The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and supplementary data referred to in this Form 10-Q.
This discussion contains forward-looking statements that involve risks and
uncertainties. Such statements, which include statements concerning future
revenue sources and concentration, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed elsewhere in this Form 10-Q, and in the "Risk
Factors" that could cause actual results to differ materially from those
projected. Unless otherwise expressly indicated, the information set forth in
this Form 10-Q is as of March 31, 2021, and we undertake no duty to update this
information.
Overview
QS Energy, Inc. ("QS Energy" or "Company" or "we" or "us" or "our") develops and
seeks to commercialize energy efficiency technologies that assist in meeting
increasing global energy demands, improving the economics of oil transport, and
reducing greenhouse gas emissions. The Company's intellectual properties include
a portfolio of domestic and international patents and patents pending, a
substantial portion of which have been developed in conjunction with and
exclusively licensed from Temple University of Philadelphia, PA ("Temple"). QS
Energy's primary technology 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 is designed to reduce crude oil viscosity by applying a
high intensity electrical field to crude oil while in transit.
Our Company was incorporated on February 18, 1998, as a Nevada Corporation under
the name Mandalay Capital Corporation. The Company changed its name to Save the
World Air, Inc. on February 11, 1999. Effective August 11, 2015, the Company
changed its name to QS Energy, Inc. The name change was affected through a
short-form merger pursuant to Section 92A.180 of the Nevada Revised Statutes.
Additionally, QS Energy Pool, Inc., a California corporation, was formed as a
wholly owned subsidiary of the Company on July 6, 2015 to serve as a vehicle for
the Company to explore, review and consider acquisition opportunities. To date,
QS Energy Pool has not entered into any acquisition transaction. However, the
Company may still consider entering into potential beneficial acquisitions. The
Company is considering dissolving QS Energy Pool to reduce costs associated with
operating this subsidiary. The Company's common stock is quoted under the symbol
"QSEP" on the Over-the-Counter Bulletin Board. More information including the
Company's updates, fact sheet, logos and media articles are available at our
corporate website, www.qsenergy.com.
As previously reported in our Form 10-K filed with the SEC on July 22, 2021, QS
Energy's AOT technology has been tested in a variety of configurations at
small-scale in the laboratory and at full-scale in the field under commercial
operating conditions, including tests performed U.S. Department of Energy, the
PetroChina Pipeline R&D Center, and ATS RheoSystems, a division of CANNON™. The
Company's first two full-scale midstream pipeline installations were on
TransCanada's Keystone pipeline in 2014 and a pipeline operated by Kinder Morgan
Crude & Condensate, LLC in 2015. Tests performed at these two facilities were
limited due primarily to technical issues with the AOT equipment. Although tests
at these facilities provided limited sets of data, the equipment did not operate
properly, and no conclusions could be reached regarding the efficacy or
commercial viability of the AOT technology. Also, in 2014, the Company began
development of a product based on an electrical heat system which reduces oil
viscosity through a process known as joule heat ("Joule Heat"). In December
2015, we suspended Joule Heat development activities to focus Company resources
on finalizing commercial development of the AOT. For more information regarding
prior history, development and testing of the AOT technology, and specifics
regarding these earlier tests and technical issues experience, please refer to
our Form 10-K filed with the SEC on July 22, 2021.
In July 2017, the Company filed for trademark protection for the word "eDiluent"
in advance of rolling out a marketing and revenue strategy based on the concept
of using AOT to reduce pipeline dependence upon diluent to reduce viscosity of
crude oils. A primary function of AOT is to reduce viscosity by means of its
solid-state electronics technology, in essence providing an electronic form of
diluent, or "eDiluent". Subject to successful testing of our AOT technology and
the availability of sufficient operating capital, the Company plans to market
and sell a value-added service under the name eDiluent, designed to be upsold by
the Company's midstream pipeline customers in an effort to provide the Company
with long-term recurring revenues.
14
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 could be ideal for demonstration purposes, delivering heavy crudes which,
based on samples tested at Temple University, and, subject to the discussion
below, could experience significant viscosity reduction when treated with our
AOT technology.
