Filed 2026-03-31 · Period ending 2025-12-31 · 44,193 words · SEC EDGAR
← QSEP Profile · QSEP JSON API
# QS Energy, Inc. (QSEP) — 10-K
**Filed:** 2026-03-31
**Period ending:** 2025-12-31
**Accession:** 0001683168-26-002551
**Source:** [SEC EDGAR](https://www.sec.gov/Archives/edgar/data/1103795/000168316826002551/)
**Origin leaf:** 15aa096abd1d75f11eee09ee0efa10b7e4d7904be4f4be86e97c88f56c621081
**Words:** 44,193
---
**Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION**
**Washington, D.C. 20549**
****
**FORM 10-K**
****
**ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934**
**For the fiscal year ended December 31, 2025**
****
**or**
****
**TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
****
**For the transition period from __________ to
__________**
****
**Commission File Number 0-29185**
****
**QS ENERGY, INC.**
(Exact name of registrant as specified in its charter)
|
Nevada |
52-2088326 | |
|
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer
Identification No.) | |
**23902 FM 2978**
**Tomball, TX 77375**
(Address, including zip code, of principal executive
offices)
****
**(775) 300-7647**
(Registrants telephone number, including
area code)
(Former name, former address and former fiscal
year, if changed since last report)
****
**Securities registered pursuant to Section 12(b)
of the Act:**
****
|
Title of each class |
Name of each exchange on which registered | |
|
None |
N/A | |
Securities registered pursuant to Section12(g)
of the Exchange Act: Common Stock, $0.001 par value.
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ( 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of large accelerated filer, accelerated filer, smaller reporting company,
and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one)
|
Large accelerated filer |
Accelerated filer | |
|
Non-accelerated filer |
Smaller reporting company | |
|
|
Emerging growth company | |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
has filed a report on and attestation to its managements assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements.
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive- based compensation received by any of the registrants
executive officers during the relevant recovery period pursuant to 240.10D-1(b).
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act).
Yes No
The aggregate market value of the voting and non-voting common equity
held by non-affiliates (excluding voting shares held by officers and directors) as of June 30, 2025, was $100,504,000.
The number of shares of the Registrants
Common Stock outstanding as of March 27, 2026 was 550,617,942.
**DOCUMENTS INCORPORATED BY
REFERENCE - None**
Transitional Small Business Disclosure Format (Check one)
Yes No
| | | | |
****
**QS ENERGY, INC.**
**FORM 10-K**
**INDEX**
|
PART I |
| |
|
|
| |
|
Item 1. Business |
1 | |
|
|
| |
|
Item 1A. Risk Factors |
21 | |
|
|
| |
|
Item 1B. Unresolved Staff Comments |
28 | |
|
|
| |
|
Item 1C. Cybersecurity |
28 | |
|
|
| |
|
Item2. Properties |
28 | |
|
|
| |
|
Item3. Legal Proceedings |
28 | |
|
|
| |
|
Item4. Mine Safety Disclosures |
28 | |
|
|
| |
|
PART II |
| |
|
|
| |
|
Item5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
29 | |
|
|
| |
|
Item 6. Selected Financial Data |
31 | |
|
|
| |
|
Item7. Managements Discussion and Analysis of Financial Condition and Results of Operation |
31 | |
|
|
| |
|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
36 | |
|
|
| |
|
Item8. Financial Statements and Supplementary Data |
36 | |
|
|
| |
|
Item9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
36 | |
|
|
| |
|
Item9A. Controls and Procedures |
36 | |
|
|
| |
|
Item 9B. Other Information |
38 | |
|
|
| |
|
PART III |
| |
|
|
| |
|
Item 10. Directors, Executive Officers and Corporate Governance |
39 | |
|
|
| |
|
Item 11. Executive Compensation |
43 | |
|
|
| |
|
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
47 | |
|
|
| |
|
Item 13. Certain Relationships and Related Transactions, and Director Independence |
48 | |
|
|
| |
|
Item 14. Principal Accounting Fees and Services |
48 | |
|
|
| |
|
PART IV |
| |
|
|
| |
|
Item15. Exhibits, Financial Statement Schedules |
49 | |
|
|
| |
|
Item 16. Form 10-K Summary |
50 | |
|
|
| |
|
SIGNATURES |
51 | |
| | i | | |
****
**PART I**
****
**Forward-Looking Statements**
****
This Annual Report on Form
10-K contains forward-looking statements. These forward-looking statements include predictions and statements regarding our future:
|
|
|
revenues and profits; | |
|
|
|
customers; | |
|
|
|
research and development expenses and efforts; | |
|
|
|
scientific and other third-party test results; | |
|
|
|
sales and marketing expenses and efforts; | |
|
|
|
liquidity and sufficiency of existing cash; | |
|
|
|
technology and products; and | |
|
|
|
the effect of recent accounting pronouncements on our financial condition and results of operations. | |
You can identify these and
other forward-looking statements by the use of words such as may, will, expects, anticipates,
believes, estimates, intends, project, potential, forecast
continues, strategies, or the negative of such terms, or other comparable terminology, and also include statements
concerning plans, objectives, goals, strategies and future events or performance.
Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below
under the heading Risk Factors. We cannot assure you that we will achieve or accomplish our expectations,
beliefs or projections. All forward-looking statements included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements.
| | 1 | | |
**Item 1. Business**
****
The discussion of our business
is as of the date of filing of this report, unless otherwise indicated. Our business discussion below is qualified by our Risk
Factors, disclosures in Item 1A, below.
**Overview**
****
QS Energy, Inc. (QS
Energy or Company or we or us or our) develops and seeks to commercialize
energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil transport, and
reducing greenhouse gas emissions. The Company's intellectual properties include a portfolio of domestic and international patents, a
substantial portion of which have been developed in conjunction with and exclusively licensed by us from Temple University of Philadelphia,
PA (Temple). QS Energy's primary technology (and for now only technology) is called Applied Oil Technology (AOT), a commercial-grade
crude oil pipeline transportation flow-assurance product. Engineered specifically to reduce pipeline pressure loss, increase pipeline
flow rate and capacity, and reduce shippers reliance on diluents and drag reducing agents to meet pipeline maximum viscosity requirements,
AOT is a 100% solid-state system that in lab and other tests has shown to reduce crude oil viscosity by applying a high intensity electrical
field to crude oil while in transit. AOT technology has shown to deliver 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 Americas largest high-volume crude oil pipelines. Prior 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
is still in development and testing and has transitioned from laboratory testing to initial demonstration and continued testing in advance
of our goal of seeking commercial acceptance and adoption by the upstream and midstream pipeline marketplace. Such commercial acceptance
and adoption have not been achieved. We continue to devote the bulk of our efforts to the promotion, design, testing and the commercial
manufacturing and test operations of our crude oil AOT pipeline product in the upstream and midstream energy sector. Our efforts in the
foregoing regard have been substantially hampered by our lack of capital. We should be able to continue our efforts to commercialize our
AOT product during 2026 only if we are able to raise sufficient capital to do so. We can provide no assurances that we will be able to
raise the capital we need to continue our efforts in 2026, or that any such capital will be available to us on acceptable terms and conditions.
Nor can we provide assurances our technology will be accepted and deployed by the pipeline industry. See Risk Factors, below
in Item 1A.
Our Company was incorporated
on February 18, 1998, as a Nevada Corporation under the name Mandalay Capital Corporation. The Company changed its name to Save the World
Air, Inc. on February 11, 1999. Effective August 11, 2015, the Company changed its name to QS Energy, Inc. The name change was affected
through a short-form merger pursuant to Section 92A.180 of the Nevada Revised Statutes. Additionally, QS Energy Pool, Inc., a California
corporation, was formed as a wholly owned subsidiary of the Company on July 6, 2015 to serve as a vehicle for the Company to explore,
review, and consider acquisition opportunities. To date, QS Energy Pool has not entered into any acquisition transaction. However, the
Company will still consider, if appropriate to do so, and subject to the availability of adequate and acceptable capital and financing,
entering into potential beneficial acquisitions. The Company is considering dissolving QS Energy Pool to reduce costs associated with
operating this subsidiary. The Companys common stock is quoted under the symbol QSEP on the Over-the-Counter Bulletin
Board (Pink Sheets).
A history of important events
associated with our efforts to develop and commercialize our AOT technology is as follows:
| | 2 | | |
Since 2011, 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 Companys 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 Companys
AOT technology and equipment on one of TransCanadas operating pipelines. As previously reported in our 10-K report filed with the
SEC on March 16, 2015, in June 2014, the equipment was accepted by TransCanada and the lease commenced and the first full test of the
AOT equipment on the Keystone pipeline was performed in July 2014 by Dr. Rongjia Tao of Temple University, with subsequent testing performed
by an independent laboratory, ATS RheoSystems, a division of CANNON (ATS) in September 2014. Upon review of the July
2014 test results and preliminary report by Dr. Tao, QS Energy and TransCanada mutually agreed that this initial test was flawed due to,
among other factors, the short-term nature of the test, the inability to isolate certain independent pipeline operating factors such as
fluctuations in upstream pump station pressures, and limitations of the AOT device to produce a sufficient electric field to optimize
viscosity reduction. Subsequent testing by ATS in September 2014 demonstrated viscosity reductions of 8% to 23% depending on flow rates
and crude oil types in transit. In its summary report, ATS concluded that i) data indicated a decrease in viscosity of crude oil flowing
through the TransCanada pipeline due to AOT treatment of the crude oil; and ii) the power supply installed on our equipment would need
to be increased to maximize reduction in viscosity and take full advantage of the AOT technology. We determined more testing would be
required to establish the commercial efficacy of our AOT technology. 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 agreed to lease and test the effectiveness of the Companys AOT technology
and equipment on one of Kinder Morgans operating crude oil condensate pipelines. Equipment provided under the Lease included a
single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The equipment was delivered to Kinder Morgan
in December 2014 and installed in March 2015. In April 2015, during pre-start testing, low electrical impedance was measured in the unit,
indicating an electrical short. A replacement unit was installed in May 2015. The second unit also presented with low impedance when flooded
with crude condensate from Kinder Morgans pipeline. Subsequent to design modifications, a remanufactured AOT unit was installed
and tested at Kinder Morgans pipeline facility in August 2015. Initial results were promising, with the unit operating generally
as expected. However, voltage dropped as preliminary tests continued, indicating decreased impedance within the AOT pressure vessel. QS
Energy personnel and outside consultants performed a series of troubleshooting assessments and determined that, despite modifications
made to the AOT, conductive materials present in the crude oil condensate appeared 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 suspended in-field testing to provide time to re-test crude oil condensate in a laboratory setting, and thoroughly review and test
selected AOT component design and fabrication. Subsequent analysis and testing led to changes in electrical insulation, inlet flow improvements
and other component modifications. These design changes were implemented and tested by Industrial Screen and Maintenance (ISM), one of
QS Energy's supply chain partners in Casper, Wyoming. Tests performed by ISM at its Wyoming facility indicated significant improvements
to system impedance and efficiency of electric field generation.
| | 3 | | |
In February 2016, the modified
AOT equipment was installed at Kinder Morgans 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, demonstrating 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. Results of this test were promising; however, due to the short duration of the test
and limited data collection, definitive conclusions regarding the AOT performance and its impact on pipeline operations could not be reached.
Based on final analysis of in-field test results, SCADA operating data and subsequent analysis of crude oil condensate samples at Temple
University, it became unlikely Kinder Morgan would use the AOT at the original test location or other condensate pipeline. Kinder Morgan
expressed interest in AOT operations at one of their heavy crude pipeline locations subject to results of other AOT demonstration projects
and provided the Company with additional crude oil samples which have been tested at Temple University for future test correlation and
operational planning purposes. The Kinder Morgan Lease is in suspension and there are no current plans to resume the lease or reinstall
an AOT device at a Kinder Morgan facility.
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.
During the third quarter of
2016, the Company developed an onsite testing program to demonstrate AOT viscosity reduction at prospective customer sites. This program
utilized a laboratory-scale AOT device designed and developed by the Company and tested at the Southern Research Institute. Under this
program, Company engineers set up a temporary lab at the customers site to test a full range of crude oils. Fees charged for providing
this service were dependent on scope of services, crude oil sample to be tested, and onsite time requirements. In the fourth quarter 2016,
the Company entered a contract to provide these onsite testing services to a North American oil producer and pipeline operator over a
one-week period in early 2017 at a fixed price of $50,000. This test was performed in January 2017; data analysis and a final report were
completed in March 2017. Test results demonstrated viscosity reduction under limited laboratory conditions. The oil producer requested
access to observe a full-scale demonstration facility and view operating data when they become available. This has not occurred.
Separately, in 2014, the Company
began development of a new suite of products based around the new electrical heat system which reduces oil viscosity through a process
known as joule heat (Joule Heat). The Company built and tested its first Joule Heat prototype in June 2015. The system was
operational; however, changes to the prototype configuration would be required to determine commercial effectiveness of this unit. In
December 2015, we suspended Joule Heat development activities to focus Company resources on finalizing commercial development of the AOT.
We may resume Joule Heat development in the future depending on the availability of sufficient capital and other resources.
| | 4 | | |
Also, 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, in essence providing an electronic form of diluent, or eDiluent.
Subject to successful testing of our AOT technology and sufficient availability of operating capital, the Company may seek to market and
sell a value-added service under the name eDiluent, designed to be upsold by the Companys midstream pipeline customers in an effort
to provide the Company with long-term recurring revenues.
During the third quarter 2017,
the Company built a dedicated laboratory space at its then Tomball, Texas facility, providing onsite testing utilizing our laboratory-scale
AOT device, among other equipment. Development of an AOT unit for use in crude oil upstream and gathering operations was restarted in
September 2017, utilizing resources at the Tomball, Texas facility. Also, during the third quarter 2017, the Company built an outdoor
facility at the Tomball, Texas site for onsite storage of AOT inventory and other large equipment. These sites are no longer in use.
Throughout 2018 our primary
strategic goal was focused on installing and operating a demonstration AOT project on a commercial crude oil pipeline. Much of our time
was spent meeting with industry executives and engineers in North and South America and working with local representatives in the Asian
and the Middle Eastern markets. In December 2018, we reached mutual agreement with a major U.S.-based pipeline operator on a demonstration
project under which we would install and operate our AOT equipment on a crude oil pipeline located in the Southern United States. We believed
at the time that the selected project site would be ideal for demonstration purposes, delivering heavy crudes which, based on samples
tested at Temple University, and, subject to the discussion below, would 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 upgrade, inspections
and testing protocols were completed in December 2018. The pipeline operator finalized site selection and began site design and engineering
in January 2019, completing site preparation and equipment installation in June 2019. The project was installed within budget, quality
compliant, and without safety incidents. The system passed the pre-start safety review, data acquisition signal verifications, and mechanical
inspections. Under full crude oil flow, the system was confirmed to have no leaks and no environmental issues were noted. Data collected
during the full-flow startup phase confirmed internal differential pressures to be negligible and consistent with design specifications.
However, when the system was energized, and the unit was run-up to high-voltage operations, the primary power supply began to operate
erratically and had to be taken offline. Subsequent inspection determined the primary power supply had failed.
After removing the primary
power supply, our engineers reconfigured the system to run off a smaller secondary power supply. Although this unit was not capable of
achieving target treatment voltage, we performed limited testing and troubleshooting measures, after which the damaged power supply was
shipped to the manufacturer for expedited repair and reconditioning. Inspections performed during the repair process indicated internal
power supply components had been physically damaged. Though not definitive, it appears that damage may have occurred during transit prior
to initial installation at the demonstration site. While the demonstration project was offline for power supply repairs, our engineering
team worked with oil samples pulled from the operating pipeline for testing at our then Tomball laboratory facility. These tests were
designed to confirm our target power requirements as accurately as possible and help us fine-tune enhancements planned for a new optimized
AOT internal grid pack design we had planned to test at the demonstration site as part of our continuing value 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 oils high electrical conductivity. In anticipation of this result, the Company initiated in advance of testing
parallel tasks of: i) installation of the repaired power supply to perform 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.
| | 5 | | |
When the repaired power supply
was installed in late August 2019, the system operated as expected, and limited testing was performed at that time. Results of this limited
testing were consistent with laboratory tests performed to date. But, as expected, the repaired power supply was not capable of providing
sufficient power to fully treat the crude oil under commercial operating conditions. Based on results of this limited testing, Company
engineers completed designs and began implementation of modifications to the AOT internal grid pack assembly.
The new high capacity power
supply and modified grid pack were installed in December 2019. However, prior to flooding the system with crude oil, early-phase startup
testing indicated an electrical short circuit. Subsequent inspection revealed damage to the internal grid pack which likely occurred during
installation. The grid pack was shipped offsite for repairs with reinstallation scheduled for January 2020.
The AOT demonstration project
continued to experience setbacks during the first quarter of 2020. After repairing and re-installing the modified grid pack, the system
shut down again during commissioning presenting with error conditions similar to the December 2019 failure. At that time, based on external
inspections and on-site testing, our engineers suspected the grid pack had again been damaged during re-installation and that such suspected
damage was the most likely cause of the electrical short circuit. It was determined at that time the best course of action would be to
remove the modified grid pack and re-install the original grid pack which had previously been installed multiple times without sustaining
damage, and perform a detailed inspection of the modified grid pack in an effort to determine the cause of the electrical short circuit.
Executing this plan, our team
removed the modified grid pack and re-installed the original grid pack assembly in the AOT 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,
but not high enough for treatment with the installed grid pack, 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 pipelines operating pressure. However, once the valves were opened and the system was subjected to the pipelines
operating pressure, the system developed an electrical short circuit and shut down.
As the presence of high pressure
appears to trigger the short circuit, it was the belief of our engineers that it is unlikely the fault is in the grid pack assembly as
this component is fully submerged in crude oil and is generally subjected to equal pressure on all components. The electrical short is
more likely developing in the electrical connection assembly built into the blind flange at the top of the pressure vessel, which is 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 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.
| | 6 | | |
While the blind flange assembly
was being remanufactured, we took the opportunity to implement a number of relatively minor modifications to other system configurations
which had been planned for future units based on results of our engineering teams 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 at that time continued to be non-operational under normal operating conditions. As reported in previous updates on our
website at https://www.qsenergy.com/index.php/qs-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 systems 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.
Executing on this plan, our
team removed the modified grid pack and re-installed the original grid pack assembly in the AOT. After removal, our engineers performed
a detailed inspection of the modified grid pack. Inconsistent with our expectations, no damage to the modified grid pack was found during
this inspection, leaving the cause of the most recent electrical short circuit undiagnosed.
We have tested and attempted
to operate the AOT under a variety of conditions. We have been able to bring the system up to high voltage under static shut-in
conditions; however, as reported above, the system continued to shut down due to an electrical short circuit when operated under pressure.
In simple terms, as also reported above, this means we can flood the system with crude oil, shut-in the system by closing the intake and
outtake valves isolating the system from the pipelines operating pressure, and power up the system in excess of 10,000 volts. Once
the valves are opened and the system is subjected to the pipelines operating pressure, the system develops an electrical short
circuit and shuts down. Because of our inability to fully diagnose the cause of our current electrical problems, we can provide no assurances
that we will not face other operational issues after completing a full diagnosis and evaluation of our technology.
As previously reported, in
December 2018, we entered into an agreement with a major U.S.-based pipeline operator under which the Company installed its AOT equipment
on a crude oil pipeline located in the Southern United States for testing and demonstration purposes. Based on laboratory tests and operations
of prototype equipment at other locations, we had a reasonable expectation that the equipment would operate successfully and that test
results would demonstrate quantifiable benefits to pipeline operators. This has not occurred.
As reported in the Companys
Form 10-K and Form 10-Q filed with the SEC on March 31, 2020 and June 29, 2020, respectively, and in website updates published on the
Companys website at https://www.qsenergy.com/index.php/qs-updates/, the Company experienced a number of difficulties and delays
at the demonstration site. Despite identifying and implementing numerous design modifications over several months, the Company was unable
to successfully operate its AOT equipment.
| | 7 | | |
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 systems high-voltage power supply which, in their experience, could resolve the systems 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.
After discussions with our
demonstration pipeline partner, it was mutually agreed that the best course of action was to move the equipment from the demonstration
site to another location where our engineers could disassemble and inspect the equipment. Our AOT equipment was moved to storage, inspection,
and testing site in the state of Mississippi. Our former demonstration partner 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.
We shut down all testing of
our AOT product in July 2020, due to a lack of operating capital; we received limited capital in 2021, allowing us to commence some additional
testing of our AOT product.
In 2021, following our receipt
of limited capital, our engineer commenced re-testing and completed a troubleshooting sequence. Lab test fixtures were designed and built,
and testing results supported the redesign of the AOT internals. The results of the electrical testing of the insulating material showed
that the material of constructions was 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.
We validated 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 was completed, final drawings were sent to our
vendors, and prototype parts for fit and electrical testing were ordered.
In August 2022 we completed
the testing of the new components. The assembly did not suffer the arcing problems we saw when testing an assembly made from parts of
the full size AOT. It appeared that we accomplished the goal of eliminating the sources of arcing that prevented us from achieving treatment
voltages with this new design.
The lessons learned during
the stack assembly test have been applied and the results incorporated into the designs for the spacer rings and the screens. This change
to the isolator ring design resulted in some iterative designs to optimize the casting tooling or molds. The time spent on this redesign
created a delay in our goal for testing in September 2022.
Since reporting our findings
on October 7, 2021, we have been able to positively confirm and correct approximately 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.
| | 8 | | |
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 believed at the time that the AOT would be ready to test with customer oil and be deployed
back into the field. Still, no such testing or deployment has yet to occur.
We reopened discussions with
our original development partner as well as reaching out to others. While we have tested with a representative oil sample, we have not
yet reached an agreement with a development partner allowing us to test a development partner's pipeline oil as a prelude to another field
test. Our efforts continue to reach agreement with a suitable development partner as our next step to develop and commercialize our AOT
technology.
Our team has diligently pursued
the formalization of a new initiative, aligning it with the strategic priorities of potential development partners. As we endeavor to
seamlessly incorporate state-of-the-art technologies into a novel operational framework, we acknowledge that comprehensive testing, planning
and meticulous execution invariably require more time than initially anticipated.
A noteworthy milestone has
been achieved, demonstrating significant viscosity reduction for the specified oil target. Our collaboration with Temple University continues
as we define the operational parameters of the AOT system, essential for effective field deployment. Concurrently, we are actively exploring
commercial opportunities for our AOT product.
In our ongoing effort to commercialize
our AOT technology, as announced in our press release of June 12, 2024, we entered into a letter of intent on June 11, 2024, with VIPS
Petroleum, LLC (VIPS) to collaborate on and outline preliminary terms of a memorandum of understanding (MOU)
regarding the commercial deployment of our AOT technology on one or more pipeline networks owned and operated by VIPS customer/clients.
The MOU was completed and signed with VIPS on September 25, 2024, as reported in our press release of September 26, 2024. We have now
entered into a Collaboration Agreement with VIPS as of August 1, 2024 to collaborate with them in facilitating the deployment of our AOT
technology and products to VIPS customers. We hope to finalize a definitive agreement with a VIPS customer or customers to demonstrate
the efficacy of our AOT product within the operating goals and requirements of the customer. If those customers goals and requirements
are satisfied, we hope next to deploy our AOT product on the customers pipeline networks. As of the date of this filing, we have
not entered into any agreement with any of VIPS customers for the deployment of our AOT technology and products. While we believe
we have an opportunity to seek deployment of our AOT product on a VIPS customers pipeline network, we can offer no assurances that
agreements will be signed with VIPS' customers or that such customers, if any, will approve or seek installation of our AOT product.
We believe the partnership
between VIPS and QS Energy has significantly strengthened. This collaboration has advanced to the signing of a Memorandum of Understanding
(MOU) with the Australia Asia India Business Organization (AAIBO), as disclosed in our December 10, 2024, update, QS Energy Achieves
Phase 4 Milestone with Southeast Asias Leading Energy Producer. Engagements with AAIBO and stakeholders in Malaysia have
led to progress toward formalizing a contract. Still, no contract has been entered into between them and the Company.
