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, 20172023

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)

23902 FM 2978

Tomball, TX77375

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

(805)-845-3561(775)300-7647

(Registrant’s telephone number, including area code)

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

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

Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one)

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 10, 20179, 2023 was 233,788,905.392,519,805.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements include predictions and statements regarding our future:

You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” “intends,” “project,” “potential,” “forecast” “continues,” “strategies,” or the negative of such terms, or other comparable terminology, and also include statements concerning plans, objectives, goals, strategies and future events or performance.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the heading “Risk Factors.” We cannot assure you that we will achieve or accomplish our expectations, beliefs or projections. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

QS ENERGY, INC.

FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

QS ENERGY, INC.

Condensed Consolidated Balance SheetSheets

See notes to condensed consolidated financial statements.

QS ENERGY, INC.

Condensed Consolidated Statement of Operations, Unaudited

See notes to condensed consolidated financial statements.

QS ENERGY, INC.

Condensed Consolidated StatementStatements of Stockholders’ Deficit,Operations, Unaudited

For the NINE months Ended SEPTEMBER 30, 2017

See notes to condensed consolidated financial statements.

QS ENERGY, INC.

Condensed Consolidated StatementsStatement of Cash Flows,Stockholders’ Deficit, Unaudited

For the three and NINE months Ended September 30, 2023

See notes to condensed consolidated financial statements.

QS ENERGY, INC.

Condensed Consolidated Statement of Stockholders’ Deficit, Unaudited

For the THREE and NINE months Ended September 30, 2022

See notes to condensed consolidated financial statements.

QS ENERGY, INC.

Condensed Consolidated Statements of Cash Flows, Unaudited

See notes to condensed consolidated financial statements.

QS ENERGY, INC.

Notes to Condensed Consolidated Financial Statements, Unaudited

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20172023 AND 20162022

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.Board ( Pink Sheets). More information including the Company’s fact sheet, logos, and media articles, and update information are available at our corporate website, www.qsenergy.com. Information included on, or accessed through, our website is not intended to be incorporated into or to be part of this Form 10-Q.

QS Energy develops and commercializesis 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 are exclusively licensed from Temple University of Philadelphia, PA (“Temple”). QS Energy's primary technology is called Applied Oil Technology™Technology (AOT), a commercial-grade crude oil pipeline transportation flow-assurance product. EngineeredAOT is engineered specifically to reduce pipeline pressure loss, increase pipeline flow rate and capacity, and reduce shippers’ reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements,requirements. AOT is a 100% solid-state system that reduceshas shown to reduce crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. The AOT product has transitionedis seeking to transition from the testing, research and development stage to initial production for continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace.

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, 2023, the Company plansincurred a net loss of $919,000, used cash in operations of $491,000 and had a stockholders’ deficit of $5,041,000 as of that date. In addition, as of September 30, 2023, thirty-eight notes payable with an aggregate balance of $1,977,000 and certain obligations to restart shortly commercial developmenta former officer are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within a reasonable period of a suite of products based around the Joule Heat technology. The Company began fabrication of prototype equipmenttime, which is considered to be operated under a joint development agreement with a commercial entity inone year from the fourth quarterissuance date of 2014. The Company’s first Joule Heat prototype was installed for testing purposes at the Newfield facility in June 2015 and the system is operational; however, changes to the prototype configuration will be required to determine commercial effectiveness of this unit.these financial statements. In addition, the Company's independent registered public accounting firm, in its report on the Company's December 31, 2022 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

The ability of the Company filed twoto continue as a going concern is dependent upon the Company’s ability to raise additional provisional patents relatedfunds 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, 2023, the technology’s methodCompany had cash on hand in the amount of $214,000. Management estimates that the current funds on hand will be sufficient to continue operations through December 2023. Management is currently seeking additional funds, primarily through the issuance of debt and apparatus. In December 2015, we temporarily suspended Joule Heatequity 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 activities to focus Company resources on finalizing commercial developmentand commercialization of the AOT Midstream. We currently plantechnologies; costs to resume Joule Heat development in 2018 depending onmanufacture and ship the availabilityproducts; costs to design and implement an effective system of sufficient capitalinternal controls and other resources.disclosure controls and procedures; costs of maintaining our status as a public company, including, without limitation, legal and accounting fees and costs associated therewith, by filing periodic reports with the SEC and fees and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements, certain payments to a former officer and consulting fees, during the remainder of 2023 and beyond.

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

Inflation

Macroeconomic factors such as inflation, rising interest rates, governmental responses there to and possible recession caused thereby also add significant uncertainty to our operations and possible effects to the amount and type of financing available to the Company in the future.

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, 20162022, filed with the SEC.SEC on March 30, 2023. The condensed consolidated balance sheet as of December 31, 20162022, 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'sCompany’s financial position and results of operations for the interim periods reflected. Except as noted, all adjustments contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily indicative of the full fiscal year-end results.

Consolidation Policy

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

Going ConcernEstimates

The accompanying consolidatedpreparation of financial statements have been prepared on a going concern basis, which contemplatesin conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the realizationreported amounts of assets and the settlement of liabilities and commitments indisclosure of contingent assets and liabilities at the normal coursedate of business. As reflected in the accompanying consolidated financial statements and the reported amounts of revenues and expenses during the nine-months ended September 30, 2017, the Company incurred a net lossreporting 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 $4,145,000, used cash in operations of $1,369,000 and had a stockholders’ deficit of $1,459,000 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, 2016 financial statements, has raised substantial doubt about the Company's ability to continue as a going concern.

At September 30, 2017, the Company had cash on hand of $587,000. Management estimates that the current funds on hand will be sufficient to continue operations through January 2018. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with the license and research and development agreements with Temple; costs associated with product development and commercialization of the AOT and Joule Heat technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by,deferred tax assets, among other things, 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 2017 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.others. Actual results could differ from those estimates.

Basic and Diluted Income (loss) per share(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, 20172023 and 2016,2022, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquirefollowing dilutive shares of common stock as their effect would have been anti-dilutive.

Estimates

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

Revenue Recognition PolicyStock-Based Compensation

The Company recognizes lease revenue upon commencementperiodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. Stock option grants, which are generally time or performance vested, are measured at the grant date fair value and depending on the conditions associated with the vesting of the lease. Revenueaward, compensation cost is recognized on future product sales will be recognized upon meetinga straight-line or graded basis over the following criteria: persuasive evidencevesting period. Recognition of an arrangement exists; delivery has occurred, or services rendered;compensation expense for non-employees is in the seller's price to the buyer is fixed or determinable;same period and collectability is reasonably assured.

In the fourth quarter 2016,manner as if the Company entered a contracthad paid cash for the services. The fair value of stock options granted is estimated using the Black-Scholes option-pricing model, which uses certain assumptions related to provide onsite testing services to a Canadian oil producerrisk-free interest rates, expected volatility, expected life, and pipeline operator at a fixed price of $50,000.future dividends. The testing service was performedassumptions used in January 2017 and was completedthe Black-Scholes option pricing model could materially affect compensation expense recorded in March 2017.future periods.

Research and Development Costs

CostsResearch and development costs are expensed as incurred forand 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 expensedincurred 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 incurred. Purchased materials that do not have an alternative future use are also expensed. Furthermore, costs incurredadvances on research and development contract services in the constructionCompany’s consolidated balance sheet and then charged to research and development costs in the Company’s consolidated statement of prototypes with no certainty of any alternative future use and established commercial usesoperations as those contract services are also expensed.performed.

For the nine-month periods ended September 30, 20172023 and 20162022 research and development costs were $173,000$148,000 and $200,000,$227,000, respectively. For the three-month periods ended September 30, 2023 and 2022 research and development costs were $47,000 and $130,000, 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 Heatother products, all patent costs are expensed as incurred. During the nine-month periods ended September 30, 20172023 and 2016,2022, patent costs were $38,000$3,000 and $49,000,$13,000, respectively, and were included as part of operating expenses in the accompanying consolidated statements of operations. During the three-month periods ended September 30, 2017 and 2016, patent costs were $14,000 and $19,000, respectively, and werewhich is included as part of operating expenses in the accompanying consolidated statements of operations.

