10-K: QS Energy Faces Going Concern Doubts Despite AOT Technology Development Efforts

Sentiment:

Annual Report 28 March 2025 4:02 PM

QS Energy's 10-K filing reveals ongoing losses and substantial doubt about its ability to continue as a going concern, despite efforts to commercialize its AOT technology.

Capital raiseThe company will need to raise substantial additional capital through 2025, 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.During fiscal 2024, our cash burn rate amounted to approximately $97,000 per month and could increase during the remainder of fiscal 2025.In order to fund our capital needs, we conducted private offerings of our securities in 2023 and 2024.

Worse than expectedThe company's net losses increased from $1,224,000 in 2023 to $1,934,000 in 2024.The company's independent auditor has expressed substantial doubt about its ability to continue as a going concern.The company's internal controls over financial reporting were not effective as of December 31, 2024, due to material weaknesses.

Summary

QS Energy, Inc. develops energy efficiency technologies, primarily Applied Oil Technology (AOT), aimed at improving oil transport economics and reducing emissions.
The company's AOT product is still in development and testing, with the goal of commercial acceptance, which has not yet been achieved.
QS Energy has incurred net losses of $1,934,000 in 2024 and $1,224,000 in 2023, and its auditors have expressed substantial doubt about its ability to continue as a going concern.
The company's ability to continue operations depends on raising additional capital and generating revenue from sales.
QS Energy is seeking to commercialize AOT as a cost-efficient solution for new and existing pipeline operations.
The company has entered into a Collaboration Agreement with VIPS Petroleum, LLC to facilitate the deployment of its AOT technology.
The company's expenses have been funded through the sale of common stock and convertible debt.
The company will need to raise substantial additional capital through 2025 to fund its operations.
The company's internal controls over financial reporting were not effective as of December 31, 2024, due to material weaknesses.
The company's stock is thinly traded and subject to penny stock regulations, which may make it difficult to raise capital.

Sentiment

Score: 3

Explanation: The document presents a concerning financial situation for QS Energy, with significant losses, going concern doubts, and ineffective internal controls. While there are some positive developments, the overall sentiment is negative due to the company's financial instability and reliance on future capital raises.

Positives

QS Energy has a Collaboration Agreement with VIPS Petroleum, LLC to facilitate the deployment of its AOT technology.
Key players in the pipeline industry continue to demonstrate interest in the company's technologies.
The company has a supply chain for fabrication of the commercial AOT.
The company is seeking to commercialize AOT as a cost-efficient solution for new and existing pipeline operations.

Negatives

QS Energy has a history of losses and has not yet begun to generate positive cash flow from operations.
The company's independent auditor has expressed substantial doubt about its ability to continue as a going concern.
The company's internal controls over financial reporting were not effective as of December 31, 2024, due to material weaknesses.
The company's stock is thinly traded and subject to penny stock regulations.
The commercial viability of QS Energy's technologies remains largely unproven.
The company is dependent on its ability to raise capital from outside sources.
The company has substantial contractual commitments, including payments to a former officer, during the remainder of 2024 and beyond.
The company has a stockholders deficit of $5,698,000 as of December 31, 2024.

Risks

The company may not be able to attract customers.
The company outsources and relies on third parties for the manufacture of its products.
The company may face costly intellectual property/license agreements disputes.
The company may not be able to attract or retain qualified senior personnel.
The market price of the company's stock is volatile.
Substantial sales of common stock could cause the company's stock price to fall.
Potential issuance of additional shares of the company's common stock could dilute existing stockholders.
The company may not be successful in identifying, making, financing, and integrating acquisitions.
The company's common stock is subject to penny stock regulation, which may make it more difficult to raise capital.
The company is subject to cyber and other security threats.

Future Outlook

The company anticipates continuing its efforts to commercialize its AOT product during 2025, contingent on raising sufficient capital.

Management Comments

Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business.
Management estimates that the current funds on hand will be sufficient to continue operations through March 2025.

Industry Context

QS Energy's AOT technology operates within the competitive landscape of crude oil pipeline optimization, where several companies offer solutions aimed at enhancing pipeline efficiency and reducing operational costs, including drag reducing agents, pipeline heating systems, and ultrasonic and mechanical devices.

Comparison to Industry Standards

Key competitors include companies such as Baker Hughes and LiquidPower Specialty Products Inc. (LSPI) providing Drag Reducing Agents (DRAs), Chromalox offering pipeline heating solutions, and Applus+ RTD developing ultrasonic technologies.
These companies offer established solutions, while QS Energy's AOT distinguishes itself through its innovative electrostatic technology.
AOT employs a high-voltage, low-amperage electric field to reduce crude oil viscosity, enhancing pipeline throughput without the need for chemical additives or significant thermal input.
By reducing viscosity electrically, AOT aims to lower energy consumption and operational costs associated with pipeline transportation, potentially offering a more environmentally friendly and cost-effective solution compared to traditional methods.