While management focused on finding a partner and finalizing terms of the
demonstration project, and in our continuing efforts to commercialize our AOT
technology, our engineering team worked throughout 2018 to prepare one of our
inventoried AOT units for deployment. All system upgrades, inspections and
testing protocols were completed in December 2018. The pipeline operator
finalized site selection and began site design and engineering in January 2019,
completing site preparation and equipment installation in June 2019. The project
was installed within budget, quality compliant, and without safety incidents.
The system passed the pre-start safety review, data acquisition signal
verifications, and mechanical inspections. Under full crude oil flow, the system
was confirmed to have no leaks and no environmental issues were noted. Data
collected during the 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
reliability engineering effort.
During initial testing with the small power supply, current draw was greater
than prior field deployments. While it was expected that the small power supply
would not achieve treatment voltage, as voltage was increased, actual current
draw experienced under test conditions exceeded the operating limit of the power
supply. Subsequent laboratory and in-field testing performed at our then Tomball
facility showed the electrical conductivity of the oil to be quite high and in
line with field observations. Although these tests indicated the unit was
generally functioning properly, results further indicated the damaged power
supply, once repaired, would not be capable of providing sufficient power to
fully treat the crude oil due to the oil's high electrical conductivity. In
anticipation of this result, the Company had initiated parallel tasks in advance
of testing of: i) installation of the repaired power supply and performance of
limited testing to confirm laboratory and in-field test results; and ii)
procurement of a new power supply capable of providing significantly more power
and a modified AOT grid pack assembly reconfigured and generally optimized based
on the latest laboratory and in-field test results.
When the repaired power supply was installed in August 2019, the system operated
as expected, and limited testing was performed. Results of this limited testing
were consistent with laboratory tests performed to date. As expected, however,
the repaired power supply was not capable of providing sufficient power to fully
treat the crude oil under commercial operating conditions. Based on results of
this limited testing, Company engineers completed designs and began
implementation of modifications to the AOT internal grid pack assembly.
The new high capacity power supply and modified grid pack were installed in
December 2019. However, prior to flooding the system with crude oil, early-phase
startup testing indicated an electrical short circuit. Subsequent inspection
revealed damage to the internal grid pack which likely occurred during
installation or during the startup testing cycle. The grid pack was shipped
offsite for repairs with reinstallation scheduled for January 2020.
The AOT demonstration project continued to experience setbacks during the first
quarter 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.
15
Executing this plan, our team removed the modified grid pack and re-installed
the original grid pack assembly in January 2020. After removal, our engineers
performed a detailed inspection of the modified grid pack. Inconsistent with
expectations, no damage to the modified grid pack was found during this
inspection, leaving the cause of the electrical short circuit undiagnosed.
In January and February 2020, our engineers tested and attempted to operate the
AOT under a variety of conditions. In these tests, the system could be run at
high voltage under static "shut-in" conditions; however, the system continued to
shut down due to an electrical short circuit when operated under pressure. In
simple terms, this means the system could be flooded with crude oil and powered
up in excess of 10,000 volts when the system was shut-in by closing the intake
and outtake valves which isolates the system from the pipeline's operating
pressure. However, once the valves were opened and the system was subjected to
the pipeline's operating pressure, the system developed an electrical short
circuit and shut down.
As the presence of high pressure appeared to trigger the short circuit, our
engineers believed it is unlikely the fault was in the grid pack assembly as
this component was fully submerged in crude oil and would generally be subjected
to equal pressure on all components. The electrical short was more likely
developing in the electrical connection assembly built into the blind flange at
the top of the pressure vessel, which would be subjected to high pressure under
normal operating conditions. Unfortunately, this electrical connection assembly
could not be inspected without destroying the assembly itself. Instead, our
engineers developed a plan to replace the installed the blind flange and
electrical connection assembly with components from inventory which would be
rebuilt prior to installation.
As part of an ongoing reliability-engineering effort, our engineers at that
time worked on incremental modifications to improve electrical isolation within
the blind flange and electrical connection assembly. These previously developed
plans allowed us to move quickly with vendors and present an expedited plan to
the pipeline operator. In March 2020, our engineers designed modifications to
the blind flange, electrical connections and related housing intended to
minimize the effects of high pressure and likelihood of internal electrical
short circuits. Concurrently, a blind flange with high voltage assembly was
shipped from inventory to a shop with specialized equipment used to strip the
flange of all electrical insulation materials. Once the stripping process was
complete, castings were made to complete the internal assembly. Our engineers
believed at the time that this modification could solve the electrical short
issue we have experienced in prior tests.
