Company Quick10K Filing
QS Energy
Price0.10 EPS-0
Shares303 P/E-6
MCap30 P/FCF-13
Net Debt1 EBIT-5
TEV31 TEV/EBIT-7
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-23
10-Q 2020-06-30 Filed 2020-08-19
10-Q 2020-03-31 Filed 2020-06-26
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-01
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-04-02
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-14
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10-K 2016-12-31 Filed 2017-03-31
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10-Q 2016-06-30 Filed 2016-08-09
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10-K 2015-12-31 Filed 2016-03-15
10-Q 2015-09-30 Filed 2015-11-09
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-11
10-K 2014-12-31 Filed 2015-03-16
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-11
10-Q 2014-03-31 Filed 2014-05-09
10-K 2013-12-31 Filed 2014-03-17
10-Q 2013-09-30 Filed 2013-11-12
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-06
10-K 2012-12-31 Filed 2013-03-22
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-11
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-10
10-Q 2011-06-30 Filed 2011-08-12
10-Q 2011-03-31 Filed 2011-05-11
10-K 2010-12-30 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-14
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-07-08
8-K 2020-05-15
8-K 2020-04-16
8-K 2020-03-04
8-K 2019-06-04
8-K 2018-11-09
8-K 2018-09-05

QSEP 10Q Quarterly Report

Part I - Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 qsep_ex3101.htm
EX-31.2 qsep_ex3102.htm
EX-32 qsep_ex3200.htm

QS Energy Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
4.83.31.70.2-1.4-2.92012201420172020
Assets, Equity
4.41.5-1.4-4.2-7.1-10.02012201420172020
Rev, G Profit, Net Income
4.12.91.80.6-0.5-1.72012201420172020
Ops, Inv, Fin

10-Q 1 qsenergy_10q-093020.htm FORM 10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2020

or

 

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

 

For the transition period from __________ to __________

 

Commission File Number 0-29185

 

QS ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 52-2088326

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

23902 FM 2978

Tomball, TX 77375

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

 

(281)-738-1893

(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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 ☐
  Non-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 ☐ No ☒

 

The number of shares of the Registrant’s Common Stock outstanding as of November 19, 2020 was 321,421,243.

  

 

 

   
 

 

QS ENERGY, INC.
FORM 10-Q

 

INDEX

 

PART I – FINANCIAL INFORMATION 3
Item 1. Unaudited Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations, Unaudited 4
Condensed Consolidated Statement of Stockholders’ Deficit, Unaudited 5
Condensed Consolidated Statements of Cash Flows, Unaudited 7
Notes to Condensed Consolidated Financial Statements, Unaudited 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure about Market Risk 24
Item 4. Controls and Procedures 24
   
PART II – OTHER INFORMATION 25
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 26
   
SIGNATURES 27
   
EXHIBITS  
EXHIBIT 31.1  
EXHIBIT 31.2  
EXHIBIT 32  

 

 

 

 

 

 

 2 
 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

QS ENERGY, INC.

Condensed Consolidated Balance Sheets

 

   September 30, 2020   December 31, 
   (unaudited)   2019 
ASSETS
Current assets:          
Cash  $52,000   $479,000 
Prepaid expenses and other current assets   89,000    96,000 
Total current assets   141,000    575,000 
Property and equipment, net of accumulated depreciation of $85,000 and $80,000 at September 30, 2020 and December 31, 2019, respectively   18,000    23,000 
Other assets       2,000 
Total assets  $159,000   $600,000 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable-license agreements  $1,432,000   $1,255,000 
Accounts payable and accrued expenses   733,000    557,000 
Accrued expenses and accounts payable-related parties   54,000    7,000 
Convertible debentures, net of discounts of $47,000 and $153,000 at September 30, 2020 and December 31, 2019, respectively   1,132,000    1,050,000 
PPP Loan payable   151,000     
Total current liabilities   3,502,000    2,869,000 
           
Commitments and contingencies          
           
Stockholders’ deficit          
Common stock, $.001 par value: 500,000,000 shares authorized, 321,087,910 and 310,111,536 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively   321,089    310,111 
Additional paid-in capital   117,167,911    116,209,889 
Accumulated deficit   (120,832,000)   (118,789,000)
Total stockholders’ deficit   (3,343,000)   (2,269,000)
Total liabilities and stockholders’ deficit  $159,000   $600,000 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 3 
 

 

QS ENERGY, INC.