Increase in Authorized CapitalRecent Accounting Pronouncements

In October 2017, the Company amended its articles of incorporationRecent accounting pronouncements and increased its authorized shares of common stock from 300,000,000 shares to 500,000,000 shares. In addition, the Company also created a new class of preferred stock which the Company is authorized to issue up to 100,000,000 shares of preferred stock.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures. In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

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

In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 is to be applied using a full or modified retrospective approach. The adoption of ASU 2017-11 is not currently expected to have any impact on the Company’s financial statement presentation or disclosures.

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

Accrued expense and accounts payable – related parties consist of accrued salaries of officers and fees due to members of the Board of Directors.

As of September 30, 20172023 and December 31, 2016,2022, the Company owed $197,000 and $197,000, respectively, pursuant to a separation agreement with a former executive officer effective April 1, 2017 as amended by letter agreements dated effective August 16, 2018 and March 31, 2019, (the “Letter Agreements”) which have been included as part of accounts payable and accrued expenses and accounts payableon the accompanying condensed consolidated balance sheet. The payments are to related parties amounted to $40,000 and $135,000, respectively.be made at $10,000 per month. During the nine months ended September 30, 2023 the Company made no payments.

At September 30, 2017 and December 31, 2016, property and equipment consist of the following:

Depreciation expense for the nine-month periods ended September 30, 2017 and 2016 was $11,000 and $5,000, respectively. Depreciation expense for the three-month periods ended September 30, 2017 and 2016 was $6,000 and $2,000, respectively.

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%10% since the notes are typically issued at a price 10% less than its face value.discount. The notes are unsecured, and usually mature twelve months from issuance.

The notes are convertible at the option of the note holder into shares of the Company’s common stock at a conversion price stipulated in the conversion agreement. In addition, the note holders receivedreceive warrants to purchase shares of common stock that are fully vested upon issuance 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%10% (OID). The note discounts are amortized over the term of the notes.

Convertible notes or amortized in full upon its conversion to common stock. At

As of December 31, 2016,2022, total outstanding notes payable amounted to $417,000, accrued penalty interest of $23,000 and unamortized note discount of $92,000, or a net balance of $348,000.

totaled $1,393,000. During the nine-month period endingended September 30, 2017,2023, the Company issued similar convertible promissory notes in the aggregate of $1,616,000$586,000 for cash proceeds of $1,469,000 or a discount$533,000, net of $147,000.OID of $53,000. The notes do not bear any interest; however, theare unsecured, have an implied interest rate used was 10% since the notes were issued at a price 10% less than its face value. The notes are unsecured,of 10%, mature in twelve months from issuance, and are convertible into 11,715,748 shares of the Company’s common stock at $0.05 per share. In addition, the Company also granted thesethe note holders warrants to purchase 16,160,77011,715,748 shares of the Company’s common stock.stock with a relative value of $231,000. The warrants are fully vested, exercisable at $0.05 per share and will expire in one year. As a result,year from the date of issuance. The Company recorded a note discount of $1,616,000 to account fordetermined the relative fair value of the warrants by using a Black-Scholes option pricing model, with the notes’ BCF, and OID. The note discounts are being amortized over thefollowing assumptions: expected term of 1.0 year, stock price of $0.05 to $0.08, exercise price of $0.07, volatility of 169% to 206%, risk-free rate of 4.64% to 5.46%, and no forfeiture rate. Also during the note or amortized in full upon the conversion toperiod ended September 30, 2023, convertible notes of $469,000, net of unamortized discount of $216,000, were converted into 11,584,848 shares of common stock. At September 30, 2023, total outstanding convertible notes payable totaled $1,510,000. As of September 30, 2023, convertible notes payable and accrued interest are convertible into approximately 37,535,351 shares of common stock at conversion rates ranging from $0.02 to $0.48 per share. As of September 30, 2023, a total of thirty-eight convertible notes and accrued interest in the aggregate of $1,977,000 have reached maturity and are past due.

Accrued interest

At December 31, 2022, accrued interest on convertible notes payable totaled $612,000. During the nine-month period ended September 30, 2017, a total2023, accrued interest of $1,522,000$137,000 was recorded. At September 30, 2023, accrued interest on convertible notes payable totaled $749,000.

Debt discount

At December 31, 2022, the unamortized debt discount was $140,000. During the nine-month period ended September 30, 2023, debt discount of $284,000 was recorded for the relative fair value of warrants of $231,000 and OID of $53,000, debt discount amortization of $90,000 was recorded, and $216,000 of debt discount was removed and included in the carrying amount of related convertible notes payable that were converted to 29,876,772into shares of common stock. In addition, the note discount of $1,625,000 was amortized to interest expense, and interest of $42,000 was accrued.

As ofAt September 30, 2017, total outstanding notes payable amounted to $515,000, accrued interest of $61,000 and2023, the unamortized notedebt discount of $83,000 for a net balance of $493,000. In addition, a total of four notes amounting to $381,000 reached maturity and are past due. The Company is currently in negotiations with the noteholders to settle the matured notes payable.was $118,000.  

In June 2020, the Company was granted a loan (the “PPP loan”) for $151,000 from Cadence Bank, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan is dated June 18, 2020, matures on June 18, 2025, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The Company was in compliance with the terms of the PPP loan as of September 30, 2023. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. During 2022, the Company received notice that a total of $63,000 of the PPP loan was forgiven. At December 31, 2022, the balance of the PPP loan was $75,000. During the nine-month period ended September 30, 2023, the Company made principal payments on the PPP loan of $11,000, and at September 30, 2023, the balance of the PPP loan was $64,000.

The Company constructs, develops and tests the AOT technologytechnologies with internal resources and through the assistance of various third-party entities. Costs incurred and expensed include fees such as license fees, purchase of test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT prototypes.

Costs incurred for research and development are expensed as incurred. Purchased materials that do not have an alternative future use are also expensed. Furthermore, costs incurred in the construction of prototypes with no certainty of any alternative future use and established commercial uses are also expensed.

For the nine-month periods ended September 30, 20172023 and 2016, our2022 research and development expensescosts were $173,000$148,000 and $200,000$227,000, respectively. For the three-month periods ended September 30, 20172023 and 2016, our2022 research and development expensescosts were $53,000$47,000 and $52,000,$130,000, respectively.

AOT Product Development and TestingPrototypes

During the nine-month periods ended September 30, 20172023 and 2016,2022, the Company incurred total expenses of $30,000$6,000 and $59,000,$86,000, respectively, in the manufacture delivery and testing of the AOT prototype equipment. During the three-month periods ended September 30, 2017 and 2016, the Company incurred total expenses of $6,000 and $5,000, respectively. These expenses have been reflected as part of Research and Development expenses on the accompanying condensed consolidated statements of operations.

Temple University Licensing AgreementAgreements

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 paypaid Temple the following: (i)a non-refundable license maintenance fee of $300,000; (ii)$300,000 and agreed to pay (i) annual maintenance fees of $187,500; (iii)(ii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements; and (iv)(iii) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. Temple also agreed to defer $37,500 of the amount due if the Company agreed to fund at least $250,000 in research or development of Temple’s patent rights licensed to the Company. The term of the licenses commenced in August 2011 and will expire upon the expiration of the patents. The agreementagreements 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 failurefails to commercialize the patent rights.

Total expenses recognized during each nine-month period ended September 30, 20172023 and 20162022 pursuant to these two agreementsLicense Agreements amounted to $173,000. Total expenses recognized during each three-month period ended September 30, 2017$141,000 and 2016 pursuant to these two agreements amounted to $47,000, respectively. These expenses havehas been reflected in Research and Development expenses on the accompanying condensed consolidated statements of operations. In the nine-month periods ended September 30, 2023 and 2022, the Company also recognized penalty interest on past-due balances of $36,000 and $36,000, respectively, which is included as part of interest and financing expense in the accompanying condensed consolidated statements of operations.

As of September 30, 2023 and December 31, 2016,2022, total unpaid fees due to Temple pursuant to these agreements amounted to $727,000,are $2,139,000 and $1,962,000, respectively, which are included as part of Accounts Payable – licensing agreementlicense agreements in the accompanying consolidated balance sheets.

In July 2017, the Company and Temple amended the Second Temple License agreement. Pursuant to the amendment, the Company paid Temple $62,000 and Temple agreed to defer payment of the remaining $135,000 in unpaid licensing fee until such time the Company generates revenues totaling $835,000 from the license. In addition, the unpaid balance of $135,000 will accrue interest of 9% per annum.