While the blind flange assembly was being remanufactured, we took the
opportunity to implement a number of relatively minor modifications to other
system configurations which had been planned for future units based on results
of our engineering team's reliability engineering work over the past two years.
These modifications were designed to improve the reliability of internal
electrical connections, increase the structural support of the internal grid
pack, and maintain higher quality control over internal component positioning
and alignment during vertical installation.
Notwithstanding our efforts, the AOT system continues to be non-operational
under normal operating conditions. As reported in previous updates on our
website at https://qsenergy.com/updates and in our Form 8-K filed with the SEC
on March 4, 2020, the AOT system experienced shutdowns during the commissioning
process. In December 2019, after installing a modified grid pack and new
high-capacity power supply, the system shut down presenting with an electrical
short which was determined to be due to damage to the system's internal grid
pack likely incurred during installation. After repairing and re-installing the
modified grid pack in January 2020, the system shut down again during
commissioning presenting with error conditions similar to the December 2019
failure. At that time, based on external inspections and on-site testing, our
engineers suspected the grid pack had again been damaged during re-installation
and that such suspected damage was the most likely cause of the electrical short
circuit. As reported in our January 24, 2020 website update page, it was
determined at that time the best course of action would be to remove the
modified grid pack and re-install the original grid pack which had previously
been installed multiple times without sustaining damage, and perform a detailed
inspection of the modified grid pack in an effort to determine the cause of the
electrical short circuit.
We have tested and attempted to operate the AOT under a variety of conditions.
As noted above, we have been able to bring the system up to high voltage under
static "shut-in" conditions; however, the system continued to shut down due to
an electrical short circuit when operated under pressure. Because of our
inability to fully diagnose the cause of our current electrical problems, we can
provide no assurances that we will not face other operational issues after
completing a full diagnosis and evaluation of our technology.
16
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 Company's 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 Company's website at https://qsenergy.com/updates, the Company has
experienced a number of difficulties and delays at the demonstration site.
Despite identifying and implementing numerous design modifications over the past
several months, the Company has been unable to successfully operate its AOT
equipment.
In late June 2020, equipment modifications intended to mitigate electrical short
circuit issues identified in earlier tests were completed. During startup
testing, the system experienced a new failure mode in which the system could be
operated at a baseline high voltage (well below operational voltage required to
treat heavy crude), but after a period of time, the system would drop to very
low voltage indicating a reduction in electrical resistance in the AOT. This
voltage drop was both dynamic, developing over time as electrical current was
applied; and transient, in that the power supply could be shut-down and
re-started with this voltage drop characteristic repeating. After reviewing
these results and running subsequent in-field tests at the direction of the
power supply manufacturer, they recommended a configuration modification to the
control module of the system's high-voltage power supply which, in their
experience, could resolve the system's ability to maintain constant voltage
under our unique operating conditions in which the AOT essentially acts as a
very large capacitor. During the first week of July 2020, we modified the power
supply control module at the direction of the power supply manufacturer. Though
this modification did appear to solve the voltage drop issue, the AOT could not
achieve operational voltage as the system control module indicated arc-faults
when high voltage was applied above the baseline voltage levels. After many
attempts to bring the system up to operating voltage, arc-faults continued until
the AOT demonstrated symptoms of what appeared to be a dead short (electrical
short-to-ground; voltage dropped to zero) and the system could no longer be
re-started.
Our engineers have working concepts as to what may be causing this most recent
failure but will not be able to fully diagnose these issues at the demonstration
site. After discussions with our demonstration pipeline partner, it was mutually
agreed that the best course of action would be to move the equipment from the
demonstration site to another location where our engineers could disassemble and
inspect the equipment. Our AOT equipment has been moved to storage, inspection,
and testing sites in the state of Mississippi and in Tomball, Texas. Our former
demonstration partner has indicated their continued interest in our AOT
technology and may consider installation and operation of a new AOT
demonstration project if our operational issues can be resolved.