As reported in our form 8-K,
filed with the SEC on June 25, 2025, we entered into a Distributor Agreement with VIPS, providing for VIPS to serve as our exclusive distributor
to promote, sell, and lease our AOT product in the territories of Malaysia, Ghana, and India, among other territories. To date, we have
not received any purchase orders under the Distributor Agreement, nor has our AOT product been placed with, nor currently being used by,
any of VIPS customers or anyone else. We have also amended the Distributor Agreement, as follows:
Section 3.2 (Additional Revenue),
Section 3.3 (Order Process & Payment Terms), and Section 3.5 (Additional Consideration) of the Distributor Agreement was amended,
effective September 3, 2025 (Amended Distributor Agreement).
| | 9 | | |
Amendment No. 1 referenced
in Section 3.3 of the Amended Distributor Agreement now provides for, among other things and conditions, an initial pre-phase purchase
order of two (2) AOT units for a total purchase price of ten million dollars ($10,000,000), payment of which has not been made. Thereafter,
Amendment No.1 of Section 3.3 provides for five (5) purchase order phases, the first of which (Phase 1) provides for an order of ten (10)
AOT units for a total purchase price of $50,000,000 ($5,000,000 per unit), payable with a down payment of $25,000,000 followed by two
payments of $12,500,000 each. These orders and payments are subject to satisfaction of several conditions including, without limitation,
compliance and verification with SBLC and FAT conditions (defined and discussed in the paragraph below). Amendment No. 1 of Section 3.3
also provides for phase 2 through phase 5 order, payment, and funding conditions, as well as approval conditions and compliance. Sample
purchase orders for pre-phase and phases 1 through 5 are, attached to the Amended Distribution Agreement, together with other sample invoices
and sample orders. The samples do not represent actual orders or payments but establish only the form pursuant to which future orders
and payments may be made. We can provide no assurances that conditions will be satisfied triggering any purchase or payment under the
Amended Distributor Agreement or its attachments.
Amendment No. 3 referenced
in Section 3.5 of the Amended Distributor Agreement now provides that upon the Companys receipt of payment of ten million dollars
($10,000,000) for the purchase of two (2) AOT Units, the Company shall issue VIPS/Stephen Bosco a Stock Purchase Warrant (Warrant)
providing VIPS the right to purchase 25,000,000 million restricted shares of common stock of the Company, at a price of $0.07 cents per
share (Exercise Price). The Warrant will vest on issuance and expire three (3) years from the date of issuance. VIPS
payment of the Exercise Price of $1,750,000 for all 25,000,000 shares shall be rebate-based, meaning, as previously reported in the Companys
Form 8-K filing on June 25, 2025, for every AOT Unit sold by the Company to VIPS for a purchase price per unit of $5,000,000, the Company
will process a post-sale rebate of 15% of the purchase price, or $750,000, to VIPS. Post-sale rebates due VIPS, up to a maximum of $1,750,000,
will be applied to, and be deemed payment of, the Exercise Price.
Amendment No.2 referenced
in Section 3.2 of the Amended Distributor Agreement now provides a formula for the sharing of additional revenue between the Company and
VIPS based on incremental barrels and carbon credits achieved through the use of the Companys AOT Units.
A copy of the Amended Distributor
Agreement, together with amendments and samples attached thereto are included in this Form 10-K filing as Exhibit 10.22. The above summary
of the Amended Distributor Agreement provides selected information only and is qualified in its entirety by the Amended Distributor Agreement.
The Amended Distributor Agreement and attachments thereto should be carefully read in their entirety.
Additionally, QS Energy, in
coordination with VIPS, VIPS customer counterparties, and associated financial institutions, is engaged in negotiations seeking
execution of an initial commercial deployment plan for the 3.0 generation AOT Units. The parties maintain active alignment on the master
schedule, which incorporates a five-point Standby Letter of Credit (SBLC) trigger framework tied to Factory Acceptance Testing (FAT),
completion of manufacturing by specified dates, scheduled delivery to destination countries, and defined installation windows coordinated
with crude oil operators. Activities to date have resulted in some progress across all workstreams associated with the 3.0 deployment
plan, but no revenue has been realized nor AOT purchases have been made under such deployment plan.
The multi-phase potential
deployment of up to 400 AOT units previously disclosed under the VIPS Distributor Agreement was structured as an aggregate, multi territory
framework across VIPSs priority regions, including India, Malaysia and Ghana, rather than as a country specific order. This multi-territory
framework has not yet produced any sales or revenue for the Company. We are now focusing on a potential sale of 150 units as an initial
purchase order under the so-called Laksel LOI (discussed below). This represents a defined India focused initial program within our broader
framework, targeting the regions largest crude pipeline market, while the Amended VIPS Distributor Agreement continues to provide
the contractual basis for pursuing additional opportunities in other territories, including potential applications in Malaysia where certain
offshore to onshore crude transportation systems and related subsea infrastructure may, subject to further engineering evaluation, present
longer term deployment use cases for the Companys AOT technology.
The Company's commercialization
efforts in India, initiated through its collaboration and distribution arrangements with VIPS have progressed with the formalization of
a relationship with Laksel Corporation Pte Ltd, which will serve as the designated EPC partner for the region a role Laksel has
held since the inception of the VIPS India initiative by virtue of its regional expertise, longstanding relationships with the Indian
public sector oil and gas enterprises, and extensive prior project execution experience across Asia Pacific and the Middle East. Our relationship
with Laksel is reflected in the non-binding Laksel LOI described in Note 13 Subsequent Events-- of the financial statements attached
hereto. The Laksel LOI outlines a potential large-scale AOT deployment program on crude oil pipeline infrastructure in India but remains
subject to financing, other conditions, and definitive documentation. We can provide no assurances that such conditions will be met and
such definitive documentation will be achieved.
| | 10 | | |
To date, we have not received
any purchase orders, nor generated any revenue, under the Amended Distributor Agreement, nor has our AOT product been placed with, nor
is it currently being used by, any of VIPS customers or anyone else, and we can provide no assurances that our AOT product will
be accepted or purchased by VIPS, or any of its customers, or anyone else.
QS Energy has collaborated
with its manufacturing partners to ensure readiness for anticipated production demands. This proactive approach positions us to efficiently
scale operations and support anticipated growth, if we are able to secure contacts for the deployment and use of our AOT products and
technology.
We believe the supply chain
is ready for production of our AOT product, if we are able to secure a contract for its deployment. We also believe investments are being
made by potential third-party users of our AOT product in technology and data analysis, which we hope will lead to contracts for the
deployment and use of our AOT product and technology.
As part of our ongoing commitment
to advancing QS Energys strategic objectives, we have initiated preparations to deploy an AOT Midstream Viscosity Reduction
Unit in Corpus Christi, Texas in collaboration with ReadyFlo Systems. Final engineering and design work was performed for a 300-meter
flow loop, which will enable us to conduct operational trials of the AOT under live-flow conditions utilizing customer crude oil
streams.
The development of this flow
loop marks a significant milestone in enhancing our customer support infrastructure and demonstrates our continued investment in operational
excellence. We plan to repurpose the vessel from the demonstration site and integrate it with an upgraded stack, ensuring alignment with
current customer project requirements. Importantly, this flow loop will serve not only as a resource for customer-driven projects but
also as a platform for ongoing product improvement and innovation initiatives. This proactive approach supports our objective to deliver
robust, value-added solutions to our clients and stakeholders.
The design and implementation
of the flow loop have been successfully completed. The system is operational and has delivered positive initial results, validating its
utility for future testing and qualification efforts.
We have initiated consultations
with the Environmental Protection Agency (EPA) and other relevant stakeholders to evaluate the requirements for operating the loop with
crude oil. These discussions have been constructive, and as anticipated, only minor system modifications are necessary to accommodate
crude oil safely and compliantly.
It is important to note that
the decision to construct the flow loop was a strategic initiativenot a requirement. Our team identified the loop as a proactive
investment to improve testing fidelity, accelerate development timelines, and strengthen stakeholder confidence. To mark this milestone,
we invited key stakeholders to participate in a christening event on September 8, 2025, reinforcing our commitment to transparency, collaboration,
and continuous improvement.
Our expenses to date have
been funded through the sale of shares of common stock and convertible debt, as well as proceeds from the exercise of stock purchase warrants
and options. We will need to raise substantial additional capital through 2026, and beyond, to fund work on our AOT, our sales and marketing
efforts, continuing research and development, and certain other expenses, including without limitation, legal and accounting expenses,
until we are able to achieve a revenue base. We can provide no assurances that additional capital will be available to us, or if it is,
that such additional capital will be offered at acceptable terms.
There are significant risks
associated with our business, our Company and our stock. See Risk Factors, below.
**Our Business Strategy**
Assuming we are able to raise
sufficient capital, we intend to continue to seek commercialization and marketing of our current technologies. Our current and primary
product portfolio is dedicated to the crude oil production and transportation marketplace, with a specifically targeted product (AOT)
offering for enhancing the flow-assurance parameters of new and existing pipeline gathering and transmission systems.
Our primary goal is to provide
the oil industry with a cost-effective method by which to increase the number of barrels of oil able to be transported per day through
the industrys existing and newly built pipelines. The greatest impact on oil transport volume may be realized through reductions
in pipeline operator reliance on diluent for viscosity reduction utilizing AOT technology; a process the Company refers to as electronic
diluent, or eDiluent. The Company filed for trademark protection of the term eDiluent in 2017. We also seek to provide the
oil industry with a way to reduce emissions from operating equipment. We believe our goals are realizable via viscosity reduction using
our AOT product line.
| | 11 | | |
We believe QS Energys
technologies will enable the petroleum industry to gain key value advantages boosting profit, while satisfying the needs of regulatory
bodies at the same time. Key players in the pipeline industry continue to demonstrate interest in our technologies.
Our manufacturing strategy
is to contract with third-party vendors and suppliers, each with a strong reputation and proven track record in the pipeline industry.
These vendors are broken up by product component subcategory, enabling multiple manufacturing capacity redundancies and safeguards to
be utilized. In addition, this strategy allows the Company to eliminate the prohibitively high capital expenditures such as costs of building,
operating and maintaining its own manufacturing facilities, ratings, personnel and licenses, thereby eliminating unnecessary capital intensity
and risk.
Our identified market strategy
is to continue meeting with oil and gas industry executives in the upstream, gathering, and midstream sectors from both domestic and foreign
companies. Our goal is to introduce our technology to oil and gas companies and to demonstrate potential value for the purposes of negotiating
commercial implementation of our AOT technology to their existing infrastructures.
Our strategy includes:
|
|
1. |
Continue optimization and value engineering of our AOT Midstream commercial product line. | |
|
|
2. |
Install and operate AOT equipment on a commercial midstream pipeline. | |
|
|
3. |
Directly market AOT technology to midstream pipeline operators based on results and analysis of data from the AOT demonstration project. | |
|
|
4. |
Present demonstration project results and analysis at various trade conferences. | |
|
|
5. |
Continue to make inroads and meet with key strategic potential customers in the following geographic regions: | |
|
|
a. |
United States | |
|
|
b. |
Canada | |
|
|
c. |
South and Central America | |
|
|
d. |
Middle East | |
|
|
e. |
Asia | |
|
|
6. |
Continue to make inroads and strategic alliances with additional supply chain and logistics support to rapidly expand our production capacity beyond its current physical limitations, adding capacity, reach and stability with pre-approved supply chain members that meet the criteria of the customers procurement divisions. | |
|
|
7. |
Develop new AOT technologies crude oil technologies with the potential to expand our market reach upstream and gathering pipeline, offshore pipelines, rail and trucking containers, and crude oil container ships. | |
|
|
8. |
Continue to collaborate on scientific and technical whitepaper reports, product development enhancements, and additional products with our engineering support, consultants and relationships. | |
|
|
9. |
Seek long-term recurring revenues by directly offering or licensing electronic viscosity reduction (electronic diluent, or eDiluent) as a service to reduce reliance on physical diluent. | |
| | 13 | | |
****
**Market Analysis Overview**
****
QS Energys AOT crude
oil viscosity reduction technology directly targets the heavy crude oil transportation industry, initially targeting the midstream crude
oil pipeline operations which deliver high volumes of heavy crude oil to market. The U.S. Energy Information Administration (EIA) forecasts
U.S. crude oil production will average 13.2 million barrels per day in 2024 and predicts it to grow to an average of 13.5 million barrels
per day in 2025. Worldwide, EIA forecasts Brent crude oil prices averaging $74 per barrel in 2025, decreasing to $66 per barrel in 2026.
These forecasts and the forecasts discussed below were completed prior to additional sanctions targeting Russias oil sector, which
have the potential to reduce Russias oil exports to the global market, and also completed prior to initiation of the current war
in the Middle East, current oil and gas production and transport disruptions as a result of that war, and the ongoing implementation of
tariffs imposed on importers by the United States and other countries.
In 2024, global demand for
crude oil averaged approximately 102.9 million barrels per day (b/d). The U.S. Energy Information Administration (EIA) projects that this
demand will increase by 1.3 million b/d in 2025 and by an additional 1.2 million b/d in 2026, primarily driven by consumption in non-OECD
Asia. Looking further ahead, the EIA forecasts that global oil demand in 2030 could range from a 3% to 10% increase compared to 2022 levels,
depending on various economic and policy factors.
Regarding global crude oil
production, the EIA's February 2025 Short-Term Energy Outlook anticipates that production will average 104.2 million b/d in 2025 and 105.8
million b/d in 2026. This growth is expected to result from a combination of gradual increases in OPEC+ production and further expansion
from non-OPEC countries, including the United States, Canada, Brazil, and Guyana. Focusing on the United States, crude oil production
is projected to reach 13.61 million b/d in 2025 and 13.76 million b/d in 2026. The Federal Gulf of Mexico is expected to contribute approximately
1.80 million b/d to these totals, while Alaska's output is projected at 0.42 million b/d in 2025 and 0.44 million b/d in 2026.
In terms of transportation,
the EIA estimates that a significant portion of crude oil production continues to be transported via midstream pipelines. While specific
recent percentages are not provided, historically, a substantial share of both global and North American crude oil has relied on pipeline
infrastructure for transportation. Assuming a transportation cost of $5 per barrel, as estimated in previous analyses, and applying it
to the projected production rates, the annual midstream crude oil transportation costs can be approximated. However, it's important to
note that these figures are subject to change based on market conditions, infrastructure developments, and other economic factors.
Please note that these projections
are based on current data and are subject to change due to various factors, including economic conditions, technological advancements,
and policy decisions related to climate change and energy transition efforts.
The energy sector continues
to operate in a dynamic period marked by both rapid change and expansion. Advancements in oilfield drilling and completion technologies,
particularly enhanced oil recovery (EOR) techniques, have significantly increased the recoverability of tight oil and gas
from shale formations across North America and worldwide. This historic surge in upstream crude oil production has led to persistent transportation
bottlenecks when moving upstream production to downstream storage, offloading facilities, and refineries. These bottlenecks continue to
stimulate substantial investments in both new and existing pipeline infrastructure while also increasing reliance on less efficient alternative
transportation methods such as rail and freight trucks.
| | 14 | | |
Since the initial application
of EOR or tertiary recovery techniques in the 1970s, oil and gas producers have increasingly relied on gas and chemical injection, as
well as thermal recovery. These advanced extraction methods, combined with a significantly higher number of new wells in active oilfields,
have increased reservoir output by 30% to 60% over traditional primary and secondary recovery practices. The rapid adoption of these cutting-edge
extraction technologies in the U.S. energy industry reversed a 34-year decline in domestic oil and gas production in 2006. High output
from massive shale formations, including North Dakotas Bakken, Texas Eagle Ford and Permian Basin, Colorados Green
River, and Utahs Uintah Basin, continues to drive production growth through 2025 and beyond.
Other nations with substantial
exploitable shale formations include Russia, China, Argentina, Colombia, Ecuador, Libya, Australia, Venezuela, Mexico, and many others.
These countries present a growing market for crude oil pipeline optimization technologies as production comes online. The U.S. Energy
Information Administration (EIA) currently estimates that approximately 345 billion barrels of identified and recoverable shale oil exist
worldwide, positioning many regions for sustained production growth.
Despite advancements, oil
production continues to outpace the capacity of existing pipeline infrastructure in the U.S., Canada, South and Central America, and various
other global regions, leading to delivery delays to refineries and increased dependence on higher-cost rail and tanker truck transport.
This imbalance between production and infrastructure capacity highlights the critical need for innovations in pipeline optimization.
Additionally, fluctuating
global oil prices since the early 2020s have encouraged producers and transporters to reduce costs and seek technologies that increase
operational efficiency. The Applied Oil Technology (AOT) system is specifically designed to enhance pipeline throughput capacity, reduce
the use of diluents, lower pipeline operating costs, and optimize overhead, ultimately improving margins and delivering measurable competitive
advantages. As the industry moves through 2026, 2030, and beyond, we believe AOTs ability to increase efficiency and reduce transportation
costs will remain vital to maintaining profitability in an increasingly competitive market.
**Projected Pipeline Infrastructure Investment**
Among the challenges facing
the global crude oil production and transportation sectors, few are as intransigent or detrimental to the industry as the transportation
bottlenecks and well-to-market delivery delays that are endemic here in North America and overseas. While new pipeline infrastructure
projects are underway here in the U.S., Canada and in foreign markets, gaining legislative approval is a lengthy process and their construction
is highly capital-intensive.
Although pipelines are by
far the safest and most economical transportation method, outmoded pipeline infrastructure constructed primarily in the 1950s and 1960s
cannot provide the capacity necessary to move production downstream to storage, refinery and offloading facilities. Consequently, delivery
delays to refineries and reliance on less desirable rail and tanker truck transport have increased exponentially since 2008 when the shale
boom began in earnest. Data compiled by the U.S. Energy Information Administration, IHS Global and the American Petroleum Institute identify
billions in lost revenue opportunities for E&P companies and tax collection agencies in leading oil producing states such as Texas,
North Dakota, Alaska, California, Colorado, Wyoming and Utah directly attributable to production takeaway constraints.
Despite the recently depressed
price level of global oil benchmarks, experts forecast continued growth in crude oil pipeline capital expenditures. In June 2018, the
Interstate National Gas Association of America published a study titled North America Midstream Infrastructure through 2035.
Among its key findings, this report estimates $321 billion will be invested in midstream crude oil infrastructure between 2018 and 2035.
This demand is largely due to capacity constraints coupled with the high cost of delivering crude oil by truck or rail.
We believe QS Energys
AOT technology is strategically aligned with the major requirements and challenges facing the petroleum pipeline economy. The AOT is designed
to increase pipeline flowrate while relaxing pipeline viscosity requirements, effectively increasing pipeline capacity and reducing or
eliminating bottlenecks. This has the ancillary benefit of reducing the need to add diluent or heat to reduce viscosity while reducing
reliance on more costly truck and rail transport to meet increasing capacity demands. Our AOT technology may also mitigate costly operating
factors such as vapor pressure, pigging (pipeline cleaning) frequency, power consumption, and onset of turbulent flow. Of these factors,
vapor pressure, which may be mitigated by AOT through reduced reliance on diluent and a reduction in heat buildup in transit, is of high
importance to many pipeline operators as vapor pressure is tightly controlled by the EPA and is very expensive to mitigate by other means.
We are now seeking to commercialize AOT as a cost-efficient solution for both new and existing pipeline operations.
| | 15 | | |
**Target Markets**
****
The oil and gas sector market
can be segmented into three primary categories: Upstream Producers, Midstream Transporters and Downstream Refiners:
|
|
|
The Upstream segment is involved in the exploration and production (E&P) of oil and gas. | |
|
|
|
| |
|
|
|
Midstream companies and partnerships transport oil and gas to markets via pipelines, rail and shipping, and provide storage in the field and at the destination location. | |
|
|
|
| |
|
|
|
The Downstream sector refines oil and gas into finished products and, in cooperation with manufacturers and retailers, markets and distributes fuels and other refined petroleum products. | |
****
**Upstream Producers**
The Upstream segment has the
greatest exposure to commodity prices. When prices fall as has been the case recently, they feel the brunt of this realignment. They also
have the most to gain from additional flow throughput capacity and therefore would see immediate benefit from QS Energys AOT.
This sector is typically nimble
and faces few barriers to entry. With clear financial upside for every additional barrel of crude oil that they are able to transport,
these companies are often open to new and innovative technology capable of providing greater efficiencies, lower costs and improved cash
flow. Upstream producers physically move the most volume of product. They are customers to the Midstream transporters and enter into long-term
contractual shipping obligations (tariff-based transportation contracts) with Midstream transporters to secure the movement of product
from their fields to the refiners and markets downstream.
Producers make the spot market
price for every barrel delivered to refinery, minus the transport costs, tariffs, and marketing discounts associated with bringing the
product to market. A rough rule of thumb for this market is that the further away they are from the refinery, the higher the transport
costs to deliver the product. Discussions with Upstream entities has uncovered strong interest in solutions that unlock chokepoints from
their field equipment to the transmission line loading terminals through viscosity reduction (AOT). In addition, this group would also
benefit from transporters implementing our AOT transmission-line series due to its ability to increase the overall flow capacity of pipelines
transporting product from loading terminals to market.
**Midstream Gathering Transporters**
A subset of the Midstream
transporters sector is the gathering line operators. This group often functions as a part of the Upstream producers operations,
or within the Midstream transporters operations. Midstream gathering lines are the regional transportation infrastructure that
connect Upstream oilfield gathering lines to Midstream long-distance main trunk lines. Typically, these pipelines are of a relatively
short length (20-100 miles) and have diameters between 6 and 12, and could benefit from our smaller, lower cost AOT technology.
Midstream entities transport
the bulk of the worlds crude oil output via the 400,000 miles of crude oil pipelines globally. Domestically, they deliver a large
percentage of the U.S. daily production of 9.2 million barrels per day through 160,000 miles of crude pipelines. Midstream operators represent
a strong and ready market for AOT, and field test deployments for both solutions are underway.
The pipeline transport operators
business model is to charge a tariff to transport each barrel of oil through their pipeline. Due to the high daily volume of oil being
transported and its value as a commodity, even incremental performance efficiencies can drive significant reductions in overhead reduction
and increases in toll revenues. AOT may also provide pipeline operators the opportunity to offer on-demand electronic diluent as a service
at a premium fee to customers highly dependent on diluent to meet viscosity requirements.
The potential benefits of
AOT includes increased flow, reduced pipeline operating pressure and reduced friction losses and friction-induced heat build-up, providing
economic benefits through increased capacity and toll rate income, and regulatory benefits through reductions in BTU per ton-mile, off-gassing
and reduced carbon emissions (CO2).
**Other heavy crude oil transporters**
Truck, rail and marine crude
oil carriers rely on heat and other costly and potentially hazardous measures to address the difficulties of onloading and offloading
thick, heavy crudes. The Company is investigating AOT equipment designs specifically targeting this markets viscosity and vapor
pressure requirements and related evaporation mitigation practices mandated by the U.S. Environmental Protection Agency.
| | 16 | | |
**Our Products and Technology**
****
**AOT Commercial Products**
See Item 1., above, (Business)
under the section Overview. The following discussion is qualified in its entirety by the aforementioned discussion in Item 1, above, (Business).
Beginning in the second quarter of 2012, the Company began the design and engineering efforts required to transition from laboratory and
prototype testing to AOT units designed for full-scale commercial testing. The Company established its supply chain, designs, drawings,
engineering, certifications and specifications to comply with the engineering audit processes as dictated by the energy industry regulation
processes and North American regulatory bodies. We have built, delivered and tested, under limited duration and conditions, AOT equipment
on a high-volume commercial pipeline. We believe we have established the commercial viability of this product. Please see ITEM
1A, Risk Factors, for a discussion associated with the commercial viability of our products.