As of September 30, 2017, total unpaid fees due to Temple pursuant to these agreements amounted to $786,000, which are included as part of Accounts Payable – licensing agreement in the accompanyingcondensed consolidated balance sheets. With regards to the unpaid fees to Temple, a total of $108,000 are current, $370,000$135,000 are deferred until such time the Company achieves a revenue milestone of $835,000$835,000 or upon termination of the licensing agreements and the remaining $308,000$2,004,000 are deemed past due. The Company is currently in negotiationsdiscussions with Temple to settle or cure the past due balance.

The Company generated $50,000 in revenue from the viscosity reduction license during the nine-month period ended September 30, 2017. This amount is not sufficient to be subject to additional license fees under the license agreement. No revenues were earned from the two license agreementsLicense Agreements during the nine-month periodperiods ended September 2016.

Temple University Sponsored Research Agreement

On March 19, 2012, the Company entered into a Sponsored Research Agreement (“Research Agreement”) with Temple University (“Temple”), whereby Temple, under the direction of Dr. Rongjia Tao, performed research related to the Company’s AOT device (the “Project”), for the period April 1, 2012, through April 1, 2014. All rights30, 2023 and title to intellectual property resulting from Temple’s work related to the Project were subjected to the Exclusive License Agreements between Temple and the Company, dated August 1, 2011. In exchange for Temple’s research efforts on the Project, the Company has agreed to pay Temple $500,000, payable in quarterly installments of $62,500. The agreement expired in August 2015.

On July 14, 2017, the Company and Temple reached agreement to settle these past due amounts under a payment plan, paying the amount before the end of December 2017.

As of September 30, 2017 and December 31, 2016, total unpaid fees due to Temple pursuant to this agreement amounted to $29,000 and $78,000, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.

In addition, Temple continues to provide laboratory testing and support related to the Company’s commercialization efforts. This continuing work is provided on at a fixed price, on an ad hoc basis depending upon the scope of work. During the nine-month period ending September 30, 2017, the Company incurred a total of $2,000 in ad hoc testing with Temple University. No ad hoc testing was performed during the three-month period ending September 30, 2017. Temple ad hoc testing expense is reported as part of Research and development expenses in the accompanying consolidated statements of operations.2022.

During the nine months ended September 30, 2017,2023, the Company issued a total of 34,303,87912,901,509 shares of its common stock as follows:

The Company periodically issues stock options and warrants to directors, 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, 20172023 was 5.94.1 years. Stock option activity for the period January 1, 20172023 up to September 30, 2017,2023, was as follows:

The weighted average exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of September 30, 20172023 were as follows:

During the nine-month period ending September 30, 2017, the Company granted options to purchase 8,339,285 shares of common stock to members of the Company’s Board of Directors. The options are exercisable at $0.05 to $0.19 per share, vest monthly over a twelve-month period, and expire ten years from the date granted. Total fair value of these options at grant date was $909,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 5 years; risk free interest rate of 1.94%; volatility of 123% to 144%, and dividend yield of 0%.

During the nine-month period ending September 30, 2017, the Company granted two officers and employees of the Company stock options to purchase a total of 4,222,567 shares of common stock. The stock options vest over a two-year period, exercisable at a price range of $0.07 through $0.40 per share and will expire in 10 years. Total fair value of the stock options amounted to $246,000 which will be expensed over the vesting period. In addition, as a result of the resignation of the Company’s CEO and three members of the Board of Directors, the Company agreed to modify the vesting term of 4.5 million options granted to them in January 2017 and fully vested those options resulting in a charge of $308,000 to account for the fair value of these options. There were no other changes in the remaining terms of the original grant.

During the nine-month periods ended September 30, 20172023 and 2016, the Company recognized total compensation costs based on the fair value of options that vested of $653,000 and $265,000 respectively, which is included in Operating expenses in the Company’s statement of operations. During the three-month periods ended September 30, 2017 and 2016,2022, the Company recognized compensation costs based on the fair value of options that vested of $117,000$0 and $84,000 respectively, which is included in Operating expenses in$0 respectively.

As of September 30, 2023, the market price of the Company’s statement of operations.

During the period ended September 30, 2017, the Company issued 271,752 shares of common stock upon exercise of stock options which resulted in proceeds of $25,000.

was $0.06 per share. At September 30, 2017,2023, the Company’s closing stock price was $0.29 per share. The aggregate intrinsic value of the options outstanding at September 30, 20172023 was $3,042,000. Future unamortized compensation expense on the unvested outstanding options at September 30, 2017 is $295,000 to be recognized through December 2017.$115,000.

Warrants

The following table summarizes certain information about the Company’s stock purchase warrants activity for the period starting January 1, 20172023 up to September 30, 2017.2023.

The weighted average exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of September 30, 20172023 were as follows:

DuringIn the nine-month period ending September 30, 2017, pursuant to terms of convertible notes issued,2023, the Company grantedissued warrants to purchase 16,160,770666,663 shares of common stock with an exercisein exchange for services. The warrants are exercisable at a price range of $0.05 per share,$0.04 to $0.08, vesting immediately upon grant and expiringup to one yearmonth from the date of grant, (see Note 5)and expiring one to two years from the date of grant. Total fair value of these warrants at grant date was $34,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 2 to 5 years; risk free interest rate of 4.17% to 5.12%; volatility of 170% to 207% and dividend yield of 0%.

During the nine-month period ended September 30, 2017, the Company issued 3,974,000 shares of common stock upon exercise of warrants which resulted in proceeds of $337,000.

During the nine-month periods ended September 30, 2017 and 2016,2023, the Company recognized compensation costs of $1,000 and $108,000, respectively, based on the fair value of warrants previously issued for services that vested during the period, which is included in Operating expenses in the Company’s statement of operations. During the three-month periods ended September 30, 2017 and 2016, the Company recognized compensation costs of $2,000 and $21,000, respectively, based on the fair value of warrants that vested which is included in Operating expenses in the Company’s statement of operations.$34,000.

At September 30, 2017,2023, the aggregate intrinsic value of the warrants outstanding was $3,638,000. Future unamortized$145,000.

In the nine-month period ending September 30, 2022, the Company issued warrants to purchase 799,997 shares of common stock in exchange for services. The warrants are exercisable at a price range of $0.02 to $0.09, vesting up to one month from the date of grant, and expiring two to five years from the date of grant. Total fair value of these warrants at grant date was $31,000 using the Black-Scholes Option Pricing model with the following assumptions: life of 2 to 5 years; risk free interest rate of 0.73% to 3.25%; volatility of 193% to 245% and dividend yield of 0%. During the nine-month period ended September 30, 2022, the Company recognized compensation expensecosts based on the unvested outstandingfair value of warrants atthat vested of $31,000.

At September 30, 2017 is approximately $1,000 to be recognized through July 2018.2022, the aggregate intrinsic value of warrants outstanding was $1,332,000.

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.

On April 1, 2017,The Company is closely monitoring the impact of the pandemic on all aspects of its business. While the pandemic did not materially affect the Company's financial results and business operations for the three and nine months ended September 30, 2023, the Company executed a separation agreementis unable to predict the impact that COVID-19 will have on its financial position and release effective withoperating results in future periods due to numerous uncertainties. The Company will continue to assess the Company’s Chief Executive Officer (CEO). As partevolving impact of the agreement, the Company agreedCOVID-19 pandemic and will make adjustments to pay the CEO $580,000 in severance, payable in equal installment over 24 months. In addition, the Company also agreed to pay the CEO’s medical insurance for 24 months and provide use of a cell phone for 12 months with an estimated cost of $44,000. As a result, the Company accrued the entire amount of $624,000 which was also reportedits operations as part of Operating Expenses in the accompanying consolidated statements of operations. As of September 30, 2017, the outstanding balance amounted to $468,000 which was reported as part of Accounts Payable and Accrued Expenses in the accompanying consolidated balance sheets.necessary.

Amendment to Articles of Incorporation or Bylaws

OnIn October 10, 2017,2023, the Company filed a Certificate of Amendment to the Company’s Articles of Incorporation with the Nevada Secretary of State to increase the Company’s authorizedissued 1,460,800 shares of common stock from 300 million to 500 million and to create a new classupon the conversion of preferred stock and authorize the Company to issue up to 100 million shares of preferred stock.