Though our engineers have working concepts as to what may be causing the most
recent voltage drop and arc-fault issues, it is unknown whether these issues can
be solved with minor modifications to the current design. To fully diagnose and
resolve these issues, new testing would likely need to be performed in a
laboratory setting. The time and cost of implementing such a plan would likely
be significant. The Company did not have sufficient capital to take on this
endeavor. We shut down all testing of our AOT product in July 2020, due to a
lack of operating capital. See, however, note 11 (Subsequent Events) of our
Consolidated Financial Statements, attached to our Form 10-K filed with the SEC
on July 22, 2021, for an update of limited capital we received in the first two
quarters of 2021, allowing us to commence some additional testing of our AOT
product.
Following our receipt of the limited capital identified in the paragraph above,
and under new management, our engineer went to the new site of our AOT equipment
to inspect the condition of the equipment and develop logistics of testing going
forward. Our engineer commenced re-testing operations in June 2021. Our engineer
has reported that the AOT has been unloaded and the electrical connection has
been ordered. The unit will undergo testing to try and duplicate the electrical
short condition experienced at the test site. After initial testing, a
troubleshooting sequence will be performed to attempt to identify the location
of the short. If an electrical short can be found based on our hypothesis, we
intend to resolve it. If the electrical short cannot be found the AOT will be
disassembled and tested in pieces, assuming we are able to raise sufficient
capital to do so. Additionally, laboratory materials testing of the electrical
insulation will be initiated. Measurement of the electrical properties of both
newly cast and material both exposed and submerged in fluid will be done to
determine if the resin remains our material of choice. Our engineer reports that
he is expecting to visit the AOT in July 2021 to inspect all the connections and
conduct initial testing while the AOT is empty. He further reports that lab test
fixtures are being designed and initial designs could be available for review in
August 2021. Because of our inability fully to diagnose the cause of our current
electrical problems, we can provide no assurances that we will not face other
operational issues after completing a full diagnosis and evaluation of our
technology, requiring additional capital, which, as stated above, may not be
available to us.
17
During the visit a plan was developed to prepare the location for the inspection
and testing of the AOT and AOT components. A transformer was needed to provide
power to the power supply. Due to supply chain issues the transformer delivery
was delayed until July.
Re-testing of the AOT began in July and the dead short condition that had
developed during the demonstration was not present. Various tests were conducted
to control variables and identify possible reasons for the arcs and short
circuits. We ran tests to isolate debris, plate spacing, alignment of grid pack,
presence of oil and presence of the pressure vessel. The best results obtained
with the new stackwere when the stack had been cleaned, assembled in a hanging
position and was outside of the vessel.
For comparison the old stack was tested in a similar manner, and, by chance,
arcs were observed near insulated parts. The stack was inspected where the arcs
were witnessed, and damaged insulation was found. It seems likely these
locations failed during the demonstration and led to the short circuits.
Testing of grid screens in isolation showed the ability to achieve much higher
voltages. More testing needs to be done to find methods to control the variables
in a full stack to achieve similar voltages. So far it seems plate alignment and
flatness must be improved. Secondarily, constraining the stack alignment during
installation should also be improved. As we isolate additional variables, we
hope to be able to see if there are additional constraints that will need to be
incorporated into the design of a new stack.
If we are able to raise sufficient capital to continue our ongoing research,
development, and testing efforts for a full scale AOT, we would also consider
designing, testing and commercializing a smaller scale AOT unit targeting
upstream, trucking and rail applications. This strategy could reduce development
time and costs, with the intention of moving back into the midstream crude oil
pipeline market subsequent to successful commercial operations at a smaller
scale.
The Company currently has limited capital resources and will need to raise
substantial capital to continue operations. We are considering all options but
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, nor can
we provide any assurances that if capital would be available to us on acceptable
terms, any redesign and testing of our AOT equipment would prove successful.
Assuming the corrective actions discussed above are achieved, our plans moving
forward are centered on achieving commercial adoption of our AOT device.
Assuming successful testing and operations, we believe the 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 at the AOT demonstration site 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 any demonstration partner's operations. We believe that
real-world data from our AOT project may be used to accelerate our desire to
achieve commercial adoption of our AOT technology, positioning us to re-engage
with industry executives.
Providing sufficient working capital can be obtained, QS Energy intends to
continue to work to maintain normal operations during the current COVID-19
pandemic under social distancing and shelter-in-place guidelines as recommended
or required by the CDC, federal, state and county government agencies. Over the
past few years, the Company moved much of its operations to the cloud. Our
employees can perform most vital functions remotely. Currently, most day-to-day
operations have been minimally impacted by COVID-19.