The first commercial deployment
of AOT occurred on the Keystone Pipeline in Udall, Kansas in May 2014, utilizing four AOT pressure vessels in a parallel 4-Pack
configuration for a cumulative capacity of 600,000 barrels per day. This system was operated under normal pipeline operating conditions
as reported in the ATS RheoSystems field test summary report dated February 5, 2015. See section titled Laboratory and Scientific
Testing below for more information on test procedures and results. Subsequent to testing and termination of the TransCanada lease,
the AOT 4-Pack was uninstalled and reconfigured for deployment as four individual AOT units.
Our second AOT commercial
installation was a single AOT deployment initially installed in March 2015 on the Kinder Morgan Crude & Condensate pipeline, which
provides takeaway capacity for the Eagle Ford Shale in South Texas, primarily delivering light crude oil. As discussed in the Overview
section above, equipment was installed limited operations and tests were performed in 2015 and 2016. Based on final analysis of in-field
test results, SCADA operating data and subsequent analysis of crude oil samples at Temple University, it is unlikely Kinder Morgan would
use the AOT at the original test location or other condensate pipeline. Kinder Morgan may consider AOT operations at one of their heavy
crude pipeline locations subject to results of other AOT demonstration projects.
The Company continues to optimize
and value engineer its AOT product line, targeting both midstream and upstream markets. The Company has installed an AOT demonstration
project in cooperation with a major U.S. pipeline operator. As described in the Overview section above, this project has experienced numerous
failures during initial testing which the Company is working to correct. As reported above, the project was removed from the demonstration
site.
**Joule Heat Product Development**
The Company began development
of its Joule Heat product in 2014, based around the new electrical heat system which reduces oil viscosity through a process known as
joule heat, specifically targeting the upstream crude oil transportation market. The Companys first Joule Heat prototype was installed
for testing purposes under a joint development agreement with Newfield Exploration Company in June 2015 and the system was operational;
however, changes to the prototype configuration will be required to determine commercial effectiveness of this unit. In December 2015,
we suspended Joule Heat development activities to focus Company resources on finalizing commercial development of the AOT. We may resume
Joule Heat development in the future depending on the availability of sufficient capital and other resources.
| | 17 | | |
**AOT Commercial Supply Chain**
The Company has developed
a supply chain for fabrication of the commercial AOT. The supply chain consists of multiple component suppliers and manufacturing companies
engaged under Independent Contractor Agreements according to their respective fields of expertise. The supply chain entities have been
chosen for their ability to work collaboratively with QS Energy and for their existing relationships with current and potential future
customers of QS Energy technologies. The external components such as pressure vessels, inlet and outlet piping header systems, personnel
and equipment shelters have been manufactured under contract with Power Service Inc. with offices in Wyoming, Utah, Colorado, Montana,
North Dakota, and Texas. Internal components such as grid packs, electrical connections and other machined parts have been manufactured
by Industrial Screen and Maintenance, with offices in Wyoming and Colorado. All equipment is manufactured in the United States of America,
using only approved raw materials and vendors for quality control and import/export compliance purposes and meet the certifications and
specifications as dictated by our customers and their independent oversight and auditing authorities.
Other components such as power
systems, electrical junction boxes, cabling, hardware, switches, circuit breakers, computer equipment, sensors, SCADA/PLC, software and
other power and integration equipment are purchased as complete units from various suppliers with operations based throughout North America.
All component vendors are required to meet or exceed the same specifications as the parts manufacturers to maintain compliance as dictated
by our customers and their independent oversight and auditing authorities.
**AOT Intellectual Property**
The Company began its own
independent audit process for the updating of its intellectual property portfolio in 2012. The goal of this process was to streamline
unnecessary legacy items left over from prior management, consolidate efforts to countries and regions of interest and retire items that
were no longer valid or had been replaced with new intellectual property developments. In 2013, the Company retained the law firm of Jones
Walker LLP, with operations based in New Orleans, Louisiana and began consolidation and streamlining efforts to manage intellectual properties.
QS Energy is currently maintaining
and licensing from Temple University a portfolio of domestic and international patents, which have either been granted or have been published
and are pending subject to final approval by the respective patent agency. We have amended the licensing agreements with Temple University,
but are not current on payments due thereunder. See Note 6 of financial statements attached hereto for details of the licensing agreements
with Temple University. Each of these intellectual properties are related to QS Energys AOT, Joule Heat and Fuel Injector technologies.
Subject to additional capital funding, we intend actively to continue to develop and market our AOT technology. Development of QS Energys
Fuel Injector and Joule Heat technologies have been suspended. The Company continues to maintain a license agreement with Temple University
with respect to the underlying Fuel Injector patents, and is considering its options to re-start commercialization, sublicense the technology,
or terminate the fuel injector license agreement with Temple. For details of the licensing agreements with Temple University, see Financial
Statements attached hereto, Note 6. Please also see ITEM 1A, Risk Factors below for a discussion of risks associated with these intellectual
properties.
| | 18 | | |
**Current Business Status**
****
As reported above, our AOT
technology had design and operational flaws, and continues to require substantial testing and development, requiring a substantial infusion
of capital in the Company. We can provide no assurances that we will be able to raise additional capital required to continue our efforts
to commercialize our AOT technology. With limited capital, reported above, the Company is currently seeking to correct the failures associated
with its AOT technology. Once operational, the Company plans to analyze and use AOT performance data to re-engage current and new prospective
customers in our primary target North American and South American midstream crude oil markets. See the Overview section above for details.
Throughout 2025 and continuing
through the date of this report, our efforts have been tightly focused on executing our AOT demonstration project strategy. A number of
companies in North America, South America and the Middle East have expressed interest in our technology and a desire to review demonstration
project test results and visit the demonstration site. Assuming successful operations, we believe our AOT project should provide data
requested by prospective customers such as real-time changes in viscosity, pipeline pressure drop reduction and increases in pipeline
operating flowrates. All collected data will be normalized such that it can be used to evaluate the financial and operational benefits
across a wide range of commercial operating scenarios without disclosing confidential details of our operations. We believe that real-world
data from our AOT project could be used to accelerate our desire to achieve commercial adoption of our AOT technology, positioning us
to re-engage with industry executives.
**Laboratory and Scientific Testing**
****
From 2010 through 2013, the
Company worked with the U.S. Department of Energy (US DOE) to test its technology at the Department of Energys Rocky
Mountain Oilfield Testing Center (RMOTC), near Casper, Wyoming. This third-party testing independently verified the efficacy
of the Companys technology operating in a controlled facility, using commercial-scale prototype of our AOT equipment. These tests
were summarized in the US DOE Rocky Mountain Oilfield Test Center report dated April 4, 2012 (ROMRC Report), which reported
AOT measured pressure loss reduction of 40% and viscosity reduction of 40%; and reported observed reductions in line-loss and gains in
pump operation efficiency across the entire length of the 4.4-mile test pipeline. A subsequent long-duration (24-hour) test at the RMOTC
facility tested the effectiveness of AOT in treating oil overnight, as pipeline oil temperatures and viscosities drop. In its report dated
May 3, 2012 to May 4, 2012, US DOE engineers recorded 56% reduction in viscosity of the AOT-treated oil versus untreated oil, with AOT
effectively stabilizing oil viscosity throughout the overnight run despite dropping temperatures.
Laboratory testing of our
AOT technology has been conducted by Dr. Rongjia Tao. Testing of the technology as applied to crude oil transmission has been conducted
at Temple University in their Physics Department, in addition to the US DOE, at their Rocky Mountain Oilfield Testing Center, located
on the Naval Petroleum Reserve #3 Teapot Dome Oilfield, north of Casper, Wyoming. In addition, a group led by Dr. Rongjia Tao, Chairman,
Department of Physics of Temple University conducted experiments, using the laboratory-scale Applied Oil Technology apparatus at the National
Institute of Standards and Technology (NIST) Center for Neutron Research (CNR). NIST is an agency of the U.S. Department of Commerce,
founded in 1901 in Gaithersburg, Maryland.
Independent laboratory testing
was also conducted as a collaborative effort by Temple University and PetroChina Pipeline R&D Center (PetroChina) in
2012. In its report dated June 26, 2012 (PetroChina Report), PetroChina concluded, The above series of tests show
that it is very effective to use AOT to reduce the viscosity of crude oil. We can see that AOT has significantly reduced the viscosity
of Daqing crude oil, Changqing crude oil, and Venezuela crude oil, and greatly improved its flow rate.
| | 19 | | |
As previously reported in
2014, QS Energy installed and tested its commercial AOT equipment, leased and operated by TransCanada on TransCanadas high-volume
Keystone pipeline operation. The first full test of the AOT equipment on the Keystone pipeline was performed in July 2014, with preliminary
data analyzed and reported by Dr. Rongjia Tao of Temple University. Upon review of the July 2014 test results and preliminary report by
Dr. Tao, QS Energy and TransCanada mutually agreed that this initial test was flawed due to, among other factors, the short-term nature
of the test, the inability to isolate certain independent pipeline operating factors such as fluctuations in upstream pump station pressures,
and limitations of the AOT device to produce a sufficient electric field to optimize viscosity reduction. Although Dr. Taos preliminary
report indicated promising results, QS Energy and TransCanada mutually agreed that no conclusions could be reliably reached from the July
2014 test or from Dr. Taos preliminary report. As a result of this test, the Company modified its testing protocols and contracted
with an independent laboratory, ATS RheoSystems, a division of CANNON (ATS), to perform follow-up tests at the TransCanada
facility. This independent laboratory performed viscosity measurements at the TransCanada facility during subsequent testing in September
2014. As detailed in its field test report dated October 6, 2014, ATS measured AOT viscosity reductions of 8% to 23% depending on flow
rates and crude oil types in transit. Over the duration of a 24-hour test intended to measure the recovery of the AOT treated oil from
its reduced-viscosity treated state to its original pre-treated viscosity, ATS measured viscosity reductions of 23% three hours after
treatment and 11% thirteen hours after treatment, with the crude oil returning to its untreated state approximately twenty-two hours after
treatment. In its summary report dated February 5, 2015, 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.
Although, as reported by ATS,
the efficacy of the AOT technology operated in the TransCanada field test was constrained due to limitations of the electric field applied
by that units power supply, subsequent analysis by QS Energy personnel of ATS test results compared against laboratory tests performed
at Temple University on oil samples provided by TransCanada revealed a single test run in which the electric field generated by the AOT
was sufficient to fully treat the oil given operating conditions at the time of the test. In this test run, ATS measured a 23% reduction
in viscosity three hours after AOT treatment. Laboratory tests at Temple University performed on a sample of crude oil provided by TransCanada
of the same type treated in that specific field test measured a 27% reduction in viscosity in the laboratory immediately following treatment.
Allowing for the actual three-hour of recovery time of the field test measurement, the resulting field test viscosity reduction of 23%
correlates very well to the 27% viscosity reduction achieved in the laboratory setting.
Due to the small sample size
of tests performed during the TransCanada field test, results reported by ATS are statistically inconclusive and cannot be relied upon
to provide proof of AOT efficacy. While more testing is required to establish the efficacy of our AOT technology, we are encouraged by
the findings of our independent research laboratory and the results of subsequent comparative analysis of data collected under laboratory
and commercial operating conditions. We look forward to further development and commercialization of our technology. The TransCanada Lease
was terminated by TransCanada, effective October 15, 2014. The Company has modified the design of the AOT power supply such that future
installations of the AOT device are expected to achieve sufficient electric field to optimize viscosity reduction.
The Company contracted Southern
Research Company (SRI) in 2015 to perform independent laboratory tests on its prototype Joule Heat units AOT Upstream units.
SRI performed tests on a prototype Joule Heat unit in September 2015, which showed promising results in which the Joule Heat prototype
was observed to increase crude oil temperatures. In December 2015, we suspended Joule Heat and AOT Upstream development activities to
focus Company resources on finalizing commercial development of the AOT Midstream.
See also our discussion above
in Item 1., under the section labeled Overview (Business).
| | 20 | | |
**Competition**
****
QS Energy's Applied Oil Technology
(AOT) operates within the competitive landscape of crude oil pipeline optimization, where several companies offer solutions aimed at enhancing
pipeline efficiency and reducing operational costs. Key competitors include:
|
|
|
Drag Reducing Agents (DRAs): Companies such as Baker Hughes and LiquidPower Specialty Products Inc. (LSPI) provide DRAs that reduce turbulence in pipelines, thereby improving flow rates. DRAs are widely adopted in the industry and serve as a conventional method for enhancing pipeline throughput. | |
|
|
|
| |
|
|
|
Pipeline Heating Systems: Firms like Chromalox offer pipeline heating solutions designed to reduce the viscosity of crude oil by maintaining elevated temperatures, facilitating smoother flow through pipelines. These systems are particularly effective in colder regions where low temperatures can significantly increase oil viscosity. | |
|
|
|
| |
|
|
|
Ultrasonic and Mechanical Devices: Companies such as Applus+ RTD have developed ultrasonic technologies aimed at improving pipeline flow by reducing friction and preventing buildup within the pipeline. These mechanical interventions provide alternative methods for enhancing flow efficiency without chemical additives. | |
While these competitors offer
established solutions, QS Energy's AOT distinguishes itself through its innovative approach:
|
|
|
Electrostatic Technology: AOT employs a high-voltage, low-amperage electric field to reduce crude oil viscosity, enhancing pipeline throughput without the need for chemical additives or significant thermal input. | |
|
|
|
| |
|
|
|
Environmental and Economic Benefits: By reducing viscosity electrically, AOT aims to lower energy consumption and operational costs associated with pipeline transportation, potentially offering a more environmentally friendly and cost-effective solution compared to traditional methods. | |
As QS Energy progresses towards
the commercialization of AOT, understanding the competitive landscape is crucial for strategic positioning. The company's focus on leveraging
electrostatic technology to address viscosity reduction presents a unique value proposition in the pipeline optimization market.
**Government Regulation and Environmental Matters**
****
Our research and development
activities are not subject to any governmental regulations that would have a significant impact on our business and we believe that we
are in compliance with all applicable regulations that apply to our business as it is presently conducted. Our products, as such, are
not subject to certification or approval by the EPA or other governmental agencies domestically or internationally. Depending upon whether
we manufacture or license our products in the future and in which countries such products are manufactured or sold, we may be subject
to regulations, including environmental regulations, at such time.
| | 21 | | |
****
**Non-Disclosure Agreements**
****
To protect our intellectual
property, we have entered into agreements with certain employees and consultants, which limit access to, and disclosure or use of, our
technology. There can be no assurance, however, that the steps we have taken to deter misappropriation of our intellectual property or
third-party development of our technology and/or processes will be adequate, that others will not independently develop similar technologies
and/or processes or that secrecy will not be breached. In addition, although management believes that our technology has been independently
developed and does not infringe on the proprietary rights of others, there can be no assurance that our technology does not and will not
so infringe or that third parties will not assert infringement claims against us in the future. Management believes that the steps they
have taken to date will provide some degree of protection; however, no assurance can be given that this will be the case.
**Employees**
****
As of December 31, 2025, in
addition to the Companys CEO/CFO, the Company had one full-time employee. We also utilized the services of part-time consultants
and independent contractors on an as-needed basis to assist us with various matters, includingengineering, logistics, investor relations,
public relations, accounting and sales and marketing. We intend to hire additional personnel to provide services when they are needed
on a full-time basis. We recognize that our efficiency largely depends, in part, on our ability to hire and retain additional qualified
personnel as and when needed and we have adopted procedures to assure our ability to do so.
**Item 1A. Risk Factors**
****
**We have a history of losses,
and we cannot assure you that we will ever become or remain profitable. As a result, you may lose your entire investment.**
****
We generated insignificant
revenues from operations in late 2006 and subsequently did not generate any revenues until 2014, and thereafter we have generated no revenues,
and we have incurred recurring net losses every year since our inception in 1998. For the fiscal years ended December 31, 2025 and 2024,
we had net losses of $15,305,000 and $1,934,000 respectively. To date, we have dedicated most of our financial resources to research and
development, general and administrative expenses (including the payment of salaries and bonuses) and initial sales and marketing activities.
We have funded all of our activities through sales of our debt and equity securities for cash. We anticipate net losses and negative cash
flow to continue until such time as our products are brought to market in sufficient amounts to offset operating losses. Our ability to
achieve profitability is dependent upon our continuing research and development, product development, and sales and marketing efforts,
to deliver viable products and the Companys ability to successfully bring them to market. Although our management is optimistic
that we will succeed in marketing products incorporating our technologies, there can be no assurance that we will ever generate significant
revenues or that any revenues that may be generated will be sufficient for us to become profitable or thereafter maintain profitability.
If we cannot generate sufficient revenues or become or remain profitable, we may have to cease our operations and liquidate our business.
**There is substantial doubt
about our ability to continue as a going concern, which may hinder our ability to obtain future financing.**
****
During the year ended December
31, 2025, we incurred a net loss of $15,305,000 and used cash in operations of $4,008,000 and had a stockholders deficit of $5,780,000
as of December 31, 2025. As a result, management has concluded, and our independent registered public accounting firm has agreed with
our conclusion that there is a substantial doubt regarding the Companys ability to continue as a going concern for a period of
at least 12 months beyond the filing of this Annual Report on Form 10-K. As a result, the report of our independent registered public
accounting firm on our financial statements for the year ended December 31, 2025, includes an explanatory paragraph regarding the existence
of substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is subject to our ability
to obtain significant additional capital to fund our operations and to generate revenue from sales, of which there is no assurance. If
we fail to raise sufficient capital, we may have to liquidate our business and you may lose your investment.
| | 22 | | |
**Since we have not yet begun
to generate positive cash flow from operations, our ability to continue operations is dependent on our ability to either begin to generate
positive cash flow from operations or our ability to raise capital from outside sources.**
****
We have not generated cash
flow from operations since our inception in February 1998 and have relied on external sources of capital to fund operations. We had $6,000
in cash at December 31, 2025 and used cash in operations of $4,008,000 (a substantial portion of which has been used to pay salaries and
bonuses to employees and consultants) for the year ended December 31, 2025.
We currently do not have credit
facilities available with financial institutions or other third parties, and historically have relied upon best efforts third-party funding.
Though we have been successful at raising capital on a best-efforts basis in the past, we can provide no assurance that we will be successful
in any future best-efforts financing endeavors. We will need to continue to rely upon financing from external sources to fund our operations
for the foreseeable future. If we are unable to raise sufficient capital from external sources to fund our operations, we may need to
curtail operations.
**We will need substantial
additional capital to meet our operating needs, and we cannot be sure that additional financing will be available.**
****
During fiscal 2025, our cash
burn rate amounted to approximately $334,000 per month (a substantial portion of which has been used to pay salaries and bonuses to employees
and consultants) and could increase during the remainder of fiscal 2026. In order to fund our capital needs, we conducted private offerings
of our securities in 2024 and 2025. While discussion regarding additional interim and permanent financings are being actively conducted,
management cannot predict with certainty that an equity line of credit will be available to provide adequate funds, or any funds at all,
or whether any additional interim or permanent financings will be available at all or, if it is available, if it will be available on
favorable terms. If we cannot obtain needed capital, our research and development, and sales and marketing plans, business and financial
condition and our ability to reduce losses and generate profits will be materially and adversely affected.
****
Our business prospects are
difficult to predict because of our limited operating history, early stage of development and unproven business strategy. Since our incorporation
in 1998, we have been and continue to be involved in development of products using our technology, establishing manufacturing and marketing
of these products to consumers and industry partners. Although we believe our technology and products in development have significant
profit potential, we may not attain profitable operations and our management may not succeed in realizing our business objectives.
**If we are not able to devote
adequate resources to product development and commercialization, we may not be able to develop our products.**
****
Our business strategy is to
develop, manufacture and market products incorporating our AOT technology. We believe that our revenue growth and profitability, if any,
will substantially depend upon our ability to raise additional necessary capital for research and development, complete development of
our products in development and successfully introduce and commercialize our products.
**If we are not able to devote
adequate resources to product development and commercialization, we may not be able to develop our products.**
****
Our business strategy is to
develop, manufacture and market products incorporating our AOT technology. We believe that our revenue growth and profitability, if any,
will substantially depend upon our ability to raise additional necessary capital for research and development, complete development of
our products in development and successfully introduce and commercialize our products.
Certain of our products are
still under various stages of development. Because we have limited resources to devote to product development and commercialization, any
delay in the development of one product or reallocation of resources to product development efforts that prove unsuccessful may delay
or jeopardize the development of other product candidates. Although our management believes that it may finance our product development
through private placements and other capital sources, if we do not develop new products and bring them to market, our ability to generate
revenues will be adversely affected.
| | 23 | | |
****
**The commercial viability
of QS Energys technologies remains largely unproven and we may not be able to attract customers.**
****
Despite the fact that we leased
AOT equipment in 2014 to a major oil pipeline operator and tested the equipment on their high-volume pipeline under normal operating conditions,
entered into a lease agreement with a second major oil pipeline operator to operate and test AOT equipment in 2015, and have initiated
a project to demonstrate our AOT technology on a commercial pipeline in 2019, the commercial viability of our devices is not known at
this time. If commercial opportunities are not realized from the use of products incorporating the AOT technology, our ability to generate
revenue would be adversely affected. There can be no assurances that we will be successful in marketing our products, or that customers
will ultimately purchase our products. Failure to have commercial success from the sale of our products will significantly and negatively
impact our financial condition. There can be no assurances that we will be successful in****marketing our products, or
that customers will ultimately purchase our products. Failure to have commercial success from the sale of our products will significantly
and negatively impact our financial condition.
**If our products and services
do not gain market acceptance, it is unlikely that we will become profitable and it is unlikely that we will be able to stay in business.**
****
At this time, our technology
is commercially unproven, and the use of our technology by others is limited. Specific examples of use to date include:
|
|
|
Temple University, testing, research and joint development; | |
|
|
|
| |
|
|
|
U.S. Department of Energy Rocky Mountain Oilfield Testing Center, testing and research; | |
|
|
|
| |
|
|
|
PetroChina Pipeline R&D Center, testing and research; | |
|
|
|
| |
|
|
|
TransCanada, short-term testing; | |
|
|
|
| |
|
|
|
Kinder Morgan Crude and Condensate, short-term testing; | |
|
|
|
| |
|
|
|
On-site short-term testing of a laboratory-scale AOT at a Canadian oil producers facility in Alberta Canada. | |
|
|
|
| |
|
|
|
A demonstration project in cooperation with a commercial pipeline operator in the Southern United States | |
The commercial success of
our products will depend upon the adoption of our technology by the oil industry. Market acceptance will depend on many factors, including:
|
|
|
the willingness and ability of consumers and industry partners to adopt new technologies; | |
|
|
|
our ability to convince potential industry partners and consumers that our technology is an attractive alternative to other technologies; | |
|
|
|
our ability to manufacture products and provide services in sufficient quantities with acceptable quality and at an acceptable cost; and, | |
|
|
|
our ability to place and service sufficient quantities of our products. | |
If our products do not achieve
a significant level of market acceptance, demand for our products will not develop as expected and it is unlikely that we will become
profitable, and unlikely that we will be able to stay in business.
| | 24 | | |
**We outsource and rely on
third parties for the manufacture of our products.**
****
Our business model calls for
the outsourcing of the manufacture of our products in order to reduce our capital and infrastructure costs, capital expenditure and personnel.
Accordingly, we must enter into agreements with other companies that can assist us and provide certain capabilities that we do not possess,
and to increase our manufacturing capacity as necessary. We can provide no assurances that any such outsourcing will be at commercially
acceptable rates or profitable. Moreover, we do not have the required financial and human resources or capability to manufacture, market
and sell our products. Our business model calls for the outsourcing of the manufacture, and sales and marketing of our products in order
to reduce our capital and infrastructure costs as a means of potentially improving our financial position and the profitability of our
business. Accordingly, we must enter into agreements with other companies that can assist us and provide certain capabilities that we
do not possess. We may not be successful in entering into additional such alliances on favorable terms or at all. Furthermore, any delay
in entering into agreements could delay the development and commercialization of our products and reduce their competitiveness even if
they reach the market. Any such delay related to our existing or future agreements could adversely affect our business.