Exercise of Warrants

From October 1, 2017 up to October 20, 2017, the Company issued 440,000 shares of restricted common stock on the exercise of warrants$73,000 in aggregate value of $22,000.

Amendment to Employment Agreement

On November 13, 2017, in an effort to clarify and more accurately reflect the original intentions of the Company and the Company’s Chief Executive Officer (CEO) in signing the employment agreement between them (the “Employment Agreement”), the Company executed an amendment to the Employment Agreement (the “Amendment”). Pursuant to the Amendment, any transactions involving the Company’s AOT technology, executed by the Company during the term of the Employment Agreement, shall be considered sourced by the CEO for the purposes of bonus eligibility. Any payments received by the Company as a result of such transactions shall be deemed net of any fees or commissions for the purpose of calculating bonus payments. The terms of the bonus structure under the Employment Agreement is otherwise unchanged. In addition, pursuant to the Amendment, the CEO shall be eligible to participate in any group health insurance plan offered by the Company to employees, or, should the CEO select private health insurance outside of the Company’s group plan, the CEO shall receive each month an amount from the Company equal to the premium paid by the CEO for such private health insurance.convertible notes payable at $0.05 per share.

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, particularlyand in the “Risk Factors,”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, 2017,2023, and we undertake no duty to update this information.

Overview

QS Energy, Inc. (“QS Energy” or “Company” or “we” or “us” or “our”) develops and commercializesseeks 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™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 reducesis designed to reduce crude oil viscosity by applying a high intensity electrical field to crude oil feedstock while in transit. AOT technology delivers reductions in crude oil viscosity and pipeline pressure loss as demonstrated in independent third-party tests performed by the U.S. Department of Energy, the PetroChina Pipeline R&D Center, and ATS RheoSystems, a division of CANNON™, at full-scale test facilities in the U.S. and China, and under commercial operating conditions on one of North America’s largest high-volume crude oil pipelines. Recent testing on a commercial crude oil condensate pipeline demonstrated high correlation between laboratory analysis and full-scale AOT operations under commercial operating conditions with onsite measurements and data collected by the pipeline operator on its supervisory control and data acquisition (“SCADA”) system. The AOT product has transitioned from laboratory testing and ongoing research and development to initial production and continued testing in advance of our goal of seeking acceptance and adoption by the midstream pipeline marketplace. We continue to devote the bulk of our efforts to the promotion, design, testing and the commercial manufacturing and operations of our crude oil pipeline products in the upstream and midstream energy sector. We anticipate that these efforts will continue during 2017 and 2018.

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-ownedwholly 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 willmay 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.Board market-Pink Sheets. More information including the Company’s updates, fact sheet, logos and media articles are available at our corporate website, www.qsenergy.com.

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

In 2013, the Company entered into an Equipment Lease/Option to Purchase Agreement (“TransCanada Lease”) with TransCanada Keystone Pipeline, L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") which agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. As previously reported in our Form 10-K report filed with the SEC on March 16, 2015,July 22, 2021, QS Energy’s AOT technology has been tested in June 2014,a variety of configurations at small-scale in the equipment was accepted by TransCanadalaboratory and at full-scale in the lease commencedfield under commercial operating conditions, including tests performed U.S. Department of Energy, the PetroChina Pipeline R&D Center, and the first full test of the AOT equipment on the Keystone pipeline was performed in July 2014 by Dr. Rongjia Tao of Temple University, with subsequent testing performed by an independent laboratory, ATS RheoSystems, a division of CANNON™ (“ATS”). The Company’s first two full-scale midstream pipeline installations were on TransCanada’s Keystone pipeline in September 2014. Upon review of the July 2014 test results and preliminary reporta pipeline operated by Dr. Tao, QS Energy and TransCanada mutually agreed that this initial test was flawed due to, among other factors, the short-term nature of the test, the inability to isolate certain independent pipeline operating factors such as fluctuations in upstream pump station pressures, and limitations of the AOT device to produce a sufficient electric field to optimize viscosity reduction. Subsequent testing by ATS in September 2014 demonstrated viscosity reductions of 8% to 23% depending on flow rates and crude oil types in transit. In its summary report, ATS concluded that i) data indicated a decrease in viscosity of crude oil flowing through the TransCanada pipeline due to AOT treatment of the crude oil; and ii) the power supply installed on our equipment would need to be increased to maximize reduction in viscosity and take full advantage of the AOT technology. While more testing is required to establish the commercial efficacy of our AOT technology, we are encouraged by the findings of these field tests performed under commercial operating conditions. The TransCanada Lease was terminated by TransCanada, effective October 15, 2014. Upon termination of the TransCanada Lease, all equipment was uninstalled, returned, inspected and configured for re-deployment.

On July 15, 2014, the Company entered into an Equipment Lease/Option to Purchase Agreement (“Kinder Morgan Lease”) with Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”) under which Kinder Morgan agreedin 2015. Tests performed at these two facilities were limited due primarily to leasetechnical issues with the AOT equipment. Although tests at these facilities provided limited sets of data, the equipment did not operate properly, and testno conclusions could be reached regarding the effectivenessefficacy or commercial viability of the Company’sAOT 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 equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The equipment was deliveredspecifics regarding these earlier tests and technical issues experience, please refer to Kinder Morgan in December 2014 and installed in March 2015. In April 2015, during pre-start testing, low electrical impedance was measured in the unit, indicating an electrical short. A replacement unit was installed May 2015. The second unit also presented with low impedance when flooded with crude condensate from Kinder Morgan’s pipeline. Subsequent to design modifications, a remanufactured AOT unit was installed and tested at Kinder Morgan’s pipeline facility in August 2015. Initial results were promising,our Form 10-K filed with the unit operating generally as expected. However, voltage dropped as preliminary tests continued, indicating decreased impedance within the AOT pressure vessel. QS Energy personnelSEC on July 22, 2021, and outside consultants performed a series of troubleshooting assessments and determined that, despite modifications made to the AOT, conductive materials present in the crude oil condensate continued to be the root cause of the decreased impedance. Based on these results, QS Energy and Kinder Morgan personnel mutually agreed to put a hold on final acceptance of equipment under the lease and temporarily suspend in-field testing to provide time to re-test crude oil condensate in a laboratory setting, and thoroughly review and test selected AOT component design and fabrication. Subsequent analysis and testing led to changes in electrical insulation, inlet flow improvements andour other component modifications. These design changes were implemented and tested by Industrial Screen and Maintenance (ISM), one of QS Energy's supply chain partners in Casper, Wyoming. Tests performed by ISM at its Wyoming facility indicated significant improvements to system impedance and efficiency of electric field generation.

In February 2016, the modified AOT equipment was installed at Kinder Morgan’s facility. Pre-acceptance testing was performed in April 2016, culminating in more than 24 hours of continuous operations. In-field viscosity measurements and pipeline data collected during this test indicated the AOT equipment operated as expected, resulting in viscosity reductions equivalent to those measured under laboratory conditions. Supervisory Control And Data Acquisition (“SCADA”) pipeline operating data collected by Kinder Morgan during this test indicated a pipeline pressure drop reduction consistent with expectations. Kinder Morgan provided the Company with a number of additional crude oil samples which were tested in the laboratory for future test correlation and operational planning purposes. Based on final analysis of in-field test results, SCADA operating data and subsequent analysis of crude oil samples at Temple University, Kinder Morgan and QS Energy are considering moving the AOT test facility to a different, higher-volume pipeline location. The Kinder Morgan Lease is currently in suspension and lease payments have not yet commenced.

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

The Company is actively seeking new deployments of its AOT technology. In August 2015, QS Energy was invited to an offshore oil transfer platform in the Gulf of Mexico. This offshore platform was assessed by QS Energy personnel for a potential deployment of the AOT viscosity reduction technology as a solution for super-heavy crude oil flow assurance issues. Following the site visit, subject to non-disclosure agreements executed by all parties, laboratory testing was performed on crude oil samples provided by the operator, which demonstrated significant AOT viscosity reductions. Detailed hydraulic analysis based on laboratory results and pipeline operating parameters was presented to the operator demonstrating potential benefits of AOT technology within the operator’s specified infrastructure. Based on this analysis, the Company was directed by the operator to prepare a preliminary configuration for AOT units optimized for the operator’s high-volume, space-constrained operations. Company engineers and supply chain partners have prepared an optimized configuration and production budget. Based on this optimized configuration, the operator is considering an onsite pilot test with full scale AOT equipment for deployment in 2018 or 2019.