18
It is unclear, however, what impact COVID-19 may have on our supply chain, or on
our ability to operate and test our AOT technology. As of the date of this
report, few suppliers related to our testing efforts have announced reduced
operating capacity or advised us of delays related to COVID-19 restrictions;
furthermore, we have not been made aware of any COVID-19 restrictions at that
would impact our ability to restart our onsite testing activities.
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 affect our supply chain, will not negatively affect
access or operating restrictions on our AOT technology, or negatively impact our
ability to fund continued operations.
Our expenses to date have been funded through the sale of shares of common stock
and convertible debt, as well as proceeds from the exercise of stock purchase
warrants and options. We will need to raise substantial additional capital
through 2021, 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.
We are dedicated to the crude oil production and transportation marketplace,
with a specifically targeted product 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 industry's existing and newly built pipelines. The greatest impact
on oil transport volume may be realized through reductions in pipeline operator
reliance on diluent for 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 may be realizable via viscosity reduction using our AOT
product line.
We believe QS Energy's technologies will enable the petroleum industry to gain
key value advantages boosting profit, while satisfying the needs of regulatory
bodies at the same time. Key players in the pipeline industry continue to
demonstrate interest in our technologies.
Our manufacturing strategy is to contract with third-party vendors and
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.
19
Results of Operations for Three months ended March 31, 2021 and 2020
Three months ended
March 31,
2021 2020 Change
Revenues $ - $ - $ -
Costs and Expenses
Operating expenses 214,000 532,000 (318,000 )
Research and development expenses 47,000 70,000 (23,000 )
Loss from operations
(261,000 ) (602,000 ) (341,000 )
Other expense
Interest and financing expense (110,000 ) (164,000 ) (54,000 )
Net Loss
$ (371,000 ) $ (766,000 ) $ (395,000 )
Operating expenses were $214,000 for the three-month period ended March 31,
2021, compared to $532,000 for the three-month period ended March 31, 2020, a
decrease of $318,000. This is due to decreases in non-cash expenses of $108,000,
and cash expenses of $210,000. Specifically, the decrease in non-cash expenses
are attributable to decreases in warrants issued as compensation for services of
$24,000, and stock compensation expense attributable to options granted to
employees and directors of $84,000. The decrease in cash expense is attributable
increases in insurance of $5,000, rent and utilities of $33,000, offset by
decreases in salaries and benefits of $78,000, legal and accounting of $72,000,
consulting fees of $35,000, public and investor relations of $28,000, travel
expenses of $20,000, office expenses of $5,000, corporate expenses of $4,000,
market fees of $3,000, patent expenses of $2,000, and other expenses of $1,000.
Research and development expenses were $47,000 for the three-month period ended
March 31, 2021, compared to $70,000 for the three-month period ended March 31,
2020, a decrease of $23,000. This decrease is attributable a decrease in
prototype product development costs of $23,000.
Other income and expense were $110,000 expense for the three-month period ended
March 31, 2021, compared to $164,000 expense for the three-month period ended
March 31, 2020, a net decrease in other expenses of $54,000. This decrease is
attributable to a decrease in non-cash other expenses of $110,000. The decrease
in non-cash other expense is due to decreases in expense attributable to
interest, beneficial conversion factors and warrants associated with convertible
notes issued in the amount of $97,000, and other non-cash interest of $13,000.
The Company had a net loss of $371,000, or $0 per share, for the three-month
period ended March 31, 2021, compared to a net loss of $766,000, or $0 per
share, for the three-month period ended March 31, 2020.
Liquidity and Capital Resources
General
As reflected in the accompanying condensed consolidated financial statements,
the Company has not yet generated significant revenues and has incurred
recurring net losses. We have incurred negative cash flow from operations since
our inception in 1998 and a stockholders' deficit of $3,746,000 as of March 31,
2021. Our negative operating cash flow for the periods ended March 31, 2021 was
funded primarily through issuance of convertible notes and execution of options
and warrants to purchase common stock.
