UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address, including zip code, of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered |
| None | N/A |
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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the Registrant’s Common Stock outstanding as of May 8, 2023 was .
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements include predictions and statements regarding our future:
| · | revenues and profits; | |
| · | customers; | |
| · | research and development expenses and efforts; | |
| · | scientific and other third-party test results; | |
| · | sales and marketing expenses and efforts; | |
| · | liquidity and sufficiency of existing cash; | |
| · | technology and products; and | |
| · | the effect of recent accounting pronouncements on our financial condition and results of operations. |
You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” “intends,” “project,” “potential,” “forecast” “continues,” “strategies,” or the negative of such terms, or other comparable terminology, and also include statements concerning plans, objectives, goals, strategies and future events or performance.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the heading “Risk Factors.” We cannot assure you that we will achieve or accomplish our expectations, beliefs or projections. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.
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QS ENERGY, INC.
FORM 10-Q
INDEX
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PART I – FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
QS ENERGY, INC.
Condensed Consolidated Balance Sheets
| March 31, 2023 | December 31, | |||||||
| (unaudited) | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable-license agreements-past due | $ | $ | ||||||
| Accounts payable and accrued expenses | ||||||||
| Convertible debentures, net of discounts
of $ | ||||||||
| PPP loan payable | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit | ||||||||
| Common stock, $ par value: shares authorized, and shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See notes to condensed consolidated financial statements.
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QS ENERGY, INC.
Condensed Consolidated Statements of Operations, Unaudited
| Three months ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | $ | $ | ||||||
| Costs and expenses | ||||||||
| Operating expenses | ||||||||
| Research and development expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Gain on partial forgiveness of PPP note payable | ||||||||
| Interest and financing expense | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per common share, basic and diluted | $ | ) | $ | ) | ||||
| Weighted average common shares outstanding, basic and diluted | ||||||||
See notes to condensed consolidated financial statements.
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QS ENERGY, INC.
Condensed Consolidated Statement of Stockholders’ Deficit, Unaudited
For the Three months Ended MARCH 31, 2023 and 2022
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued on conversion of notes payable | ||||||||||||||||||||
| Warrants issued with convertible notes | – | |||||||||||||||||||
| Common stock issued on exercise of warrants | ||||||||||||||||||||
| Fair value of warrants issued as compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued on conversion of notes payable | ||||||||||||||||||||
| Common stock issued on exercise of warrants | ||||||||||||||||||||
| Fair value of warrants issued as compensation | – | |||||||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See notes to condensed consolidated financial statements.
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QS ENERGY, INC.
Condensed Consolidated Statements of Cash Flows, Unaudited
| Three months ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Fair value of options and warrants issued as compensation | ||||||||
| Amortization of debt discount | ||||||||
| Accrued interest expense | ||||||||
| Depreciation and amortization | ||||||||
| Gain on partial forgiveness of PPP note payable | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Decrease in operating lease right of use asset | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Accounts payable – license agreements | ||||||||
| Operating lease liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Net proceeds from exercise of warrants | ||||||||
| Net proceeds from issuance of convertible notes and warrants | ||||||||
| Principal payment on PPP loan payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Value of warrants issued with convertible notes | $ | $ | ||||||
See notes to condensed consolidated financial statements.
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QS ENERGY, INC.
Notes to Condensed Consolidated Financial Statements, Unaudited
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
| 1. | Description of Business |
QS Energy, Inc. (“QS Energy”, “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 Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter bulletin board-pink sheets.. More information including the Company’s fact sheet, logos, media articles, and update information are available at our corporate website, www.qsenergy.com.
QS Energy develops and is seeking to commercialize 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. AOT is 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 has shown to reduce crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. The AOT product is seeking to transition from the testing, 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.
| 2. | Summary of Significant Accounting Policies |
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 three-months
ended March 31, 2023, the Company incurred a net loss of $
At March 31, 2023, the Company
had cash on hand in the amount of $
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.
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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, 2022, filed with the SEC on March 30, 2023. The condensed consolidated balance sheet as of December 31, 2022, 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 the full fiscal year-end results.
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.
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 accruals for potential liabilities, assumptions used in valuing equity instruments issued for financing and services and realization of deferred tax assets, among others. Actual results could differ from those estimates.
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.
At March 31, 2023 and 2022, we excluded the following dilutive shares as their effect would have been anti-dilutive.
| March 31, 2023 | March 31, 2022 | |||||||
| Options | ||||||||
| Warrants | ||||||||
| Common stock issuable upon conversion of notes payable | ||||||||
| Total | ||||||||
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Stock-Based Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. Stock option grants, which are generally time or performance vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Research and Development Costs
Research and development costs
are expensed as incurred, and consist primarily of fees paid to consultants and outside service providers, and other expenses relating
to the acquisition, design, development and testing of the Company’s products. Certain research and development activities are incurred
under contract. In those instances, research and development costs are charged to operations ratably over the life of the underlying contracts,
unless the achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule
is more appropriate. Payments made pursuant to research and development contracts are initially recorded as advances on research and development
contract services in the Company’s consolidated balance sheet and then charged to research and development costs in the Company’s
consolidated statement of operations as those contract services are performed. For the three-month periods ended March 31, 2023 and 2022
research and development costs were $
Patent Costs
Patent costs consist of patent-related
legal and filing fees. Due to the uncertainty associated with the successful development of our AOT product, all patent costs are expensed
as incurred. During the three-month periods ended March 31, 2023 and 2022, patent costs were $
Recent Accounting Pronouncements
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.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. ASU 2020-06 will be effective January 1, 2024, and a cumulative-effect adjustment to the opening balance of retained earnings is required upon adoption. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. The adoption of ASU 2020-06 is not expected to have any impact on the Company’s consolidated financial statement presentation or disclosures subsequent to its adoption, with any effect being largely dependent on the composition and terms of outstanding financial instruments at the time of adoption.
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| 3. | Accounts Payable and Accrued Expenses |
As of March 31, 2023 and December
31, 2022, the Company owed $
| 4. | Convertible Notes Payable |
March 31, 2023 (unaudited) | December 31, 2022 | |||||||
| Convertible notes | $ | $ | ||||||
| Accrued interest | ||||||||
| Total outstanding debt, including $ | ||||||||
| Unamortized debit discount | ( | ) | ( | ) | ||||
| Balance on convertible notes, net of note discounts | $ | $ | ||||||
Convertible notes
At December 31, 2022,
total outstanding convertible notes payable totaled $
Accrued interest
At December 31, 2022, accrued
interest on convertible notes payable totaled $
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Debt discount
At December 31, 2022, the
unamortized debt discount was $
| 5. | PPP loan payable |
In June 2020, the Company
was granted a loan (the “PPP loan”) for $
| 6. | Research and Development |
The Company constructs, develops and tests the AOT technologies with internal resources and through the assistance of various third-party entities. Costs incurred and expensed include fees such as license 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 prototypes.
Costs incurred for research and development are expensed as incurred. Purchased materials that do not have an alternative future use are also expensed. Furthermore, costs incurred in the construction of prototypes with no certainty of any alternative future use and established commercial uses are also expensed.
For the three-month periods
ended March 31, 2023 and 2022, our research and development expenses were $
AOT Prototypes
During the periods ended March
31, 2023 and 2022, the Company incurred total expenses of $
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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 licensing agreements, the Company paid Temple a non-refundable license maintenance fee of $300,000 and agreed to pay (i) annual maintenance fees of $187,500; (ii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements; and (iii) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. The term of the licenses commenced in August 2011 and will expire upon expiration of the patents. The agreements 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 fails to commercialize the patent rights.