The Company is in discussions with a large Middle Eastern oil company regarding AOT technology in the Middle East, having tested multiple oil samples provided by this oil company at Temple University in 2015 and 2016. In 2017, the Company tested multiple oil samples provided by the Middle Eastern oil company, the most recent of which was completed in October 2017. These tests demonstrated AOT viscosity reductions on the subject samples of 20% to 50% in a laboratory setting.

During the third quarter 2016, the Company developed a new onsite testing program designed to accelerate the AOT sales cycle. This program utilizes a fully functional laboratory-scale AOT device designed and developed by the Company in 2015, and tested at the Southern Research Institute. Under this new program, Company engineers will set up a temporary lab at the customer’s site to test a full range of crude oils. Fees charged for providing this service will be dependent on scope of services, crude oil sample to be tested, and onsite time requirements. This program has received a positive response from potential customers. In the fourth quarter 2016, the Company entered a contract to provide these onsite testing services to a Canadian oil producer and pipeline operator over a one-week period in early 2017 at a fixed price of $50,000. This initial test was performed in January 2017; data analysis and final report was completed in March 2017.SEC filings.

In July 2017, the Company filed for trademark protection for the word “eDiluent” in advance of rolling out a new 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;technology, in essence providing an electronic form of diluent, or “eDiluent”. TheSubject 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.

We are in discussions with several oil companies regarding installation of

Throughout 2018 our primary strategic goal was focused on installing and operating a demonstration AOT unit. The Company recently received anproject on a commercial crude oil sample from U.S. midstreampipeline. 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 company, and is preparing to test this oil samplepipeline located in the Southern United States. We believed at the time that the selected project site could be ideal for demonstration purposes, delivering heavy crudes which, based on samples tested at Temple University, and, subject to the discussion below, could experience significant viscosity reduction when treated with our AOT technology.

While management focused on finding a partner and finalizing terms of the demonstration project, and in our continuing efforts to commercialize our AOT technology, our engineering team worked throughout 2018 to prepare one of our inventoried AOT units for deployment. All system upgrades, inspections and testing protocols were completed in December 2018. The pipeline operator finalized site selection and began site design and engineering in January 2019, completing site preparation and equipment installation in June 2019. The project was installed within budget, quality compliant, and without safety incidents. The system passed the pre-start safety review, data acquisition signal verifications, and mechanical inspections. Under full crude oil flow, the system was confirmed to have no leaks and no environmental issues were noted. Data collected during the fourthfull-flow startup phase confirmed internal differential pressures to be negligible and consistent with design specifications. However, when the system was energized, and the unit was run-up to high-voltage operations, the primary power supply began to operate erratically and had to be taken offline. Subsequent inspection determined the primary power supply had failed.

After removing the primary power supply, our engineers reconfigured the system to run off a smaller secondary power supply. Although this unit was not capable of achieving target treatment voltage, we performed limited testing and troubleshooting measures, after which the damaged power supply was shipped to the manufacturer for expedited repair and reconditioning. Inspections performed during the repair process indicated internal power supply components had been physically damaged. Though not definitive, it appears that damage may have occurred during transit prior to initial installation at the demonstration site. While the demonstration project was offline for power supply repairs, our engineering team worked with oil samples pulled from the operating pipeline for testing at our then Tomball laboratory facility. These tests were designed to confirm our target power requirements as accurately as possible and help us fine-tune enhancements planned for a new optimized AOT internal grid pack design we had planned to test at the demonstration site as part of our continuing reliability engineering effort.

During initial testing with the small power supply, current draw was greater than prior field deployments. While it was expected that the small power supply would not achieve treatment voltage, as voltage was increased, actual current draw experienced under test conditions exceeded the operating limit of the power supply. Subsequent laboratory and in-field testing performed at our then Tomball facility showed the electrical conductivity of the oil to be quite high and in line with field observations. Although these tests indicated the unit was generally functioning properly, results further indicated the damaged power supply, once repaired, would not be capable of providing sufficient power to fully treat the crude oil due to the oil’s high electrical conductivity. In anticipation of this result, the Company had initiated parallel tasks in advance of testing of: i) installation of the repaired power supply and performance of limited testing to confirm laboratory and in-field test results; and ii) procurement of a new power supply capable of providing significantly more power and a modified AOT grid pack assembly reconfigured and generally optimized based on the latest laboratory and in-field test results.

When the repaired power supply was installed in August 2019, the system operated as expected, and limited testing was performed. Results of this limited testing were consistent with laboratory tests performed to date. As expected, however, the repaired power supply was not capable of providing sufficient power to fully treat the crude oil under commercial operating conditions. Based on results of this limited testing, Company engineers completed designs and began implementation of modifications to the AOT internal grid pack assembly.

The new high capacity power supply and modified grid pack were installed in December 2019. However, prior to flooding the system with crude oil, early-phase startup testing indicated an electrical short circuit. Subsequent inspection revealed damage to the internal grid pack which likely occurred during installation or during the startup testing cycle. The grid pack was shipped offsite for repairs with reinstallation scheduled for January 2020.

The AOT demonstration project continued to experience setbacks during the first quarter 2017.of 2020. After repairing and re-installing the modified grid pack, the system shut down again during commissioning presenting with error conditions similar to the December 2019 failure. At that time, based on external inspections and on-site testing, our engineers suspected the grid pack had again been damaged during re-installation and that such suspected damage was the most likely cause of the electrical short circuit. It was determined at that time the best course of action would be to remove the modified grid pack and re-install the original grid pack which had previously been installed multiple times without sustaining damage, and perform a detailed inspection of the modified grid pack in an effort to determine the cause of the electrical short circuit.

Executing this plan, our team removed the modified grid pack and re-installed the original grid pack assembly in January 2020. After removal, our engineers performed a detailed inspection of the modified grid pack. Inconsistent with expectations, no damage to the modified grid pack was found during this inspection, leaving the cause of the electrical short circuit undiagnosed.

In January and February 2020, our engineers tested and attempted to operate the AOT under a variety of conditions. In these tests, the system could be run at high voltage under static “shut-in” conditions; however, the system continued to shut down due to an electrical short circuit when operated under pressure. In simple terms, this means the system could be flooded with crude oil and powered up in excess of 10,000 volts when the system was shut-in by closing the intake and outtake valves which isolates the system from the pipeline’s operating pressure. However, once the valves were opened and the system was subjected to the pipeline’s operating pressure, the system developed an electrical short circuit and shut down.

As the presence of high pressure appeared to trigger the short circuit, our engineers believed it is unlikely the fault was in the grid pack assembly as this component was fully submerged in crude oil and would generally be subjected to equal pressure on all components. The Company iselectrical short was more likely developing in active discussionsthe electrical connection assembly built into the blind flange at the top of the pressure vessel, which would be subjected to high pressure under normal operating conditions. Unfortunately, this electrical connection assembly could not be inspected without destroying the assembly itself. Instead, our engineers developed a plan to replace the installed the blind flange and electrical connection assembly with components from inventory which would be rebuilt prior to installation.

As part of an ongoing reliability-engineering effort, our engineers at that time worked on incremental modifications to improve electrical isolation within the blind flange and electrical connection assembly. These previously developed plans allowed us to move quickly with vendors and present an expedited plan to the pipeline operator. In March 2020, our engineers designed modifications to the blind flange, electrical connections and related housing intended to minimize the effects of high pressure and likelihood of internal electrical short circuits. Concurrently, a blind flange with high voltage assembly was shipped from inventory to a shop with specialized equipment used to strip the flange of all electrical insulation materials. Once the stripping process was complete, castings were made to complete the internal assembly. Our engineers believed at the time that this modification could solve the electrical short issue we have experienced in prior tests.

While the blind flange assembly was being remanufactured, we took the opportunity to implement a number of prospective customersrelatively minor modifications to other system configurations which had been planned for future units based on results of our engineering team’s reliability engineering work over the past two years. These modifications were designed to improve the reliability of internal electrical connections, increase the structural support of the internal grid pack, and maintain higher quality control over internal component positioning and alignment during vertical installation.

