payable past due [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Accounts payable - licensing agreement 407,500   407,500    
Temple University Sponsored Research Agreement [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Research and development expenses incurred   $ 0   $ 64,688  
Accounts payable - licensing agreement 129,376   129,376   $ 129,376
Temple University Sponsored Research Agreement [Member] | Accounts payable past due [Member]          
Research and Development Arrangement, Contract to Perform for Others [Line Items]          
Accounts payable - licensing agreement $ 129,377   $ 129,377    
XML 42 R32.htm IDEA: XBRL DOCUMENT v3.5.0.2
8. Common Stock (Details Narrative)
9 Months Ended
Sep. 30, 2016
USD ($)
shares
Value of notes converted $ 1,367,044
Fair value of stock issued for services, value $ 48,000
Consultant [Member]  
Fair value of stock issued for services, shares issued | shares 300,000
Fair value of stock issued for services, value $ 48,000
Convertible Notes Payable [Member]  
Common stock issued on conversion of notes, shares | shares 13,670,449
Value of notes converted $ 1,367,044
XML 43 R33.htm IDEA: XBRL DOCUMENT v3.5.0.2
9. Stock Options and Warrants (Details-Options Outstanding) - Options [Member]
9 Months Ended
Sep. 30, 2016
$ / shares
shares
Beginning Balance | shares 21,535,148
Granted | shares 2,250,527
Exercised | shares 0
Forfeited | shares (161,419)
Ending Balance | shares 23,624,256
Exercisable, ending balance | shares 21,373,729
Weighted Average Exercise Price, Outstanding Beginning Balance | $ / shares $ 0.30
Weighted Average Exercise Price, Granted | $ / shares .19
Weighted Average Exercise Price, Exercised | $ / shares
Weighted Average Exercise Price, Forfeited | $ / shares .77
Weighted Average Exercise Price, Outstanding Ending Balance | $ / shares .28
Exericsable, ending balance | $ / shares $ .29
XML 44 R34.htm IDEA: XBRL DOCUMENT v3.5.0.2
9. Stock Options and Warrants (Details-Options by Exercise Price Per Share) - Options [Member] - $ / shares
9 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Outstanding Options    
Options outstanding 23,624,256 21,535,148
Life (Years), options outstanding 5 years  
Weighted Average Exercise Price, options outstanding $ .28 $ 0.30
Exercisable Options    
Options exercisable 21,373,729  
Weighted Average Exercise Price, options exercisable $ .29  
$0.21 - $0.99 [Member]    
Outstanding Options    
Options outstanding 23,573,810  
Life (Years), options outstanding 5 years  
Weighted Average Exercise Price, options outstanding $ .28  
Exercisable Options    
Options exercisable 21,223,283  
Weighted Average Exercise Price, options exercisable $ .29  
$1.00 - $1.99 [Member]    
Outstanding Options    
Options outstanding 150,446  
Life (Years), options outstanding 6 years 9 months 18 days  
Weighted Average Exercise Price, options outstanding $ 1.18  
Exercisable Options    
Options exercisable 150,446  
Weighted Average Exercise Price, options exercisable $ 1.18  
XML 45 R35.htm IDEA: XBRL DOCUMENT v3.5.0.2
9. Stock Options and Warrants (Details-Warrants Outstanding) - Warrants [Member]
9 Months Ended
Sep. 30, 2016
$ / shares
shares
Warrants outstanding, beginning balance | shares 4,411,667
Warrants granted | shares 7,935,225
Warrants exercised | shares 0
Warrants cancelled | shares (695,000)
Warrants outstanding, ending balance | shares 12,451,892
Weighted Average Exercise Price, Outstanding Beginning Balance | $ / shares $ .31
Weighted Average Exercise Price, Granted | $ / shares .11
Weighted Average Exercise Price, Exercised | $ / shares
Weighted Average Exercise Price, Cancelled | $ / shares .49
Weighted Average Exercise Price, Outstanding Ending Balance | $ / shares $ .16
XML 46 R36.htm IDEA: XBRL DOCUMENT v3.5.0.2
9. Stock Options and Warrants (Details-Warrant Exercise Price per Share) - Warrants [Member] - $ / shares
9 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Outstanding Warrants    
Warrants outstanding 12,451,892 4,411,667
Life (Years), warrants outstanding 1 year 7 months 6 days  
Weighted Average Exercise Price, warrants outstanding $ 0.16  
Exercisable Warrants    
Warrants exercisable 12,451,892  
Weighted Average Exercise Price, warrants exercisable $ 0.16  
$0.01 - $0.14 [Member]    
Outstanding Warrants    
Warrants outstanding 9,015,225  
Life (Years), warrants outstanding 3 months 18 days  
Weighted Average Exercise Price, warrants outstanding $ .10  
Exercisable Warrants    
Warrants exercisable 8,915,225  
Weighted Average Exercise Price, warrants exercisable $ .10  
$0.15 - $1.99 [Member]    