Total expenses recognized
during each three-month period ended March 31, 2023 and 2022 pursuant to these two License Agreements amounted to $
As of March 31, 2023 and December
31, 2022, total unpaid fees due to Temple pursuant to these agreements are $
| 7. | Common Stock |
During the three months ended March 31, 2023, the Company issued 8,463,330 shares of its common stock as follows:
| · | The Company issued shares of its common stock upon the conversion of $ | |
| · | The Company issued shares of its common stock upon the exercise of warrants of $ |
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| 8. | 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
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 March 31, 2023 was 4.6 years. Stock option activity for the period January 1, 2023 up to March 31, 2023, was as follows:
| Options | Weighted Avg. Exercise Price | |||||||
| January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ||||||||
| March 31, 2023 | $ | |||||||
The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of March 31, 2023 were as follows:
| Outstanding Options | Exercisable Options | ||||||||||||
Option Exercise Price Per Share | Shares | Life (Years) | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||
| $0.02 - $0.24 | $ | $ | |||||||||||
| $0.25 - $0.49 | |||||||||||||
| $0.50 - $0.99 | |||||||||||||
| $1.00 - $2.00 | |||||||||||||
During the three-month periods ended March 31, 2023 and 2022, the Company recognized compensation costs based on the fair value of options that vested of $ and $ respectively.
As of March 31, 2023, the market price of the Company’s stock was $ per share. At March 31, 2023, the aggregate intrinsic value of the options outstanding at March 31, 2023 was $.
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Warrants
The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting January 1, 2023 up to March 31, 2023.
| Warrants | Weighted Avg. Exercise Price | |||||||
| January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Expired | ( | ) | ||||||
| March 31, 2023 | $ | |||||||
The weighted average exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of March 31, 2023 were as follows:
| Outstanding Warrants | Exercisable Warrants | ||||||||||||
| Warrant Exercise Price Per Share | Shares | Life (Years) | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||
| $0.02 - $0.24 | $ | $ | |||||||||||
| $0.25 - $0.49 | – | ||||||||||||
| $0.50 - $1.00 | |||||||||||||
In the three-month period
ending March 31, 2023, the Company issued warrants to purchase shares of common stock in exchange for services. The warrants are
exercisable at a price of $, vest one month from the date of grant, and expire two years from the date of grant. Total fair
value of these warrants at grant date was $
At March 31, 2023, the market price of the Company’s common stock was $ per share. At March 31, 2023, the aggregate intrinsic value of warrants outstanding was $.
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| 9. | Commitments and Contingencies |
There is no current or pending litigation of any significance with the exception of the matters that have arisen under, and are being handled in, the normal course of business.
QS Energy is working to maintain normal operations during the current COVID-19 pandemic under social distancing and shelter-in-place guidelines as recommended or required by the CDC, federal, state and county government agencies. The Company has moved many operational functions to the cloud. Our employees can perform most vital functions remotely. Most day-to-day operations have been minimally impacted by COVID-19. It is unclear what impact COVID-19 may have on our supply chain, or on our ability to operate on-site at the demonstration project. The Company has experienced delays and cost overruns due to COVID-19 impacts on our supply chain. We have not been made aware of any COVID-19 restrictions at the demonstration site that would impact our ability to restart our demonstration testing. No assurances can be made that COVID-19 will not materially affect our supply chain, will not negatively affect access to the demonstration site, restrict operations at the demonstration site, or negatively impact our ability to fund continued operations. We anticipate that COVID-19 restrictions and guidelines will expire or be substantially modified in the next quarter ending June 30, 2023.
| 10. | Subsequent Events |
In April and May 2023, the Company issued convertible promissory notes in the aggregate of $62,000 for cash proceeds of $56,000, net of OID $6,000. The notes are unsecured, have an implied interest rate of 10%, mature in twelve months from issuance, and are convertible into 1,234,464 shares of the Company’s common stock at $0.05 per share. In addition, the Company granted the note holders warrants to purchase 1,234,464 shares of the Company’s common stock at $0.07 per share. The warrants are fully vested and expire one year from the date of issuance.
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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, and in the “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 March 31, 2023, and we undertake no duty to update this information.
Overview
QS Energy, Inc. (“QS Energy” or “Company” or “we” or “us” or “our”) develops and seeks to commercialize energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil 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 is designed to reduce crude oil viscosity by applying a high intensity electrical field to crude oil while in transit.
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 affected 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. To date, QS Energy Pool has not entered into any acquisition transaction. However, the Company may still consider entering into potential beneficial acquisitions. The Company is considering dissolving QS Energy Pool to reduce costs associated with operating this subsidiary. The Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter Bulletin Board market-Pink Sheets. More information including the Company’s updates, fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.
As previously reported in our Form 10-K filed with the SEC on July 22, 2021, QS Energy’s AOT technology has been tested in a variety of configurations at small-scale in the laboratory and at full-scale in the field under commercial operating conditions, including tests performed U.S. Department of Energy, the PetroChina Pipeline R&D Center, and ATS RheoSystems, a division of CANNON™. The Company’s first two full-scale midstream pipeline installations were on TransCanada’s Keystone pipeline in 2014 and a pipeline operated by Kinder Morgan Crude & Condensate, LLC in 2015. Tests performed at these two facilities were limited due primarily to technical issues with the AOT equipment. Although tests at these facilities provided limited sets of data, the equipment did not operate properly, and no conclusions could be reached regarding the efficacy or commercial viability of the AOT technology. Also, in 2014, the Company began development of a product based on an electrical heat system which reduces oil viscosity through a process known as joule heat (“Joule Heat”). In December 2015, we suspended Joule Heat development activities to focus Company resources on finalizing commercial development of the AOT. For more information regarding prior history, development and testing of the AOT technology, and specifics regarding these earlier tests and technical issues experience, please refer to our Form 10-K filed with the SEC on July 22, 2021, and our other SEC filings.
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In July 2017, the Company filed for trademark protection for the word “eDiluent” in advance of rolling out a marketing and revenue strategy based on the concept of using AOT to reduce pipeline dependence upon diluent to reduce viscosity of crude oils. A primary function of AOT is to reduce viscosity by means of its solid-state electronics technology, in essence providing an electronic form of diluent, or “eDiluent”. Subject to successful testing of our AOT technology and the availability of sufficient operating capital, the Company plans to market and sell a value-added service under the name eDiluent, designed to be upsold by the Company’s midstream pipeline customers in an effort to provide the Company with long-term recurring revenues.
Throughout 2018 our primary strategic goal was focused on installing and operating a demonstration AOT project on a commercial crude oil pipeline. Much of our time was spent meeting with industry executives and engineers in North and South America and working with local representatives in the Asian and the Middle Eastern markets. In December 2018, we reached mutual agreement with a major U.S.-based pipeline operator on a demonstration project under which we would install and operate our AOT equipment on a crude oil pipeline located in the Southern United States. We believed at the time that the selected project site could be ideal for demonstration purposes, delivering heavy crudes which, based on samples tested at Temple University, and, subject to the discussion below, could experience significant viscosity reduction when treated with our AOT technology.
While management focused on finding a partner and finalizing terms of the demonstration project, and in our continuing efforts to commercialize our AOT technology, our engineering team worked throughout 2018 to prepare one of our inventoried AOT units for deployment. All system upgrades, inspections and testing protocols were completed in December 2018. The pipeline operator finalized site selection and began site design and engineering in January 2019, completing site preparation and equipment installation in June 2019. The project was installed within budget, quality compliant, and without safety incidents. The system passed the pre-start safety review, data acquisition signal verifications, and mechanical inspections. Under full crude oil flow, the system was confirmed to have no leaks and no environmental issues were noted. Data collected during the full-flow startup phase confirmed internal differential pressures to be negligible and consistent with design specifications. However, when the system was energized, and the unit was run-up to high-voltage operations, the primary power supply began to operate erratically and had to be taken offline. Subsequent inspection determined the primary power supply had failed.
After removing the primary power supply, our engineers reconfigured the system to run off a smaller secondary power supply. Although this unit was not capable of achieving target treatment voltage, we performed limited testing and troubleshooting measures, after which the damaged power supply was shipped to the manufacturer for expedited repair and reconditioning. Inspections performed during the repair process indicated internal power supply components had been physically damaged. Though not definitive, it appears that damage may have occurred during transit prior to initial installation at the demonstration site. While the demonstration project was offline for power supply repairs, our engineering team worked with oil samples pulled from the operating pipeline for testing at our then Tomball laboratory facility. These tests were designed to confirm our target power requirements as accurately as possible and help us fine-tune enhancements planned for a new optimized AOT internal grid pack design we had planned to test at the demonstration site as part of our continuing reliability engineering effort.