Notwithstanding our efforts, the AOT system continues to be non-operational under normal operating conditions. As reported in previous updates on our website at https://qsenergy.com/updates and in our Form 8-K filed with the SEC on March 4, 2020, the AOT system experienced shutdowns during the commissioning process. In December 2019, after installing a modified grid pack and new high-capacity power supply, the system shut down presenting with an electrical short which was determined to be due to damage to the system’s internal grid pack likely incurred during installation. After repairing and re-installing the modified grid pack in January 2020, the system shut down again during commissioning presenting with error conditions similar to the December 2019 failure. At that time, based on external inspections and on-site testing, our engineers suspected the grid pack had again been damaged during re-installation and that such suspected damage was the most likely cause of the electrical short circuit. As reported in our January 24, 2020 website update page, it was determined at that time the best course of action would be to remove the modified grid pack and re-install the original grid pack which had previously been installed multiple times without sustaining damage, and perform a detailed inspection of the modified grid pack in an effort to determine the cause of the electrical short circuit.

We have tested and attempted to operate the AOT under a variety of conditions. As noted above, we have been able to bring the system up to high voltage under static “shut-in” conditions; however, the system continued to shut down due to an electrical short circuit when operated under pressure. Because of our inability to fully diagnose the cause of our current electrical problems, we can provide no assurances that we will not face other operational issues after completing a full diagnosis and evaluation of our technology.

As previously reported, in December 2018, we entered into an agreement with a major U.S.-based pipeline operator under which the Company installed its AOT equipment on a crude oil pipeline located in the South American market operating in areas highly reliantSouthern United States for testing and demonstration purposes. Based on naphtha, onlaboratory tests and operations of prototype equipment at other locations, we had a very expensive crude oil product, as diluentreasonable expectation that the equipment would operate successfully and that test results would demonstrate quantifiable benefits to achieve required viscosity reduction.

In 2014, the Company began development of a new suite of products based around the new electrical heat system which reduces oil viscosity through a process known as joule heat (“Joule Heat”). The Companypipeline operators. This has not occurred. As discussed below, our equipment is designing and optimizing the Joule Heat technology for the upstream oil transportation market. The Company filed two provisional patents related to the technology’s method and apparatus in the second quarter and fourth quarter of 2013, respectively. The first of the two provisional patents was finalized and submitted to non-provisional status on April 29, 2014. The second of the two provisional patents was finalized and submitted to non-provisional statusno longer installed or being tested at the end of the third quarter 2014.

this demonstration site.

As reported in the Company’s Form 10-K and Form 10-Q filed with the SEC on March 31, 2021 and June 29, 2020, respectively, and in the Company’s Form 10-K filed with the SEC on March 31, 2022, and in website updates published on the Company’s website at https://qsenergy.com/updates, the Company has experienced a number of difficulties and delays at the demonstration site. Despite identifying and implementing numerous design modifications over the past several months, the Company has been unable to successfully operate its AOT equipment.

In late June 2020, equipment modifications intended to mitigate electrical short circuit issues identified in earlier tests were completed. During startup testing, the system experienced a new failure mode in which the system could be operated at a baseline high voltage (well below operational voltage required to treat heavy crude), but after a period of time, the system would drop to very low voltage indicating a reduction in electrical resistance in the AOT. This voltage drop was both dynamic, developing over time as electrical current was applied; and transient, in that the power supply could be shut-down and re-started with this voltage drop characteristic repeating. After reviewing these results and running subsequent in-field tests at the direction of the power supply manufacturer, they recommended a configuration modification to the control module of the system’s high-voltage power supply which, in their experience, could resolve the system’s ability to maintain constant voltage under our unique operating conditions in which the AOT essentially acts as a very large capacitor. During the first week of July 2020, we modified the power supply control module at the direction of the power supply manufacturer. Though this modification did appear to solve the voltage drop issue, the AOT could not achieve operational voltage as the system control module indicated arc-faults when high voltage was applied above the baseline voltage levels. After many attempts to bring the system up to operating voltage, arc-faults continued until the AOT demonstrated symptoms of what appeared to be a dead short (electrical short-to-ground; voltage dropped to zero) and the system could no longer be re-started.

Our engineers have working concepts as to what may be causing this most recent failure but will not be able to fully diagnose these issues at the demonstration site. After discussions with our demonstration pipeline partner, it was mutually agreed that the best course of action would be to move the equipment from the demonstration site to another location where our engineers could disassemble and inspect the equipment. Our AOT equipment has been moved to storage, inspection, and testing sites in the state of Mississippi and in Tomball, Texas. Our former demonstration partner has indicated their continued interest in our AOT technology and may consider installation and operation of a new AOT demonstration project if our operational issues can be resolved.

Though our engineers have working concepts as to what may be causing the most recent voltage drop and arc-fault issues, it is unknown whether these issues can be solved with minor modifications to the current design. To fully diagnose and resolve these issues, new testing would likely need to be performed in a laboratory setting. The time and cost of implementing such a plan would likely be significant. The Company did not have sufficient capital to take on this endeavor. We shut down all testing of our AOT product in July 2020, due to a lack of operating capital. See, however, note 11 (Subsequent Events) of our Consolidated Financial Statements, attached to our Form 10-K filed with the SEC on July 22, 2021, for an update of limited capital we received in the first two quarters of 2021, allowing us to commence some additional testing of our AOT product. See also note 10 (Subsequent Events) of the Consolidated Financial Statements contained in this Form 10-Q report, and Item 2 of Part II of this Form 10-Q report.

Following our receipt of the limited capital identified in the paragraph above, and under new management, our engineer went to the new site of our AOT equipment to inspect the condition of the equipment and develop logistics of testing going forward. Our engineer commenced re-testing operations in June 2021. Our engineer has reported that the AOT has been unloaded and the electrical connection has been ordered. The unit will undergo testing to try and duplicate the electrical short condition experienced at the test site. After initial testing, a troubleshooting sequence will be performed to attempt to identify the location of the short. If an electrical short can be found based on our hypothesis, we intend to resolve it. If the electrical short cannot be found the AOT will be disassembled and tested in pieces, assuming we are able to raise sufficient capital to do so. Additionally, laboratory materials testing of the electrical insulation will be initiated. Measurement of the electrical properties of both newly cast and material both exposed and submerged in fluid will be done to determine if the resin remains our material of choice. Our engineer reports that he is expecting to visit the AOT in July 2021 to inspect all the connections and conduct initial testing while the AOT is empty. He further reports that lab test fixtures are being designed and initial designs could be available for review in August 2021. Because of our inability fully to diagnose the cause of our current electrical problems, we can provide no assurances that we will not face other operational issues after completing a full diagnosis and evaluation of our technology, requiring additional capital, which, as stated above, may not be available to us.

During the visit a plan was developed to prepare the location for the inspection and testing of the AOT and AOT components. A transformer was needed to provide power to the power supply. Due to supply chain issues the transformer delivery was delayed until July 2021.

Re-testing of the AOT began in July 2021 and the dead short condition that had developed during the demonstration was not present. Various tests were conducted to control variables and identify possible reasons for the arcs and short circuits. We ran tests to isolate debris, plate spacing, alignment of grid pack, presence of oil and presence of the pressure vessel. The best results obtained with the new stack were when the stack had been cleaned, assembled in a hanging position and was outside of the vessel.

For comparison the old stack was tested in a similar manner, and, by chance, arcs were observed near insulated parts. The stack was inspected where the arcs were witnessed, and damaged insulation was found. It seems likely these locations failed during the demonstration and led to the short circuits.

Testing of grid screens in isolation showed the ability to achieve much higher voltages. Additional testing following our Form 10-Q report for the period ended September 30, 2021 resulted in conceptual methods/designs to control the variables in a full stack to achieve similar voltages as the isolation tests. The new design will control plate alignment and flatness to a much greater extent than the previous design. Secondarily, the new design constrains the stack alignment during installation should prevent shifting and damage during installation.

The results of the electrical testing of the insulating material showed that the material is functioning as designed. However, during the testing it was discovered that the material swells when exposed to crude oil. The current design does not accommodate a change in size of the parts. New materials were sourced and tested as potential replacements. A couple of new materials have been found that offer improved stability when submerged in crude oil for extended periods of time. To expedite the search several materials tested were purchased of the shelf while working with our vendors to source new commercial materials. The data has been shared with our vendors and they are working on providing us with samples of commercial versions of the promising materials.

We have also validated that a new design concept for the grid pack will reduce arcing and allowed us to apply full voltage during a recent test. A 3rd party engineering firm with proper experience and three-dimensional modeling software was engaged. A design review has been completed and final drawings have been received. Drawings were sent to our vendors for review for fit and electrical testing, which commenced during fiscal year 2022.