Condensed Consolidated Statements of Operations, Unaudited

 

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
                 
Revenues  $   $   $   $ 
Costs and Expenses                    
Operating expenses   297,000    493,000    1,242,000    1,626,000 
Research and development expenses   81,000    82,000    308,000    665,000 
Loss before other expense   (378,000)   (575,000)   (1,550,000)   (2,291,000)
                     
Other expense                    
Interest and financing expense   (58,000)   (413,000)   (493,000)   (2,437,000)
Net Loss  $(436,000)  $(988,000)  $(2,043,000)  $(4,728,000)
                     
Net loss per common share, basic and diluted  $(0.00)  $(0.00)  $(0.01)  $(0.02)
                     
Weighted average common shares outstanding, basic and diluted   319,326,044    298,834,404    315,128,749    298,834,404 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 4 
 

  

QS ENERGY, INC.

Condensed Consolidated Statement of Stockholders’ Deficit, Unaudited

For the Nine months Ended September 30, 2020 and September 30, 2019

 

   Common Stock   Additional
Paid-in
   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, January 1, 2019   256,123,515   $256,123   $111,429,877   $(113,168,000)  $(1,482,000)
Common stock issued on exercise of warrants and options   4,039,690    4,040    287,960         292,000 
Common stock issued on conversion of notes payable   42,271,760    42,272    2,311,728         2,354,000 
Fair value of warrants and beneficial conversion feature of issued convertible notes             1,350,000         1,350,000 
Fair value of options and warrants issued as compensation             275,000         275,000 
Common stock issued for services   250,000    250    67,750         68,000 
Net loss                  (4,728,000)   (4,728,000)
Balance, September 30, 2019   302,684,965   $302,685   $115,722,315   $(117,896,000)  $(1,871,000)

 

 

   Common Stock   Additional
Paid-in
   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, January 1, 2020   310,111,536   $310,111   $116,209,889   $(118,789,000)  $(2,269,000)
Common stock issued on exercise of warrants and options   1,215,000    1,215    59,785        61,000 
Fair value of common stock issued on conversion of notes payable   8,094,707    8,096    366,904        375,000 
Fair value of warrants and beneficial conversion feature of issued convertible notes           212,000        212,000 
Fair value of options and warrants issued as compensation           296,000        296,000 
Common stock issued for cash in private sale of securities   1,666,667    1,667    23,333        25,000 
Net loss               (2,043,000)   (2,043,000)
Balance, September 30, 2020   321,087,910   $321,089   $117,167,911   $(120,832,000)  $(3,343,000)

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

 5 
 

 

QS ENERGY, INC.

Condensed Consolidated Statement of Stockholders’ Deficit, Unaudited

For the THREE months Ended September 30, 2020 and September 30, 2019

 

   Common Stock   Additional
Paid-in
   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, June 30, 2019   298,457,191   $298,456   $115,085,544   $(116,908,000)  $(1,524,000)
Common stock issued on exercise of warrants and options   362,500    363    18,637         19,000 
Common stock issued on conversion of notes payable   3,865,274    3,866    305,134         309,000 
Fair value of warrants and beneficial conversion feature of issued convertible notes             232,000         232,000 
Fair value of options and warrants issued as compensation             81,000         81,000 
Common stock issued for services                     
Net loss                  (988,000)   (988,000)
Balance, September 30, 2019   302,684,965   $302,685   $115,722,315   $(117,896,000)  $(1,871,000)

 

 

   Common Stock   Additional
Paid-in
   Accumulated   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Deficit 
Balance, June 30, 2020   319,421,243   $319,422   $117,061,578   $(120,396,000)  $(3,015,000)
Common stock issued on exercise of warrants and options                    
Common stock issued on conversion of notes payable                    
Fair value of warrants and beneficial conversion feature of issued convertible notes                    
Fair value of options and warrants issued as compensation           83,000        83,000 
Common stock issued for cash in private sale of securities   1,666,667    1,667    23,333        25,000 
Net loss               (436,000)   (436,000)
Balance, September 30, 2020   321,087,910   $321,089   $117,167,911   $(120,832,000)  $(3,343,000)

 

See notes to condensed consolidated financial statements.

 

 

 

 

 

 6 
 

 

QS ENERGY, INC.