During initial testing with the small power supply, current draw was greater than prior field deployments. While it was expected that the small power supply would not achieve treatment voltage, as voltage was increased, actual current draw experienced under test conditions exceeded the operating limit of the power supply. Subsequent laboratory and in-field testing performed at our then Tomball facility showed the electrical conductivity of the oil to be quite high and in line with field observations. Although these tests indicated the unit was generally functioning properly, results further indicated the damaged power supply, once repaired, would not be capable of providing sufficient power to fully treat the crude oil due to the oil’s high electrical conductivity. In anticipation of this result, the Company had initiated parallel tasks in advance of testing of: i) installation of the repaired power supply and performance of limited testing to confirm laboratory and in-field test results; and ii) procurement of a new power supply capable of providing significantly more power and a modified AOT grid pack assembly reconfigured and generally optimized based on the latest laboratory and in-field test results.
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When the repaired power supply was installed in August 2019, the system operated as expected, and limited testing was performed. Results of this limited testing were consistent with laboratory tests performed to date. As expected, however, the repaired power supply was not capable of providing sufficient power to fully treat the crude oil under commercial operating conditions. Based on results of this limited testing, Company engineers completed designs and began implementation of modifications to the AOT internal grid pack assembly.
The new high capacity power supply and modified grid pack were installed in December 2019. However, prior to flooding the system with crude oil, early-phase startup testing indicated an electrical short circuit. Subsequent inspection revealed damage to the internal grid pack which likely occurred during installation or during the startup testing cycle. The grid pack was shipped offsite for repairs with reinstallation scheduled for January 2020.
The AOT demonstration project continued to experience setbacks during the first quarter of 2020. After repairing and re-installing the modified grid pack, the system shut down again during commissioning presenting with error conditions similar to the December 2019 failure. At that time, based on external inspections and on-site testing, our engineers suspected the grid pack had again been damaged during re-installation and that such suspected damage was the most likely cause of the electrical short circuit. It was determined at that time the best course of action would be to remove the modified grid pack and re-install the original grid pack which had previously been installed multiple times without sustaining damage, and perform a detailed inspection of the modified grid pack in an effort to determine the cause of the electrical short circuit.
Executing this plan, our team removed the modified grid pack and re-installed the original grid pack assembly in January 2020. After removal, our engineers performed a detailed inspection of the modified grid pack. Inconsistent with expectations, no damage to the modified grid pack was found during this inspection, leaving the cause of the electrical short circuit undiagnosed.
In January and February 2020, our engineers tested and attempted to operate the AOT under a variety of conditions. In these tests, the system could be run at high voltage under static “shut-in” conditions; however, the system continued to shut down due to an electrical short circuit when operated under pressure. In simple terms, this means the system could be flooded with crude oil and powered up in excess of 10,000 volts when the system was shut-in by closing the intake and outtake valves which isolates the system from the pipeline’s operating pressure. However, once the valves were opened and the system was subjected to the pipeline’s operating pressure, the system developed an electrical short circuit and shut down.
As the presence of high pressure appeared to trigger the short circuit, our engineers believed it is unlikely the fault was in the grid pack assembly as this component was fully submerged in crude oil and would generally be subjected to equal pressure on all components. The electrical short was more likely developing in the electrical connection assembly built into the blind flange at the top of the pressure vessel, which would be subjected to high pressure under normal operating conditions. Unfortunately, this electrical connection assembly could not be inspected without destroying the assembly itself. Instead, our engineers developed a plan to replace the installed the blind flange and electrical connection assembly with components from inventory which would be rebuilt prior to installation.
As part of an ongoing reliability-engineering effort, our engineers at that time worked on incremental modifications to improve electrical isolation within the blind flange and electrical connection assembly. These previously developed plans allowed us to move quickly with vendors and present an expedited plan to the pipeline operator. In March 2020, our engineers designed modifications to the blind flange, electrical connections and related housing intended to minimize the effects of high pressure and likelihood of internal electrical short circuits. Concurrently, a blind flange with high voltage assembly was shipped from inventory to a shop with specialized equipment used to strip the flange of all electrical insulation materials. Once the stripping process was complete, castings were made to complete the internal assembly. Our engineers believed at the time that this modification could solve the electrical short issue we have experienced in prior tests.
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While the blind flange assembly was being remanufactured, we took the opportunity to implement a number of relatively minor modifications to other system configurations which had been planned for future units based on results of our engineering team’s reliability engineering work over the past two years. These modifications were designed to improve the reliability of internal electrical connections, increase the structural support of the internal grid pack, and maintain higher quality control over internal component positioning and alignment during vertical installation.
Notwithstanding our efforts, the AOT system continues to be non-operational under normal operating conditions. As reported in previous updates on our website at https://qsenergy.com/updates and in our Form 8-K filed with the SEC on March 4, 2020, the AOT system experienced shutdowns during the commissioning process. In December 2019, after installing a modified grid pack and new high-capacity power supply, the system shut down presenting with an electrical short which was determined to be due to damage to the system’s internal grid pack likely incurred during installation. After repairing and re-installing the modified grid pack in January 2020, the system shut down again during commissioning presenting with error conditions similar to the December 2019 failure. At that time, based on external inspections and on-site testing, our engineers suspected the grid pack had again been damaged during re-installation and that such suspected damage was the most likely cause of the electrical short circuit. As reported in our January 24, 2020 website update page, it was determined at that time the best course of action would be to remove the modified grid pack and re-install the original grid pack which had previously been installed multiple times without sustaining damage, and perform a detailed inspection of the modified grid pack in an effort to determine the cause of the electrical short circuit.
We have tested and attempted to operate the AOT under a variety of conditions. As noted above, we have been able to bring the system up to high voltage under static “shut-in” conditions; however, the system continued to shut down due to an electrical short circuit when operated under pressure. Because of our inability to fully diagnose the cause of our current electrical problems, we can provide no assurances that we will not face other operational issues after completing a full diagnosis and evaluation of our technology.
As previously reported, in December 2018, we entered into an agreement with a major U.S.-based pipeline operator under which the Company installed its AOT equipment on a crude oil pipeline located in the Southern United States for testing and demonstration purposes. Based on laboratory tests and operations of prototype equipment at other locations, we had a reasonable expectation that the equipment would operate successfully and that test results would demonstrate quantifiable benefits to pipeline operators. This has not occurred. As discussed below, our equipment is no longer installed or being tested at this demonstration site.
As reported in the Company’s Form 10-K and Form 10-Q filed with the SEC on March 31, 2021 and June 29, 2020, respectively, and in the Company’s Form 10-K filed with the SEC on March 31, 2022, website updates published on the Company’s website at https://qsenergy.com/updates, the Company has experienced a number of difficulties and delays at the demonstration site. Despite identifying and implementing numerous design modifications over the past several months, the Company has been unable to successfully operate its AOT equipment.
In late June 2020, equipment modifications intended to mitigate electrical short circuit issues identified in earlier tests were completed. During startup testing, the system experienced a new failure mode in which the system could be operated at a baseline high voltage (well below operational voltage required to treat heavy crude), but after a period of time, the system would drop to very low voltage indicating a reduction in electrical resistance in the AOT. This voltage drop was both dynamic, developing over time as electrical current was applied; and transient, in that the power supply could be shut-down and re-started with this voltage drop characteristic repeating. After reviewing these results and running subsequent in-field tests at the direction of the power supply manufacturer, they recommended a configuration modification to the control module of the system’s high-voltage power supply which, in their experience, could resolve the system’s ability to maintain constant voltage under our unique operating conditions in which the AOT essentially acts as a very large capacitor. During the first week of July 2020, we modified the power supply control module at the direction of the power supply manufacturer. Though this modification did appear to solve the voltage drop issue, the AOT could not achieve operational voltage as the system control module indicated arc-faults when high voltage was applied above the baseline voltage levels. After many attempts to bring the system up to operating voltage, arc-faults continued until the AOT demonstrated symptoms of what appeared to be a dead short (electrical short-to-ground; voltage dropped to zero) and the system could no longer be re-started.