**If any party to which we
have outsourced certain functions fails to perform its obligations under agreements with us, the development and commercialization of
our products could be delayed or curtailed.**
****
To the extent that we rely
on other companies to manufacture, sell or market our products, we will be dependent on the timeliness and effectiveness of their efforts.
If any of these parties do not perform its obligations in a timely and effective manner, the commercialization of our products could be
delayed or curtailed because we may not have sufficient financial resources or capabilities to continue such development and commercialization
on our own.
**Any revenues that we may
earn in the future are unpredictable, and our operating results are likely to fluctuate from quarter to quarter.**
****
We believe that our future
operating results will fluctuate due to a variety of factors, including delays in product development, market acceptance of our new products,
changes in the demand for and pricing of our products, competition and pricing pressure from competitive products, manufacturing delays
and expenses related to and the results of proceedings relating to our intellectual property.
A large portion of our expenses,
including salaries, bonuses, expenses for our facilities, equipment and personnel, is relatively fixed and not subject to further significant
reduction. In addition, we expect our operating expenses will increase in the future as we continue our commercialization efforts and
increase our production and marketing activities, among other activities. Although we expect to generate revenues from sales of our products,
revenues may decline or not grow as anticipated and our operating results could be substantially harmed for a particular fiscal period.
Moreover, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our
stock price most likely would decline.
**Nondisclosure agreements
with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.**
****
In order to protect our proprietary
technology and processes, we rely in part on nondisclosure agreements with our employees, licensing partners, customers, consultants,
agents and other organizations to which we disclose our proprietary information. These agreements may not effectively prevent disclosure
of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.
In addition, others may independently discover trade secrets and proprietary information, and in such cases, we could not assert any trade
secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Since we rely on trade secrets and nondisclosure agreements, in addition to patents, to protect some of our intellectual property, there
is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not
be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights.
| | 25 | | |
**The manufacture, use or
sale of our current and proposed products may infringe on the patent rights of others, and we may be forced to litigate if an intellectual
property dispute arises.**
****
We have taken measures to
protect ourselves from infringing on the patent rights of others; however, if we infringe or are alleged to have infringed another partys
patent rights, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court.
Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion.
In addition, if we do not obtain a license, do not successfully defend an infringement action or are unable to have infringed patents
declared invalid, we may incur substantial monetary damages ,encounter significant delays in marketing our current and proposed product
candidates, be unable to conduct or participate in the manufacture, use or sale of product, candidates or methods of treatment requiring
licenses, lose patent protection for our inventions and products; or find our patents are unenforceable, invalid, or have a reduced scope
of protection.
Parties making such claims
may be able to obtain injunctive relief that could effectively block our ability to further develop or commercialize our current and proposed
product candidates in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or failure
to obtain any such license could substantially harm the company. Litigation, regardless of outcome, could result in substantial cost to
and a diversion of efforts by the Company to operate its business.
****
**We may face costly intellectual
property/ license agreements disputes.**
****
Our ability to compete effectively
will depend in part on our ability to develop and maintain proprietary aspects of our technologies and either to operate without infringing
the proprietary rights of others or to obtain rights to technology owned by third parties. Our pending patent applications, specifically
patent rights of the AOT technology and Joule Heating process may not result in the issuance of any patents or any issued patents that
will offer protection against competitors with similar technology. Patents we have licensed for our technologies, and which we may receive,
may be challenged, invalidated or circumvented in the future or the rights created by those patents may not provide a competitive advantage.
We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may
independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. See
Note 6 of our financial statements attached hereto for a discussion and status of our license agreements with Temple University.
**Changes in governmental
regulations and policies may affect export of our technologies.**
****
The Company recognizes domestic
and foreign governmental actions, including but not limited to trade restrictions and tariffs, the current war in the Middle East leading
to the disruption of oil and gas production and the worldwide transport of oil and gas, may adversely affect our ability to export our
technologies, or may adversely affect the economics of cross-border transactions.
**We may not be able to attract
or retain qualified senior personnel.**
****
We believe we are currently
able to manage our current business with our existing management team. However, as we expand the scope of our operations, we will need
to obtain the full-time services of additional senior management and other personnel. Competition for highly skilled personnel is intense,
and there can be no assurance that we will be able to attract or retain qualified senior personnel. Our failure to do so could have an
adverse effect on our ability to implement our business plan. As we add full-time senior personnel, our overhead expenses for salaries
and related items will increase compensation packages, these increases could be substantial.
| | 26 | | |
**If we lose our key personnel
or are unable to attract and retain additional personnel, we may be unable to achieve profitability.**
****
Our future success is substantially
dependent on the efforts of our senior management. The loss of the services of members of our senior management may significantly delay
or prevent the achievement of product development and other business objectives. Because of the scientific nature of our business, we
depend substantially on our ability to attract and retain qualified marketing, scientific and technical personnel, including consultants.
If we lose the services of, or do not successfully recruit key marketing, scientific and technical personnel, the growth of our business
could be substantially impaired. We do not maintain key man insurance for any of these individuals.
****
**Currently, there is only
very limited trading in our stock, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your
shares.**
****
The shares of our common stock
are thinly traded on the OTC Bulletin Board (pink sheets), meaning that the number of persons interested in purchasing our common shares
at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors,
including the fact that we are a small company with no revenue, engaged in a high-risk business which is relatively unknown to stock analysts,
stock brokers, institutional investors and others in the investment community that can generate or influence daily trading volume and
valuation. Should we even come to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven,
early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.
As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared
to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous trading without negatively
impacting share price. We cannot provide any assurance that a broader or more active public trading market for shares of our common stock
will develop or be sustained. Due to these conditions, we cannot give any assurance that shareholders will be able to sell their shares
at or near bid prices or at all.
**The market price of our
stock is volatile.**
****
The market price for our common
stock has been volatile during the last year, ranging from a closing price of $0.12 on June 10, 2025 to a closing price of $0.33 on March
28,2025, and a closing price of $0.10 on March 27, 2026. See Part II, item 5, below. Additionally, the price of our stock has been both
higher and lower than those amounts on an intra-day basis in the last year. Because our stock is thinly traded, its price can change dramatically
over short periods, even in a single day. The market price of our common stock could fluctuate widely in response to many factors, including,
developments with respect to patents or proprietary rights, announcements of technological innovations by us or our competitors, announcements
of new products or new contracts by us or our competitors, actual or anticipated variations in our operating results due to the level
of development expenses and other factors, changes in financial estimates by securities analysts and whether any future earnings of ours
meet or exceed such estimates, conditions and trends in our industry, new accounting standards, general economic, political and market
conditions and other factors.
**Substantial sales of common
stock could cause our stock price to fall.**
****
In the past year, there have
been times when average daily trading volume of our common stock has been extremely low, and there have been many days in which no shares
were traded at all. At other times, the average daily trading volume of our common stock has been high. Nevertheless, the possibility
that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for our common
stock and could impair a shareholders ability to sell our stock or our ability to raise capital through the sale of our equity
securities.
**Potential issuance of additional
shares of our common stock could dilute existing stockholders.**
****
Effective February 14, 2025,
we are authorized to issue up to 750,000,000 shares of common stock and up to 100,000,000 of preferred stock. To the extent of such authorization,
our Board of Directors has the ability, without seeking stockholder approval, to issue additional shares of common stock or preferred
stock in the future for such consideration as the Board of Directors may consider sufficient. The issuance of additional common stock
or preferred stock in the future may reduce the proportionate ownership and voting power of shareholders.
| | 27 | | |
**We may not be successful in identifying, making,
financing, and integrating acquisitions.**
****
Currently, a minor component
of our business strategy is to make selective acquisitions that will strengthen our core services or presence in selected markets. The
success of this strategy will depend, among other things, on our ability to identify suitable acquisition candidates, to obtain acceptable
financing, to timely and successfully integrate acquired businesses or assets and to retain the key personnel and the customer base of
acquired businesses. Any future acquisitions could present a number of risks, including but not limited to:
|
|
|
incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets; | |
|
|
|
| |
|
|
|
failure to integrate successfully the operations or management of any acquired operations or assets in a timely manner; | |
|
|
|
| |
|
|
|
failure to retain or attract key employees; and | |
|
|
|
| |
|
|
|
diversion of managements attention from existing operations or other priorities. | |
If we are unable to identify,
make and successfully integrate acquired businesses, it could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
**Our common stock is subject
to penny stock regulation, which may make it more difficult for us to raise capital.**
****
Our common stock is considered
penny stock under SEC regulations. It is subject to rules that impose additional sales practice requirements on broker-dealers who sell
our securities. For example, broker-dealers must make a suitability determination for the purchaser, receive the purchasers written
consent to the transaction prior to sale, and makespecial disclosures regarding sales commissions, current stock price quotations,
recent price information and information on the limited market in penny stock. Because of these additional obligations, some broker-dealers
may not affect transactions in penny stocks, which may adversely affect the liquidity of our common stock and shareholders ability
to sell our common stock in the secondary market. This lack of liquidity may make it difficult for us to raise capital in the future.
**Cyber Security and Information
Technology Risks.**
We rely on our information
technology (IT) in connection with our efforts to commercialize our AOT technology. However, at this time, we have no process,
including Board oversight, to assess, identify, and manage material risks from cybersecurity threats. If there would be a significant
problem with our IT infrastructure, such as an IT system failure or system disruption, it could halt or delay our ability to develop and
commercialize our AOT technology. Remote work by our personnel and remote access to our systems have also increased, which could increase
our cybersecurity risk profile. We believe our cybersecurity risks will further increase when, and if, we commercialize our AOT technology.
Hacking, phishing attacks, ransomware, insider threats, physical breaches or other actions may cause our confidential and proprietary
information to be stolen or misused. We currently are unable to anticipate any of these actions, and if such actions occur, we would not
be able to react to or cure them in a timely manner, which would have a material adverse effect on our business and technology. Cyber
attacks and security breaches may also persist undetected over extended periods of time and may not be mitigated in a timely manner to
minimize the impact of such a cyber attack or security breach. Any significant cybersecurity incident could expose us to risks of litigation
and liability, disrupt our business, or otherwise have a material adverse effect on our business and efforts to commercialize our AOT
technology.
| | 28 | | |
**Item1B. Unresolved Staff Comments**
****
None.
**Item 1C. Cybersecurity**
**Risk Management and Strategy**
We are subject to cyber and
other security threats, including potential threats to gain access to our confidential, private, and proprietary information. However,
we have not established at this time any policies, standards, processes, or practices, including Board oversight, to assess, identify,
and manage material risks from cybersecurity threats. (See Risk Factors, in Item 1A, above.) As of the date of this report,
we are not aware of any cybersecurity threats that would materially affect, or would reasonably likely materially affect our business
or our efforts to commercialize our AOT technology. We can provide no assurances that there will not be cyberattacks in the future or
that any such attacks would not materially affect our business or efforts to commercialize our AOT technology.
**Item2. Properties**
The Companys executive
offices are located in Tomball, Texas (Tomball Facility) and leased on a month to month basis at $1,000 per month. Total
rent expense under this lease for the years ended December 31, 2025 and 2024 was $12,000 and $12,000, respectively. The Company also rents
a storage facility in Laurel, Mississippi on a month-to-month basis for $250 per month. The Company reimburses Cecil Bond Kyte, Company
CEO and CFO, in rent expenses for a home office and partial storage space in Carson City, Nevada at a rate of $1,000 per month under a
month-to-month rental agreement (Carson Rental Agreement). Total rent expense under the Carson Rental Agreement during the
years ended December 31, 2025, and 2024 were $3,000 and $12,000, respectively which are included as part of Operating Expenses in the
attached consolidated statement of operations.
We believe our facilities
are adequate to meet our current and near-term needs.
**Item3. Legal Proceedings**
****
We are not subject to any
litigation or legal proceedings.
**Item4. Mine Safety Disclosures**
****
None.
| | 29 | | |
****
**PART
II**
****
**Item5. Market for Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities**
****
Effective August 11, 2015,
the Company changed its name to QS Energy, Inc., and changed its trading symbol to QSEP. The following table sets forth
the high and low bid prices of the Companys common stock for the quarters indicated as quoted in the Pink Sheets as reported by
Yahoo Finance. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual
transactions.
|
|
|
2025 |
|
|
2024 |
| |
|
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
| |
|
First Quarter |
|
$ |
0.40 |
|
|
$ |
0.13 |
|
|
$ |
0.08 |
|
|
$ |
0.05 |
| |
|
Second Quarter |
|
$ |
0.35 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
| |
|
Third Quarter |
|
$ |
0.32 |
|
|
$ |
0.18 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
| |
|
Fourth Quarter |
|
$ |
0.30 |
|
|
$ |
0.12 |
|
|
$ |
0.18 |
|
|
$ |
0.18 |
| |
According to the records of
our transfer agent, we had approximately 1,000 stockholders of record of our common stock at February 16, 2026. The Company believes that
the number of beneficial owners of our common stock is substantially higher than this amount.
We do not pay a dividend on
our common stock and we currently intend to retain future cash flows to finance our operations and fund the growth of our business. Any
payment of future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings,
financial condition, capital requirements, level of indebtedness, contractual restrictions in respect to the payment of dividends and
other factors that our Board of Directors deems relevant.
All of the shares issued by
the Company discussed below were issued in non-public offerings without SEC registration in reliance on exemptions from registration contained
in Section 4(a)(2) of the Securities Act of 1933, as amended (Securities Act) and other applicable exemptions under the
Securities Act.
**Issuances of Unregistered Securities in Current Fiscal
Year**
During the year ended December
31, 2025, the Company issued an aggregate of 114,925,716 shares of its common stock as follows:
|
|
|
The Company issued 65,523,469 shares of its common stock upon the conversion of $3,344,000 in convertible notes and $607,000 of accrued interest, net of unamortized discount of $1,572,000, pursuant to convertible notes conversion prices of $0.02 to $0.15 per share. | |
|
|
|
| |
|
|
|
The Company issued 36,802,254 shares of its common stock upon the exercise of options and warrants at $0.02 to $0.15 per share, for total proceeds of $908,000. | |
|
|
|
| |
|
|
|
The Company issued 2,049,993 shares of its common stock upon the cashless exercise of warrants at $0.03 to $0.15 per share for $104,000, which were applied to the settlement of accounts payable. | |
|
|
|
| |
|
|
|
The Company issued 9,050,000 shares of its common stock for services of $1,451,000 valued at $0.04 to $0.19 per share based on the closing price of the Companys common stock on the dates granted. | |
|
|
|
| |
|
|
|
The Company issued convertible notes in aggregate value of $2,515,000 for net proceeds of $2,285,000, convertible into 31,423,615 shares in common stock of the Company at a conversion price of $0.08 per share, and in connection with these notes, issued warrants to purchase 31,423,615 shares of common stock of the Company at an exercise price of $0.10 per share and expiring one year from the date of issuance, summarized by month as follows: | |
****
****
****
| | 30 | | |
****
**Shares of Common Stock Issuable upon conversion
of Notes Issued in 2025**
|
Month of Issuance |
|
Principal amount of convertible notes |
|
|
Conversion
Price |
|
Shares of common
Stock issuable upon
Conversion of Principal |
| |
|
January 2025 |
|
$ |
162,000 |
|
|
$0.08 per share |
|
|
2,025,690 |
| |
|
February 2025 |
|
|
693,000 |
|
|
$0.08 per share |
|
|
8,658,732 |
| |
|
March 2025 |
|
|
604,000 |
|
|
$0.08 per share |
|
|
7,542,809 |
| |
|
April 2025 |
|
|
333,000 |
|
|
$0.08 per share |
|
|
4,163,718 |
| |
|
May 2025 |
|
|
292,000 |
|
|
$0.08 per share |
|
|
3,643,432 |
| |
|
June 2025 |
|
|
431,000 |
|
|
$0.08 per share |
|
|
5,389,212 |
| |
|
|
|
|
2,515,000 |
|
|
|
|
|
31,423,593 |
| |
**Issuances of Unregistered Securities in Prior Fiscal
Year**
During the year ended December
31, 2024, the Company issued an aggregate of 35,838,409 shares of its common stock as follows:
|
|
|
The Company issued 32,341,748 shares of its common stock upon the conversion of $1,034,000 in convertible notes, net of unamortized discount of $699,000, pursuant to convertible notes conversion prices of $0.03 to $0.05 per share. | |
|
|
|
| |
|
|
|
The Company issued 1,063,332 shares of its common stock upon the exercise of warrants at $0.04 to $0.07 per share, for total proceeds of $52,000. | |
|
|
|
| |
|
|
|
The Company issued 433,329 shares of its common stock upon the cashless exercise of warrants at $0.02 to $0.06 per share for $18,000, which were applied to the settlement of accounts payable. | |
|
|
|
| |
|
|
|
The Company issued 2,000,000 shares of its common stock upon services with a fair value of $140,000, at $0.07 per share. | |
|
|
|
| |
|
|
|
The Company issued convertible notes in aggregate value of $1,353,000 for net proceeds of $1,230,000, convertible into 42,457,348 shares in common stock of the Company at a conversion price of $0.03 to $0.05 per share, and in connection with these notes, issued warrants to purchase 42,457,348 shares of common stock of the Company at an exercise price of $0.04 to $0.07 per share and expiring one year from the date of issuance, summarized by month as follows: | |
| | 31 | | |
**Shares of Common Stock Issuable upon conversion
of Notes Issued in 2024**
|
Month of Issuance |
|
Principal amount of convertible notes |
|
|
Conversion
Price |
|
Shares of common
Stock issuable upon
Conversion of Principal |
| |
|
March 2024 |
|
$ |
161,000 |
|
|
$0.05 per share |
|
|
3,212,000 |
| |
|
May 2024 |
|
|
23,000 |
|
|
$0.03 per share |
|
|
770,000 |
| |
|
June 2024 |
|
|
92,000 |
|
|
$0.03 per share |
|
|
3,080,000 |
| |
|
July 2024 |
|
|
115,000 |
|
|
$0.03 per share |
|
|
3,816,999 |
| |
|
August 2024 |
|
|
73,000 |
|
|
$0.03 per share |
|
|
2,425,573 |
| |
|
September 2024 |
|
|
68,000 |
|
|
$0.03 per share |
|
|
2,273,837 |
| |
|
October 2024 |
|
|
197,000 |
|
|
$0.03 per share |
|
|
6,580,292 |
| |
|
November 2024 |
|
|
289,000 |
|
|
$0.03 per share |
|
|
9,633,047 |
| |
|
December 2024 |
|
|
17,000 |
|
|
$0.03 per share |
|
|
550,000 |
| |
|
|
|
$ |
1,035,000 |
|
|
|
|
|
32,341,748 |
| |
****
**Item 6. Selected Financial Data**
****
None.
****
**Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operation**
****
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 Item 7 of this Form 10-K.
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 above in Part I, Item 1 and elsewhere in
this Form 10-K, particularly in Risk Factors, that could cause actual results to differ materially from those projected.
Unless otherwise expressly indicated, the information set forth in this Form10-K is as of December31, 2025, and we undertake
no duty to update this information.
****
****
****
****
****
| | 32 | | |
****
**Overview**
****
The Company has not generated
significant revenues since its inception in February 1998. We continue to devote the bulk of our efforts to the promotion, design, testing
and the commercial manufacturing and operations of our crude oil pipeline products in the upstream and midstream energy sector. We anticipate
that these efforts will continue during 2025.
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 raised capital in 2025 and also need to raise substantial additional capital in 2026, and possibly beyond,
to fund our sales and marketing efforts, continuing research and development, and certain other expenses, until our revenue base grows
sufficiently.
**Results of Operation**
****
**QS ENERGY, INC.**
**CONSOLIDATED STATEMENTS OF OPERATIONS**
|
| |
Year ended | | |
|
| |
2025 | | |
2024 | | |
Change | | |
% Change | | |
|
Revenues | |
$ | | | |
$ | | | |
$ | | | |
| | | |
|
| |
| | | |
| | | |
| | | |
| | | |
|
Operating expenses | |
| 13,312,000 | | |
| 1,385,000 | | |
| 11,927,000 | | |
| 861 | % | |
|
Research and development expenses | |
| 1,611,000 | | |
| 191,000 | | |
| 1,420,000 | | |
| 743 | % | |
|
Loss from operations | |
| (14,923,000 | ) | |
| (1,576,000 | ) | |
| (13,347,000 | ) | |
| (846 | %) | |
|
| |
| | | |
| | | |
| | | |
| | | |
|
Other | |
| 7,000 | | |
| | | |
| 7,000 | | |
| | | |
|
Interest and financing expense | |
| (389,000 | ) | |
| (358,000 | ) | |
| 31,000 | | |
| 9 | % | |
|
Net Loss | |
$ | 15,305,000 | | |
$ | (1,934,000 | ) | |
$ | (13,371,000 | ) | |
| 691 | % | |
**Revenue Comparison, 2025 and 2024**
The Company recognized no
revenues during the twelve-month periods ended December 31, 2025 and December 31, 2024.
**Operating Expense Comparison, 2025 and 2024**
Operating expenses were $13,312,000
for the fiscal year ended December 31, 2025, compared to $1,385,000 for the fiscal year ended December 31, 2024, an increase of $11,927,000.
This increase was attributable to increases in non-cash compensation expenses of $9,317,000 and other expenses of $2,610,000. Specifically,
the increase in non-cash expenses is attributable to an increase in stock compensation expense attributable to common stock and warrants
issued for services of $2,747,000, options issued for reinstatement of the Companys Director Compensation Policy of $2,594,000,
and common stock issued as compensation of $3,976,000. The increase in other expenses is attributable to increases in salaries and benefits
of $1,648,000, consulting fees of $633,000, legal and accounting fees of $132,000, corporate expenses of $86,000, insurance expenses of
$82,000, travel expenses of $22,000, office expenses of $21,000, market fees of $8,000, auto expenses of $7,000, depreciation expenses
of $2,000, meals and entertainment expenses of $2,000, and other expenses of $2,000, offset by decreases in patent maintenance expenses
of $29,000, public and investor relations of $3,000, and rent expenses of $3,000.
Research and development expenses
were $1,611,000 for the fiscal year ended December 31, 2025, compared to $191,000 for the fiscal year ended December 31, 2024, an increase
of $1,420,000. This increase is attributable to AOT prototype and demonstration project development costs.
Interest expenses were $389,000
for the fiscal year ended December 31, 2025, compared to $358,000 for the fiscal year ended December 31, 2024, an increase of $31,000.
This increase is attributable to an increase in interest and financing expense of $31,000 to account for the accrual of interest on past
due convertible notes and the amortization of debt discount related to our convertible notes.
We had a net loss of $15,305,000
or $0.03 loss per share for the fiscal year ended December 31, 2025 compared to a net loss of $1,934,000 or $0.00 loss per share for the
fiscal year ended December 31, 2024.
| | 33 | | |
**Liquidity and Capital Resources**
****
**Going concern**
We have incurred negative
cash flow from operations since our inception in 1998. As of December31, 2025, we had cash of $6,000 and a stockholders deficit
of $5,780,000. Our operating cash flow in 2025 was funded primarily through cash reserves, the exercise of stock purchase warrants for
cash, and the issuance of convertible notes for cash.
During the year ended December
31, 2025, the Company had a net loss of $15,305,000 and used cash in operations of $4,008,000. In addition, as of December 31, 2025, 51
notes payable with an aggregate balance of $1,116,000 and certain obligation to a former officer are past due. As a result, management
has concluded, and our independent registered public accounting firm has agreed with our conclusion that there is a substantial doubt
regarding the Companys ability to continue as a going concern for a period of at least 12 months beyond the filing of this Annual
Report on Form 10-K. The report of our independent registered public accounting firm on our financial statements for the year ended December
31, 2025, includes an explanatory paragraph regarding the existence of substantial doubt about our 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.