Condensed Consolidated Statements of Cash Flows, Unaudited

 

   Nine months ended 
   September 30 
   2020   2019 
Cash flows from Operating Activities          
Net loss  $(2,043,000)  $(4,728,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation expense   296,000    275,000 
Issuance of common stock for services       68,000 
Amortization of debt discount   339,000    2,348,000 
Accrued interest expense   118,000    44,000 
Depreciation and amortization   5,000    5,000 
Changes in operating assets and liabilities:          
Prepaid expenses and other assets   9,000    (211,000)
Accounts payable and accrued expenses   176,000    (158,000)
Accounts payable – license agreements   177,000    123,000 
Accounts payable and accrued expenses – related parties   47,000    (50,000)
Deposits and other current liabilities        
Net cash used in operating activities   (876,000)   (2,284,000)
           
Cash flows from investing activities          
Purchase of equipment       (6,000)
Net cash used in investing activities       (6,000)
           
Cash flows from financing activities          
Net proceeds from private sale of restricted common stock   25,000     
Net proceeds from issuance of convertible notes and warrants   212,000    1,350,000 
Net proceeds from exercise of warrants   61,000    292,000 
Net proceeds from PPP Loan   151,000     
Net cash provided by financing activities   449,000    1,642,000 
           
Net decrease in cash   (427,000)   (648,000)
Cash, beginning of period   479,000    1,153,000 
Cash, end of period  $52,000   $505,000 
           
Supplemental disclosures of cash flow information          
Cash paid during the year for:          
Interest  $   $ 
Income Taxes  $   $1,600 
Non-cash investing and financing activities          
Conversion of convertible debentures and accrued interest to common stock  $375,000   $2,354,000 
Fair value of warrants and beneficial conversion feature associated with issued convertible notes  $212,000   $1,350,000 

 

See notes to condensed consolidated financial statements.

 

 

 

 7 
 

 

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

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

 

  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. More information including the Company’s fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.

 

QS Energy is developing and 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. Engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements, AOT is a 100% solid-state system that reduces crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. We are seeking to transition our AOT product from the research and development stage to initial production for continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC. The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

 

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

 

 

  2. Summary of Significant Accounting Policies

 

Consolidation Policy

 

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

 

 

 

 

 

 8 
 

 

Going Concern

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the nine months ended September 30, 2020, the Company incurred a net loss of $2,043,000, used cash in operations of $876,000 and had a stockholders’ deficit of $3,343,000 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2019 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

 

At September 30, 2020, the Company had cash on hand in the amount of $52,000. Management estimates that the current funds on hand will be sufficient to continue operations through November 2020. 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 2020 and beyond.

 

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

 

Basic and Diluted Income (loss) per share

 

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

 

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted (loss) per common share is the same for periods in which the Company reported an operating loss because all warrants and stock options outstanding are anti-dilutive. At September 30, 2020 and 2019, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock as their effect would have been anti-dilutive.

 

   September 30,
2020
   September 30,
2019
 
Options   32,180,601    39,450,603 
Warrants   6,281,536    25,941,062 
Common stock issuable upon conversion of notes payable   12,624,632    12,689,373 
Total   51,086,769    78,081,038 

 

 

 

 

 9 
 

 

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.

 

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 nine-month periods ended September 30, 2020 and 2019 research and development costs were $308,000 and $665,000, respectively. For the three-month periods ended September 30, 2020 and 2019 research and development costs were $81,000 and $82,000, 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 and Joule Heat products, all patent costs are expensed as incurred. During the nine-month periods ended September 30, 2020 and 2019, patent costs were $13,000 and $12,000, respectively, which is included as part of operating expenses in the accompanying 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.

 

  3. Accrued Expenses and Accounts Payable

 

Accrued Expenses

 

As of September 30, 2020 and December 31, 2019, the Company owed $197,000 and $207,000, 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 included as part of Accrued expenses and accounts payable on the accompanying balance sheet. The amount is to be repaid at an amount of $10,000 per month. During the nine months ended September 30, 2020 the Company made $10,000 in payments reducing the outstanding balance to $197,000. The Company is currently past-due under terms of the separation agreement as amended.

 

Accrued Expenses and Accounts Payable – Related Parties

 

Accrued expense – related parties consists of accrued fees due to members of the Board of Directors and deferred salary and related payroll taxes due to an Executive Officer for unpaid salary. As of September 30, 2020 and December 31, 2019, accrued expenses and accounts payable to related parties amounted to $54,000 and $7,000, respectively.

 

 

 

 

 10 
 

 

  4. Property and Equipment

 

At September 30, 2020 and December 31, 2019, property and equipment consists of the following:

 

   September 30,
2020
   December 31,
2019
 
Office equipment  $36,000   $36,000 
Furniture and fixtures   5,000    5,000 
Testing Equipment   37,000    37,000 
Leasehold Improvements   25,000    25,000 
Subtotal   103,000    103,000 
Less accumulated depreciation   (85,000)   (80,000)
Total  $18,000   $23,000 

 

Depreciation expense for the nine-month periods ended September 30, 2020 and 2019 was $5,000 and $5,000, respectively. Depreciation expense for the three-month periods ended September 30, 2020 and 2019 was $2,000 and $2,000, respectively.