Outstanding Warrants    
Warrants outstanding 3,436,667  
Life (Years), warrants outstanding 3 years 4 months 24 days  
Weighted Average Exercise Price, warrants outstanding $ .30  
Exercisable Warrants    
Warrants exercisable 3,436,667  
Weighted Average Exercise Price, warrants exercisable $ .30  
XML 47 R37.htm IDEA: XBRL DOCUMENT v3.5.0.2
9. Stock options and Warrants (Details Narrative) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Valuation assumptions        
Share-based compensation     $ 405,605 $ 593,732
Options [Member]        
Options granted, shares     2,250,527  
Valuation assumptions        
Share-based compensation $ 84,293 $ 162,744 $ 265,448 548,619
Aggregate intrinsic value of options outstanding 0   0  
Future unamortized compensation expense on unvested outstanding options 125,462   $ 125,462  
Options [Member] | Board of Directors [Member]        
Options granted, shares     1,710,527  
Fair value of options at grant date, per share price     $ 0.19  
Fair value of options at grant date     $ 273,683  
Valuation assumptions        
Expected life     5.5 years  
Risk free interest rate     1.73%  
Volatility     119.00%  
Expected dividend yield     0.00%  
Options [Member] | Employees [Member]        
Options granted, shares     540,000  
Fair value of options at grant date, per share price     $ 0.18  
Fair value of options at grant date     $ 83,500  
Valuation assumptions        
Expected life     5.5 to 6 years  
Risk free interest rate     1.23%  
Volatility     121.00%  
Expected dividend yield     0.00%  
Warrants [Member]        
Valuation assumptions        
Share-based compensation $ 21,396 $ 3,816 $ 92,157 $ 45,113
Warrants granted     7,935,225  
Warrant exercise price 0.16      
Aggregate intrinsic value of warrants outstanding $ 444,761   $ 444,761  
Future unamortized compensation expense on unvested outstanding warrants $ 12,104   $ 12,104  
Warrants [Member] | Amended Agreement [Member]        
Valuation assumptions        
Expected life     1 year  
Stock price $ .17   $ .17  
Risk free interest rate     0.81%  
Volatility     97.00%  
Expected dividend yield     0.00%  
Fair value of warrants granted     $ 32,083  
Warrants [Member] | Consultants [Member]        
Valuation assumptions        
Expected life     1 to 3 years  
Stock price $ .16   $ .16  
Risk free interest rate     0.82%  
Volatility     110.00%  
Expected dividend yield     0.00%  
Warrants granted     800,000  
Warrant exercise price     $.012 to $0.18 per share  
Warrants [Member] | Convertible Notes [Member]        
Valuation assumptions        
Warrants granted     7,935,225  
Warrant exercise price     $0.10 per share  
XML 48 R38.htm IDEA: XBRL DOCUMENT v3.5.0.2
10. Contractual Obligations (Details)
Sep. 30, 2016
USD ($)
Year ending 2016 $ 151,865
Year ending 2017 562,889
Year ending 2018 518,310
Year ending 2019 241,875
Year ending 2020 187,500
Total obligations 1,662,439
Office lease  
Year ending 2016 17,490
Year ending 2017 69,960 [1]
Year ending 2018 40,810 [1]
Year ending 2019 0
Year ending 2020 0
Total obligations 128,260 [1]
Research and License Agreements  
Year ending 2016 46,875
Year ending 2017 187,500 [2]
Year ending 2018 187,500 [2]
Year ending 2019 187,500 [2]
Year ending 2020 187,500 [2]
Total obligations 796,875 [2]
Compensation Agreements  
Year ending 2016 87,500
Year ending 2017 305,429 [3]
Year ending 2018 290,000 [3]
Year ending 2019 54,375 [3]
Year ending 2020 0
Total obligations $ 737,304 [3]
[1] Consists of rent for the Company's Santa Barbara Facility expiring on July 31, 2018.
[2] Consists of license maintenance fees to Temple University in the amount of $187,500 paid annually through the life of the underlying patents or until otherwise terminated by either party.
[3] Consists of base salary and certain contractually-provided benefits, to i) an executive officer, pursuant to an employment agreement at a base salary of $290,000 per year and, as amended by the Board on March 10, 2016, expires on March 8, 2019; and ii) and a severance agreement of a former officer in the amount of $45,429.
XML 49 R39.htm IDEA: XBRL DOCUMENT v3.5.0.2
10. Contractual Obligations (Details Narrative) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Contractual obligation $ 1,662,439  
Accounts payable 209,888 $ 182,334
Santa Barbara Facility [Member] | Rent Expense Through End Of Lease [Member]    
Contractual obligation 35,910  
Santa Barbara Facility [Member] | Loss on Facility Lease Agreement [Member]    
Accounts payable $ 29,260  
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