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 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 Form 10-K is as of December 31, 2021, and we
undertake no duty to update this information.
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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 2022.
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 2021 and also need to
raise substantial additional capital in 2021, and possibly beyond, to fund our
sales and marketing efforts, continuing research and development, and certain
other expenses, until our revenue base grows sufficiently.
QS Energy operations have been minimally impacted by COVID-19; however, COVID-19
has had a significant negative financial impact across a wide spectrum of
industries, both in terms of operations and access to operating capital. The
Company's ability to continue operations is, in part, dependent on our access to
funding. A published by the National Association of Manufacturers in March 2020
reports that due to COVID-19, 35% of manufacturers surveyed anticipate supply
chain disruptions, 53% anticipate changes to operations, and 78% anticipate a
negative financial impact. With these facts in mind, no assurances can be made
that COVID-19 will not materially affect operations or negatively impact our
ability to fund continued operations.
Results of Operation
QS ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
12/31/2021
2021 2020 Change % Change
Revenues $ - $ - $ - -
Operating expenses 837,000 1,468,000 (631,000 ) (43% )
Research and development expenses 350,000 355,000 (5,000 ) (1% )
Loss from operations
(1,187,000 ) (1,823,000 ) (636,000 ) (35% )
Interest and financing expense (233,000 ) (592,000 ) (359,000 ) (61% )
Net Loss $ (1,420,000 ) $ (2,415,000 ) $ (995,000 ) (41% )
Revenue Comparison, 2021 and 2020
The Company recognized no revenues during the twelve-month periods ended
December 31, 2020 and December 31, 2021.
Operating Expense Comparison, 2021 and 2020
Operating expenses were $837,000 for the fiscal year ended December 31, 2021,
compared to $1,468,000 for the fiscal year ended December 31, 2020, a decrease
of $631,000. This decrease was attributable to a decreases in non-cash expenses
of $272,000 and in cash expenses of $359,000. Specifically, the decrease in
non-cash expenses is attributable to a decrease in stock-based compensation
related to directors and employees of $310,000, offset by an increase in
stock-based compensation related to consultants of $38,000. The decrease in cash
expenses is attributable to decreases in salaries and benefits of $302,000,
insurance of $86,000, legal and accounting fees of $39,000, public and investor
relations of $28,000, corporate expenses of $8,000, market expenses of $6,000,
mail and freight of $4,000, and travel expenses of $3,000, offset by increases
in office expenses of $35,000, consulting fees of $32,000, rent of $25,000,
computer expenses of $12,000, auto expenses of $5,000, patent maintenance
expenses of $5,000, meals and entertainment of $2,000, and other expenses of
$1,000.
Research and development expenses were $350,000 for the fiscal year ended
December 31, 2021, compared to $355,000 for the fiscal year ended December 31,
2020, a decrease of $5,000. This decrease is attributable to AOT prototype and
demonstration project development costs.
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Interest expenses were $233,000 for the fiscal year ended December 31, 2021,
compared to $592,000 for the fiscal year ended December 31, 2020, a decrease of
$359,000. This decrease is attributable to a decrease in interest and financing
expense of $96,000 to account the relative fair value of the warrants issued
with our convertible notes and the notes' beneficial conversion feature that
were recorded as note discounts.
We had a net loss of $1,420,000 or $0.00 loss per share for the fiscal year
ended December 31, 2021 compared to a net loss of $2,415,000 or $0.01 loss per
share for the fiscal year ended December 31, 2020.
Liquidity and Capital Resources
General
We have incurred negative cash flow from operations since our inception in 1998.
As of December 31, 2021, we had cash of $114,000 and a stockholders' deficit of
$4,173,000. Our operating cash flow in 2021 was funded primarily through cash
reserves, the exercise of stock purchase warrants and options for cash, and the
issuance of convertible notes for cash.
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, the Company had a net loss
of $1,420,000 and used cash in operations of $722,000 for the year ended
December 31, 2021. In addition, as of December 31, 2021, notes payable with an
aggregate balance of $1,333,000 and certain obligation to a former officer are
past due. These factors raise substantial doubt about our ability to continue as
a going concern within one year after the date that the financial statements are
issued. Our ability to continue as a going concern is dependent upon our ability
to raise additional funds and implement our business plan. The consolidated
financial statements do not include any adjustments that might be necessary if
we are unable to continue as a going concern.
Summary
At December 31, 2021, the Company had cash on hand in the amount of $114,000.
Management estimates that the current funds on hand will be sufficient to
continue operations through September 2022. 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
2021 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 stock holders, in case of equity financing.
Contractual Obligations
The Company's contractual commitments for future periods, including minimum
guaranteed compensation payments and other agreements as described in the
following table and associated footnotes:
Year ending License Compensation Total
December 31, Agreements (1) Agreements Obligations
2022 $ 187,500 $ 197,000 $ 384,500
2023 187,500 - 187,500
2024 187,500 - 187,500
2025 187,500 - 187,500
2026 187,500 187,500
Total $ 937,500 $ 197,000 $ 1,134,500
___________________
(1) Consists of license maintenance fees to Temple University in the amount of
$187,500 paid annually through the life of the underlying patents or until
otherwise terminated by either party. For details of the Temple Licensing
Agreements, see Note 6 of the Financial Statements, attached hereto.
25
Licensing Fees to Temple University
For details of the licensing agreements with Temple University, see Financial
Statements attached hereto, Note 6.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements and related
disclosures requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, expenses, and related disclosure of contingent
assets and liabilities. We evaluate, on an on-going basis, our estimates and
judgments, including those related to the useful life of the assets. We base our
estimates on historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results that we report in
our consolidated financial statements. The SEC considers an entity's most
critical accounting policies to be those policies that are both most important
to the portrayal of a company's financial condition and results of operations
and those that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about matters that
are inherently uncertain at the time of estimation. For a more detailed
discussion of the accounting policies of the Company, see Note 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 option and warrant grants issued and
vesting to employees based on the authoritative guidance provided by the
Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. From prior periods
until December 31, 2018, the Company accounted for share-based compensation
issued to non-employees and consultants in accordance with the provisions of
FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of
share-based payment transactions with non-employees is based on the fair value
of whichever is more reliably measurable: (a) the goods or services received or
(b) the equity instruments issued. The final fair value of the share-based
payment transaction is determined at the performance completion date.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU
2018-07"). The guidance was issued to simplify the accounting for share-based
transactions by expanding the scope of ASU 2018-07 from only being applicable to
share-based payments to employees to also include share-based payment
transactions for acquiring goods and services from nonemployees. As a result,
nonemployee share-based transactions will be measured by estimating the fair
value of the equity instruments at the grant date, taking into consideration the
probability of satisfying performance conditions. We adopted ASU 2018-07 on
January 1, 2019. The adoption of the standard did not have a material impact on
our financial statements for the year ended December 31, 2020 or the previously
reported financial statements.
26
The fair value of the Company's common 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 common stock options, and future dividends. Compensation expense is
recorded based upon the value derived from the Black-Scholes Option Pricing
model and based on actual experience. The assumptions used in the Black-Scholes
Option Pricing model could materially affect compensation expense recorded in
future periods.
Recent Accounting Pronouncements
See Note 1 of the financial statements for discussion of recent accounting
pronouncements.
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QS ENERGY, INC. 