  

  5. Convertible Notes

 

  

September 30,
2020

(unaudited)

  

December 31,

2019

 
Balance due on convertible notes  $893,000   $1,019,000 
Accrued interest   286,000    184,000 
Subtotal   1,179,000    1,203,000 
Convertible note discount   (47,000)   (153,000)
Balance on convertible notes, net of note discounts  $1,132,000   $1,050,000 

 

The Company issues convertible notes in exchange for cash. The notes typically do not bear any interest; however, there is an implied interest rate of 10% since the notes are typically issued at a 10% discount. The notes are unsecured, and usually mature twelve months from issuance.

 

The notes are convertible at the option of the note holder into the Company’s common stock at a conversion price stipulated in the conversion agreement. In addition, the note holders receive warrants to purchase shares of common stock that are fully vested and will expire in one year from the date of issuance. As a result, the Company records a note discount to account for the relative fair value of the warrants, the notes’ beneficial conversion feature or BCF, and original issue discount of 10% (OID). The note discounts are amortized over the term of the notes or amortized in full upon its conversion to common stock.

 

As of December 31, 2019, total outstanding notes payable amounted to $1,019,000 which are due through December 2019 and unamortized note discount of $153,000.

 

During the nine-month period ended September 30, 2020, the Company issued similar convertible promissory notes in the aggregate of $233,000 for cash of $212,000 or a discount of $21,000. The notes do not bear any interest; however, the implied interest rate used was 10% since the notes were issued 10% less than its face value. The notes are unsecured, mature in twelve months from issuance and convertible at $0.035 per share. In addition, the Company also granted these note holders warrants to purchase 3,324,517 shares of the Company’s common stock. The warrants are fully vested, exercisable at $0.035 per share and will expire in one year. As a result, the Company recorded a note discount of $212,000 to account for the relative fair value of the warrants, the notes’ beneficial conversion feature (BCF), and original issue discount (OID). The note discounts are being amortized over the term of the note or amortized in full upon the conversion to common stock. During the nine-month period ended September 30, 2020 notes payable and accrued interest of $375,000 were converted into 8,094,707 shares of common stock.

 

As of September 30, 2020, total outstanding notes payable amounted to $893,000, accrued interest of $286,000 and unamortized note discount of $47,000 for a net balance of $1,132,000. A total of twenty-one notes in the aggregate of $1,095,000 including accrued interest have reached maturity and are past due.

 

 

 

 

 11 
 

 

  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, prototype equipment fabrication and installation, 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 nine-month periods ended September 30, 2020 and 2019, our research and development expenses were $308,000 and $665,000 respectively. For the three-month periods ended September 30, 2020 and 2019, our research and development expenses were $81,000 and $82,000 respectively.

 

AOT Product Development and Testing

 

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 testing fees, purchase of test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT prototypes.

 

During the year ended December 31, 2019, the Company incurred costs related to a work order for work to be performed by a pipeline operator under which the Company paid a $500,000 deposit in advance of work to be performed. During the period ended December 31, 2019, the Company amortized $483,000 of such amount as a research and development cost based on the progress of work performed as required by the contract, and reflected the $17,000 remaining amount on deposit as Prepaid expenses and other current assets in the accompanying consolidated balance sheet as of December 31, 2019.

 

During the period ended September 30, 2020, the work order was increased by $85,000 and the Company paid an additional $85,000 deposit in advance of work to be performed.

 

During the period ended September 30, 2020, the Company amortized the remaining $102,000 of amounts paid on deposit under the work order as a research and development cost based on the progress of work performed as required by the contract.

 

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 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 pursuant to these two License Agreements amounted to $141,000 during each nine-month periods ended September 30, 2020 and 2019. Total expenses recognized pursuant to these two License Agreements amounted to $47,000 during each three-month periods ended September 30, 2020 and 2019. Total expenses have been reflected in Research and Development expenses on the accompanying consolidated statements of operations. In the nine-month periods ended September 30, 2020 and 2019, the Company also recognized penalty interest on past-due balances of $36,000 and $45,000, respectively, which is included as part of interest and financing expense in the accompanying statements of operations.

 

 

 

 

 12 
 

 

As of September 30, 2020 and December 31, 2019, total unpaid fees due to Temple pursuant to these agreements are $1,432,000 and $1,255,000, respectively, which are included as part of Accounts Payable – license agreements in the accompanying 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 $1,297,000 is deemed past due. The Company is currently in discussions with Temple to settle or cure the past due balance.