Management Changes

Role	Previous Person	New Person	Effective Date	Reason
Director	Don Dickson		2024-06-03	Voluntary resignation for personal reasons

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Reinstatement of Director Compensation Policy	The Companys Director Compensation Policy (Director Compensation Policy) was suspended on April 15, 2021, and reinstated on February 14, 2025. The reinstated Director Compensation Policy provides the following terms and conditions: (i)Board Options: On January 1, 2016, and thereafter, January 1st of each succeeding year, each member of the Board shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $50,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the last day of each calendar month for 12 months, beginning January 31st in the year of grant ('First Vesting Date'), and for each successive month through December 31st in the year of grant ('Final Vesting Date'). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event a member of the Board ceases to be a member of the Board for any reason prior to Final Vesting Date of the Option. (ii)Audit Committee Chairman Options: On January 1, 2016, and thereafter, on January 1st of each succeeding year, the Chairman of the Audit Committee, or the equivalent thereof, shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $25,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the last day of each calendar month for 12 months, beginning January 31st in the year of grant ('First Vesting Date'), and for each successive month through December 31st in the year of grant ('Final Vesting Date'). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event the Board member ceases to be Chairman of the Audit Committee for any reason prior to Final Vesting Date of the Option. (iii)Options Issued upon Appointment to the Board of Directors: Upon appointment to the Board of Directors the appointed Director shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $50,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the day preceding the one-month anniversary of the date of grant ('First Vesting Date'), and for each successive month through the day preceding the one-year anniversary of the date of grant ('Final Vesting Date'). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event a member of the Board ceases to be a member of the Board for any reason prior to Final Vesting Date of the Option. (iv)Options Issued to the Board member who oversees financial audit functions. Upon appointment the Board member who oversees financial audit functions shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $25,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the day preceding the one-month anniversary of the date of grant ('First Vesting Date'), and for each successive month through the day preceding the one-year anniversary of the date of grant ('Final Vesting Date'). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event the Director ceases to be Chairman of the Audit Committee for any reason prior to Final Vesting Date of the Option. (v)Committee Member Compensation: Each member of a committee of the Board shall receive monthly compensation of $500.00, plus reimbursement of reasonable travel and lodging expenses.	2025-02-14	The reinstatement of the Director Compensation Policy could impact the company's expenses and potentially dilute existing stockholders.

Legal Proceedings

The former executive officer disputes the amount identified in the above table, claiming the above amount is less than the amount to which he believes he is owed.
Absent an agreement to settle the dispute, and in the event the former executive officer elects to initiate litigation regarding the dispute, including claims for interest and penalties to which the former executive officer believes he is entitled, the Company has reserved, and if necessary and appropriate will assert, all factual and legal defenses, counter-claims, rights, and remedies it may have in any such suit.

Related Party Transactions

As of December 31, 2024 and 2023, total accrued expenses related parties amounted to $6,000 and $6,000, respectively.
The Company reimburses Cecil Bond Kyte, Company CEO and CFO, in rent expenses for a home office and partial storage space in Carson City, Nevada at a rate of $1,000 per month under a month-to-month rental agreement (Carson Rental Agreement).

Stakeholder Impact

Shareholders face the risk of dilution and potential loss of investment due to the company's financial instability and need for additional capital.
Employees face uncertainty regarding job security due to the company's going concern doubts.
Customers and suppliers may be hesitant to engage with the company due to its financial instability.
Creditors face the risk of non-payment due to the company's financial difficulties.

Next Steps

Continue optimization and value engineering of our AOT Midstream commercial product line.
Install and operate AOT equipment on a commercial midstream pipeline.
Directly market AOT technology to midstream pipeline operators based on results and analysis of data from the AOT demonstration project.
Present demonstration project results and analysis at various trade conferences.
Continue to make inroads and meet with key strategic potential customers in the following geographic regions: a. United States b. Canada c. South and Central America d. Middle East e. Asia
Continue to make inroads and strategic alliances with additional supply chain and logistics support to rapidly expand our production capacity beyond its current physical limitations, adding capacity, reach and stability with pre-approved supply chain members that meet the criteria of the customers procurement divisions.
Develop new AOT technologies crude oil technologies with the potential to expand our market reach upstream and gathering pipeline, offshore pipelines, rail and trucking containers, and crude oil container ships.
Continue to collaborate on scientific and technical whitepaper reports, product development enhancements, and additional products with our engineering support, consultants and relationships.
Seek long-term recurring revenues by directly offering or licensing electronic viscosity reduction (electronic diluent, or eDiluent) as a service to reduce reliance on physical diluent.

Key Dates

Date	Description
1998-02-18	Company incorporated as Mandalay Capital Corporation.
1999-02-11	Company changed its name to Save the World Air, Inc.
2007-02-02	Date of License Agreement between the Registrant and Temple University.
2011-08-01	Company and Temple University entered into two Exclusive License Agreements.
2011-08-09	Date of License Agreement between the Registrant and Temple University.
2015-07-06	QS Energy Pool, Inc. formed as a wholly owned subsidiary.
2015-08-11	Company changed its name to QS Energy, Inc.
2017-04-01	Eric Bunting appointed to the Board of Directors.
2020-06-01	Start date of PPP Loan period.
2020-06-30	End date of PPP Loan period.
2024-06-03	Don Dickson voluntarily resigned as a Director of the Company.
2024-06-11	Company entered into a letter of intent with VIPS Petroleum, LLC.
2024-08-01	Company entered into a Collaboration Agreement with VIPS Petroleum, LLC.
2024-09-25	MOU completed and signed with VIPS.
2024-12-10	Update: QS Energy Achieves Phase 4 Milestone with Southeast Asia's Leading Energy Producer.
2024-12-31	End of fiscal year.
2025-01-01	Effective date of Employment Agreement with Cecil Bond Kyte.
2025-02-14	Director Compensation Policy reinstated.
2025-02-19	QS Energy, Inc. entered into an Employment Agreement with Cecil Bond Kyte.
2025-03-21	Date of report and number of shares of the Registrants Common Stock outstanding.
2025-03-26	Date of Insider Trading Policy.
2025-03-28	Date of report signatures.

Keywords

AOT, QS Energy, Going Concern, Convertible Notes, Viscosity Reduction, Pipeline, Financial Results, Risk Factors, Commercialization, Energy Efficiency

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