At December 31, 2025, the
Company had cash on hand in the amount of $6,000. In January and February 2026, the Company issued 4,718,188 shares of its common stock
upon the exercise of warrants for proceeds of $472,000 at an exercise price of $0.10 per share. Management estimates that the current
funds on hand will be sufficient to continue operations through March 31, 2026. Management is currently seeking additional funds, primarily
through the issuance of debt and equity securities for cash to operate our business, including without limitation the expenses it will
incur in connection with the license agreements with Temple; costs associated with product development and commercialization of the AOT
technology; costs to manufacture and ship the products; costs to maintain 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
certain payments to a former officer, during the remainder of 2024 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.
| | 34 | | |
**Contractual Obligations**
****
The Companys contractual
commitments for future periods, including minimum guaranteed compensation payments and other agreements as described in the following
table and associated footnotes:
|
Year ending
December 31, |
|
License
Agreements (1) |
|
|
Compensation
Agreements (2) |
|
|
Total
Obligations |
| |
|
2026 |
|
|
3,167,000 |
|
|
|
|
|
|
|
3,167,000 |
| |
|
2027 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2028 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2029 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2030 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
$ |
3,167,000 |
|
|
$ |
197,000 |
|
|
$ |
3,167,000 |
| |
___________________
|
|
(1) |
Temple University Licensing Agreement-amount past
due
On August 1, 2011, the Company entered into two
Exclusive License Agreements with Temple University (Temple), referred to as the AOT-1 Agreement and the AOT-2
Agreement (collectively, the License Agreements). Effective as of September 26, 2025, the Company and Temple executed
Amendment No. 2 to the AOT-1 Agreement and Amendment No. 1 to the AOT-2 Agreement, under which the Company and Temple agreed that total
outstanding fees due to Temple through July 31, 2025, were $2,236,000 and $931,000, respectively, for an aggregate amount of $3,167,000
(collectively, the Outstanding Amounts). The Outstanding Amounts were required to be paid by October 11, 2025. As of the
date of this filing, the Outstanding Amounts have not been paid to Temple. | |
|
|
|
| |
|
|
(2) |
Consists of certain contractually provided benefits to a former executive officer pursuant to a severance agreement and amendments thereto. The balance due as of December 31, 2025, of $197,000 is included as part of Accounts payable and accrued expenses in the accompanying consolidated balance sheets, of which the total amount is in arrears. The former executive officer disputes the amount identified in the above table, claiming the above amount is less than the amount to which he believes he is owed. Absent an agreement to settle the dispute, and in the event the former executive officer elects to initiate litigation regarding the dispute, including claims for interest and penalties to which the former executive officer believes he is entitled, the Company has reserved, and if necessary and appropriate will assert, all factual and legal defenses, counter-claims, rights, and remedies it may have in any such suit. | |
**Licensing Fees to Temple University**
For details of the licensing
agreements with Temple University, see Financial Statements attached hereto, Note 6.
****
****
****
****
****
| | 35 | | |
****
**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 entitys most critical accounting policies to be those policies that are both most important
to the portrayal of a companys financial condition and results of operations and those that require managements 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 1 of the Notes to the Consolidated Financial
Statements, Summary of Significant Accounting Policies.
We believe the following critical
accounting policies, among others, require significant judgments and estimates used in the preparation of our consolidated financial statements.
**Estimates**
The preparation of consolidated
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of expenses during the reporting period. Certain significant estimates were made in connection
with preparing our consolidated financial statements as described in Note 1 to Notes to 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-based payments to officers, directors, employees, and consultants by measuring the cost of services received
in exchange for equity awards utilizing the grant date fair value of the awards, with the cost recognized as compensation expense on the
straight-line basis in the Companys financial statements over the vesting period of the awards. Recognition of compensation expense
for non-employees is in the same period and manner as if the Company had paid cash for the services.
The fair value of the Company's
stock options and warrants grant is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to
risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense
is recorded based upon the value derived from the Black-Scholes Option Pricing model and based on actual experience. The assumptions used
in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.
| | 36 | | |
****
**Accounting for Warrants**
The Company evaluates all
of its financial instruments, including issued warrants, to determine if such instruments are liability classified, pursuant to ASC 480,
Distinguishing Liabilities from Equity (ASC 480) or derivatives or contain features that qualify as embedded derivatives
pursuant to ASC 815, Derivatives and Hedging (ASC 815). The classification of instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Liability classified warrants are
measured at fair value at inception and at each reporting date, with changes in fair value recognized in the statements of operations
in the period of change.
**Recent Accounting Pronouncements**
See Note 1 of the financial
statements for discussion of recent accounting pronouncements.
**Item 7A. Quantitative and Qualitative Disclosures
About Market Risk**
****
We are a smaller reporting
company and are not required to provide information under this Item 7A.
**Item 8. Financial Statements and Supplementary
Data**
****
Our consolidated financial
statements as of and for the years ended December 31, 2025, and 2024 are presented in a separate section of this report following Item
15 and begin with the index on page F-1.
**Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure**
****
None.
**Item 9A. Controls and Procedures**
****
**1. Disclosure Controls and Procedures**
****
The Company's management,
with the participation of the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness
of disclosure controls and procedures, pursuant to Exchange Act Rule 13a-15(b), as of December 31, 2025. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December
31, 2025, due to the material weaknesses discussed below.
| | 37 | | |
**2. Internal Control over Financial Reporting**
****
|
|
(a) |
Management's Annual Report on Internal Control over Financial Reporting | |
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting
is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the
companys principal executive and principal financial officers and effected by the companys board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures
that:
Pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
Provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the Company; and
Provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisitions, uses or disposition of the companys assets that could have
a material effect on the financial statements.
Management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2025, at the reasonable assurance level described above. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control Integrated Framework (2013). Based on this assessment, our Chief Executive Officer and Chief Financial Officer
concluded, that our internal controls over financial reporting was not effective as of December 31, 2025 due to material weaknesses. A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the registrants annual or interim financial statements will not be prevented
or detected on a timely basis.
The material weaknesses identified
include (i) the Company had inadequate segregation of duties consistent with control objectives; and (ii) the Company had an insufficient
number of personnel with an appropriate level of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP
and SEC disclosure requirements commensurate with the Companys financial reporting requirements.
Notwithstanding the identified
material weaknesses, management has concluded that the Financial Statements included in this Annual Report on Form 10-K present fairly,
in all material respects, the Companys financial position, results of operations and cash flows for the periods disclosed in conformity
with U.S. GAAP.
This Annual Report on Form
10-K does not include an attestation report of the Companys independent registered public accounting firm regarding internal control
over financial reporting. Managements report was not subject to attestation by our registered public accounting firm pursuant to
rules of the Securities and Exchange Commission that permit us to provide only managements report in this Annual Report on Form
10-K.
| | 38 | | |
|
|
(b) |
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 fourth
quarter ended December 31, 2025 that has materially affected, or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
**Item 9B. Other Information**
****
During the quarter ended December
31, 2025, and for the year ended December 31, 2025, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or
any non-Rule 10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K. Our Insider Trading Policy is part
of our Code of Business Code and Ethics, and, separately, a copy of our Insider Trading Policy is filed herewith as Exhibit 19.
| | 39 | | |
****
**PART
III**
****
**Item10. Directors, Executive Officers
and Corporate Governance**
****
**Composition of Board of Directors**
****
Our bylaws provide that the
Board shall consist of between one and eight directors, as determined by the Board from time to time. The number of directors is currently
fixed at five (5) members. Each board member serves a term of three years and will serve until their successors are elected and qualified,
or until their earlier resignation or removal. Following the resignation of Don Dickson, (see chart below) the Board currently consists
of two (2) members.
In 2016, the Board of Directors
of the Company amended the Bylaws of the Company to divide Directors into three classes: Class I, Class II, and Class III. To implement
this classified board structure, the initial term of the Class I, Class II, and Class III Directors was one (1), two (2), and three (3)
years respectively, with subsequent three-year terms for all classes of Directors.
Officers are appointed by
our Board of Directors and their terms of office are, except to the extent governed by an employment contract, at the discretion of our
Board of Directors. There are no family relationships among any of our current directors or our executive officers.
The following constitutes
the Board of Directors as of December 31, 2025:
|
Name |
|
Age |
|
Position |
|
Director Class |
|
Director Since |
|
Term Expires | |
|
Cecil Bond Kyte |
|
55 |
|
Chief Executive Officer, Director (Non-Independent) |
|
Class III |
|
2021 |
|
2028 (1) | |
|
Eric Bunting |
|
56 |
|
Director (Independent) |
|
Class II |
|
2017 |
|
2027 (2) | |
|
|
(1) |
Mr. Kyte was re-elected to the Board at the Companys Annual Shareholders Meeting on February 14, 2025, to a three-year term expiring 2028. | |
|
|
(2) |
Dr. Bunting was re-elected to the Board at the Companys Annual Shareholders Meeting on February 14, 2025, to a two-year term expiring 2027. | |
****
**Biographical Information Regarding Directors**
**Cecil Bond Kyte, Chief
Executive Officer of the Company**(Non-Independent Director of the Company). Mr. Kyte was initially elected to serve as Chairman of
the Board of the Company in December 2007, then known as Save The World Air, Inc. (STWA). In January 2010, he was appointed
to serve as CEO of STWA. In November 2013, Mr. Kyte voluntarily resigned as a director, Chairman of the Board, and CEO of STWA. Since
then, Mr. Kyte has held positions with the following public companies: MassRoots, Inc., where he served as a board member from late 2017,
through July 2019. Massroots,Inc. was a technology platform for the cannabis industry during the time Mr. Kyte served as a director of
the company; Rightscorp, Inc., where, since 2015, Mr. Kyte has served and continues to serve as the companys CEO, and since 2016,
has served and continues to serve as the companys CFO. Mr. Kyte is also a member of the board of Rightscorp. Rightscorps
mission is to support copyright holders abilities to litigate and monetize their music and other copyrights against piracy and
peer-to-peer infringement on the internet. Mr. Kyte has mainly been associated with start overs rather than startups,
using his abilities to restructure and develop a companys management, financial condition, compliance, and product commercialization.
| | 40 | | |
In addition to his current
roles as CEO, CFO, and board member of Rightscorp, and the Company, Mr. Kyte has supported the funding and business development for Bye
Aerospaces suite of products including the development and manufacturing of advanced civilian/military aerospace technologies.
Mr. Kyte has also been a pilot for 39 years and currently serves as an airline captain and instructor for American Airlines-Envoy Air,
Inc., a regional airline. Mr. Kyte devotes about 15 to 20 hours of his time per month as an airline captain and instructor. He received
a B.S. Degree in accounting from Long Beach State University.
Effective January 1, 2025,
the Company entered into an Employment Agreement with Cecil Bond Kyte. (See Employment Agreement, below.)
**Eric Bunting M.D.**(Independent
Director), was appointed to the Board of Directors of the Company effective April 1, 2017. Dr. Eric Bunting is a board-certified Ear,
Nose, and Throat specialist and a partner in an independent specialty group. His group has partnered with Wichita Surgical Specialists
(WSS), the nations largest multispecialty surgical practices in the country. For the past decade, Dr. Bunting has served on the
board of directors of Mid KS ENT, multiple surgery centers, and Blue Cross Blue Shield of Kansas consulting board, contributing to its
continued growth and leadership in the field. He earned his undergraduate degree from Kansas State University in Biology, and his medical
degree from Kansas University School of Medicine, followed by specializing in head and neck surgery at Kansas University Medical Center.
In addition to his medical
career, Dr. Bunting is a seasoned entrepreneur with a wide array of business interests. He is an investor in early-stage companies and
has developed a successful portfolio in the franchising sector, owning and partnering in approximately 85 fast-casual restaurant franchises
across 15 states. His extensive experience also includes board positions within the healthcare industry, notably with multiple ambulatory
surgical centers and a radiation treatment center, where he played a key role during mergers and acquisitions.
As a dedicated investor in
the Company, Dr. Bunting has acquired a significant stake in the Company over the past eight years. Throughout this period, he has remained
a committed advocate for shareholders, supporting the Companys path towards commercialization, market expansion, and eventual profitability.
**Executive Officers**
****
The following table sets forth
certain information regarding our executive officers as of December 31, 2025:
|
Name |
|
Age |
|
Position | |
|
Cecil Bond Kyte |
|
55 |
|
Chief Executive Officer and Chief Financial Officer | |
**Cecil Bond Kyte, Chief
Executive Officer and Chief Financial Officer**. Please see Biographical Information Regarding Directors, above.
****
****
****
****
****
****
| | 41 | | |
****
**CORPORATE GOVERNANCE**
****
We maintain a corporate governance
page on our corporate website at www.qsenergy.com, which includes information regarding the Companys corporate governance
practices. Our codes of business conduct and ethics, Board committee charters and certain other corporate governance documents and policies,
including matters related to insider trading, are posted on our website at www.qsenergy.com. In addition, we will provide a copy of any
of these documents without charge to any stockholder upon written request made to our Corporate Secretary, QS Energy, Inc., P.O. Box 17427,
Reno, Nevada 89511. The information on our website is not, and shall not be deemed to be a part of this Form 10-K or incorporated by reference
into this or any other filing we make with the Securities and Exchange Commission (the SEC).
**Board of Directors**
****
**Director Independence**
Our Board of Directors as
of December 31, 2025, consisted of two members. As of that date, the Board has affirmatively determined that Dr. Bunting is an independent
director. Mr. Kyte, our Chief Executive Officer and Chief Financial Officer, is not considered independent.
**Meetings of the Board**
The Board held five (5) meetings
in 2025. A majority of the members attended all five (5) board meetings held in 2025. One meeting was held in 2026.
**Communications with the Board**
The following procedures have
been established by the Board in order to facilitate communications between our stockholders and the Board:
Stockholders may send correspondence,
which should indicate that the sender is a stockholder, to the Board or to any individual director, by mail to Corporate Secretary, QS
Energy, Inc. P.O. Box 17427, Reno, Nevada 89511 or by e-mail to info@qsenergy.com.
Our Corporate Secretary will
be responsible for the first review and logging of this correspondence and will forward the communication to the director or directors
to whom it is addressed unless it is a type of correspondence which the Board has identified as correspondence which may be retained in
our files and not sent to directors. The Board has authorized the Secretary to retain and not send to directors communications that: (a)
are advertising or promotional in nature (offering goods or services), (b) solely relate to complaints by customers with respect to ordinary
course of business customer service and satisfaction issues or (c) clearly are unrelated to our business, industry, management or Board
or committee matters. These types of communications will be logged and filed but not circulated to directors. Except as set forth in the
preceding sentence, the Secretary will not screen communications sent to directors.
The log of stockholder correspondence
will be available to members of the Board for inspection. At least once each year, the Secretary will provide to the Board a summary of
the communications received from stockholders, including the communications not sent to directors in accordance with the procedures set
forth above.
Our shareholders may also
communicate directly with the non-management directors, individually or as a group, by mail c/o Corporate Secretary, QS Energy, Inc. P.O.
Box 17427, Reno, Nevada 89511, or by e-mail to info@qsenergy.com.
Our Board has established
procedures, as outlined in the Companys policy for Procedures for Accounting and Auditing Matters, for the receipt,
retention and treatment of complaints regarding questionable accounting, internal controls, and financial improprieties or auditing matters.
Any of the Companys employees may confidentially communicate concerns about any of these matters by calling our toll-free number,
+1 (844) 645-7737. Upon receipt of a complaint or concern, a determination will be made whether it pertains to accounting, internal controls
or auditing matters and if it does, it will be handled in accordance with the procedures established by the Audit Committee.
| | 42 | | |
**Committees of the Board**
****
Effective July 21, 2021, the
Board dissolved the Companys Audit Committee, and the functions thereof were assumed by the full Board.
**Item 11. Executive Compensation**
****
**EXECUTIVE COMPENSATION DISCUSSION
AND ANALYSIS**
****
**Pay vs. Performance**
****
The following table sets forth
compensation information for our chief executive officer, referred to below as our PEO(Title), and our other named executive officers,
or NEOs, for purposes of comparing their compensation to the value of our shareholders investments and our net income, calculated
in accordance with SEC regulations, for fiscal years 2025, 2024 and 2023.
|
Year |
|
Summary
Compensation
Table Total
for PEO(1) |
|
|
Compensation
Actually Paid
to PEO(2) |
|
|
Average Summary Compensation Table Total for Non-PEO NEOs(3) |
|
|
Average Compensation Actually Paid to Non-PEO NEOs(2) |
|
|
Value of Initial Fixed $100 Investment Based On Total Shareholder Return(4) |
|
|
Net Income(5) |
| |
|
2025 |
|
$ |
1,537,000 |
|
|
$ |
1,537,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
750 |
|
|
|
(15,305,000 |
) | |
|
2024 |
|
$ |
210,000 |
|
|
$ |
210,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
750 |
|
|
$ |
(1,934,000 |
) | |
|
2023 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
300 |
|
|
$ |
(1,224,000 |
) | |
|
(1) |
The dollar amounts reported are the amounts of total compensation reported for the Companys CEO, Cecil Bond Kyte, in the Summary Compensation Table (SCT) for fiscal years 2025, 2024, and 2023. | |
|
|
| |
|
(2) |
The following table reflects the adjustments necessary, each of which is prescribed by SEC rule, to calculate the Compensation Actually Paid (CAP) from those total amounts reflected in the SCT. The SCT amounts and the CAP amounts do not reflect the actual amount of compensation earned by or paid to the Companys executives during the applicable years, but rather are amounts determined in accordance with Item 402 of Regulation S-K under the Exchange Act. To determine CAP, the adjustments below were made to the Companys executive officers total compensation. | |
| | 43 | | |
|
|
|
2025 |
|
|
2024 |
|
|
2023 |
| |
|
|
|
PEO |
|
|
NEOs |
|
|
PEO |
|
|
Other
NEOs |
|
|
PEO |
|
|
Other
NEOs |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
SCT Amounts |
|
$ |
1,537,000 |
|
|
|
|
|
|
$ |
210,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
| |
|
Adjustments Related to Defined Benefit and Actuarial Plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
None (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Adjustments Related to Stock-Based Compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Values reported in Stock Awards and Option Awards columns of the SCT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year-end fair value of awards granted during the year that are outstanding and unvested at the end of the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Decrease in fair value of awards granted in prior years that are outstanding and unvested at year-end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair value of awards granted and vested during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Decrease in fair value of awards granted in prior years that vested during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Decrease in fair value of awards granted in prior years that failed to meet vesting conditions during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dividends and other earnings paid on awards before the vesting date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
CAP Amounts |
|
|
1,537,000 |
|
|
|
|
|
|
$ |
210,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
| |
|
(3) |
The amounts presented reflect the total compensation set forth in the SCT for the Companys Non-PEO NEOs. | |
|
(4) |
The amounts presented reflect the value of a fixed
investment of $100 on January 1st of the reporting period (i.e., market price of $0.02 on January 1, 2021) based upon the closing
market price of the Companys common stock of $0.15, $0.15, $0.06, and $0.05 at December 31, 2025, December 31, 2024, December 31,
2023, and December 31, 2022, respectively, as traded on The OTC Market (Pink Sheets).
| |
|
(5) |
The amounts presented reflect the net loss as reported in the Companys audited financial statements for the periods presented. | |
|
|
| |
|
(6) |
The Company had no Defined Benefit or Actuarial Plans during the periods presented. | |
| | 44 | | |
The following table sets forth
certain information regarding the compensation earned during the last three fiscal years by the Named Executive Officers:
**Summary Compensation Table**
****
|
|
|
Long-Term Compensation Awards |
| |
|
Name and Principal Position |
|
Fiscal
Year |
|
|
Annual
Compensation
Salary
($) |
|
|
Stock
Awards
($) |
|
|
Securities
Underlying
Options
(#) |
|
|
Full Value
of Options
($) |
|
|
All Other
Compensation
($) |
|
|
Total
($) |
| |
|
Cecil Bond Kyte (1) |
|
|
2025 |
|
|
|
443,000 |
|
|
|
|
|
|
|
31,536,250 |
|
|
|
1,502,650 |
|
|
|
1,094,000 |
|
|
|
1,537,000 |
| |
|
Chief Executive Officer |
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,000 |
|
|
|
210,000 |
| |
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
_________________
|
(1) |
Mr. Kyte was appointed Chief Executive Officer (CEO) effective April 15, 2021. Effective January 1, 2025, the Company entered into an Employment Agreement with Mr. Kyte providing for, among other things, an annual salary of $420,000. In addition, his Annual Compensation Salary included a bonus in November and December 2025 of $23,000. All Other Compensation includes $1,038,000 paid in bonuses, health allowance of $1,500 per month, rent allowance of $1,000 per month, and auto allowance of $500 per month, as outlined in the Employment Agreement with Mr. Kyte. (See Employment Agreement below). In addition, his All Other Compensation included a bonus in April 2025 of $20,000. | |
****
**OPTION GRANTS IN LAST FISCAL YEAR**
****
During the year ended December 31, 2025, the Company
granted 31,536,250 options to Named Executive Officers.
**AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES**
****
No options were exercised
by our Named Executive Officer, Cecil Bond Kyte, during the 2025 fiscal year. The following table sets forth the number of shares of our
common stock subject to exercisable and unexercisable stock options which the Named Executive Officers held at the end of the 2025 fiscal
year.
|
|
|
Shares
Acquired on Exercise |
|
|
Value
Realized |
|
|
Number of Securities
Underlying Unexercised
Options at
Fiscal Year-End (#) |
|
|
Value of Unexercised
In-the-Money Options ($)(1) |
| |
|
Name |
|
(#) |
|
|
($) |
|
|
Exercisable |
|
|
Unexercisable |
|
|
Exercisable |
|
|
Unexercisable |
| |
|
Cecil Bond Kyte |
|
|
|
|
|
|
|
31,536,250 |
|
|
|
|
|
3,227,788 |
|
|
|
| |
_________________
|
(1) |
Market value of our common stock at fiscal year-end minus the exercise price. The closing price of our common stock on December31, 2025 the last trading day of the year was $0.15 per share. | |
| | 45 | | |
**Director Compensation Policy**
The Companys Director
Compensation Policy (Director Compensation Policy) was suspended on April 15, 2021, and reinstated on February 14, 2025.
The reinstated Director Compensation Policy provides the following terms and conditions:
|
|
(i) |
Board Options: On January 1, 2016, and thereafter, January 1st of each succeeding year, each member of the Board shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $50,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the last day of each calendar month for 12 months, beginning January 31st in the year of grant ("First Vesting Date"), and for each successive month through December 31st in the year of grant ("Final Vesting Date"). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event a member of the Board ceases to be a member of the Board for any reason prior to Final Vesting Date of the Option. | |
|
|
(ii) |
Audit Committee Chairman Options: On January 1, 2016, and thereafter, on January 1st of each succeeding year, the Chairman of the Audit Committee, or the equivalent thereof, shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $25,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the last day of each calendar month for 12 months, beginning January 31st in the year of grant ("First Vesting Date"), and for each successive month through December 31st in the year of grant ("Final Vesting Date"). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event the Board member ceases to be Chairman of the Audit Committee for any reason prior to Final Vesting Date of the Option. | |
|
|
(iii) |
Options Issued upon Appointment to the Board of Directors: Upon appointment to the Board of Directors the appointed Director shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $50,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the day preceding the one-month anniversary of the date of grant ("First Vesting Date"), and for each successive month through the day preceding the one-year anniversary of the date of grant ("Final Vesting Date"). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event a member of the Board ceases to be a member of the Board for any reason prior to Final Vesting Date of the Option. | |
|
|
(iv) |
Options Issued to the Board member who oversees financial audit functions. Upon appointment the Board member who oversees financial audit functions shall receive a grant of unqualified Options to purchase Shares of the Company's common stock. The number of underlying Shares of the Option shall be equal to the quotient of $25,000 divided by the market value of the Company's shares, on the day of the grant, as reported on the OTCBB or, if applicable, NASDAQ. One-twelfth (1/12) of the number of options granted shall vest on the day preceding the one-month anniversary of the date of grant ("First Vesting Date"), and for each successive month through the day preceding the one-year anniversary of the date of grant ("Final Vesting Date"). Options shall expire ten (10) years after the day of grant. All unvested Options shall be cancelled in the event the Director ceases to be Chairman of the Audit Committee for any reason prior to Final Vesting Date of the Option. | |
|
|
(v) |
Committee Member Compensation: Each member of a committee of the Board shall receive monthly compensation of $500.00, plus reimbursement of reasonable travel and lodging expenses. | |
The Board has not established
policies and practices (whether written or otherwise) regarding the timing of option grants or other awards in relation to the release
of material nonpublic information (MNPI) and do not take MNPI into account when determining the timing and terms of stock
option or other equity awards to executive officers. The Company does not time the disclosure of MNPI, whether positive or negative, for
the purpose of affecting the value of executive compensation.
| | 46 | | |
**EMPLOYMENT AGREEMENT**
On February 19, 2025, QS Energy,
Inc. (the Company) entered into an Employment Agreement (Agreement) with Cecil Bond Kyte, the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The term (Term) of the Agreement
is one (1) year and will automatically renew for successive one (1) year periods unless either Mr. Kyte or the Company provides notice,
no later than December 1 of the then-current year of the Term, that the Agreement shall not be renewed.
