UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x |
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December
31, 2015
or
o |
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.) |
735 State Street, Suite 500
Santa Barbara, California 93101
(Address, including zip code, of principal
executive offices)
(805)-845-3561
(Registrant’s telephone number,
including area code)
Save the World Air, Inc.
(Former name, former address and former
fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b)
of the Exchange Act: None.
Securities registered pursuant to Section 12(g)
of the Exchange Act: Common Stock, $0.001 par value.
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o
No x
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 o
No x
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 x
No o
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes x
No o
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Smaller reporting company o |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act).
Yes o
No x
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, 2015, was $61,579,449.
The number of shares
of the Registrant’s Common Stock outstanding as of March 4, 2016, was 186,251,577
DOCUMENTS INCORPORATED
BY REFERENCE - None
Transitional Small Business Disclosure
Format (Check one)
Yes o
No x
QS ENERGY, INC.
FORM 10-K
INDEX
PART I |
3 |
Item 1. Business |
3 |
Item 1A. Risk Factors |
15 |
Item 1B. Unresolved Staff
Comments |
20 |
Item 2. Properties |
20 |
Item 3. Legal Proceedings |
20 |
Item 4. Mine Safety
Disclosures. |
20 |
PART II |
21 |
Item 5. Market for Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
21 |
Item 6. Selected Financial Data |
24 |
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operation |
25 |
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk |
29 |
Item 8. Financial Statements and
Supplementary Data |
29 |
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure |
29 |
Item 9A. Controls and
Procedures |
29 |
Item 9B. Other Information |
30 |
PART III |
31 |
Item 10. Directors, Executive
Officers and Corporate Governance |
31 |
Item 11. Executive
Compensation |
40 |
Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters |
44 |
Item 13. Certain Relationships
and Related Transactions, and Director Independence |
45 |
Item 14. Principal Accounting
Fees and Services |
45 |
PART IV |
46 |
Item 15. Exhibits, Financial
Statement Schedules |
46 |
SIGNATURES |
52 |
EXHIBITS |
|
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:
| · | 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.
Item 1. Business
The discussion of our
business is as of the date of filing this report, unless otherwise indicated.
Overview
QS Energy, Inc.
(“QS Energy” or “Company” or “we” or “us” or “our”) (formerly known
as Save the World Air, Inc.) develops and commercializes energy efficiency technologies that assist in meeting increasing global
energy demands, improving the economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual
property portfolio includes 47 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” or “Temple
University”). For details of the licensing agreements with Temple University, see Financial Statements attached hereto, Note
6. QS Energy's primary technology is called Applied Oil Technology™ (AOT™), a commercial-grade crude oil pipeline
transportation flow-assurance product. AOT™ has been proven in U.S. Department of Energy tests to increase the energy efficiency
of oil pipeline pump stations. The AOT product has transitioned from the research and development stage to initial commercial production
for the midstream pipeline marketplace.
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 effected 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. The Company’s common stock is quoted
under the symbol “QSEP” on the Over-the-Counter Bulletin Board. More information including the Company’s fact
sheet, logos and media articles are available at our corporate website, www.qsenergy.com.
In 2014, we reached
a major milestone in the Company’s evolution, generating revenues from our AOT technology for the first time since our 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 2016 and 2017.
Between 2011 and
2012, the Company transitioned from prototype testing of its AOT technology at the U.S. Department of Energy Rocky Mountain Oilfield
Testing Center, Midwest, Wyoming, to the design and production of full-scale commercial prototype units. The Company worked in
a collaborative engineering environment with multiple energy industry companies to refine the AOT™ Midstream commercial design
to comply with the stringent standards and qualification processes as dictated by independent engineering audit groups and North
American industry regulatory bodies. In May 2013, the Company’s first commercial prototype unit known as AOT™ Midstream,
was completed.
In 2013, the Company
entered into an Equipment Lease/Option to Purchase Agreement (“TransCanada Lease”) with TransCanada Keystone Pipeline,
L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") which agreed to lease and test the effectiveness of
the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. As previously reported in our
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. While more testing is required to establish the efficacy of our AOT technology, we are encouraged
by the findings of these field tests performed under 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. Upon termination
of the TransCanada Lease, all equipment was uninstalled, returned, inspected and configured for re-deployment. For more information
on test procedures and results, see section below labeled “Laboratory and Scientific Testing”.