 

No revenues were earned from the two License Agreements during the three-month periods ended September 30, 2020 and September 30, 2019.

 

  7. Common Stock

 

During the nine months ended September 30, 2020, the Company issued 10,976,374 shares of its common stock as follows:

 

  · The Company issued 8,094,707 shares of its common stock upon the conversion of $375,000 in convertible notes pursuant to the convertible notes conversion prices of $0.05 to $0.15 per share.

 

  · The Company issued 1,155,000 shares of its common stock upon the exercise of warrants for proceeds of $58,000 at an exercise price of $0.05 per share.

 

  · The Company issued 60,000 shares of its common stock upon the exercise of options for proceeds of $3,000 at an exercise price of $0.05 per share.

 

  · The Company issued 1,666,667 shares of its common stock upon the private sale of restricted common stock for cash proceeds of $25,000 at a purchase price of $0.015 per share along with other considerations.

 

  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 vest and expire according to terms established at the grant date.

 

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 September 30, 2020 was 5.7 years. Stock option activity for the period January 1, 2020 up to September 30, 2020, was as follows:

 

    Options     Weighted
Avg. Exercise
Price
 
January 1, 2020     39,750,603     $ 0.20  
Granted     3,299,998       0.13  
Exercised     (60,000 )     0.05  
Forfeited     (10,810,000 )     0.25  
September 30, 2020     32,180,601     $ 0.18  

  

 

 

 

 13 
 

 

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of September 30, 2020 were as follows:

 

        Outstanding Options       Exercisable Options  
Option
Exercise Price
Per Share
      Shares       Life
(Years)
      Weighted
Average Exercise
Price
      Shares       Weighted
Average Exercise
Price
 
$0.05 - $0.24        21,205,551       7.2     $ 0.10        20,563,885     $ 0.10  
$0.25 - $0.49        10,353,552       2.8       0.30        10,353,552       0.30  
$0.50 - $0.99        471,052       3.6       0.85        471,052       0.85  
$1.00 - $2.00        150,446       2.8       1.18        150,446       1.18  
        32,180,601       5.7     $ 0.18       31,538,935     $ 0.18  

 

During the nine-month period ending September 30, 2020, and pursuant to the Company’s Board Compensation policy approved by the Board June 19, 2015, the Company granted options to purchase 3,299,998 shares of common stock to members of the Company’s Board of Directors and an executive officer under terms of an employment agreement. The options are exercisable at $0.02 to $0.15 per share, vest monthly over a twelve-month period, and expire ten years from the date granted. Total fair value of these options at grant date was $365,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 5.5 years; risk free interest rate of 0.6% to 1.7%; volatility of 128% to 188% and dividend yield of 0%.

 

During the nine-month periods ended September 30, 2020 and 2019, the Company recognized compensation costs based on the fair value of options that vested of $283,000 and $265,000 respectively. During the three-month periods ended September 30, 2020 and 2019, the Company recognized compensation costs based on the fair value of options that vested of $81,000 and $82,000 respectively.

 

At September 30, 2020, the Company’s closing stock price was $0.03 per share. The aggregate intrinsic value of the options outstanding at September 30, 2020 was $1,000. Future unamortized compensation expense on the unvested outstanding options at September 30, 2020 is approximately $72,000 to be recognized through December 2020.

 

Warrants

 

The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting January 1, 2020 up to September 30, 2020.

 

    Warrants     Weighted Avg.
Exercise Price
 
January 1, 2020     13,065,084     $ 0.11  
Granted     3,624,514       0.04  
Exercised     (1,155,000 )     0.05  
Cancelled     (9,253,062 )     0.07  
September 30, 2020     6,281,536     $ 0.14  

 

 

 

 

 

 14 
 

 

The weighted average exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of September 30, 2020 were as follows:

 

        Outstanding Warrants       Exercisable Warrants  
Warrant Exercise Price Per Share       Shares       Life
(Years)
      Weighted
Average Exercise Price
      Shares       Weighted
Average Exercise Price
 
$0.05 - $0.24        4,211,536       0.9     $ 0.05        4,178,203     $ 0.06  
$0.25 - $0.49        2,000,000       1.1       0.30        2,000,000       0.30  
$0.50 - $1.00        70,000       3.6       0.80        70,000       0.80  
        6,281,536       1.0     $ 0.14       6,248,203     $ 0.14  

 

In the nine-month period ending September 30, 2020, pursuant to terms of convertible notes issued, the Company granted warrants to purchase 3,324,517 shares of common stock with an exercise price of $.04 to $0.18 per share, vesting immediately upon grant and expiring one year from the date of grant (see Note 5, above).