The effective date of the
Agreement is January 1, 2025 (Effective Date), and provides for Mr. Kyte to continue to serve as the Companys CEO
and CFO for a base salary of $35,000 per month. The Agreement also provides Mr. Kyte with a retention bonus of $1,557,500, payable in
three (3) equal installments of $519,617. The Agreement provides that payment of each of the installments is subject to the Companys
financial condition, including the Company maintaining sufficient funds to pay, as due, its operating expenses and establishing a reasonable
reserve therefor. Subject to the foregoing condition, the first installment of $519,167 was due on execution of the Agreement and paid
to Mr. Kyte as follows: $1,750 in January 2025 in anticipation of the execution of the Agreement, $480,000 in February 2025, $30,000 in
March 2025 and $7,417 in May 2025; the second installment of $519,617 was due on the execution, delivery, and effective date of a customer
contract for the purchase or lease and installation of the Companys AOT product and paid to Mr. Kyte as follows: $51,917 in May
2025 in anticipation of the execution of a customer contract with VIPS Petroleum, $400,000 in June 2025 and $67,250 in July 2025; and
the third installment of $519,617 will be due on the execution, closing, and effective date of debt or equity financing in favor of the
Company in an amount of no less than $5,000,000.
The Agreement also provides
a further inducement to Mr. Kyte to continue his employment as CEO and CFO of the Company in the form of stock options. Upon execution
of the Agreement, the Company issued to Mr. Kyte an option (Option) to purchase 20,817,500 shares of restricted common stock
of the Company, at an exercise price of $0.03 per share. The Option immediately vested on the issuance thereof and expires 10 years from
the Effective Date.
Upon execution of the Agreement,
the Company also issued to Mr. Kyte an additional option (Additional Option) to purchase 3,500,000 shares of restricted
common stock of the Company, at an exercise price equal to the price quoted in the OTC pink sheets for the Companys publicly traded
shares as of the Effective Date. The Additional Option immediately vested on the issuance thereof, and expires 10 years from the Effective
Date.
In addition to the Option
and Additional Option described above, the Agreement provides that Mr. Kyte will receive an option to purchase an additional 3,500,000
shares of restricted common stock of the Company on each annual renewal of the Agreement (Renewal Option), at a price equal
to the price quoted in the OTC pink sheets for the Companys publicly traded shares on the date of renewal of the Agreement. The
Renewal Option will vest at the rate of one-twelfth (1/12th) per month on the last calendar day of each month, provided the Agreement
is not terminated and Mr. Kyte continues to serve as the Companys CEO and CFO on the date of vesting. The Renewal Option will expire
10 years from its issuance date.
The Agreement also contains
other terms and conditions usual and customary in employment agreements.
The above description of material
terms and conditions of the Agreement is qualified in its entirety by reference to the Agreement, a copy of which is attached to our Form
8-K, filed with the Securities and Exchange Commission on February 21, 2025.
**DIRECTORS COMPENSATION**
****
There was $6,000 in Board
compensation paid to our Directors for calendar year 2025. See our Director Compensation Policy, above.
| | 47 | | |
****
**Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters**
****
**SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT**
****
The following table sets forth
certain information regarding the beneficial ownership of our common stock as of December 31, 2025.
|
|
|
each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock; | |
|
|
|
each of our directors; and | |
|
|
|
our Chief Executive Officer, who also serves as our Chief Financial Officer as of December 31, 2025, for his services rendered in all capacities to the Company (such individual is hereafter referred to as the Named Executive Officer), and all of our current directors and executive officers serving as a group. | |
|
Named Executive Officers and Director |
|
Number of Shares
of Common Stock
Beneficially |
|
|
Percentage of
Shares
Beneficially |
| |
|
Name and Address of Beneficial Owner (1) |
|
Owned (2) |
|
|
Owned (2) |
| |
|
Kyte, Cecil Bond, Chief Executive Officer, Chief Financial Officer (3) |
|
|
48,504,583 |
|
|
|
8.66% |
| |
|
Bunting, Eric Director (4) |
|
|
20,862,201 |
|
|
|
3.70% |
| |
|
All current directors and executive officer as a group |
|
|
69,366,784 |
|
|
|
11.32% |
| |
_________________
|
(1) |
Unless otherwise indicated, the address of each listed person is c/o QS Energy, Inc., 23902 FM 2978, Tomball, Texas 77375. | |
|
|
| |
|
(2) |
Percentage of beneficial ownership is based upon 543,350,596 shares of our common stock outstanding as of December 31, 2025. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to notes, options and warrants currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for determining the number of shares beneficially owned and for computing the percentage ownership of the person holding such notes, options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. | |
|
|
| |
|
(3) |
Mr. Kyte owns 16,968,333 shares of common stock. In addition, Mr. Kyte holds options under which he has the right to purchase 31,536,250 shares of common stock at prices ranging from $0.02 to $0.15 per share. | |
|
|
| |
|
(4) |
Dr. Bunting owns 20,639,977 shares of common stock. In addition, Dr. Bunting holds options under which he has the right to purchase 222,224 shares of common stock at $0.15 per share. | |
|
|
| |
****
****
****
****
| | 48 | | |
****
**Item 13. Certain Relationships and Related
Transactions, and Director Independence**
****
**Accrued Expenses - Related Parties**
As of December 31, 2025 and
2024, total accrued expenses related parties amounted to $0 and $6,000, respectively.
**Reimbursements for Rent
Related Party**
****
The Company reimburses Cecil
Bond Kyte, Company CEO and CFO, in rent expenses for a home office and partial storage space in Carson City, Nevada at a rate of $1,000
per month under a month-to-month rental agreement (Carson Rental Agreement). Total rent expense under the Carson Rental
Agreement during the years ended December 31, 2025, and 2024 were $3,000 and $12,000, respectively which are included as part of Operating
Expenses in the attached consolidated statement of operations.
**Director Independence**
The Company believes Dr. Bunting
is independent, and Mr. Kyte is not independent.
**Item 14. Principal Accounting Fees and Services**
****
The Board has selected Weinberg&
Company, P.A. to audit our financial statements for the fiscal year ended December31, 2025.
Weinberg& Company,
P.A. was first appointed in fiscal year 2002, and has audited our financial statements for fiscal years 2002 through 2025.
**Audit and Other Fees**
****
The following table summarizes
the fees charged by Weinberg& Company, P.A. for certain services rendered to the Company during 2025 and 2024.
|
| |
Amount | | |
|
| |
Fiscal | | |
Fiscal | | |
|
Type of Fee | |
Year 2025 | | |
Year 2024 | | |
|
Audit (1) | |
$ | 178,000 | | |
$ | 83,000 | | |
|
Audit Related (2) | |
| | | |
| | | |
|
Taxes (3) | |
| 11,000 | | |
| 9,000 | | |
|
All Other (4) | |
| | | |
| | | |
|
Total | |
$ | 189,000 | | |
$ | 91,000 | | |
_________________
|
(1) |
This category consists of fees for the audit of our annual financial statements included in the Companys annual report on Form 10-K and review of the financial statements included in the Companys quarterly reports on Form 10-Q. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, statutory audits required by non-U.S. jurisdictions and the preparation of an annual management letter on internal control matters. | |
|
(2) |
Represents services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years, aggregate fees charged for assurance and related services that are reasonably related to the performance of the audit and are not reported as audit fees. These services include consultations regarding Sarbanes-Oxley Act requirements, various SEC filings and the implementation of new accounting requirements. | |
|
(3) |
Represents aggregate fees charged for professional services for tax compliance and preparation, tax consulting and advice, and tax planning. | |
|
(4) |
Represents aggregate fees charged for products and services other than those services previously reported. | |
****
****
****
****
| | 49 | | |
****
**PART
IV**
****
**Item 15. Exhibits, Financial Statement Schedules**
****
(a)The
following documents are filed as part of this Form 10-K.
Financial Statements:
Reference is made to the contents
to the consolidated financial statements of QS Energy, Inc. under Item7 of this Form 10-K.
(b)Exhibits:
The exhibits listed below
are required by Item601 of Regulation S-K.
|
Exhibit No. |
|
Description | |
|
3.1(1) |
|
Articles of Incorporation, as amended, of the Registrant | |
|
3.1(6) |
|
Articles of Merger | |
|
3.1(5) |
|
Amendment to Articles of Incorporation (12/20/13) | |
|
3.1(15) |
|
Second amendment to Articles of Incorporation (10/12/17) | |
|
3.1(20) |
|
Amendment to the Articles of Incorporation (02/14/25) | |
|
3.2(4) |
|
Amended and Restated Bylaws of the Registrant | |
|
3.2(8) |
|
Amendment to the Amended and Restated Bylaws | |
|
10.1(2) |
|
License Agreement between the Registrant and Temple University dated February 2, 2007 | |
|
10.2(3) |
|
License Agreement between the Registrant and Temple University dated August 9, 2011 | |
|
10.4(7) |
|
Registrants Business Plan | |
|
10.8(9) |
|
Jason Lane Employment Agreement effective April 1, 2017 | |
|
10.9(10) |
|
Michael McMullen Employment Agreement effective April 1, 2017 | |
|
10.10(11) |
|
Bigger Separation Agreement effective April 1, 2017 | |
|
10.13(12) |
|
Forms of Convertible Note, Warrant, and Securities Purchase Agreement in 2017 Spring Offering | |
|
10.11(13) |
|
Amendment to the License Agreement between the Registrant and Temple University | |
|
10.12(14) |
|
Submission of Matters to a Vote of Security Holders | |
|
10.13(16) |
|
Amendment to Jason Lane employment agreement | |
|
10.14(17) |
|
Form of Spring 2018 Securities Purchase Agreement | |
|
10.15(18) |
|
Form of Winter 2018-2019 Offering Securities Purchase Agreement | |
|
10.16(18) |
|
Amendment to Jason Lane employment agreement effective April 1, 2019 | |
|
10.17(18) |
|
Amendment to Michael McMullen employment agreement effective April 1, 2019 | |
|
10.18(19) |
|
Fourth Amendment to Jason Lane employment agreement effective February 15, 2020 | |
|
10.19(19) |
|
Third Amendment to Michael McMullen employment agreement effective February 15, 2020 | |
|
10.20(21) |
|
Cecil Bond Kyte Employment Agreement effective January 1, 2025 | |
|
10.21(23) |
|
Distributor Agreement dated June 19, 2025 | |
|
10.22(24) |
|
Amended Distributor Agreement dated September 3, 2025 | |
|
10.23* |
|
Amendment No. 1 to Exclusive License Agreement with Temple University dated September 26, 2025 | |
|
10.24* |
|
Amendment No. 2 to Exclusive License Agreement with Temple University dated September 26, 2025 | |
|
19(22) |
|
Insider Trading Policy | |
|
21(17) |
|
List of Subsidiaries | |
|
24* |
|
Power of Attorney (included on Signature Page) | |
|
31.1* |
|
Certification of Chief Executive Officer of Annual Report Pursuant to Rule13(a)15(e) or Rule15(d)15(e) | |
|
31.2* |
|
Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section1350 | |
|
32.1* |
|
Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule13(a)15(e) or Rule15(d)15(e) | |
|
|
|
| |
|
101.INS* |
|
Inline XBRL Instance Document | |
|
101.SCH* |
|
Inline XBRL Schema Document | |
|
101.CAL* |
|
Inline XBRL Calculation Linkbase Document | |
|
101.DEF* |
|
Inline XBRL Definition Linkbase Document | |
|
101.LAB* |
|
Inline XBRL Label Linkbase Document | |
|
101.PRE* |
|
Inline XBRL Presentation Linkbase Document | |
|
104 |
|
Cover Page Interactive Data File (formatted in iXBRL, and included in exhibit 101) | |
| | 50 | | |
|
* |
Filed herewith. | |
|
** |
Confidential treatment previously requested. | |
|
|
Management contract or compensatory plan or arrangement. | |
|
(1) |
Incorporated by reference from Registrants Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000 | |
|
(2) |
Incorporated by reference from Registrants Form 8-K filed on February 8, 2007 | |
|
(3) |
Incorporated by reference from Registrants Form 8-K filed on August 11, 2011 | |
|
(4) |
Incorporated by reference from Registrants Form 8-K filed on July 8, 2013 | |
|
(5) |
Incorporated by reference from Registrants Form 8-K filed on December 20, 2013 | |
|
(6) |
Incorporated by reference from Registrants Form 8-K filed on August 11, 2015 | |
|
(7) |
Incorporated by reference from Registrants Form 8-K filed on December 1, 2015 | |
|
(8) |
Incorporated by reference from Registrants Form 8-K filed on November 14, 2016 | |
|
(9) |
Incorporated by reference from Registrants Form 10-K filed March 31, 2017 | |
|
(10) |
Incorporated by reference from Registrants Form 10-K filed March 31, 2017 | |
|
(11) |
Incorporated by reference from Registrants Form 10-K filed March 31, 2017 | |
|
(12) |
Incorporated by reference from Registrants Form 8-K filed June 6, 2017 | |
|
(13) |
Incorporated by reference from Registrants Form 8-K filed July 14, 2017 | |
|
(14) |
Incorporated by reference from Registrants Form 8-K filed July 19, 2017 | |
|
(15) |
Incorporated by reference from Registrants Form 8-K filed October 12, 2017 | |
|
(16) |
Incorporated by reference from Registrants Form 10-Q filed November 14, 2017 | |
|
(17) |
Incorporated by reference from Registrants Form 10-K filed April 2, 2018 | |
|
(18) |
Incorporated by reference from Registrants Form 10-K filed April 1, 2019 | |
|
(19) |
Incorporated by reference from Registrants Form 10-K filed March 30, 2020 | |
|
(20) |
Incorporated by reference from Registrants Form 8-K filed February 19, 2025 | |
|
(21) |
Incorporated by reference from Registrants Form 8-K filed February 21, 2025 | |
|
(22) |
Incorporated by reference from Registrants Form 10-K filed February 21, 2025 | |
|
(23) |
Incorporated by reference from Registrants Form 8-K filed June 25, 2025 | |
|
(24) |
Incorporated by reference from Registrants Form 10-Q filed November 14, 2025 | |
**Item 16. Form 10-K Summary**
None.
| | 51 | | |
****
**SIGNATURES**
****
In accordance with Section13
or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorize.
|
|
QS Energy, Inc. |
| |
|
|
|
|
| |
|
Date: March 31, 2026 |
By: |
/s/ Cecil Bond Kyte |
| |
|
|
|
Cecil Bond Kyte |
| |
|
|
|
Chief Executive Officer |
| |
|
|
|
|
| |
**POWER OF ATTORNEY**
****
KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and appoints Cecil Bond Kyte as his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements
of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
NAME |
|
TITLE |
|
DATE | |
|
|
|
|
|
| |
|
/s/ Cecil Bond Kyte |
|
Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors |
|
March
31, 2026 | |
|
Cecil Bond Kyte |
|
|
|
| |
|
|
|
|
|
| |
|
/s/ Eric Bunting, M.D. |
|
Director |
|
March 31, 2026 | |
|
Eric Bunting, M.D. |
|
|
|
| |
****
****
****
****
****
| | 52 | | |
****
****
**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
**QS ENERGY, INC. AND SUBSIDIARIES**
**DECEMBER 31, 2025 AND 2024**
****
|
|
Page | |
|
|
| |
|
Report of Independent Registered Public Accounting Firm (PCAOB ID 572) |
F-2 | |
|
|
| |
|
Consolidated Balance Sheets |
F-4 | |
|
|
| |
|
Consolidated Statements of Operations |
F-5 | |
|
|
| |
|
Consolidated Statements of Stockholders Deficit |
F-6 | |
|
|
| |
|
Consolidated Statements of Cash Flows |
F-7 | |
|
|
| |
|
Notes to Consolidated Financial Statements |
F-8 | |
| | F-1 | | |
**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**
****
To the Stockholders and Board of Directors of
QS Energy, Inc.
**Opinion on the Financial Statements**
We have audited the accompanying consolidated
balance sheets of QS Energy, Inc. and subsidiaries (the Company) as of December 31, 2025 and 2024, the related consolidated
statements of operations, shareholders deficit, and cash flows for the years then ended, and the related notes (collectively referred
to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
**Going Concern**
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has
experienced recurring operating losses and negative operating cash flows since inception, has a stockholders deficit, and has financed
its working capital requirements through the recurring sale of its debt and equity securities. In addition, as of December 31, 2025, notes
payable with an aggregate balance of $1,116,000 and certain obligations to a former officer are past due. These conditions raise substantial
doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also described
in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
**Basis for Opinion**
These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| | F-2 | | |
**Critical Audit Matter**
The critical audit matter communicated below is
a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the
audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
*Convertible note transactions*
As described in Note 4 to the financial statements,
during 2025 the Company issued convertible notes in the aggregate of $2,515,000, and warrants to acquire shares of the Companys
common stock. The Company allocated the proceeds received from the issuance of the convertible notes and warrants based upon their relative
fair values.
We identified the accounting for the issuance
of the convertible notes and warrants as a critical audit matter because of the significance of the account balances, and due to the complexity
involved in assessing the classification and presentation of the convertible notes and warrants. The auditing for these transactions required
a high degree of auditor judgement including evaluating the reasonableness of the significant judgements made by management in determining
the appropriate accounting.
The primary audit procedures we performed to address
this critical audit matter included the following, among others:
|
| We
read the convertible note and warrant agreements, and relevant documentation. |
|
|
| We
evaluated the reasonableness of the Companys methodology for allocation of proceeds including the Companys consideration
of relevant accounting standards. |
|
|
| We developed independent
estimates for the relative fair value of the warrants issued. |
|
We have served as the Companys auditor
since 2002.
/s/Weinberg & Company, P.A.
Los Angeles, California
March 31, 2026
****
****
****
****
****
****
| | F-3 | | |
****
**QS ENERGY, INC.**
**CONSOLIDATED BALANCE SHEETS**
****
|
| |
| | |
| | |
|
| |
December 31 | | |
December 31 | | |
|
| |
2025 | | |
2024 | | |
|
ASSETS | |
| | | |
| | | |
|
Current assets: | |
| | | |
| | | |
|
Cash | |
$ | 6,000 | | |
$ | 150,000 | | |
|
Prepaid expenses | |
| 49,000 | | |
| 11,000 | | |
|
Total current assets | |
| 55,000 | | |
| 161,000 | | |
|
Property and equipment, net | |
| | | |
| 3,000 | | |
|
Total assets | |
$ | 55,000 | | |
$ | 164,000 | | |
|
| |
| | | |
| | | |
|
LIABILITIES AND STOCKHOLDERS DEFICIT | |
| | | |
| | | |
|
Current liabilities: | |
| | | |
| | | |
|
Accounts payable-license agreements-past due | |
$ | 3,167,000 | | |
$ | 2,433,000 | | |
|
Accounts payable and accrued expenses | |
| 1,416,000 | | |
| 881,000 | | |
|
Convertible notes payable, net of discounts of $16,000 and $133,000, respectively: including $1,116,000 and $2,339,000, respectively, in default | |
| 1,351,000 | | |
| 2,524,000 | | |
|
PPP Loan payable | |
| | | |
| 24,000 | | |
|
Total current liabilities | |
| 5,934,000 | | |
| 5,862,000 | | |
|
Total liabilities | |
| 5,934,000 | | |
| 5,862,000 | | |
|
| |
| | | |
| | | |
|
Commitments and contingencies | |
| | | |
| | | |
|
| |
| | | |
| | | |
|
Stockholders deficit | |
| | | |
| | | |
|
Common stock, $0.001 par value: 750,000,000 shares authorized, 543,350,596 and 428,424,880 shares issued and outstanding at December 31, 2025 and 2024, respectively | |
| 543,351 | | |
| 428,428 | | |
|
Additional paid-in capital | |
| 136,182,649 | | |
| 121,173,575 | | |
|
Accumulated deficit | |
| (142,605,000 | ) | |
| (127,300,000 | ) | |
|
Total stockholders deficit | |
| (5,879,000 | ) | |
| (5,698,000 | ) | |
|
Total liabilities and stockholders deficit | |
$ | 55,000 | | |
$ | 164,000 | | |
The accompanying notes are an integral part of
these consolidated financial statements.
| | F-4 | | |
****
**QS ENERGY, INC.**
**CONSOLIDATED STATEMENTS OF OPERATIONS**
|
| |
| | |
| | |
|
| |
Year ended | | |
|
| |
December 31 | | |
|
| |
2025 | | |
2024 | | |
|
Revenues | |
$ | | | |
$ | | | |
|
| |
| | | |
| | | |
|
Operating expenses | |
| 13,312,000 | | |
| 1,385,000 | | |
|
Research and development expenses | |
| 1,611,000 | | |
| 191,000 | | |
|
Loss from operations | |
| (14,923,000 | ) | |
| (1,576,000 | ) | |
|
| |
| | | |
| | | |
|
Interest and financing expense | |
| (389,000 | ) | |
| (358,000 | ) | |
|
Other | |
| 7,000 | | |
| | | |
|
Net Loss | |
$ | (15,305,000 | ) | |
$ | (1,934,000 | ) | |
|
| |
| | | |
| | | |
|
Net loss per common share, basic and diluted | |
$ | (0.03 | ) | |
$ | (0.00 | ) | |
|
Weighted average common shares outstanding, basic and diluted | |
| 499,682,276 | | |
| 404,977,565 | | |
The accompanying notes are an integral part of
these consolidated financial statements.