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Our engineers have working concepts as to what may be causing this most recent failure but will not be able to fully diagnose these issues at the demonstration site. After discussions with our demonstration pipeline partner, it was mutually agreed that the best course of action would be to move the equipment from the demonstration site to another location where our engineers could disassemble and inspect the equipment. Our AOT equipment has been moved to storage, inspection, and testing sites in the state of Mississippi and in Tomball, Texas. Our former demonstration partner has indicated their continued interest in our AOT technology and may consider installation and operation of a new AOT demonstration project if our operational issues can be resolved.
Though our engineers have working concepts as to what may be causing the most recent voltage drop and arc-fault issues, it is unknown whether these issues can be solved with minor modifications to the current design. To fully diagnose and resolve these issues, new testing would likely need to be performed in a laboratory setting. The time and cost of implementing such a plan would likely be significant. The Company did not have sufficient capital to take on this endeavor. We shut down all testing of our AOT product in July 2020, due to a lack of operating capital. See, however, note 11 (Subsequent Events) of our Consolidated Financial Statements, attached to our Form 10-K filed with the SEC on July 22, 2021, for an update of limited capital we received in the first two quarters of 2021, allowing us to commence some additional testing of our AOT product. See also note 10 (Subsequent Events) of the Consolidated Financial Statements contained in this Form 10-Q report, and Item 2 of Part II of this Form 10-Q report.
Following our receipt of the limited capital identified in the paragraph above, and under new management, our engineer went to the new site of our AOT equipment to inspect the condition of the equipment and develop logistics of testing going forward. Our engineer commenced re-testing operations in June 2021. Our engineer has reported that the AOT has been unloaded and the electrical connection has been ordered. The unit will undergo testing to try and duplicate the electrical short condition experienced at the test site. After initial testing, a troubleshooting sequence will be performed to attempt to identify the location of the short. If an electrical short can be found based on our hypothesis, we intend to resolve it. If the electrical short cannot be found the AOT will be disassembled and tested in pieces, assuming we are able to raise sufficient capital to do so. Additionally, laboratory materials testing of the electrical insulation will be initiated. Measurement of the electrical properties of both newly cast and material both exposed and submerged in fluid will be done to determine if the resin remains our material of choice. Our engineer reports that he is expecting to visit the AOT in July 2021 to inspect all the connections and conduct initial testing while the AOT is empty. He further reports that lab test fixtures are being designed and initial designs could be available for review in August 2021. Because of our inability fully to diagnose the cause of our current electrical problems, we can provide no assurances that we will not face other operational issues after completing a full diagnosis and evaluation of our technology, requiring additional capital, which, as stated above, may not be available to us.
During the visit a plan was developed to prepare the location for the inspection and testing of the AOT and AOT components. A transformer was needed to provide power to the power supply. Due to supply chain issues the transformer delivery was delayed until July 2021.
Re-testing of the AOT began in July 2021 and the dead short condition that had developed during the demonstration was not present. Various tests were conducted to control variables and identify possible reasons for the arcs and short circuits. We ran tests to isolate debris, plate spacing, alignment of grid pack, presence of oil and presence of the pressure vessel. The best results obtained with the new stack were when the stack had been cleaned, assembled in a hanging position and was outside of the vessel.
For comparison the old stack was tested in a similar manner, and, by chance, arcs were observed near insulated parts. The stack was inspected where the arcs were witnessed, and damaged insulation was found. It seems likely these locations failed during the demonstration and led to the short circuits.
Testing of grid screens in
isolation showed the ability to achieve much higher voltages. Additional testing following our
Form 10-Q report for the period ended September 30, 2021 resulted in conceptual methods/designs to control the variables in a full stack
to achieve similar voltages as the isolation tests. The new design will control plate alignment and flatness to a much greater extent
than the previous design. Secondarily, the new design constrains the stack alignment during installation should prevent shifting and damage
during installation.
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The results of the electrical testing of the insulating material showed that the material is functioning as designed. However, during the testing it was discovered that the material swells when exposed to crude oil. The current design does not accommodate a change in size of the parts. New materials were sourced and tested as potential replacements. A couple of new materials have been found that offer improved stability when submerged in crude oil for extended periods of time. To expedite the search several materials tested were purchased of the shelf while working with our vendors to source new commercial materials. The data has been shared with our vendors and they are working on providing us with samples of commercial versions of the promising materials.
We have also validated that a new design concept for the grid pack will reduce arcing and allowed us to apply full voltage during a recent test. A 3rd party engineering firm with proper experience and three-dimensional modeling software was engaged. A design review has been completed and final drawings have been received. Drawings had been sent to our vendors for review and pending no issues the ordering process for prototype parts, for fit and electrical testing, should commence at some point during fiscal year 2022.
The work through May 2022 mainly focused on selecting a new material of construction for the insulating parts to reduce possible absorption of oil by the insulators. Absorbing components from crude oil could lead to a change in size and possibly to unanticipated mechanical and electrical properties.
In August 2022 we completed the testing of the stack assembly. The stack assembly did not suffer the arcing problems we saw when testing a stack assembly made from parts of the full size AOT. It appeared that we accomplished the goal of eliminating the sources of arcing that prevented us from achieving treatment voltages with this new design.
The lessons learned during the stack assembly test have been applied and the results incorporated into the designs for the spacer rings and the screens. This change to the isolator ring design resulted in some iterative designs to optimize the casting tooling or molds. The time spent on this redesign created a delay in our goal for testing in September 2022.
Since reporting our findings on October 7, 2021, we have been able to positively confirm and correct 80% of what we have determined thus far to be the necessary improvements for a reliable and field worthy AOT. Based on the results of the recent component testing, we were able to rework the original grid pack, achieve high voltage in air and oil to verify that the individual components worked when assembled. As previously explained, the reason for component testing is to reveal a potential problem that could be otherwise concealed with a fully assembled AOT.
Once all the parts were delivered for a full AOT, we assembled the stack and installed the stack into the vessel. The vessel was filled with oil and tested. We were able to apply full voltage of 40.1kV to the AOT. We believe the AOT is ready to test with customer oil and be deployed back into the field. Having achieved a positive hydrostatic test, we were able to have our final engineering call with our new potential development partner. We are currently seeking a contractual arrangement with a development partner to install and test the newly designed AOT. We have reopened discussions with our original development partner as well as reaching out to others. While we have tested with a representative oil sample, we have not yet reached an agreement with a development partner allowing us to test a development partner's actual pipeline oil as a prelude to another field test. Our efforts continue to reach agreement with a suitable development partner as our next step to develop and commercialize our AOT technology In this regard, we have completed two engineering reviews, but as of the date of the filing of this 10-Q have not reached an agreement with a development partner.
Providing sufficient working capital can be obtained, QS Energy intends to continue to work to maintain normal operations during the current COVID-19 pandemic under social distancing and shelter-in-place guidelines as recommended or required by the CDC, federal, state and county government agencies. Over the past few years, the Company moved much of its operations to the cloud. Our employees can perform most vital functions remotely. Currently, most day-to-day operations have been minimally impacted by COVID-19. We expect that COVID-19 restrictions and guidelines will substantially change during the second quarter ending June 30, 2023.
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It is unclear, however, what impact COVID-19 may have on our supply chain, or on our ability to operate and test our AOT technology. As of the date of this report, few suppliers related to our testing efforts have announced reduced operating capacity or advised us of delays related to COVID-19 restrictions; furthermore, we have not been made aware of any COVID-19 restrictions at that would impact our ability to restart our onsite testing activities.
COVID-19 has had a significant negative financial impact across a wide spectrum of industries, both in terms of operations and access to operating capital. The Company’s ability to continue operations is, in part, dependent on our access to funding. A published by the National Association of Manufacturers in March 2020 reports that due to COVID-19, 35% of manufacturers surveyed anticipate supply chain disruptions, 53% anticipate changes to operations, and 78% anticipate a negative financial impact. With these facts in mind, no assurances can be made that COVID-19 will not affect our supply chain, will not negatively affect access or operating restrictions on our AOT technology, or negatively impact our ability to fund continued operations.
Our expenses to date have been funded 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 2023, and beyond, to fund work on our AOT, our sales and marketing efforts, continuing research and development, and certain other expenses, including without limitation, legal and accounting expenses, until we are able to achieve a revenue base. We can provide no assurances that additional capital will be available to us, or if it is, that such additional capital will be offered at acceptable terms.