20
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As
reflected in the accompanying condensed consolidated financial statements, the
Company had a net loss of $371,000 and a negative cash flow from operations of
$74,000 for the three-month period ended March 31, 2021. In addition, as of
March 31, 2021, twenty-three notes payable with an aggregate balance of
$1,198,000 and certain obligations to a former officer are past due. These
factors raise substantial doubt about our ability to continue as a going
concern.
In addition, the Company's independent registered public accounting firm, in its
report on the Company's December 31, 2020 financial statements, has raised
substantial doubt about the Company's ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to
raise additional funds and implement our business plan. The consolidated
financial statements do not include any adjustments that might be necessary if
we are unable to continue as a going concern.
Summary
During the period ended March 31, 2021, we received cash totaling $75,000 from
issuance of our convertible notes payable and private sale to purchase common
stock and used cash in operations of $74,000. At March 31, 2021, we had cash on
hand in the amount of $53,000. We will need additional funds to operate our
business, including without limitation the expenses we will incur in connection
with the license agreements with Temple University; costs associated with
product development and commercialization of the AOT and related technologies;
costs to manufacture and ship our products; costs to design and implement an
effective system of internal controls and disclosure controls and procedures;
costs of maintaining our status as a public company by filing periodic reports
with the SEC and costs required to protect our intellectual property. In
addition, as discussed above, we have substantial contractual commitments,
including without limitation salaries to our executive officers pursuant to
employment agreements, certain severance payments to a former officer and
consulting fees, during the remainder of 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.
Licensing Fees to Temple University
For details of the licensing agreements with Temple University, see Financial
Statements, Part I, Item 1, Note 6 (Research and Development).
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements and related
disclosures requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, expenses, and related disclosure of contingent
assets and liabilities. We evaluate, on an on-going basis, our estimates and
judgments, including those related to the useful life of the assets. We base our
estimates on historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results that we report in
our consolidated financial statements. The SEC considers an entity's most
critical accounting policies to be those policies that are both most important
to the portrayal of a company's financial condition and results of operations
and those that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about matters that
are inherently uncertain at the time of estimation. For a more detailed
discussion of the accounting policies of the Company, see Note 2 of the Notes to
the 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.
21
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 2 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. The Company
accounts for stock option and warrant grants issued and vesting to non-employees
in accordance with the authoritative guidance of the Financial Accounting
Standards Board whereas the value of the stock compensation is based upon the
measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete. Non-employee stock-based compensation
charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance
requirements by the non-employee, option grants are immediately vested and the
total stock-based compensation charge is recorded in the period of the
measurement date.
The fair value of the Company's common stock option grants is estimated using
the Black-Scholes Option Pricing model, which uses certain assumptions related
to risk-free interest rates, expected volatility, expected life of the common
stock options, and future dividends. Compensation expense is recorded based upon
the value derived from the Black-Scholes Option Pricing model, and based on
actual experience. The assumptions used in the Black-Scholes Option Pricing
model could materially affect compensation expense recorded in future periods.
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in
the accompanying consolidated financial statements, during the three-months
ended March 31, 2021, the Company incurred a net loss of $371,000, used cash in
operations of $74,000 and had a stockholders' deficit of $3,746,000 as of that
date. In addition, as of March 31, 2021, twenty-three notes payable with an
aggregate balance of $1,198,000 and certain obligations to a former officer are
past due. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The ability of the Company to continue as a going
concern is dependent upon the Company's ability to raise additional funds and
implement its business plan. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
At March 31, 2021, the Company had cash on hand in the amount of $53,000.
Management estimates that the current funds on hand will be sufficient to
continue operations through November 2021. Management is currently seeking
additional funds, primarily through the issuance of debt and equity securities
for cash to operate our business, including without limitation the expenses it
will incur in connection with the license agreements with Temple; costs
associated with product development and commercialization of the AOT
technologies; costs to manufacture and ship the products; costs to design and
implement an effective system of internal controls and disclosure controls and
procedures; costs of maintaining our status as a public company by filing
periodic reports with the SEC and costs required to protect our intellectual
property. In addition, as discussed below, the Company has substantial
contractual commitments, including without limitation salaries to our executive
officers pursuant to employment agreements, certain payments to a former officer
and consulting fees, during the remainder of 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 stockholders in case of equity financing.
22
Recent Accounting Polices
See Footnote 2 in the accompanying financial statements for a discussion of
recent accounting policies.
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