 

In the nine-month period ending September 30, 2020, the Company issued warrants to purchase 299,997 shares of common stock in exchange for services. The warrants are exercisable at a price of $0.03 to $0.14, vesting one month from the date of grant and expiring two years from the date of grant. Total fair value of these options at grant date was $14,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 2 years; risk free interest rate of 0.4% to 1.5%; volatility of 163% to 192% and dividend yield of 0%. During the nine-month period ended September 30, 2020, the Company recognized compensation costs based on the fair value of warrants that vested of $13,000.

 

At September 30, 2020, the aggregate intrinsic value of the warrants outstanding was $1,000.

 

  9. PPP Loan

 

In June 2020, the Company (“Borrower”) entered into an unsecured promissory note with Cadence Bank (“Lender”) in the amount of $151,000 (“Note”, or “PPP Loan”). The Note is payable in 53 monthly consecutive principal and interest payments of $2,584.57 each, beginning January 2, 2021, with interest calculated on the unpaid principal balances using an interest rate of 1.000% per annum based on a year of 360 days. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note.

 

The Lender made this loan pursuant to the Paycheck Protection Program (the "PPP") created by Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and governed by the CARES Act, section 7(a)(36) of the Small Business Act, any rules or guidance that has been issued by the Small Business Administration implementing the PPP, or any other applicable Loan Program Requirements, as defined in 13 CFR 120.10, as amended from time to time (collectively "PPP Loan Program Requirements"). Notwithstanding anything to the contrary herein, Borrower (a) agrees that this Promissory Note shall be interpreted and construed to be consistent with the PPP Loan Program Requirements and (b) authorizes the Lender to unilaterally amend any provision to the Promissory Note to the extent required to comply with the PPP Loan Program Requirements.

 

Borrower may apply to Lender for forgiveness of the amount due under terms of the Note.

 

Interest accrued on this Note during the period ended September 30, 2020 was less than $400. The balance due under the Note of $151,000 is reflected in PPP Loan payable on the accompanying consolidated balance sheet.

 

 

 

 

 

 

 15 
 

 

Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide 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 September 30, 2020.

 

  10. 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. No assurances can be made that COVID-19 will not materially affect operations or negatively impact our ability to fund continued operations.

 

  11. Subsequent Events

 

Issuance of Unregistered Securities

Convertible notes 

 

From October 1, 2020, through November 20, 2020, the Company issued and sold an aggregate of $70,000 Convertible Promissory Notes (the “Notes”) and warrants to purchase an aggregate of 1,739,375 shares of common stock (the “Warrants”). The Company received proceeds from the private placement of $63,000, which funds were used, and are being used, for general corporate purposes and working capital.

 

The Notes are due twelve (12) months from their respective issuance dates (the “Maturity Date”). The Notes do not bear interest and were issued in the face amount equal to 110% of the purchasers’ commitments. The Notes are convertible into shares of the Company’s common stock at a rate of $0.02 per share. If the Notes are not paid in full by the Maturity Date, the balance remaining on the Maturity Date shall be increased by 10% and the Company shall be required to pay interest at a rate of 10% per annum thereon until all sums thereunder are paid in full.

 

The Warrants are exercisable into shares of the Company’s common stock for a term of one (1) year at an exercise price of $0.03 per share. The Warrants also contain provisions that protect the holders against dilution by adjustment of the conversion price in certain events involving a reduction or increase in the Company’s shares.

 

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

 

Of these aggregate amounts, the Company received proceeds of $63,000 on the sale of $70,000 in Notes and Warrants to purchase 1,739,375 shares of common stock were purchased subsequent to the September 30, 2020 reporting date of this Form 10-Q.

 

Private sale of restricted common stock

 

In November 2020, the Company issued 333,333 shares of restricted common stock for proceeds of $5,000 at a price of $0.015, along with other considerations.

  

 

 

 

 16 
 

 

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 September 30, 2020, 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 under development is called Applied Oil Technology (AOT), a commercial-grade crude oil pipeline transportation flow-assurance product. Engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements, AOT is a 100% solid-state system that reduces crude oil viscosity by applying a high intensity electrical field to crude oil 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. 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 March 30, 2020, 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 March 30, 2020.

 

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.

 

 

 

 

 

 17 
 

 

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.

 

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 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 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.

 

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, 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. 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.