| | F-5 | | |
****
**QS ENERGY, INC.**
**CONSOLIDATED STATEMENTS OF STOCKHOLDERS
DEFICIT**
**FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024**
****
|
| |
| | |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
Additional | | |
| | |
Total | | |
|
| |
Common Stock | | |
Paid-in | | |
Accumulated | | |
Stockholders | | |
|
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Deficit | | |
|
| |
| | |
| | |
| | |
| | |
| | |
|
| |
| | |
| | |
| | |
| | |
| | |
|
Balance, December 31, 2023 | |
| 392,586,471 | | |
$ | 392,587 | | |
$ | 119,729,413 | | |
$ | (125,366,000 | ) | |
$ | (5,244,000 | ) | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Common stock issued on conversion of notes payable | |
| 32,341,748 | | |
| 32,342 | | |
| 303,658 | | |
| | | |
| 336,000 | | |
|
Warrants issued with convertible notes | |
| | | |
| | | |
| 782,000 | | |
| | | |
| 782,000 | | |
|
Common stock issued on exercise of warrants | |
| 1,063,332 | | |
| 1,063 | | |
| 50,937 | | |
| | | |
| 52,000 | | |
|
Common stock issued for settlement of vendor payable | |
| 433,329 | | |
| 433 | | |
| 17,567 | | |
| | | |
| 18,000 | | |
|
Fair value of warrants issued as compensation | |
| | | |
| | | |
| 152,000 | | |
| | | |
| 152,000 | | |
|
Fair value of common stock issued for services | |
| 2,000,000 | | |
| 2,000 | | |
| 138,000 | | |
| | | |
| 140,000 | | |
|
Net loss | |
| | | |
| | | |
| | | |
| (1,934,000 | ) | |
| (1,934,000 | ) | |
|
Balance, December 31, 2024 | |
| 428,424,880 | | |
$ | 428,425 | | |
$ | 121,173,575 | | |
$ | (127,300,000 | ) | |
$ | (5,698,000 | ) | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Balance, January 1, 2025 | |
| 428,424,880 | | |
$ | 428,425 | | |
$ | 121,173,575 | | |
$ | (127,300,000 | ) | |
$ | (5,698,000 | ) | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Common stock issued on conversion of notes payable | |
| 65,523,469 | | |
| 65,524 | | |
| 2,312,476 | | |
| | | |
| 2,378,000 | | |
|
Warrants issued with convertible notes | |
| | | |
| | | |
| 1,430,000 | | |
| | | |
| 1,430,000 | | |
|
Common stock issued on exercise of options and warrants | |
| 36,802,254 | | |
| 36,802 | | |
| 1,566,198 | | |
| | | |
| 1,603,000 | | |
|
Common stock issued for settlement of vendor payable | |
| 2,049,993 | | |
| 2,050 | | |
| 101,950 | | |
| | | |
| 104,000 | | |
|
Fair value of vested options and warrants | |
| | | |
| | | |
| 7,407,000 | | |
| | | |
| 7,407,000 | | |
|
Stock-based compensation expense warrant modification | |
| | | |
| | | |
| 511,000 | | |
| | | |
| 511,000 | | |
|
Fair value of common stock issued for services | |
| 9,050,000 | | |
| 9,050 | | |
| 1,441,950 | | |
| | | |
| 1,451,000 | | |
|
Fair value of common stock issued as compensation | |
| 1,500,000 | | |
| 1,500 | | |
| 238,500 | | |
| | | |
| 240,000 | | |
|
Net loss | |
| | | |
| | | |
| | | |
| (15,305,000 | ) | |
| (15,305,000 | ) | |
|
Balance, December 31, 2025 | |
| 543,350,596 | | |
$ | 543,351 | | |
$ | 136,182,649 | | |
$ | (142,605,000 | ) | |
$ | (5,879,000 | ) | |
The accompanying notes are an integral part of
these consolidated financial statements.
| | F-6 | | |
****
**QS ENERGY, INC.**
**CONSOLIDATED STATEMENTS OF CASH FLOWS**
****
|
| |
| | |
| | |
|
| |
Year ended | | |
|
| |
December 31 | | |
|
| |
2025 | | |
2024 | | |
|
Cash flows from Operating Activities | |
| | | |
| | | |
|
Net loss | |
$ | (15,305,000 | ) | |
$ | (1,934,000 | ) | |
|
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
|
Fair value of vested options and warrants | |
| 7,407,000 | | |
| 152,000 | | |
|
Stock-based compensation expense warrant modification | |
| 511,000 | | |
| | | |
|
Fair value of common stock issued for services | |
| 1,451,000 | | |
| 140,000 | | |
|
Issuance of common stock as compensation | |
| 240,000 | | |
| | | |
|
Amortization of debt discount | |
| 204,000 | | |
| 98,000 | | |
|
Accrued interest expense | |
| 146,000 | | |
| 213,000 | | |
|
Depreciation | |
| 3,000 | | |
| 1,000 | | |
|
Changes in operating assets and liabilities: | |
| | | |
| | | |
|
Prepaid expenses | |
| (38,000 | ) | |
| 1,000 | | |
|
Accounts payable and accrued expenses | |
| 639,000 | | |
| (73,000 | ) | |
|
Accounts payable license agreements | |
| 734,000 | | |
| 235,000 | | |
|
Operating lease liabilities | |
| | | |
| | | |
|
Net cash used in operating activities | |
| (4,008,000 | ) | |
| (1,167,000 | ) | |
|
Cash flows from investing activities | |
| | | |
| | | |
|
Purchase of property and equipment | |
| | | |
| (2,000 | ) | |
|
Net cash used in investing activities | |
| | | |
| (2,000 | ) | |
|
Cash flows from financing activities | |
| | | |
| | | |
|
Net proceeds from issuance of convertible notes and warrants | |
| 2,285,000 | | |
| 1,230,000 | | |
|
Net proceeds from exercise of warrants and options | |
| 1,603,000 | | |
| 52,000 | | |
|
Principal payment on PPP loan payable | |
| (24,000 | ) | |
| (33,000 | ) | |
|
Net cash provided by financing activities | |
| 3,864,000 | | |
| 1,249,000 | | |
|
Net increase (decrease) in cash | |
| (144,000 | ) | |
| 80,000 | | |
|
Cash, beginning of period | |
| 150,000 | | |
| 70,000 | | |
|
Cash, end of period | |
$ | 6,000 | | |
$ | 150,000 | | |
|
| |
| | | |
| | | |
|
Supplemental disclosures of cash flow information | |
| | | |
| | | |
|
Cash paid during the year for: | |
| | | |
| | | |
|
Interest | |
$ | | | |
$ | | | |
|
Income Taxes | |
$ | 1,600 | | |
$ | 1,600 | | |
|
Non-cash investing and financing activities | |
| | | |
| | | |
|
Conversion of convertible notes to common stock, net | |
$ | 3,803,000 | | |
$ | 1,034,000 | | |
|
Common stock issued for settlement of accounts payable | |
$ | 104,000 | | |
$ | 18,000 | | |
|
Relative fair value of warrants associated with issued convertible notes | |
$ | 1,430,000 | | |
$ | 782,000 | | |
The accompanying notes are an integral part of
these consolidated financial statements.
| | F-7 | | |
****
**QS ENERGY, INC.**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
**FOR THE YEARS ENDED DECEMBER 31, 2025 AND 2024**
****
****
|
1. |
Business and Summary of Significant Accounting Policies | |
****
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.
QS Energy develops and seeks
to commercialize energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil
transport, and reducing greenhouse gas emissions. The Companys intellectual properties include a portfolio of domestic and international
patents, a substantial portion of which have been developed in conjunction with and exclusively licensed from Temple University of Philadelphia,
PA (Temple). QS Energys primary technology is called Applied Oil Technology (AOT), a commercial-grade crude oil pipeline
transportation flow-assurance product.
**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 twelve-months
ended December 31, 2025, the Company incurred a net loss of $15,305,000, used cash in operations of $4,008,000 and as of December 31,
2025, had a stockholders deficit of $5,879,000. In addition, as of December 31, 2025, 51 notes payable with an aggregate balance
of $1,116,000 and certain obligations to a former officer are past due. These factors raise substantial doubt about the Companys
ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Companys
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 December 31, 2025, the
Company had cash on hand in the amount of $6,000. In January through February 2026, the Company issued 4,718,188 shares of its common
stock upon the exercise of warrants for proceeds of $472,000.
The AOT product is still in
development and testing and has transitioned from laboratory testing to initial demonstration and continued testing in advance of our
goal of seeking commercial acceptance and adoption by the upstream and midstream pipeline marketplace. QS Energys efforts in the
foregoing regard have been substantially hampered by a lack of capital. The Company should be able to continue its efforts to commercialize
its AOT product during 2026 only if sufficient capital is raised to do so. The Company can provide no assurances in its ability to raise
the capital needed to continue efforts in 2026, or that any such capital will be available to it on acceptable terms and conditions.
Management is currently seeking
additional funds, primarily through the issuance of debt and equity securities for cash to operate our business, including without limitation
the expenses it will incur in connection with the license agreements with Temple; costs associated with product development and commercialization
of the AOT technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls
and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and
costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual commitments,
including without limitation salaries to our executive officers pursuant to employment agreements, and certain payments to a former officer
and consulting fees, during the remainder of 2026 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.
| | F-8 | | |
**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 consolidated financial statements and related notes include activities of the Company and have been prepared in conformity
with accounting principles generally accepted in the United States of America (GAAP).
The
consolidated financial statements include the accounts of QS Energy Inc. and its wholly owned subsidiaries, QS Energy Pool, Inc. and STWA
Asia Pte. Limited. Intercompany transactions and balances have been eliminated in consolidation.
****
**Estimates**
The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting period. Significant estimates include those related to assumptions used in valuing
equity instruments issued for financing and services, the realizability of deferred tax assets and the related valuation allowance, accruals
for potential liabilities, and assumptions used in the determination of the Companys liquidity. Actual results could differ from
these estimates.
****
**Revenue Recognition**
Under its business plan, the
Company anticipates the leasing of its primary technology. The Company will recognize lease revenue ratably over the life of the lease
upon commencement of the lease. Revenue on future product sales will be recognized in accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 606,*Revenue from Contracts with Customers*.
**Cash**
Cash consists of demand deposits
with banks. The Company holds no cash equivalents as of December 31, 2025 and 2024, respectively. The Company maintains its cash with
domestic financial institutions. At times, cash balances may exceed federally insured limits of $250,000 per depositor at each financial
institution. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because
of its assessment of the creditworthiness and financial viability of the financial institutions.
| | F-9 | | |
**Property and Equipment**
Property and equipment are
stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives
of the assets, generally ranging from three to ten years. Expenditures for major renewals and improvements that extend the useful lives
of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
**Impairment of Long-lived
Assets**
Our long-lived assets, such
as property and equipment, are reviewed for impairment at least annually, or when events and circumstances indicate that depreciable or
amortizable long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to
reflect the current value. Based upon managements annual review, no impairments were recorded for the years ended December 31,
2025 and 2024.
**Leases**
****
The Company accounts for its
leases in accordance with the guidance of ASC 842, *Leases.* The Company determines whether a contract is, or contains, a lease at
inception. Right-of-use assets represent the Companys right to use an underlying asset during the lease term, and lease liabilities
represent the Companys obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are
recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company uses
its incremental borrowing rate based on the information available at lease commencement in determining the present value of unpaid lease
payments (see Note 3).
****
**Income Taxes**
The Company uses an asset
and liability method for accounting for income taxes. The Company recognizes deferred tax assets and liabilities to reflect the estimated
future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable to events that have
been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when
it is more likely than not that some portion of the deferred tax asset will not be realized.
**Research and Development Costs**
****
Research and development expenses
relate primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are
expensed as incurred. Total research and development costs recorded during the years ended December 31, 2025 and 2024, amounted to $1,611,000
and $191,000, respectively.
| | F-10 | | |
**Patent Costs**
Patent costs consist of patent-related
legal and filing fees. Due to the uncertainty associated with the successful development of our AOT product, all patent costs are expensed
as incurred. During the years ended December 31, 2025 and 2024, patent costs were $5,000 and $34,000, respectively, and were included
as part of operating expenses in the accompanying consolidated statements of operations.
****
**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-based payments to officers, directors, employees, and consultants by measuring the cost of services received
in exchange for equity awards utilizing the grant date fair value of the awards, with the cost recognized as compensation expense on the
straight-line basis in the Companys financial statements over the vesting period of the awards. Recognition of compensation
expense for non-employees is in the same period and manner as if the Company had paid cash for the services.
The fair value of the Company'sstock
options and warrants grant is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions related to risk-free
interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded
based upon the value derived from the Black-Scholes Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes
Option Pricing model could materially affect compensation expense recorded in future periods.
****
**Accounting for Warrants**
The Company evaluates all
of its financial instruments, including issued warrants, to determine if such instruments are liability classified, pursuant to ASC 480,
Distinguishing Liabilities from Equity (ASC 480) or derivatives or contain features that qualify as embedded derivatives
pursuant to ASC 815, Derivatives and Hedging (ASC 815). The classification of instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Liability classified warrants are
measured at fair value at inception and at each reporting date, with changes in fair value recognized in the statements of operations
in the period of change.
**Fair Value of Financial Instruments**
Accounting standards require
certain assets and liabilities to be reported at fair value in the financial statements and provide a framework for establishing that
fair value. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal
or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset
or liability. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used
to measure fair value:
Level1Quoted
prices in active markets for identical assets or liabilities.
Level2Inputs,
other than the quoted prices in active markets, are observable either directly or indirectly.
Level3Unobservable
inputs based on the Companys assumptions.
The Company is required to
use observable market data if such data is available without undue cost and effort.
The carrying amounts for cash,
accounts payable, accrued expenses and convertible notes payable approximate their fair value due to the short-term nature of such instruments.
| | F-11 | | |
**Loss per Common Share**
Basic loss per share is computed
by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted
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 loss of
the Company. In computing diluted 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.
For the years ended December
31, 2025 and 2024, the dilutive impact of outstanding stock options of 69,015,001 shares and 25,294,103 shares; outstanding warrants of
45,622,728 shares and 44,044,009 shares; and notes convertible into approximately 16,408,334 and 48,304,534 shares of our common stock,
respectively, have been excluded because their impact on the loss per share is anti-dilutive.
**Segment
Information**
The
Companys Chief Executive Officer (CEO) is our chief operating decision maker (CODM) and evaluates performance
and makes operating decisions about allocating resources based on financial data presented on a consolidated basis. Because our CODM evaluates
financial performance on a consolidated basis, the Company has determined that it operates as a single reportable segment composed of
the consolidated financial results of QS Energy, Inc. (see Note 12).
**Recent Accounting Pronouncements**
In November 2024, the FASB
issued ASU No. 2024-03 Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures (Subtopic
220-40): Disaggregation of Income Statement Expenses. This ASU requires public business entities to disclose, for interim and annual
reporting periods, additional information about certain income statement expense categories. The requirements are effective for fiscal
years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027. Entities are permitted to apply either
the prospective or retrospective transition methods. The Company is currently evaluating the impact that the adoption of this ASU will
have on its consolidated financial statements.
The Companys management
has evaluated all other the recently issued, but not yet effective, accounting standards and guidance that have been issued or proposed
by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and
Exchange Commission through the filing date of these financial statements and does not believe the future adoption of any such pronouncements
will have a material effect on the Companys financial position and results of operations.
| | F-12 | | |
|
2. |
Property and Equipment | |
At December 31, 2025 and 2024,
property and equipment consists of the following:
|
Schedule of property and equipment | |
| | |
| | |
|
| |
December 31, | | |
|
| |
2025 | | |
2024 | | |
|
| |
| | |
| | |
|
Office equipment | |
$ | 37,000 | | |
$ | 37,000 | | |
|
Furniture and fixtures | |
| 5,000 | | |
| 5,000 | | |
|
Testing equipment | |
| 37,000 | | |
| 37,000 | | |
|
Leasehold Improvements | |
| 25,000 | | |
| 25,000 | | |
|
Subtotal | |
| 104,000 | | |
| 104,000 | | |
|
Less accumulated depreciation | |
| (104,000 | ) | |
| (101,000 | ) | |
|
Total | |
$ | | | |
$ | 3,000 | | |
Depreciation expense for the
years ended December 31, 2025 and 2024 was $3,000 and $1,000, respectively.
|
3. |
Leases | |
****
The Company accounts for its
leases in accordance with ASC 842, Leases. The Company determines whether a contract is, or contains, a lease at inception. Operating
lease right-of-use (ROU) assets and liabilities are recognized at the lease commencement date based on the present value
of lease payments over the lease term. ROU assets represent the Companys right to use an underlying asset during the lease term,
and lease liabilities represent the Companys obligation to make lease payments arising from the lease. At December 31, 2025 and
2024, the Company had no long term leases.
During the years ended December
31, 2025 and 2024, the Company rented certain spaces on a month-to-month basis, and rent expense was $17,000 and $15,800, respectively.
|
4. |
Convertible Notes Payable | |
|
Schedule of convertible notes payable | |
| | |
| | |
|
| |
December31, | | |
|
| |
2025 | | |
2024 | | |
|
| |
| | |
| | |
|
Convertible notes | |
$ | 822,000 | | |
$ | 1,651,000 | | |
|
Accrued interest | |
| 545,000 | | |
| 1,006,000 | | |
|
Total outstanding debt, including $1,116,000 and $2,339,000 in default at December 31, 2025 and 2024, respectively | |
| 1,367,000 | | |
| 2,657,000 | | |
|
Less: Unamortized debt discount | |
| (16,000 | ) | |
| (133,000 | ) | |
|
Total outstanding debt, net of unamortized debt discount | |
$ | 1,351,000 | | |
$ | 2,524,000 | | |
| | F-13 | | |
Convertible notes
At December 31, 2023, convertible
notes payable totaled $1,332,000. During the year ended December 31, 2024, the Company issued convertible promissory notes in the aggregate
of $1,353,000 for cash proceeds of $1,230,000, net of OID of $123,000. The notes are unsecured, with a 10% original issue discount, mature
in twelve months from issuance, and are convertible into 42,457,348 shares of the Companys common stock at $0.03 to $0.05 per share.
In addition, the Company granted the note holders warrants to purchase 42,457,348 shares of the Companys common stock with a relative
fair value of $782,000. The warrants are fully vested and expire one year from the date of issuance. The Company determined the fair value
of the warrants by using a Black-Scholes option pricing model, with the following assumptions: expected term of 1.0 year, stock price
of $0.05 to $0.12, exercise price of $0.04 to $0.07, volatility of 156% to 174%, risk-free rate of 3.98% to 5.09%, and no forfeiture rate.
Also during 2024, convertible notes of $1,034,000, net of unamortized discount of $699,000, were converted into 32,341,748 shares of common
stock. At December 31, 2024, total outstanding convertible notes payable totaled $1,651,000.
During the year ended December
31, 2025, the Company issued convertible promissory notes in the aggregate of $2,515,000 for cash proceeds of $2,285,000, net of original
issue discount (OID) of $229,000. The notes are unsecured, mature in twelve months from issuance, and are convertible into
shares of the Companys common stock at $0.08 per share.
In addition, the Company granted
the note holders warrants to purchase 31,423,615 shares of the Companys common stock with a relative value of $1,430,000. The warrants
are fully vested, and expire one year from the date of issuance. The Company determined the fair value of the warrants by using a Black-Scholes
option pricing model, with the following assumptions: expected term of 1.0 year, stock price of $0.16 to $0.20, exercise price of $0.10,
volatility of 136% to 160%, risk-free rate of 3.96% to 4.03%, and no forfeiture rate.
Also, during the year ended
December 31 2025, convertible notes of $3,344,000, net of unamortized discount of $1,572,000, were converted into 65,523,469 shares of
common stock (see also accrued interest below). At December 31, 2025, total outstanding convertible notes payable totaled $822,000. As
of December 31, 2025, convertible notes payable and accrued interest are convertible into approximately 16,408,334 shares of common stock
at conversion rates ranging from $0.03 to $0.48 per share. As of December 31, 2025, a total of 51 convertible notes and accrued interest
in the aggregate of $1,116,000 have reached maturity and are past due.
Accrued interest
At December 31, 2023, accrued
interest on convertible notes payable totaled $793,000. During the year ended December 31, 2024, accrued interest of $213,000 was recorded.
At December 31, 2024, accrued interest on convertible notes payable totaled $1,006,000.
During the year ended December
31, 2025, accrued interest of $146,000 was recorded. Also, during the year ended December 31 2025, accrued interest on convertible notes
of $607,000 was converted into shares of common stock. At December 31, 2025, accrued interest on convertible notes payable totaled $545,000.
Debt discount
At December 31, 2023, the
unamortized debt discount was $25,000. During the year ended December 31, 2024, debt discount of $905,000 was recorded for the relative
fair value of warrants of $782,000 and OID of $123,000, debt discount amortization of $98,000 was recorded, and $699,000 of debt discount
was removed and included in the carrying amount of related convertible notes payable that were converted into shares of common stock.
At December 31, 2024, the unamortized debt discount was $133,000.
During the year ended December
31, 2025, debt discount of $1,659,000 was recorded for the relative fair value of warrants of $1,430,000 and OID of $229,000, debt discount
amortization of $204,000 was recorded, and $1,572,000 of debt discount was removed and included in the carrying amount of related convertible
notes payable that were converted into shares of common stock. At December 31, 2025, the unamortized debt discount was $16,000.
| | F-14 | | |
|
5. |
PPP Loan Payable | |
In June 2020, the Company
was granted a loan (the PPP loan) from Cadence Bank in the aggregate amount of $151,000, pursuant to the Paycheck Protection
Program (the PPP) under the CARES Act.
At December 31, 2023, the
balance of the PPP loan was $57,000. During the year ended December 31, 2024, the Company paid $33,000 of principal, and at December 31,
2024, the balance of the PPP loan was $24,000. During the year ended December 31, 2025, the Company paid $24,000 of the principal on the
PPP loan, and at December 31, 2025, the PPP loan was paid in full.
|
6. |
Research and Development | |
The Company constructs, develops
and tests the AOT technology 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, viscometers, SCADA systems, computer equipment, direct costs related to
AOT equipment manufacture and installation, payroll and other related equipment and various logistical expenses for the purposes of evaluating
and testing the Companys 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 years ended December
31, 2025 and 2024, our research and development expenses were $1,611,000 and $191,000, respectively.
**Temple University Licensing
Agreement-amount past due**
On August 1, 2011, the Company
entered into two Exclusive License Agreements with Temple University (Temple). One license agreement covered technology
to reduce crude oil viscosity (referred to as the AOT-1 Agreement) and the second license agreement covered technology associated
with an electric and/or magnetic field assisted fuel injector system (referred to as the AOT-2 Agreement, and together the
AOT-1 Agreement, the License Agreements). The License Agreements provide the Company with exclusive, worldwide rights to
Temples patents, patent applications, and technical information related to the respective technologies. Pursuant to the original
terms of the License Agreements, the Company paid Temple a non-refundable license maintenance fee of $300,000 and agreed to pay (i) annual
maintenance fees of $187,500, (ii) royalty fees ranging from 4% to 7% on net sales and extended term net sales, and (iii) 25% of all revenues
generated from sublicenses.
Effective as of September
26, 2025, the Company and Temple executed Amendment No. 2 to the AOT-1 Agreement and Amendment No. 1 to the AOT-2 Agreement, under which
the Company and Temple agreed that total outstanding fees due to Temple through July 31, 2025, were $2,236,000 and $931,000, respectively,
for an aggregate amount of $3,167,000 (collectively, the Outstanding Amounts). The Outstanding Amounts were required to
be paid by October 11, 2025. As of the date of this filing, the Outstanding Amounts have not been paid to Temple. As of December 31, 2025
and December 31, 2024, total unpaid fees due to Temple under the License Agreements amounted to $3,167,000 and $2,433,000, respectively,
which are included in accounts payable license agreements in the accompanying consolidated balance sheets.
| | F-15 | | |
Under the amended agreements,
royalty rates are structured as follows: 7% on the first $20 million of applicable net sales, 6% on sales between $20 million and $40
million, 5% on sales between $40 million and $100 million, and 4% on sales in excess of $100 million. These rates apply both during the
initial term of the agreements and throughout the Extended Term, defined as a period of at least ten (10) years beginning
upon the expiration of the last to expire patent (including continuations, extensions, and foreign counterparts), or upon early termination,
whichever occurs earlier. During the Extended Term, royalties remain payable on all extended term net sales, regardless of patent expiration
or the existence of valid claims.
The amended agreements also
clarified that the Company shall retain exclusive rights to any improvements developed solely by the Company during or after the Extended
Term, and Temple shall have no ownership interest in such improvements. Notwithstanding this, the Company remains obligated to pay royalties
on such sales during the Extended Term.
For the years ended December
31, 2025 and 2024, total expenses recognized under the License Agreements amounted to $698,000 and $188,000, respectively, and are included
in research and development expenses. In addition, the Company recognized penalty interest on past due balances of $36,000 and $48,000
for the years ended December 31, 2025 and 2024, respectively, which is included in interest and financing expense. No revenues were recognized
from these License Agreements during the year ended December 31, 2025 and 2024.