The work through May 2022 mainly focused on selecting a new material of construction for the insulating parts to reduce possible absorption of oil by the insulators. Absorbing components from crude oil could lead to a change in size and possibly to unanticipated mechanical and electrical properties.

In August 2022 we completed the testing of the stack assembly. The stack assembly did not suffer the arcing problems we saw when testing a stack assembly made from parts of the full size AOT. It appeared that we accomplished the goal of eliminating the sources of arcing that prevented us from achieving treatment voltages with this new design.

The lessons learned during the stack assembly test have been applied and the results incorporated into the designs for the spacer rings and the screens. This change to the isolator ring design resulted in some iterative designs to optimize the casting tooling or molds. The time spent on this redesign created a delay in our goal for testing in September 2022.

Since reporting our findings on October 2014, QS Energy entered7, 2021, we believe that we have been able to positively confirm and correct 80% of what we have determined thus far to be the necessary improvements for a reliable and field worthy AOT. Based on the results of the recent component testing, we were able to rework the original grid pack, achieve high voltage in air and oil to verify that the individual components worked when assembled. As previously explained, the reason for component testing is to reveal a potential problem that could be otherwise concealed with a fully assembled AOT.

Once all the parts were delivered for a full AOT, we assembled the stack and installed the stack into the vessel. The vessel was filled with oil and tested. We were able to apply full voltage of 40.1kV to the AOT. We believe the AOT is ready to test with customer oil and be deployed back into the field. Having achieved a Joint Development Agreementpositive hydrostatic test, we were able to have our final engineering call with Newfield Exploration Company (“Newfield”)a new potential development partner. We are currently seeking a contractual arrangement with a development partner to install and test the newly designed AOT. We have reopened discussions with our original development partner as well as reaching out to others. While we have tested with a representative oil sample, we have not yet reached an agreement with a development partner allowing us to test a prototype of QS Energy Joule Heat equipment,development partner's actual pipeline oil as a prelude to another field test. Our efforts continue to reach agreement with a suitable development partner as our next step to develop and combined Joule Heat andcommercialize our AOT technology, on a crude oil pipeline serving the Greater Monument Butte oilfield located in the Uintah Basin of Utah. This testtechnology. In this regard, we have completed two engineering reviews, but as of the Joule Heat technology provides ideal conditions to demonstrate efficiencydate of the filing of this 10-Q have not reached an agreement with a development partner, and efficacy. The Uintah Basin is 5,000 to 10,000 feet above sea level with average low winter temperatures of 16ºF. Crude oil pumped from the region is highly paraffinic with the consistency of shoe polish at room temperature. Uintah's black wax crude must remain at a minimum of 95ºF and yellow wax above 115ºF and therefore requires a substantial amount of heat to keep it above its high pour point. Operators in the upstream market often run at temperatures of 140ºF to 160ºF. Newfield, like many other companies in the region, incurs significant operating expense in the form of fuel and power used to heat the waxy crude and counter the cold climate conditions characteristic of Utah. The Company’s first Joule Heat prototype was installed for testing purposes at the Newfield facility in June 2015 and the system is operational; however, changes to the prototype configurationwe can provide no assurances that we will be requiredable to determine commercial effectiveness of this unit. During the third and fourth quarters of 2015, we worked with Newfield and Dr. Carl Meinhart to modify the prototype configuration based on observed pipeline and Joule Heat operating factors. In addition, QS Energy provided a scaled-down version of the Joule Heat unit for static and flow-through testing at SRI. Testing performed by SRI in September 2015 on a laboratory-scale Joule Heat unit demonstrated the ability of the Joule Heat technology to deliver temperature increases in the laboratory setting.do so.

In 2015, the Company worked in collaboration with Newfield, SRI, Dr. Carl Meinhart, and our manufacturing partner to design and build an AOT prototype unit, for operations in the upstream crude oil pipeline market (“AOT Upstream”). In December 2015, we temporarily suspended Joule Heat and AOT Upstream development activities to focus Company resources on finalizing commercial development of the AOT Midstream. Testing terminated at SRI and all prototype equipment was returned to the Company.

Providing sufficient working capital can be obtained, QS Energy intends to continue to work to maintain normal operations during current COVID-19 guidelines as recommended or required by the third quarter 2017,CDC, federal, state and county government agencies. Over the past few years, the Company built a dedicated laboratory spacemoved much of its operations to the cloud. Our employees can perform most vital functions remotely. Currently, most day-to-day operations have been minimally impacted by COVID-19. We expect that COVID-19 restrictions and guidelines will continue to substantially change during the period ending December 31, 2023.

It is unclear, however, what impact COVID-19 may have on our supply chain, or on our ability to operate and test our AOT technology. As of the date of this report, few suppliers related to our testing efforts have announced reduced operating capacity or advised us of delays related to COVID-19 restrictions; furthermore, we have not been made aware of any COVID-19 restrictions at its Tomball Texas facility, and now has the capabilitythat would impact our ability to performrestart our onsite testing utilizingactivities.

The Company’s ability to continue operations is, in part, dependent on our laboratory-scaleaccess to funding. No assurances can be made that we will have access to funding, in which case our goal of achieving commercialization of our AOT device, among other equipment. We restarted AOT Upstream development in September 2017,technology and plans to resume Joule Heat development in the future depending on the availability of sufficient capital and other resources. Also during the third quarter 2017, the Company built an outdoor facility at its Tomball Texas facility for onsite storage of AOT inventory and other large equipment.products will be substantially impaired. commerc

Our expenses to date have been funded primarily through the sale of shares of common stock and convertible debt, as well as proceeds from the exercise of stock purchase warrants and options. We will need to raise substantial additional capital through 2017,2023, and beyond, to fund work on our AOT, our sales and marketing efforts, continuing research and development, and certain other expenses, including without limitation, legal and accounting expenses, until we are able to achieve a revenue base. We can provide no assurances that additional capital will be available to us, or if it is, that such additional capital will be offered at acceptable terms or that available capital will result in our achieving a revenue base grows sufficiently.base.

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

ResultsWe are dedicated to the crude oil production and transportation marketplace, with a specifically targeted product offering for enhancing the flow-assurance parameters of Operationnew and existing pipeline gathering and transmission systems.

Our primary goal is to provide the oil industry with a cost-effective method by which to increase the number of barrels of oil able to be transported per day through the industry’s existing and newly built pipelines. The greatest impact on oil transport volume may be realized through reductions in pipeline operator reliance on diluent for Nineviscosity reduction utilizing AOT technology; a process the Company refers to as electronic diluent, or “eDiluent”. The Company filed for trademark protection of the term eDiluent in 2017. We also seek to provide the oil industry with a way to reduce emissions from operating equipment. We believe our goals may be realizable via viscosity reduction using our AOT product line.

We believe QS Energy’s technologies will enable the petroleum industry to gain key value advantages boosting profit, while satisfying the needs of regulatory bodies at the same time. Key players in the pipeline industry continue to demonstrate interest in our technologies.

Our manufacturing strategy is to contract with third-party vendors and Three-month periodssuppliers, each with a strong reputation and proven track record in the pipeline industry. These vendors are broken up by product component subcategory, enabling multiple manufacturing capacity redundancies and safeguards to be utilized. In addition, this strategy allows the Company to eliminate the prohibitively high capital expenditures such as costs of building, operating and maintaining its own manufacturing facilities, ratings, personnel and licenses, thereby eliminating unnecessary capital intensity and risk.

Three months ended September 30, 20172023 and 20162022

DuringThe Company had no revenues in the nine-month periodthree month-periods ended September 30, 2017, the Company recognized revenues of $50,000 pursuant to the completion of lease2023 and testing agreement of the Company’s AOT equipment. There was no similar transaction during the period ended September 30, 2016.2022.