 

 

 

 

 18 
 

 

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 believe it is unlikely the fault was in the grid pack assembly as this component was fully submerged in crude oil and would generally 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 rebuild the blind flange and electrical connection assembly and modify the design to better isolate and insulate all electrical pathways, connections, and components.

 

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.

 

Reinstallation of the modified equipment was completed in late June 2020. Commissioning and equipment testing resumed shortly thereafter.

 

As reported the Company’s Form 8-K filed with the SEC on July 13, 2020, the system experienced a new failure mode during startup testing 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, 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.

 

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 has been 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 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.

 

In late July, our equipment was removed from the demonstration site and was been relocated to a facility where we may have access to heavy equipment and other resources necessary to disassemble and inspect the equipment.

 

 

 

 

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Though our engineers do 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 does not currently have sufficient capital to take on this endeavor.

 

QS Energy operations have been minimally impacted by COVID-19; however, 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 materially affect operations 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. Due to lack of sufficient capital, no material work has been performed by the Company on our AOT technology since July 2020 when the equipment was removed from the demonstration site. Subsequent to the reporting period of this Form 10-Q, during the period of October 1, 2020 through November 20, 2020, the Company raised $68,000 through the private sale of restricted company stock and convertible notes (see Note 11 to the Company’s consolidated financial statements). We will need to raise substantial additional capital through 2020, and beyond, to restart testing and development of our AOT technology and to fund our sales and marketing efforts, continuing research and development, and certain other expenses. 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 Part II Item 1A, “Risk Factors,” below.

 

I. Nine months ended September 30, 2020 and 2019

 

Results of Operations for nine months ended September 30, 2020 and 2019

 

   Nine months ended 
   September 30, 
   2020   2019   Change 
Revenues  $   $   $ 
Costs and Expenses               
Operating expenses   1,242,000    1,626,000    (384,000)
Research and development expenses   308,000    665,000    (357,000)
Loss before other income (expense)   (1,550,000)   (2,291,000)   (741,000)
Other income (expense)               
Interest and financing expense   (493,000)   (2,437,000)   (1,944,000)
Net Loss  $(2,043,000)  $(4,728,000)  $(2,685,000)

 

Operating expenses were $1,242,000 for the nine-month period ended September 30, 2020, compared to $1,626,000 for the nine-month period ended September 30, 2019, a decrease of $384,000. This is due to decreases in non-cash expenses of $47,000 and in cash expenses of $337,000. Specifically, the decrease in non-cash expenses is attributable to an increase stock compensation expense attributable to options granted to employees and directors of $17,000, offset by a decrease in common stock and warrants issued as compensation for services of $64,000. The decrease in cash expense is attributable increases in consulting fees of $6,000, insurance of $33,000, and legal and accounting of $19,000, offset by a decrease in corporate expenses of $9,000, mail and freight of $12,000, office expenses of $49,000, public and investor relations of $53,000, salaries and benefits of $210,000, travel expenses of $42,000, property taxes of $9,000, and other expenses of $11,000.

 

Research and development expenses were $308,000 for the nine-month period ended September 30, 2020, compared to $665,000 for the nine-month period ended September 30, 2019, a decrease of $357,000. This decrease is attributable a decrease in prototype product development costs of $357,000.

 

 

 

 

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Other income and expense were $493,000 expense for the nine-month period ended September 30, 2020, compared to $2,437,000 expense for the nine-month period ended September 30, 2019, a net decrease in other expenses of $1,944,000. This decrease is attributable to a decrease in non-cash other expenses of $1,944,000. The decrease 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 $1,935,000, and other non-cash interest of $9,000.

 

The Company had a net loss of $2,043,000 or $0.01 per share, for the nine-month period ended September 30, 2020, compared to a net loss of $4,728,000, or $0.02 per share, for the nine-month period ended September 30, 2019.

 

II. Three months ended September 30, 2020 and 2019

 

    Three months ended  
    September 30  
    2020     2019     Change  
Revenues   $     $     $  
Costs and expenses                        
Operating expenses     297,000       493,000       (196,000 )
Research and development expenses     81,000       82,000       (1,000 )
Loss before other income (expense)     (378,000 )     (575,000 )     197,000  
Other income (expense)                        
Interest and financing expense     (58,000 )     (413,000 )     355,000  
Net Loss   $ (436,000 )   $ (988,000 )   $ 552,000  

 

The Company had no revenues in the three month-periods ended September 30, 2020 and 2019.