**AOT Prototypes**
During the years ended December
31, 2025 and 2024, the Company incurred total expenses of $913,000 and $3,000, respectively, in the manufacture and testing of the AOT
prototype equipment. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated
statements of operations.
|
7. |
Income Taxes | |
The Company did not provide
for any Federal and State income tax for the years ended December 31, 2025 and 2024 due to the Companys net losses. A reconciliation
of income taxes with the amounts computed at the statutory federal rate follows:
|
Schedule of reconciliation of income taxes | |
| |
|
|
|
| |
| |
|
|
|
| |
|
| |
December31, |
| |
|
| |
2025 |
| |
2024 |
| |
|
Computed tax provision (benefit) at federal statutory rate | |
$ | (3,193,000 | ) |
|
|
21% |
| |
$ | (406,000 | ) |
|
|
21% |
| |
|
Valuation allowance | |
| 3,194,600 | |
|
|
(21% |
) | |
| 406,000 | |
|
|
(21% |
) | |
|
Income tax provision | |
$ | 1,600 | |
|
|
|
| |
$ | | |
|
|
|
| |
The deferred tax assets and
deferred tax liabilities recorded on the balance sheet are as follows:
|
Schedule of deferred tax assets and deferred tax liabilities | |
| | |
| | |
|
| |
December 31, | | |
|
| |
2025 | | |
2024 | | |
|
Net operating loss carry forwards | |
| 13,838,000 | | |
$ | 12,872,000 | | |
|
Stock based compensation | |
| (1,555,000 | ) | |
| (32,000 | ) | |
|
Other temporary differences | |
| (270,000 | ) | |
| (33,000 | ) | |
|
Valuation allowance | |
| (12,013,000 | ) | |
| (12,807,000 | ) | |
|
Total deferred taxes net of valuation allowance | |
| | | |
$ | | | |
| | F-16 | | |
As of December 31, 2025, the
Company had net operating losses available for carry forward for state and federal tax purposes of approximately $66 million expiring
through 2045. These carry forward benefits will be subject to annual limitations due to the ownership change limitations imposed by the
Internal Revenue Code and similar state provisions. The annual limitation, if imposed, may result in the expiration of net operating losses
before utilization.
As of December 31, 2025, the
Company recorded a valuation allowance of $12,013,000 for its deferred tax assets since the Company believes that such assets did not
meet the more likely than not criteria to be recoverable through projected future profitable operations in the foreseeable future. This
valuation is based on the federal corporate tax rate of 21%.
The Company follow FASB guidance
that addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial
statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement. The FASB also provides guidance on de-recognition, classification, interest
and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of December 31, 2025 and 2024, the
Company does not have a liability for unrecognized tax benefits.
The Company files income tax
returns in the U.S. federal jurisdiction and the State of Texas. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years after 2022. During the periods open to examination, the Company has net operating loss and tax credit carry
forwards for U.S. federal and state tax purposes that have attributes from closed periods. Since these net operating losses and tax credit
carry forwards may be utilized in future periods, they remain subject to examination. The Companys policy is to record interest
and penalties on uncertain tax provisions as income tax expense. As of December 31, 2025, the Company has no accrued interest or penalties
related to uncertain tax positions. The Company believes that it has not taken any uncertain tax positions that would impact its consolidated
financial statements as of December 31, 2025 and 2024.
|
8. |
Common Stock | |
**Year Ending December
31, 2025**
During the year ended December
31, 2025, the Company issued an aggregate of 114,925,716 shares of its common stock as follows:
|
|
|
The Company issued 65,523,469 shares of its common stock upon the conversion of $3,344,000 in convertible notes and $606,000 of accrued interest, net of unamortized discount of $1,572,000, pursuant to convertible notes conversion prices of $0.02 to $0.15 per share. | |
|
|
|
| |
|
|
|
The Company issued 36,802,254 shares of its common stock upon the exercise of options and warrants at $0.02 to $0.15 per share, for total proceeds of $1,603,000. | |
|
|
|
| |
|
|
|
The Company issued 2,049,993 shares of its common stock upon the cashless exercise of warrants at $0.03 to $0.15 per share for $104,000, which were applied to the settlement of vendor payables. | |
|
|
|
| |
|
|
|
The Company issued 9,050,000 shares of its common stock for services of $1,451,000 valued at $0.04 to $0.19 per share based on the closing price of the Companys common stock on the dates granted. | |
****
****
****
****
| | F-17 | | |
****
**Year Ending December
31, 2024**
During the year ended December
31, 2024, the Company issued an aggregate of 35,838,409 shares of its common stock as follows:
|
|
|
The Company issued 32,341,748 shares of its common stock upon the conversion of $1,034,000 in convertible notes, net of unamortized discount of $698,000, pursuant to convertible notes conversion prices of $0.03 to $0.05 per share. | |
|
|
|
| |
|
|
|
The Company issued 1,063,332 shares of its common stock upon the exercise of warrants at $0.04 to $0.07 per share, for total proceeds of $52,000. | |
|
|
|
| |
|
|
|
The Company issued 433,329 shares of its common stock upon the cashless exercise of warrants at $0.02 to $0.06 per share for $18,000, which were applied to the settlement of accounts payable. | |
|
|
|
| |
|
|
|
The Company issued 2,000,000 shares of its common stock upon services with a fair value of $140,000, at $0.07 per share. | |
****
|
9. |
Stock Options and Warrants | |
The Company periodically issues
stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. Options
and warrants vest and expire according to terms established at the grant date.
**Options**
Employee options vest according
to the terms of the specific grant and expire from 5 to 10 years from date of grant. The weighted average, remaining contractual life
of employee and non-employee options outstanding at December 31, 2025 was 6.6 years. Stock option activity for the period January 1, 2024
to December 31, 2025, was as follows:
|
Schedule of stock option activity | |
| | |
| | |
|
| |
Options | | |
Weighted Avg. Exercise Price | | |
|
Options outstanding, December 31, 2023 | |
| 25,757,155 | | |
$ | 0.14 | | |
|
Options granted | |
| | | |
| | | |
|
Options exercised | |
| | | |
| | | |
|
Options cancelled | |
| (463,052 | ) | |
| 0.85 | | |
|
Options outstanding, December 31, 2024 | |
| 25,294,103 | | |
$ | 0.13 | | |
|
Options granted | |
| 53,100,138 | | |
| 0.04 | | |
|
Options exercised | |
| (8,640,688 | ) | |
| 0.04 | | |
|
Options cancelled | |
| (738,552 | ) | |
| 0.48 | | |
|
Options outstanding, December 31, 2025 | |
| 69,015,001 | | |
$ | 0.07 | | |
| | F-18 | | |
The weighted average exercise
prices, remaining contractual lives for options granted, exercisable, and expected to vest as of December 31, 2025, were as follows:
|
Schedule of weighted average exercise
prices, remaining contractual lives for options granted, exercisable, and expected to vest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Outstanding Options |
|
|
Exercisable Options |
| |
|
Option
Exercise Price
Per Share |
|
Shares |
|
|
Life
(Years) |
|
|
Weighted
Average
Exercise Price |
|
|
Shares |
|
|
Weighted
Average Exercise
Price |
| |
|
$0.02 - $0.24 |
|
|
66,515,001 |
|
|
|
6.8 |
|
|
$ |
0.06 |
|
|
|
66,515,001 |
|
|
$ |
0.06 |
| |
|
$0.25 - $0.49 |
|
|
2,500,000 |
|
|
|
1.2 |
|
|
|
0.33 |
|
|
|
2,500,000 |
|
|
|
0.33 |
| |
|
|
|
|
69,015,001 |
|
|
|
6.6 |
|
|
$ |
0.07 |
|
|
|
69,015,001 |
|
|
$ |
0.07 |
| |
****
As of December 31, 2025, the
market price of the Companys stock was $0.15 per share. At December 31, 2025 the aggregate intrinsic value of the options outstanding
was $6,051,073.
****
**Options granted during 2025**
|
|
|
In January and February 2025, the Company issued options to purchase 17,482,638 shares of common stock to members of the Board of Directors, including 7,218,750 options issued to the Companys CEO/CFO upon reinstatement of the Director Compensation Policy. 7,656,250 options are exercisable at $0.02 per share, 4,375,000 options are exercisable at $0.04 per share, 2,430,555 options are exercisable at $0.06 per share, 2,187,500 options are exercisable at $0.08 per share, and 833,333 options are exercisable at $0.15 per share. 16,649,305 of the options were fully vested at the date of grant and 833,333 of the options vest through December 31, 2025. Total fair value of these options at grant date was $2,571,000 using the Black-Scholes Option Pricing model with the following assumptions: expected life of 5 to 6 years; risk free interest rate of 4.47% to 4.57%; volatility of 203% to 205%, and dividend yield of 0%. During the year ended December 31, 2025, the Company recognized compensation costs based on the fair value of options that vested of $2,571,000. | |
|
|
|
| |
|
|
|
In January 2025, the Company issued options to purchase 24,317,500 shares of common stock upon execution of an employment agreement with Mr. Cecil Bond Kyte, the Companys CEO/CFO. 20,817,500 options are exercisable at $0.03 per share, and 3,500,000 options are exercisable at $0.15 per share, The options are fully vested at the date of grant, and expire in 10 years. Total fair value of these options at grant date was $3,614,000 using the Black-Scholes Option Pricing model with the following assumptions: expected life of 5 years; risk free interest rate of 4.57%; volatility of 207% and dividend yield of 0%. During the year ended December 31, 2025, the Company recognized compensation costs based on the fair value of options that vested of $3,614,000. | |
|
|
|
| |
|
|
|
In March 2025, the Company issued options
to purchase 1,500,000 shares of common stock to its corporate secretary as compensation. The options are exercisable at a price of $0.03,
one third of the options vested immediately, one third of the options vest in one year, and one third vest in two years. The options expire
in 10 years. Total fair value of these options at grant date was $238,000 using the Black-Scholes Option Pricing model with the following
assumptions: expected life of 6 years; risk free interest rate of 4.32%; volatility of 179% and dividend yield of 0%. During the year
ended December 31, 2025, the Company recognized compensation costs based on the fair value of options that vested of $143,000.
| |
|
|
|
During 2025, the Company issued options
to purchase 9,800,000 shares of common stock in exchange for services. The options are exercisable at a price of $0.03, vest up to two
years from the date of grant, and expire 5 to 10 years from the date of grant. Total fair value of these options at grant date was $1,575,000
using the Black-Scholes Option Pricing model with the following assumptions: life of 2.5 to 6 years; risk free interest rate of 3.92%
to 4.32%; volatility of 179% to 201% and dividend yield of 0%. During the year ended December 31, 2025, the Company recognized compensation
costs based on the fair value of options that vested of $1,020,000.
| |
****
****
****
****
| | F-19 | | |
****
**Options granted in 2024**
During the year ended December 31, 2024,
the Company did not issue any options.
****
**Warrants**
The following table summarizes
certain information about the Companys stock purchase warrants.
|
Schedule of warrants activity | |
| | |
| | |
|
| |
Warrants | | |
Weighted Avg. Exercise Price | | |
|
Warrants outstanding, December 31, 2023 | |
| 17,953,239 | | |
$ | 0.06 | | |
|
Warrants granted | |
| 44,340,676 | | |
| 0.04 | | |
|
Warrants exercised | |
| (1,496,661 | ) | |
| 0.05 | | |
|
Warrants cancelled | |
| (16,753,245 | ) | |
| 0.06 | | |
|
Warrants outstanding, December 31, 2024 | |
| 44,044,009 | | |
$ | 0.04 | | |
|
Warrants granted | |
| 31,823,611 | | |
| 0.10 | | |
|
Warrants exercised | |
| (30,211,559 | ) | |
| 0.04 | | |
|
Warrants expired | |
| (33,333 | ) | |
| 0.13 | | |
|
Warrants outstanding, December 31, 2025 | |
| 45,622,728 | | |
$ | 0.08 | | |
At December 31, 2025 the price
of the Companys common stock was $0.15 per share and the aggregate intrinsic value of the warrants outstanding was $3,091,990.
As of December 31, 2025, 45,589,395 warrants were fully vested and 33,333 warrants vest in January 2026.
|
Schedule of weighted average exercise
prices, remaining contractual lives for warrants granted, exercisable, and expected to vest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Outstanding Warrants |
|
|
Exercisable Warrants |
| |
|
Option
Exercise Price
Per Share |
|
Shares |
|
|
Life
(Years) |
|
|
Weighted
Average
Exercise Price |
|
|
Shares |
|
|
Weighted
Average Exercise
Price |
| |
|
$0.02 - $0.24 |
|
|
45,489,396 |
|
|
0.6 |
|
|
$ |
0.08 |
|
|
|
45,456,063 |
|
|
$ |
0.08 |
| |
|
$0.25 - $0.49 |
|
|
133,332 |
|
|
1.6 |
|
|
|
0.28 |
|
|
|
133,332 |
|
|
|
0.28 |
| |
|
|
|
|
45,622,728 |
|
|
0.6 |
|
|
$ |
0.08 |
|
|
|
45,589,395 |
|
|
$ |
0.08 |
| |
| | F-20 | | |
**Warrants granted in 2025**
|
|
|
During 2025, pursuant to terms of convertible notes issued, the Company granted warrants to purchase 31,423,615 shares of common stock with an exercise price of $0.10 per share, vesting immediately upon grant and expiring one year from the date of grant. | |
|
|
|
| |
|
|
|
During 2025, pursuant to terms of consulting agreements, the Company granted warrants to purchase 399,996 shares of common stock with an exercise price of $0.14 to $0.30 per share, vesting one month from the date of grant and expiring intwo years. Total fair value of these options at grant date was approximately $60,000 determined using the Black-Scholes Option Pricing model with the following assumptions: life of 2 years; risk free interest rate of 3.57% to 4.82%; volatility of 147% to 158% and dividend yield of 0%. During the year ended December 31, 2025, the Company recognized compensation expense of $59,000 based on the fair value of the warrants that vested. | |
|
|
|
| |
|
|
|
During 2025, the Company extended the expiration date of warrants to purchase 13,796,200 shares of common stock. The warrants had been issued to certain consultants and certain investors, and the modifications were executed to compensate the warrant holders for services provided. The Company measured the fair value of the modified warrants as of the modification date and compared it to the fair value of the warrants immediately before modification. The incremental fair value resulting from the modification was determined to be $511,000 using a Black-Scholes Option Pricing model with the following assumptions: life of 1 to 2 years; risk free interest rate of 3.94% to 4.31%; volatility of 133% to 154% and dividend yield of 0%. The warrants were fully vested on the modification date, and the full incremental fair value of $511,000 was recognized as stock-based compensation - warrant modification. | |
**Warrants granted in 2024**
|
|
|
During 2024, pursuant to terms of convertible notes issued, the Company granted warrants to purchase 42,457,348 shares of common stock with an exercise price of $0.04 to $0.07 per share, vesting immediately upon grant and expiring one year from the date of grant. | |
|
|
|
| |
|
|
|
During 2024, pursuant to terms of consulting agreements, the Company granted warrants to purchase 1,883,328 shares of common stock with an exercise price of $0.03 to $0.15 per share, vesting up to one month from the date of grant and expiring one to two years from the date of grant. Total fair value of these options at grant date was approximately $152,000 determined using the Black-Scholes Option Pricing model with the following assumptions: life of 1 to 2 years; risk free interest rate of 3.55% to 4.97%; volatility of 167% to 188% and dividend yield of 0%. During the year ended December 31, 2024, the Company recognized compensation expense of $150,000 based on the fair value of the warrants that vested. | |
| | F-21 | | |
|
10. |
Related Party Transactions | |
**Employment Agreement
with CEO/CFO**
Effective April 15, 2021,
Cecil Bond Kyte was appointed to serve as the Companys Chief Executive Officer and Chief Financial Officer upon mutually acceptable
terms and conditions to be determined at a later date subject to the Companys financial condition. From April 15, 2021 through
July 7, 2024, Mr. Kyte served as the Companys CEO and CFO without compensation. For the period July 7, 2024, through December 31,
2024, the Company paid Mr. Kyte $210,000for his services as CEO and CFO of the Company.
On February 19, 2025, effective
January 1, 2025, the Company entered into an employment agreement (the Employment Agreement) with Mr. Kyte to serve as the
Companys CEO and CFO, with an annual base salary of $420,000. In addition, the Employment Agreement provides for the payment of
a retention bonus (Bonus) in the amount of $1,557,500to Mr. Kyte, $519,167of which was paid in January 2025
to Mr. Kyte on execution of the Employment Agreement; $519,167 of the Bonus was paid in part in May 2025 in anticipation of the execution
of a customer contract with VIPS Petroleum, and the balance of that payment was paid in June and July 2025 to Mr. Kyte; and, $519,166of
the Bonus will be paid to Mr. Kyte upon the execution, closing, and effective date of debt or equity financing in favor of the Company
in the amount of no less than $5,000,000.
As part of the Employment
Agreement, Mr. Kyte was also issued a stock option exercisable into20,817,500shares of the Companys restricted common
stock at an exercise price of $0.03per share, and a stock option exercisable into3,500,000shares of the Companys
restricted common stock at an exercise price of $0.03per share. (See Note 9, above.) The stock options vested immediately and expire
in ten years. Mr. Kyte was also issued stock options exercisable into7,218,750shares of the Companys restricted stock
in his capacity as a member of the Board of Directors and as a Chairman of the Board who oversees financial and audit functions, which
vest up to one year, and have an exercise price of $0.02 to $0.15 per share.
**Accrued Expenses Related Party**
As of December 31, 2025 and
2024, total accrued expenses related parties amounted to $0 and $6,000 and are included in accrued expense on the accompanying
consolidated balance sheet. The accrued expenses related parties consist of unpaid board and committee fees to members of the
Companys Board of Directors.
**Reimbursements for Rent
Related Party**
****
The Company reimburses Cecil
Bond Kyte, Company CEO and CFO, in rent expenses for a home office and partial storage space in Carson City, Nevada at a rate of $1,000
per month under a month-to-month rental agreement (Carson Rental Agreement). Total rent expense under the Carson Rental
Agreement during the years ended December 31, 2025, and 2024 were $3,000 and $12,000, respectively which are included as part of Operating
Expenses in the attached consolidated statement of operations.
| | F-22 | | |
|
11. |
Commitments and Contingencies | |
We are involved in certain
legal proceedings that arise from time to time in the ordinary course of our business. Except for income tax contingencies, we record
accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the related amounts of
loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. 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.
At December 31, 2025 and 2024,
the Company has recorded $197,000 related to certain contractually provided benefits to a former executive officer pursuant to a severance
agreement. The former executive officer disputes the amount of $197,000, claiming the amount is less than the amount to which he believes
he is owed. Absent an agreement to settle the dispute, and in the event the former executive officer elects to initiate litigation regarding
the dispute, including claims for interest and penalties to which the former executive officer believes he is entitled, the Company has
reserved, and if necessary and appropriate will assert, all factual and legal defenses, counter-claims, rights, and remedies it may have
in any such suit. The Company believes it has recorded an appropriate accrual for the matter.
**Significant Agreement**
In 2024, the Company entered
into a Collaboration Agreement with VIPS Petroleum, LLC (VIPS) to collaborate with them in facilitating the deployment of
our AOT technology and products to VIPS customers. On June 25, 2025, the Company entered into a Distributor Agreement with VIPS,
providing for VIPS to serve as our exclusive distributor to promote, sell, and lease our AOT product in the territories of Malaysia, Ghana,
and India, among other territories. To date, we have not received any purchase orders under the Distributor Agreement, nor has our AOT
product been placed with, nor currently being used by, any of VIPS customers or anyone else.
The Distributor Agreement,
as amended, provides that upon the Companys receipt of payment for the purchase of two AOT Units, the Company shall issue VIPS/Stephen
Bosco a stock purchase warrant exercisable into 25,000,000 restricted shares of the Companys common stock, at a price of
$0.07 cents per share (the Exercise Price). The warrant will vest on issuance and expire three years from the date of issuance.
VIPS payment of the Exercise Price shall be rebate-based, meaning, for every AOT Unit sold by the Company to VIPS, the Company
will process a post-sale rebate of 15% of the purchase price to VIPS. Post-sale rebates due VIPS, up to a maximum of $1,750,000, will
be applied to, and be deemed payment of, the Exercise Price.
To date, we have not received
any purchase orders, nor generated any revenue, under the Distributor Agreement, as amended, nor has our AOT product been placed with,
nor is it currently being used by, any of VIPS customers or anyone else, and we can provide no assurances that our AOT product
will be accepted or purchased by VIPS, or any of its customers, or anyone else.
Subsequent to year-end the Company, together with VIPS and stakeholders identified under the VIPS Distributor
Agreement, advanced the India commercialization pathway as reflected in the non-binding Laksel LOI. (See Note 13, below.)
| | F-23 | | |
**12. Segment information**
The Company operates and manages its business
as one reportable and operating segment dedicated to biopharmaceutical research and development company specializing in oncology. The
measure of segment assets is reported on the balance sheet as total consolidated assets. In addition, the Company manages the business
activities on a consolidated basis.
The Companys CODM reviews financial information
presented on a consolidated basis and decides how to allocate resources based on consolidated net income (loss).
Significant segment expenses include research
and development, salaries, insurance, and stock-based compensation. Operating expenses include all remaining costs necessary to operate
our business, which primarily include external services and other administrative expenses. The following table presents the significant
segment expenses and other segment items regularly reviewed by our CODM:
|
Schedule of significant segment expenses | |
| | |
| | |
|
| |
Year ended December 31, | | |
|
| |
2025 | | |
2024 | | |
|
Revenue | |
$ | | | |
$ | | | |
|
| |
| | | |
| | | |
|
Less: | |
| | | |
| | | |
|
Research and development | |
| (1,611,000 | ) | |
| (191,000 | ) | |
|
Payroll and related | |
| (1,944,000 | ) | |
| (296,000 | ) | |
|
Share-based compensation | |
| (9,609,000 | ) | |
| (292,000 | ) | |
|
Consulting related to intellectual property | |
| (1,072,000 | ) | |
| (439,000 | ) | |
|
Insurance | |
| (159,000 | ) | |
| (77,000 | ) | |
|
Operating expenses | |
| (521,000 | ) | |
| (281,000 | ) | |
|
Interest expense | |
| (389,000 | ) | |
| (358,000 | ) | |
|
Net loss | |
$ | (15,305,000 | ) | |
$ | (1,934,000 | ) | |
|
13. |
Subsequent Events | |
****
In January 2026, the Company
issued 1,691,250 shares of its common stock upon the conversion of notes payable and accrued interest thereon at a conversion price of
$0.08 per share.
In January through March 2026,
pursuant to terms of a consulting agreement, the Company granted warrants to purchase 99,999 shares of common stock with an exercise price
of $0.09 to $0.10 per share, vesting one month from grant and expiring two years from the date of grant.
In January through February
2026, the Company issued 4,718,188 shares of its common stock upon the exercise of warrants for proceeds of $472,000 at an exercise price
of $0.10 per share.
On March 30, 2026, as a continuation
of the Company's previously disclosed collaboration and distribution arrangements with VIPS (see Note 11, above), the Company entered
into a non-binding letter of intent with Laksel Corporation Pte Ltd ("Laksel") titled "Applied Oil Technology (AOT) India
Deployment Program" (the "Laksel LOI") that contemplates the deployment of 150 units of the Company's Applied Oil Technology
("AOT"). The parties intend to establish a jointly held special purpose vehicle incorporated in India to serve as the primary
operating entity for the program. The program is subject to the commitment of senior secured financing, negotiation and execution of definitive
agreements among all parties, satisfaction of the conditions precedent set forth in such agreements, and receipt of required corporate,
governmental, and regulatory approvals. The Laksel LOI is expressly non-binding, does not create any obligation on either party to proceed
with the program or any related transaction, and may be terminated by either party in accordance with its terms. As of the date of this
report, no revenues have been recognized and no amounts are payable under the Laksel LOI.
| | F-24 | | |