There are significant risks associated with our business, our Company and our stock. See “Risk Factors,” below.
We are dedicated to the crude oil production and transportation marketplace, with a specifically targeted product offering for enhancing the flow-assurance parameters of new and existing pipeline gathering and transmission systems.
Our primary goal is to provide the oil industry with a cost-effective method by which to increase the number of barrels of oil able to be transported per day through the industry’s existing and newly built pipelines. The greatest impact on oil transport volume may be realized through reductions in pipeline operator reliance on diluent for viscosity reduction utilizing AOT technology; a process the Company refers to as electronic diluent, or “eDiluent”. The Company filed for trademark protection of the term eDiluent in 2017. We also seek to provide the oil industry with a way to reduce emissions from operating equipment. We believe our goals may be realizable via viscosity reduction using our AOT product line.
We believe QS Energy’s technologies will enable the petroleum industry to gain key value advantages boosting profit, while satisfying the needs of regulatory bodies at the same time. Key players in the pipeline industry continue to demonstrate interest in our technologies.
Our manufacturing strategy is to contract with third-party vendors and suppliers, each with a strong reputation and proven track record in the pipeline industry. These vendors are broken up by product component subcategory, enabling multiple manufacturing capacity redundancies and safeguards to be utilized. In addition, this strategy allows the Company to eliminate the prohibitively high capital expenditures such as costs of building, operating and maintaining its own manufacturing facilities, ratings, personnel and licenses, thereby eliminating unnecessary capital intensity and risk.
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Results of Operations for Three months ended March 31, 2023 and 2022
| Three months ended | ||||||||||||
| March 31, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Revenues | $– | |||||||||||
| Costs and Expenses | ||||||||||||
| Operating expenses | 186,000 | 200,000 | (13,000 | ) | ||||||||
| Research and development expenses | 54,000 | 48,000 | 6,000 | |||||||||
| Loss from operations | (240,000 | ) | (248,000 | ) | (7,000 | ) | ||||||
| Other income (expense) | ||||||||||||
| Gain on partial forgiveness of PPP loan payable | – | 24,000 | 24,000 | |||||||||
| Interest and financing expense | (94,000 | ) | (77,000 | ) | 18,000 | |||||||
| Net Loss | $ | (334,000 | ) | $ | (301,000 | ) | $ | 35,000 | ||||
Operating expenses were $186,000 for the three-month period ended March 31, 2023, compared to $200,000 for the three-month period ended March 31, 2022, a decrease of $14,000. This is due to decreases in non-cash expenses of $15,000, offset by an increase in cash expenses of $1,000. Specifically, the decrease in non-cash expenses are attributable to a decrease in stock compensation expense attributable to options granted to employees and directors of $15,000. The decrease in cash expense is attributable to increases in insurance of $3,000, rent and utilities of $3,000, corporate expenses of $3,000, meals and entertainment of $1,000, and other expenses of $1,000, offset by decreases in salaries and benefits of $4,000, legal and accounting of $3,000, and patent expenses of $3,000.
Research and development expenses were $54,000 for the three-month period ended March 31, 2023, compared to $48,000 for the three-month period ended March 31, 2022, an increase of $6,000. This increase is attributable an increase in prototype product development costs of $6,000.
Other income and expense were $94,000 expense for the three-month period ended March 31, 2023, compared to $53,000 expense for the three-month period ended March 31, 2022, a net increase in other expenses of $41,000. This increase is attributable to an increase in non-cash other expenses of $17,000 and a decrease in PPP forgiveness debt income of $24,000. The increase in non-cash other expense is due to decreases in expense attributable to interest, beneficial conversion factors and warrants associated with convertible notes issued in the amount of $1,867,000.
The Company had a net loss of $334,000, or $0 per share, for the three-month period ended March 31, 2023, compared to a net loss of $301,000, or $0 per share, for the three-month period ended March 31, 2022.
Liquidity and Capital Resources
General
As reflected in the accompanying condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. We have incurred negative cash flow from operations since our inception in 1998 and a stockholders’ deficit of $4,785,000 as of March 31, 2023. Our negative operating cash flow for the periods ended March 31, 2023 was funded primarily through issuance of convertible notes and execution of options and warrants to purchase common stock.
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The accompanying condensed 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 condensed consolidated financial statements, the Company had a net loss of $334,000 and a negative cash flow from operations of $146,000 for the three-month period ended March 31, 2023. In addition, as of March 31, 2023, thirty-four notes payable with an aggregate balance of $1,772,000 and certain obligations to a former officer are past due. These factors raise substantial doubt about our ability 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, 2022 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Summary
During the period ended March 31, 2023, we received cash totaling $129,000 from issuance of convertible notes and exercised warrants and used cash in operations of $146,000. At March 31, 2023, we had cash on hand in the amount of $107,000. We will need additional funds to operate our business, including without limitation the expenses we will incur in connection with the license 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, certain severance payments to a former officer and consulting fees, during the remainder of 2023 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, Part I, Item 1, 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 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.
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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 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 Consolidated Financial Statements. Actual results could differ from those estimates.
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.
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 three-months ended March 31, 2023, the Company incurred a net loss of $334,000, used cash in operations of $147,000 and had a stockholders’ deficit of $4,785,000 as of March 31, 2023. In addition, as of March 31, 2023, thirty-four notes payable with an aggregate balance of $1,772,000 and certain obligations to a former officer are past due. 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.
At March 31, 2023, the Company had cash on hand in the amount of $107,000. Management estimates that the current funds on hand will be sufficient to continue operations through June 2023. 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 agreements with Temple; costs associated with product development and commercialization of the AOT 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 2023 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.
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Recent Accounting Polices
See Footnote 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 |
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive and Financial Officer, evaluated, as of March 31, 2023, the effectiveness of the Company's disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f), which were designed to be effective at the reasonable assurance level. Based on this evaluation, the Company’s Chief Executive and Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2023. As of March 31, 2023, management’s assessment identified the material weaknesses in the Company’s internal control over financial reporting:
We continue to have a material weakness in our internal control over financial reporting as disclosed in the 2022 Form 10-K, in that the Company has (i) inadequate segregation of duties consistent with control objectives; and (ii) the Company has an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP and SEC disclosure requirements commensurate with the Company’s financial reporting requirements.
(a) Changes in Internal Control over Financial Reporting
There has been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three-month period ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
| 27 |
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, 2022, which we filed with the SEC on March 30, 2023, except risks associated with the COVID-19 pandemic. See Item 2, Overview section above, for a discussion related to COVID-19 risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuances
In private offerings exempt from registration, during the three months ended March 31, 2023, the Company issued 7,480,000 shares of its common stock upon the conversion of $264,000 in convertible notes at $0.03 to $0.05 per share. In connection with the issuances of the foregoing securities, the Company relied on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions not involving a public offering.
The proceeds received by the Company in connection with the above issuances of shares were used and continue to be used for general corporate purposes.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
The Company provides updates on its website in a section thereunder labeled “Recent Updates” at https://qsenergy.com/updates.