 

Operating expenses were $297,000 for the three-month period ended September 30, 2020, compared to $493,000 for the three-month period ended September 30, 2020, a decrease of $196,000. This is due to an increase in non-cash expenses of $2,000 offset by a decrease in cash expenses of $198,000. Specifically, the increase in non-cash expenses is attributable to a decrease in stock compensation expenses attributable to the fair value of options granted to directors and employees of $2,000, offset by an increase in common stock and warrants issued as compensation for services of $4,000. The decrease in cash expense is attributable increases in insurance of $5,000, and legal and accounting of $11,000, offset by a decrease in consulting of $44,000, corporate expenses of $4,000, mail and freight of $3,000, office expenses of $9,000, public and investor relations of $14,000, salaries and benefits of $109,000, travel of $13,000, and other expenses of $18,000.

 

Research and development expenses were $81,000 for the three-month period ended September 30, 2020, compared to $82,000 for the three-month period ended September 30, 2019, a decrease of $1,000. This decrease is attributable to decreases in prototype product development costs of $1,000.

 

Other income and expense were $58,000 expense for the three-month period ended September 30, 2020, compared to $413,000 expense for the three-month period ended September 30, 2019, a net decrease in other expenses of $355,000. This decrease is attributable to a decrease in non-cash other expenses of $355,000. The decrease in non-cash other expense is due to a decrease in expense attributable to interest, beneficial conversion factors and warrants associated with convertible notes issued in the amount of $355,000.

 

The Company had a net loss of $436,000, or $0.00 per share, for the three-month period ended September 30, 2020, compared to a net loss of $988,000, or $0.00 per share, for the three-month period ended September 30, 2019.

 

 

 

 

 21 
 

 

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 $3,343,000 as of September 30, 2020. Our negative operating cash flow for the periods ended September 30, 2020 was funded primarily through issuance of convertible notes and execution of options and warrants to purchase common stock.

 

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 $2,043,000 and a negative cash flow from operations of $876,000 for the nine-month period ended September 30, 2020. 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, 2020 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 September 30, 2020, we received cash totaling $449,000 from issuance of our convertible notes payable, exercise of options and warrants to purchase common stock, the private sale of restricted stock, and CARES Act funding and used cash in operations of $876,000. At September 30, 2020, we had cash on hand in the amount of $52,000. 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 salaries to our executive officers pursuant to employment agreements, certain severance payments to a former officer and consulting fees, during the remainder of 2020 and beyond.

 

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

 

Licensing Fees to Temple University

 

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

 

Critical Accounting Policies and Estimates

 

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

 

 

 

 22 
 

 

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.

 

Estimates

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our consolidated financial statements as described in Note 1 to Notes to the Condensed 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 nine months ended September 30, 2020, the Company incurred a net loss of $2,043,000, used cash in operations of $876,000 and had a stockholders’ deficit of $3,343,000 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

At September 30, 2020, the Company had cash on hand in the amount of $52,000. Management estimates that the current funds on hand will be sufficient to continue operations through November 2020. 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 2020 and beyond.

 

 

 

 

 23 
 

 

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.

 

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

 

The Company's management, with the participation of the Company's chief financial officer, evaluated, as of September 30, 2020, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company's disclosure controls and procedures as of September 30, 2020, management, the chief financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at that date.

 

(a)       Changes in Internal Control over Financial Reporting

 

No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the nine-month period ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

 

 

 

 24 
 

 

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, 2019, which we filed with the SEC on March 30, 2020, in Form 10-Q for the period ended March 31, 2020, which we filed with the SEC on June 26, 2020, in Form 10-Q for the period ended June 30, 2020, which we filed with the SEC on August 19, 2020, and in Forms 8-K filed with the SEC on May 15, 2020 and July 13 ,2020.

 

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

 

Issuances

 

In private offerings exempt from registration, during the nine months ended September 30, 2020, the Company issued 8,094,707 shares of its common stock upon the conversion of $375,000 in convertible notes at $0.04 to $0.15 per share, and 1,666,667 shares of its common stock in a private sale of restricted stock at $0.015 per share along with other considerations. In connection with the issuances of the foregoing securities, the Company relied on the exemption, among other exemptions, 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 including without limitation the demonstration project described in Part I, Item 2.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

The Company provides regular updates on its website in a section thereunder labeled “Recent Updates” at https://qsenergy.com/updates.

 

 

 

 

 

 

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Item 6. Exhibits

 

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

 

 

 

 

 

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SIGNATURES

 

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

 

  QS ENERGY, INC.  
     
       
Date: November 23, 2020 By: /s/ Michael McMullen  
    Michael McMullen  
    Chief Financial Officer  
       

 

 

 

 

 

 

 

 

 

 

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EXHIBITS

 

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

 

 

 

 

 

 

 

 

 

 

 

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