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 Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under
the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The equipment
was 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 May 2015. The second unit
also presented with low impedance when flooded with crude condensate from Kinder Morgan’s pipeline. Laboratory tests previously
run on at Temple University on condensate samples provided by Kinder Morgan indicated the condensate was non-conductive; however,
the condensate is known to have a relatively high density of semi-conductive particulate matter suspended within the fluid. Similar
conditions were experienced in earlier prototype tests at the Rocky Mountain Oilfield Testing Center (“RMOTC”). At
RMOTC, the pipeline had a high concentration of highly conductive particulate matter, which tended to concentrate at the base of
the AOT when installed horizontally, causing the AOT to present with an electrical short. This issue was solved at RMOTC by converting
to a vertical configuration, which allowed the particulate matter to flow naturally through the AOT. Based on experience at RMOTC,
Dr. Tao expressed a high level of confidence that converting to a vertical configuration will resolve the issue of conductive particulate
matter.
In June 2015, QS
Energy engineers performed a series of tests and internal inspections on the AOT unit, which identified other potential design
issues that could impact electrical impedance. Based on these findings, a number of internal components of the AOT were retrofitted
or remanufactured to improve both efficacy and efficiency. The remanufactured AOT unit was delivered to Kinder Morgan facility
in Texas and was installed in its new vertical configuration in July 2015. Installation and pre-start safety tests were successfully
completed and preliminary testing initiated 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 continue to be the root cause of the decreased impedance.
Based on this result, QS Energy and Kinder Morgan personnel mutually agreed the best course of action was to hold on final acceptance
of equipment under the lease and temporarily suspend in-field testing to provide time to thoroughly test samples of Kinder Morgan’s
crude oil condensate in a laboratory setting.
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.
In December 2015,
the Kinder Morgan AOT unit was retrofitted with the value-engineered internal components at Industrial Screen and Maintenance (“ISM”),
one of QS Energy’s supply chain partners. Tests performed by ISM on the re-engineered unit demonstrated improvements in system
efficiency, and a significant increase in internal impedance. Tests performed on an unmodified AOT measured impedance at approximately
200 mega-ohms of resistance. Under similar conditions, the re-engineered AOT measured more than 20,000 mega-ohms; a 100 times increase
in impedance. As modified, the AOT needed only 500 to 800 nano-amps to achieve a test voltage of 15,000 volts. These design modifications,
specifically designed to address impedance issues experienced in the Kinder Morgan condensate pipeline tests, have the potential
of improving efficacy and efficiency in crude oil pipeline operations as well. The increased efficiencies measured on the re-engineered
unit has the potential to mitigate the need for a larger power supplies as experienced on operations on TransCanada’s high
volume crude oil pipeline. The re-engineered AOT unit was delivered to and installed on the Kinder Morgan condensate pipeline in
February 2016, with testing scheduled begin in March 2016.
The Company is actively
seeking deployments of its AOT technology. In August, 2015, QS Energy was invited to an offshore oil
transfer platform in the Gulf of Mexico. This offshore platform was assessed by QS Energy personnel for a potential deployment
of the AOT viscosity reduction technology as a solution for super-heavy crude oil flow assurance issues. Following the site visit,
all parties executed non-disclosure agreements in advance of detailed analysis and in anticipation of developing an onsite AOT
testing program subject to laboratory testing and case studies performed on oil samples to be provided by the offshore platform
operator. In June 2015, the Company formed a strategic alliance with Norrønt, AS (“Norrønt”), located
in Oslo, Norway. Through its affiliation with Norrønt, the Company is currently in the process of negotiating a collaboration
agreement with three Norwegian based oil companies as well as a potential research grant with the Norwegian Research Council. Under
a strategic alliance formed in 2013, Energy Tech Africa is actively marketing AOT technology in Africa and the Middle East. During
the first and second quarters of 2015, oil samples from a Middle Eastern oil company were provided under non-disclosure to Temple
University for testing. These tests demonstrated AOT viscosity reductions of 20% to 35% in a laboratory setting. Discussions with
this Middle East oil company are ongoing.
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 is designing and optimizing the Joule Heat technology
for the upstream oil transportation market. The Company filed two provisional patents related to the technology’s method
and apparatus in the second quarter and fourth quarter of 2013, respectively. The first of the two provisional patents was finalized
and submitted to non-provisional status on April 29, 2014. The second of the two provisional patents was finalized and submitted
to non-provisional status at the end of the third quarter 2014.