| 28 |
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 | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted in IXBRL, and included in exhibit 101). |
| 29 |
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: May 12, 2023 | By: | /s/ Cecil Bond Kyte | |
| Cecil Bond Kyte | |||
| Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors | |||
| 30 |
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, Cecil Bond Kyte, 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: May 12, 2023 | /s/ CECIL BOND KYTE | |
| Cecil Bond Kyte | ||
| Chief Executive Officer |
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, Cecil Bond Kyte, 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: May 12, 2023 | /s/ CECIL BOND KYTE | |
| Cecil Bond Kyte | ||
| Chief Financial Officer |
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 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 March 31, 2023 (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: May 12, 2023 | /s/ Cecil Bond Kyte |
| Cecil Bond Kyte | |
| Interim Chief Executive Officer | |
| Date: May 12, 2023 | /s/ Cecil Bond Kyte |
| Cecil Bond Kyte | |
| Chief Financial Officer | |
Cover - shares |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
May 08, 2023 |
|
| Cover [Abstract] | ||
| Document Type | 10-Q | |
| Amendment Flag | false | |
| Document Quarterly Report | true | |
| Document Transition Report | false | |
| Document Period End Date | Mar. 31, 2023 | |
| Document Fiscal Period Focus | Q1 | |
| Document Fiscal Year Focus | 2023 | |
| Current Fiscal Year End Date | --12-31 | |
| Entity File Number | 0-29185 | |
| Entity Registrant Name | QS ENERGY, INC. | |
| Entity Central Index Key | 0001103795 | |
| Entity Tax Identification Number | 52-2088326 | |
| Entity Incorporation, State or Country Code | NV | |
| Entity Address, Address Line One | 23902 FM 2978 | |
| Entity Address, City or Town | Tomball | |
| Entity Address, State or Province | TX | |
| Entity Address, Postal Zip Code | 77375 | |
| City Area Code | (775) | |
| Local Phone Number | 300-7647 | |
| Entity Current Reporting Status | Yes | |
| Entity Interactive Data Current | Yes | |
| Entity Filer Category | Non-accelerated Filer | |
| Entity Small Business | true | |
| Entity Emerging Growth Company | false | |
| Entity Shell Company | false | |
| Entity Common Stock, Shares Outstanding | 385,447,792 |
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($) |
Mar. 31, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Accumulated depreciation | $ 97,000 | $ 96,000 |
| Discounts on convertible notes payable | $ 36,000 | $ 140,000 |
| Common Stock, Par or Stated Value Per Share | $ 0.001 | $ 0.001 |
| Common Stock, Shares Authorized | 500,000,000 | 500,000,000 |
| Common Stock, Shares, Issued | 384,537,426 | 376,074,096 |
| Common Stock, Shares, Outstanding | 384,537,426 | 376,074,096 |
| Convertible Notes Payable [Member] | ||
| Debt Instrument [Line Items] | ||
| Discounts on convertible notes payable | $ 36,000 | $ 140,000 |
| Convertible notes in default | $ 1,772,000 | $ 1,730,000 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Income Statement [Abstract] | ||
| Revenues | $ 0 | $ 0 |
| Costs and expenses | ||
| Operating expenses | 186,000 | 200,000 |
| Research and development expenses | 54,000 | 48,000 |
| Loss from operations | (240,000) | (248,000) |
| Other income (expense) | ||
| Gain on partial forgiveness of PPP note payable | 0 | 24,000 |
| Interest and financing expense | (94,000) | (77,000) |
| Net Loss | $ (334,000) | $ (301,000) |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Parenthetical) - $ / shares |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Income Statement [Abstract] | ||
| Earnings Per Share, Basic | $ (0.00) | $ (0.00) |
| Earnings Per Share, Diluted | $ (0.00) | $ (0.00) |
| Weighted Average Number of Shares Outstanding, Basic | 378,415,835 | 355,742,036 |
| Weighted Average Number of Shares Outstanding, Diluted | 378,415,835 | 355,742,036 |
Description of Business |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 | ||||
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||||
| Description of Business |
QS Energy, Inc. (“QS Energy”, “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 Company’s common stock is quoted under the symbol “QSEP” on the Over-the-Counter bulletin board-pink sheets.. More information including the Company’s fact sheet, logos, media articles, and update information are available at our corporate website, www.qsenergy.com.
QS Energy develops and is seeking to commercialize 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. AOT is 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 has shown to reduce crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. The AOT product is seeking to transition from the testing, 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. |
Summary of Significant Accounting Policies |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies |
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 three-months ended March 31, 2023, the Company incurred a net loss of $334,000, used cash in operations of $146,000 and had a stockholders’ deficit of $4,785,000 as of March 31, 2023. In addition, as of March 31, 2023, thirty-four notes payable with an aggregate balance of $1,772,000, license agreement payables of $2,021,000 and certain obligations to a former officer are past due. These factors raise substantial doubt about the Company’s ability 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, 2022 financial statements, has raised 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.
At March 31, 2023, the Company had cash on hand in the amount of $107,000. Management estimates that the current funds on hand will be sufficient to continue operations through approximately June 2023. 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 agreements with Temple; costs associated with product development and commercialization of the AOT technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure of 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, certain payments to a former officer and consulting fees, during the remainder of 2023 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.
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, 2022, filed with the SEC on March 30, 2023. The condensed consolidated balance sheet as of December 31, 2022, 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 the full fiscal year-end results.
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.
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 accruals for potential liabilities, assumptions used in valuing equity instruments issued for financing and services and realization of deferred tax assets, among others. Actual results could differ from those estimates.
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.
At March 31, 2023 and 2022, we excluded the following dilutive shares as their effect would have been anti-dilutive.
Stock-Based Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. Stock option grants, which are generally time or performance vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
Research and Development Costs
Research and development costs are expensed as incurred, and consist primarily of fees paid to consultants and outside service providers, and other expenses relating to the acquisition, design, development and testing of the Company’s products. Certain research and development activities are incurred under contract. In those instances, research and development costs are charged to operations ratably over the life of the underlying contracts, unless the achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule is more appropriate. Payments made pursuant to research and development contracts are initially recorded as advances on research and development contract services in the Company’s consolidated balance sheet and then charged to research and development costs in the Company’s consolidated statement of operations as those contract services are performed. For the three-month periods ended March 31, 2023 and 2022 research and development costs were $54,000 and $48,000, respectively.
Patent Costs
Patent costs consist of patent-related legal and filing fees. Due to the uncertainty associated with the successful development of our AOT product, all patent costs are expensed as incurred. During the three-month periods ended March 31, 2023 and 2022, patent costs were $100 and $3,000, respectively, and were included as part of operating expenses in the accompanying condensed consolidated statements of operations.
Recent Accounting Pronouncements
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.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. ASU 2020-06 will be effective January 1, 2024, and a cumulative-effect adjustment to the opening balance of retained earnings is required upon adoption. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. The adoption of ASU 2020-06 is not expected to have any impact on the Company’s consolidated financial statement presentation or disclosures subsequent to its adoption, with any effect being largely dependent on the composition and terms of outstanding financial instruments at the time of adoption.
|
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Accounts Payable and Accrued Expenses |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 | ||||
| Payables and Accruals [Abstract] | ||||
| Accounts Payable and Accrued Expenses |
As of March 31, 2023 and December 31, 2022, the Company owed $197,000 and $197,000, respectively, pursuant to a separation agreement with a former executive officer effective April 1, 2017 as amended by letter agreements dated effective August 16, 2018 and March 31, 2019 which are included as part of Accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets. The amount is to be repaid at an amount of $10,000 per month. During the three months ended March 31, 2023 the Company made no payments. |
Convertible Notes Payable |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Notes Payable |
Convertible notes
At December 31, 2022, total outstanding convertible notes payable totaled $1,393,000. During the three-month period ended March 31, 2023, the Company issued convertible promissory notes in the aggregate of $99,000 for cash proceeds of $90,000, net of OID of $9,000. The notes are unsecured, have an implied interest rate of 10%, mature in twelve months from issuance, and are convertible into 1,980,000 shares of the Company’s common stock at $0.05 per share. In addition, the Company granted the note holders warrants to purchase 1,980,000 shares of the Company’s common stock with a relative value of $47,000. The warrants are fully vested, and expire one year from the date of issuance. The Company determined the fair value of the warrants by using a Black-Scholes option pricing model, with the following assumptions: expected term of 1.0 year, stock price of $0.07, exercise price of $0.07, volatility of 206%, risk-free rate of 4.64%, and no forfeiture rate. Also during the period ended March 31, 2023, convertible notes of $264,000, net of unamortized discount of $120,000, were converted into shares of common stock. At March 31, 2023, total outstanding convertible notes payable totaled $1,228,000. As of March 31, 2023, convertible notes payable and accrued interest are convertible into approximately 30,262,716 shares of common stock at conversion rates ranging from $0.02 to $0.48 per share. As of March 31, 2023, a total of thirty-four convertible notes and accrued interest in the aggregate of $1,772,000 have reached maturity and are past due.
Accrued interest
At December 31, 2022, accrued interest on convertible notes payable totaled $612,000. During the three-month period ended March 31, 2023, accrued interest of $42,000 was recorded. At March 31, 2023, accrued interest on convertible notes payable totaled $654,000.