Operating expenses were $2,373,000$164,000 for the nine-monththree-month period ended September 30, 2017,2023, compared to $1,728,000$214,000 for the nine-monththree-month period ended September 30, 2016, an increase2022, a decrease of $645,000.$50,000. This is due to increasesan increase in non-cash expenses of $253,000, and$16,000 offset by a decrease in cash expenses of $392,000.$66,000. Specifically, the increase in non-cash expenses areis attributable to increases in depreciation of $6,000 and stock compensation expenses attributable to the fair value of options granted to directors and employees of $386,000, offset by decreases in stock compensation expenses attributable to the fair value of warrants granted to consultants and othersissued as compensation for services of $139,000.$16,000. The increasedecrease in cash expense is attributable to severance package expense of $671,000 with our Chief Executive Officer, and increasesdecreases in legal and accounting of $16,000,$14,000, consulting fees of $10,000, rent and utilities of $8,000, travel expenses of 16,000, offset by decreases in consulting fees of $217,000, corporate$8,000, computer expenses of $18,000, insurance$6,000, auto expenses of $21,000, rent$5,000, banking expenses of $48,000, salaries$5,000, office expenses of $5,000, patent expenses of $4,000, meals and benefitsentertainment of $3,000,$1,000, and other expenses of $4,000.$2,000, offset by increases in public and investor relations of 2,000.

Research and development expenses were $173,000$47,000 for the nine-monththree-month period ended September 30, 2017,2023, compared to $200,000$130,000 for the nine-monththree-month period ended September 30, 2016,2022, a decrease of $27,000.$83,000. This decrease is attributable to an increase in product testing, research, patents and other costs of $2,000, offset by a decreasedecreases in prototype product development costs of $29,000.$83,000.

Other income and expenseexpenses were $1,649,000$90,000 expense for the nine-monththree-month period ended September 30, 2017,2023, compared to $1,452,000$93,000 expense for the nine-monththree-month period ended September 30, 2016,2022, a net decrease in other expenses of $197,000.$3,000. This decrease is attributable to a decrease in other income of 1,000 and an increase in non-cash other expenses of $196,000.$3,000. The decrease in other income is due to a decrease in other miscellaneous income of $1,000. The increase in non-cash other expense is due an increaseto a decrease in expense attributable to interest, beneficial conversion factors and warrants associated with convertible notes issued in the amount of $217,000, offset by decreases in other non-cash interest of $18,000 and loss on disposition of assets of 3,000.$3,000.

The Company had a net loss of $4,145,000,$301,000, or $0.02$0.00 per share, for the three-month period ended September 30, 2023, compared to a net loss of $437,000, or $0.00 per share, for the three-month period ended September 30, 2022.

Nine months ended September 30, 2023 and 2022

Results of Operations for nine months ended September 30, 2023 and 2022

Operating expenses were $508,000 for the nine-month period ended September 30, 2017,2023, compared to a net loss of $3,380,000, or $0.02 per share,$504,000 for the nine-month period ended September 30, 2016.

Three months ended September 30, 2017 and 2016

The Company had no revenues in the three month-periods ended September 30, 2017 and 2016.

Operating expenses were $535,000 for the three-month period ended September 30, 2017, compared to $467,000 for the three-month period ended September 30, 2016,2023, an increase of $68,000.$4,000. This is due to an increaseincreases in non-cash expenses of $15,000,$3,000 and an increase in cash expenses of $53,000.$1,000. Specifically, the increase in non-cash expenses areis attributable to decreases in depreciation of $4,000 and stock compensation expenses attributable to the fair value of warrants granted to consultants and others of $21,000, offset by an increase in stock compensation expenses attributable to the fair value of options granted to directors and employeeswarrants issued as compensation for services of $32,000.$3,000. The increase in cash expense is attributable to decreasesincreases in office expenses of $13,000, rent and utilities of $8,000, consulting fees of $34,000, legal$5,000, insurance of $4,000, and accounting fees of $5,000, offset by increases in corporate expenses of 34,000, insurance of $2,000, office$1,000, offset by decreases in patent expenses of $16,000, rent$10,000, travel expenses of $4,000,$10,000, banking expenses of $8,000, salaries and benefits of $21,000,$1,000, and other expenses of $15,000.$1,000.

Research and development expenses were $53,000 for the three-month period ended September 30, 2017, compared to $52,000148,000 for the nine-month period ended September 30, 2016, an increase of $1,000.

Other income and expense were2023, compared to $227,000 expense for the three-monthnine-month period ended September 30, 2017, compared to $516,000 expense for the three-month period ended September 30, 2016,2022, a net increase in other incomedecrease of $289,000.$79,000. This increasedecrease is attributable to a decrease in prototype product development costs of $79,000.

Other expenses were $263,000 expense for the nine-month period ended September 30, 2023, compared to $241,000 expense for the nine-month period ended September 30, 2022, a net increase in other miscellaneous incomeexpenses of $1,000, and a decrease$22,000. This increase is attributable to an increase in non-cash other expenses of $290,000.$22,000. The decrease in other income is due to a decrease in other miscellaneous income of $1,000. The decreaseincrease in non-cash other expense is due to decreasesincreases in expense attributable to interest, beneficial conversion featuresfactors and warrants associated with convertible notes issued in the amount of $252,000 and other non-cash interest of $38,000.$22,000.

The Company had a net loss of $815,000,$919,000 or $0.00 per share, for the three-monthnine-month period ended September 30, 2017,2023, compared to a net loss of $1,035,000,$909,000, or $0.01$0.00 per share, for the three-monthnine-month period ended September 30, 2016.2022.

Liquidity and Capital Resources

General

As reflected in the accompanying condensed consolidated financial statements, the Company has not yet generated significant revenues and has incurred recurring net losses. We have incurred negative cash flow from operations since our inception in 1998 and a stockholders’ deficit of $1,459,000$5,041,000 as of September 30, 2017.2023. Our negative operating cash flow for the periods ended September 30, 20172023 was funded primarily through issuance of convertible notes.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 $4,145,000$919,000 and a negative cash flow from operations of $1,369,000$491,000 for the nine-month period ended September 30, 20172023. In addition, as of September 30, 2023, thirty-eight notes payable with an aggregate balance of $1,977,000 and stockholders’ deficit of $1,459,000.certain obligations to a former officer are past due. These factors raise substantial doubt about our ability to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 20162022 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, 2017, we received cash totaling $1,869,000 from issuance of our convertible notes payable, exercise of options and warrants, and private sale of unregistered securities, and used cash in operations of $1,369,000. At September 30, 2017,2023, we had cash on hand in the amount of $587,000.$214,000. We will need additional funds to operate our business, including without limitation the expenses we will incur in connection with the license and research and development agreements with Temple University, as amended;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 20172023 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 included in this report,attached hereto, Note 6 (Research and Development).

Critical Accounting Policies and Estimates

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

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

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

Estimates

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

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, 2017,2023, the Company incurred a net loss of $4,145,000,$919,000, used cash in operations of $1,369,000$491,000 and had a stockholders’ deficit of $1,459,000$5,041,000 as of that date. In addition, as of September 30, 2023, thirty-eight notes payable with an aggregate balance of $1,977,000 and certain obligations to a former officer are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern. TheIn addition, the Company’s independent registered public accounting firm, in its 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, 2017,2023, the Company had cash on hand in the amount of $587,000.$214,000. Management estimates that the current funds on hand will be sufficient to continue operations through January 2018.December 2023. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with the license and research and development agreements with Temple; costs associated with product development and commercialization of the AOT and Joule Heat technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements, certain payments to a former officer and consulting fees, during the remainder of 20172023 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.

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 timetime-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

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the Company's chief executive officerChief Executive and chief financial officer,Financial Officer, evaluated, as of September 30, 2017,2023, the effectiveness of the Company's disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f), which were designed to be effective at the reasonable assurance level. 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 this evaluation, the evaluation of the Company's disclosure controlsCompany’s Chief Executive and procedures as of September 30, 2017, management, the chief executive officer and the chief financial officerFinancial Officer concluded that the Company'sCompany’s disclosure controls and procedures were not effective atas of September 30, 2023. As of September 30, 2023, management’s assessment identified the reasonable assurancematerial weaknesses in the Company’s internal control over financial reporting:

We continue to have a material weakness in our internal control over financial reporting as disclosed in our 2022 Form 10-K, in that the Company has (i) inadequate segregation of duties consistent with control objectives; and (ii) the Company has an insufficient number of personnel with an appropriate level at that date.of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP and SEC disclosure requirements commensurate with the Company’s financial reporting requirements. 

(a)       Changes in Internal Control over Financial Reporting

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, 20172023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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 our Form 10-K for the period ended December 31, 2016,2022, which we filed with the SEC on March 15, 2017.30, 2023.

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

Issuances