Debt discount
At December 31, 2022, the unamortized debt discount was $140,000. During the three-month period ended March 31, 2021, debt discount of $56,000 was recorded for the relative fair value of warrants of $47,000 and OID of $9,000, debt discount amortization of $40,000 was recorded, and $120,000 of debt discount was removed and included in the carrying amount of related convertible notes payable that were converted into shares of common stock. At March 31, 2023, the unamortized debt discount was $36,000. |
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PPP loan payable |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 | ||||
| Ppp Loan Payable | ||||
| PPP loan payable |
In June 2020, the Company was granted a loan (the “PPP loan”) for $151,000 from Cadence Bank, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan is dated June 18, 2020, matures on June 18, 2025, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). Funds from the PPP loan may only be used for qualifying expenses, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. Management believes the entire loan amount has been used for qualifying expenses and all of the conditions outlined in the PPP loan program were adhered to by the Company. The PPP loan provides for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of March 31, 2023. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. During 2022, the Company received notice that a total of $63,000 of the PPP loan was forgiven. In addition during 2022, the Company made principal payments on the PPP loan of $12,000, and at December 31, 2022, the balance of the PPP loan was $75,000. During the three-month period ended March 31, 2023, the Company made principal payments on the PPP loan of $9,000, and at March 31, 2023, the balance of the PPP loan was $66,000. |
Research and Development |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 | ||||
| Research and Development [Abstract] | ||||
| Research and Development |
The Company constructs, develops and tests the AOT technologies with internal resources and through the assistance of various third-party entities. Costs incurred and expensed include fees such as license 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 prototypes.
Costs incurred for research and development are expensed as incurred. Purchased materials that do not have an alternative future use are also expensed. Furthermore, costs incurred in the construction of prototypes with no certainty of any alternative future use and established commercial uses are also expensed.
For the three-month periods ended March 31, 2023 and 2022, our research and development expenses were $54,000 and $48,000, respectively.
AOT Prototypes
During the periods ended March 31, 2023 and 2022, the Company incurred total expenses of $5,000 and $1,000, respectively, in the manufacture and testing of the AOT prototype equipment. These expenses have been reflected as part of Research and Development expenses on the accompanying condensed consolidated statements 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 licensing agreements, the Company paid Temple a non-refundable license maintenance fee of $300,000 and agreed to pay (i) annual maintenance fees of $187,500; (ii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements; and (iii) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. The term of the licenses commenced in August 2011 and will expire upon expiration of the patents. The agreements 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 fails to commercialize the patent rights.
Total expenses recognized during each three-month period ended March 31, 2023 and 2022 pursuant to these two License Agreements amounted to $47,000 and has been reflected in Research and Development expenses on the accompanying condensed consolidated statements of operations. In the three-month periods ended March 31, 2023 and 2022, the Company also recognized penalty interest on past-due balances of $12,000 and $12,000, respectively, which is included as part of interest and financing expense in the accompanying condensed consolidated statements of operations.
As of March 31, 2023 and December 31, 2022, total unpaid fees due to Temple pursuant to these agreements are $2,021,000 and $1,962,000, respectively, which are included as part of Accounts Payable – license agreements in the accompanying condensed consolidated balance sheets. With regards to the unpaid fees to Temple, a total of $135,000 are deferred until such time the Company achieves a revenue milestone of $835,000 or upon termination of the licensing agreements and the remaining $1,886,000 are deemed past due.
No revenues were earned from the two License Agreements during the three-month periods ended March 31, 2023 and March 31, 2022. |
Common Stock |
3 Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2023 | |||||||||||||
| Equity [Abstract] | |||||||||||||
| Common Stock |
During the three months ended March 31, 2023, the Company issued 8,463,330 shares of its common stock as follows:
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Stock Options and Warrants |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Share-Based Payment Arrangement [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
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 March 31, 2023 was 4.6 years. Stock option activity for the period January 1, 2023 up to March 31, 2023, was as follows:
The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of March 31, 2023 were as follows:
During the three-month periods ended March 31, 2023 and 2022, the Company recognized compensation costs based on the fair value of options that vested of $ and $ respectively.
As of March 31, 2023, the market price of the Company’s stock was $ per share. At March 31, 2023, the aggregate intrinsic value of the options outstanding at March 31, 2023 was $.
Warrants
The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting January 1, 2023 up to March 31, 2023.
The weighted average exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of March 31, 2023 were as follows:
In the three-month period ending March 31, 2023, the Company issued warrants to purchase shares of common stock in exchange for services. The warrants are exercisable at a price of $, vest one month from the date of grant, and expire two years from the date of grant. Total fair value of these warrants at grant date was $9,000 using the Black-Scholes Option Pricing model with the following assumptions: life of years; risk free interest rate of % to %; volatility of % to % and dividend yield of %. During the three-month period ended March 31, 2023, the Company recognized compensation costs based on the fair value of warrants that vested of $.
At March 31, 2023, the market price of the Company’s common stock was $ per share. At March 31, 2023, the aggregate intrinsic value of warrants outstanding was $.
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Commitments and Contingencies |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 | ||||
| Commitments and Contingencies Disclosure [Abstract] | ||||
| Commitments and Contingencies |
There is no current or pending litigation of any significance with the exception of the matters that have arisen under, and are being handled in, the normal course of business.
QS Energy is working to maintain normal operations during the current COVID-19 pandemic under social distancing and shelter-in-place guidelines as recommended or required by the CDC, federal, state and county government agencies. The Company has moved many operational functions to the cloud. Our employees can perform most vital functions remotely. Most day-to-day operations have been minimally impacted by COVID-19. It is unclear what impact COVID-19 may have on our supply chain, or on our ability to operate on-site at the demonstration project. The Company has experienced delays and cost overruns due to COVID-19 impacts on our supply chain. We have not been made aware of any COVID-19 restrictions at the demonstration site that would impact our ability to restart our demonstration testing. No assurances can be made that COVID-19 will not materially affect our supply chain, will not negatively affect access to the demonstration site, restrict operations at the demonstration site, or negatively impact our ability to fund continued operations. We anticipate that COVID-19 restrictions and guidelines will expire or be substantially modified in the next quarter ending June 30, 2023. |
Subsequent Events |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 | ||||
| Subsequent Events [Abstract] | ||||
| Subsequent Events |
In April and May 2023, the Company issued convertible promissory notes in the aggregate of $62,000 for cash proceeds of $56,000, net of OID $6,000. The notes are unsecured, have an implied interest rate of 10%, mature in twelve months from issuance, and are convertible into 1,234,464 shares of the Company’s common stock at $0.05 per share. In addition, the Company granted the note holders warrants to purchase 1,234,464 shares of the Company’s common stock at $0.07 per share. The warrants are fully vested and expire one year from the date of issuance.
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Summary of Significant Accounting Policies (Policies) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 three-months ended March 31, 2023, the Company incurred a net loss of $334,000, used cash in operations of $146,000 and had a stockholders’ deficit of $4,785,000 as of March 31, 2023. In addition, as of March 31, 2023, thirty-four notes payable with an aggregate balance of $1,772,000, license agreement payables of $2,021,000 and certain obligations to a former officer are past due. These factors raise substantial doubt about the Company’s ability 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, 2022 financial statements, has raised 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.
At March 31, 2023, the Company had cash on hand in the amount of $107,000. Management estimates that the current funds on hand will be sufficient to continue operations through approximately June 2023. 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 agreements with Temple; costs associated with product development and commercialization of the AOT technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure of 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, certain payments to a former officer and consulting fees, during the remainder of 2023 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.
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| Basis of Presentation | 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, 2022, filed with the SEC on March 30, 2023. The condensed consolidated balance sheet as of December 31, 2022, 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 the full fiscal year-end results.
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.
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| 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 accruals for potential liabilities, assumptions used in valuing equity instruments issued for financing and services and realization of deferred tax assets, among others. Actual results could differ from those estimates.
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| 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.
At March 31, 2023 and 2022, we excluded the following dilutive shares as their effect would have been anti-dilutive.
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| Stock-Based Compensation | Stock-Based Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. Stock option grants, which are generally time or performance vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the award, compensation cost is recognized on a straight-line or graded basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life, and future dividends. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.
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| Research and Development Costs | Research and Development Costs
Research and development costs are expensed as incurred, and consist primarily of fees paid to consultants and outside service providers, and other expenses relating to the acquisition, design, development and testing of the Company’s products. Certain research and development activities are incurred under contract. In those instances, research and development costs are charged to operations ratably over the life of the underlying contracts, unless the achievement of milestones, the completion of contracted work, or other information indicates that a different expensing schedule is more appropriate. Payments made pursuant to research and development contracts are initially recorded as advances on research and development contract services in the Company’s consolidated balance sheet and then charged to research and development costs in the Company’s consolidated statement of operations as those contract services are performed. For the three-month periods ended March 31, 2023 and 2022 research and development costs were $54,000 and $48,000, respectively.
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| 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 product, all patent costs are expensed as incurred. During the three-month periods ended March 31, 2023 and 2022, patent costs were $100 and $3,000, respectively, and were included as part of operating expenses in the accompanying condensed consolidated statements of operations.
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements
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.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. ASU 2020-06 will be effective January 1, 2024, and a cumulative-effect adjustment to the opening balance of retained earnings is required upon adoption. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. The adoption of ASU 2020-06 is not expected to have any impact on the Company’s consolidated financial statement presentation or disclosures subsequent to its adoption, with any effect being largely dependent on the composition and terms of outstanding financial instruments at the time of adoption.
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Summary of Significant Accounting Policies (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of antidilutive shares |
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Convertible Notes Payable (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Notes and Warrants |
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Stock Options and Warrants (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-Based Payment Arrangement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of stock option activity |
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| Schedule of options outstanding by per share price |
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| Schedule of warrant activity |
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| Schedule of warrants outstanding by per share price |
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Summary of Significant Accounting Policies (Details) - shares |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
|
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive shares excluded from EPS | 77,697,806 | 71,016,985 |
| Equity Option [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive shares excluded from EPS | 26,057,601 | 27,080,601 |
| Warrant [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive shares excluded from EPS | 21,377,489 | 19,652,149 |
| Convertible Debt [Member] | ||
| Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items] | ||
| Antidilutive shares excluded from EPS | 30,262,716 | 24,284,235 |
Summary of Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | |||
|---|---|---|---|---|
Mar. 31, 2023 |
Mar. 31, 2022 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
| Net loss | $ 334,000 | $ 301,000 | ||
| Cash flow from operations | 146,000 | 77,000 | ||
| Stockholders' deficit | 4,785,000 | 4,419,000 | $ 4,690,000 | $ 4,173,000 |
| Notes payable | 1,772,000 | |||
| Accounts payable-license agreement payables | 2,021,000 | 1,962,000 | ||
| Cash on Hand | 107,000 | $ 133,000 | ||
| Research and development costs | 54,000 | 48,000 | ||
| Patent Costs [Member] | ||||
| Operating expenses | $ 100 | $ 3,000 | ||
Accounts Payable and Accrued Expenses (Details Narrative) - Former Executive [Member] - Separation Agreement [Member] - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Dec. 31, 2022 |
|
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Accounts payable and accrued expenses | $ 197,000 | $ 197,000 |
| Payment on separation agreement | $ 10,000 |
Convertible Notes Payable (Details) - USD ($) |
Mar. 31, 2023 |
Dec. 31, 2022 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Convertible notes | $ 1,228,000 | $ 1,393,000 |
| Accrued interest | 654,000 | 612,000 |
| Total outstanding debt, including $1,772,000 and $1,730,000 in default at March 31, 2023 and December 31, 2022, respectively | 1,882,000 | 2,005,000 |
| Unamortized debit discount | (36,000) | (140,000) |
| Balance on convertible notes, net of note discounts | 1,846,000 | 1,865,000 |
| Convertible Notes Payable [Member] | ||
| Debt Instrument [Line Items] | ||
| Debt Instrument, Debt Default, Amount | 1,772,000 | 1,730,000 |
| Unamortized debit discount | $ (36,000) | $ (140,000) |
PPP loan payable (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Jun. 30, 2020 |
Jun. 18, 2020 |
Mar. 31, 2023 |
Mar. 31, 2022 |
Dec. 31, 2022 |
|
| Debt Instrument [Line Items] | |||||
| PPP loan payable | $ 66,000 | $ 75,000 | |||
| Principal payments on the PPP loan | 9,000 | $ (0) | |||
| PPP Loan [Member] | |||||
| Debt Instrument [Line Items] | |||||
| Proceeds from Notes Payable | $ 151,000 | ||||
| Debt Instrument, Maturity Date | Jun. 18, 2025 | ||||
| Debt interest rate | 1.00% | ||||
| Debt Instrument, Decrease, Forgiveness | 63,000 | ||||
| P P P Loan Payable [Member] | |||||
| Debt Instrument [Line Items] | |||||
| PPP loan paid | 12,000 | ||||
| PPP loan payable | $ 75,000 | ||||
| Principal payments on the PPP loan | 9,000 | ||||
| PPP loan | $ 66,000 | ||||
Common Stock (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2023 |
Dec. 31, 2022 |
|
| Conversion of Stock [Line Items] | ||
| Unamortized discount | $ 36,000 | $ 140,000 |
| Convertible Notes Payable [Member] | ||
| Conversion of Stock [Line Items] | ||
| Debt converted, shares issued | 7,480,000 | |
| Debt converted, amount converted | $ 264,000 | |
| Unamortized discount | $ 120,000 | |
| Convertible Notes Payable [Member] | Minimum [Member] | ||
| Conversion of Stock [Line Items] | ||
| Conversion price | $ 0.03 | |
| Convertible Notes Payable [Member] | Maximum [Member] | ||
| Conversion of Stock [Line Items] | ||
| Conversion price | $ 0.05 | |
| Exercise Of Warrants [Member] | ||
| Conversion of Stock [Line Items] | ||
| Debt converted, shares issued | 983,330 | |
| Debt converted, amount converted | $ 39,000 | |
| Exercise Of Warrants [Member] | Minimum [Member] | ||
| Conversion of Stock [Line Items] | ||
| Conversion price | $ 0.03 | |
| Exercise Of Warrants [Member] | Maximum [Member] | ||
| Conversion of Stock [Line Items] | ||
| Conversion price | $ 0.04 |
Stock Options and Warrants (Details-Options Stock Options and Warrants (Details-Options Outstanding) - Equity Option [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2023
$ / shares
shares
| |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Beginning Balance | shares | 26,057,601 |
| Weighted Average Exercise Price, Outstanding Beginning Balance | $ / shares | $ 0.15 |
| Granted | shares | 0 |
| Weighted Average Exercise Price, Granted | $ / shares | $ 0 |
| Exercised | shares | 0 |
| Weighted Average Exercise Price, Exercised | $ / shares | $ 0 |
| Expired | shares | 0 |
| Weighted Average Exercise Price, Expired | $ / shares | $ 0 |
| Ending Balance | shares | 26,057,601 |
| Weighted Average Exercise Price, Outstanding Ending Balance | $ / shares | $ 0.15 |
Stock Options and Warrants (Details-Warrants Outstanding) - Warrant [Member] |
3 Months Ended |
|---|---|
|
Mar. 31, 2023
$ / shares
shares
| |
| Share-Based Compensation Arrangement by Share-Based Payment Award [Line Items] | |
| Warrants outstanding, beginning balance | shares | 20,314,153 |
| Weighted Average Exercise Price, Outstanding Beginning Balance | $ / shares | $ 0.04 |
| Warrants granted | shares | 2,079,999 |
| Weighted Average Exercise Price, Granted | $ / shares | $ 0.07 |
| Warrants exercised | shares | (983,330) |
| Weighted Average Exercise Price, Exercised | $ / shares | $ 0.04 |
| Warrants Expired | shares | (33,333) |
| Weighted Average Exercise Price, Expired | $ / shares | $ 0.05 |
| Warrants outstanding, ending balance | shares | 21,377,489 |
| Weighted Average Exercise Price, Outstanding Ending Balance | $ / shares | $ 0.05 |