In October 2014,
QS Energy entered into a Joint Development Agreement with Newfield Exploration Company (“Newfield”) to test a prototype of QS Energy Joule Heat equipment, and combined Joule Heat and AOT technology, on a crude oil pipeline serving the Greater
Monument Butte oilfield located in the Uintah Basin of Utah. This test of the Joule Heat technology provides ideal conditions to
demonstrate efficiency and efficacy. The Uintah Basin is 5,000 to 10,000 feet above sea level with average low winter temperatures
of 16ºF. Crude oil pumped from the region is highly paraffinic with the consistency of shoe polish at room temperature. Uintah's
black wax crude must remain at a minimum of 95ºF and yellow wax above 115ºF and therefore requires a substantial amount
of heat to keep it above its high pour point. Operators in the upstream market often run at temperatures of 140ºF to 160ºF.
Newfield, like many other companies in the region, incurs significant operating expense in the form of fuel and power used to heat
the waxy crude and counter the cold climate conditions characteristic of Utah. The Company’s first Joule Heat prototype was
installed for testing purposes at the Newfield facility in June 2015 and the system is operational; however, changes to the prototype
configuration will be required to determine commercial effectiveness of this unit. During the third and fourth quarters of 2015,
we worked with Newfield and Dr. Carl Meinhart to modify the prototype configuration based on observed pipeline and Joule Heat operating
factors. In addition, QS Energy provided a scaled-down version of the Joule Heat unit for static and flow-through testing
at SRI. Testing performed by SRI in September 2015 on a laboratory-scale Joule Heat unit demonstrated the ability of the Joule
Heat technology to deliver temperature increases in the laboratory setting.
In 2015, the Company
worked in collaboration with Newfield, SRI, Dr. Carl Meinhart, and our manufacturing partner to design and build an AOT prototype
unit, for operations in the upstream crude oil pipeline market (“AOT Upstream”), specifically configured for pipeline
operating factors observed at Newfield’s Utah site. Our original plan was to retrofit an earlier prototype device previously
tested at RMOTC; however, after multiple site visits and discussions with Newfield, it was determined a new, smaller unit, specifically
optimized for Newfield operations would be more appropriate for this field test opportunity. We plan to jointly test the AOT Upstream
prototype unit under typical upstream commercial pipeline conditions on Newfield’s pipeline in conjunction with the previously
installed Joule Heat unit.
In December
2015, we temporarily suspended Joule Heat and AOT Upstream development activities to focus Company resources on finalizing
commercial development of the AOT Midstream. Testing terminated at SRI and all prototype equipment was returned to the Company. We
currently plan to resume Joule Heat and AOT Upstream development in the fourth quarter of 2016 depending on the availability
of sufficient capital and other resources.
In July 2015, the
Company formed QS Energy Pool, Inc., a wholly owned subsidiary of QS Energy, Inc., for the sole purpose of taking advantage of
asset acquisition opportunities in the oil and gas operations market. QS Energy Pool is specifically targeting the acquisition
of one or more operating companies or properties with proven positive cash flow, providing operating income and bottom line revenue
which are both accretive to and synergistic with QS Energy, Inc.’s current operations. QS Energy has identified multiple
attractive opportunities to acquire producing oil and gas field operations. Our strategy is to acquire producing oil and gas fields
with production profiles of at least ten years, proven long-term development rights, and demonstrated positive cash flow at commodity
prices as low as $25/barrel of oil and $2.00/MCF of gas. Any such acquisitions would be subject on our ability to obtain acquisition
financing under acceptable terms and conditions. We can provide no assurances that such financing would be available to us.
Our expenses to
date have been funded primarily through the sale of shares of common stock and convertible debt, as well as proceeds from the exercise
of stock purchase warrants and options. We will need to raise substantial additional capital through 2016, and beyond, to fund
our sales and marketing efforts, continuing research and development, and certain other expenses, until our revenue base grows
sufficiently.
There are significant risks
associated with our business, our Company and our stock. See “Risk Factors,” below.
Other Recent Developments
On December 1, 2015, QS
Energy posted a presentation of its Business Plan on the Company website (qsenergy.com) as announced in a Form 8-K submitted to
the SEC on December 1, 2015. A copy of the Company’s Business Plan presentation was attached to the 8-K filing as Exhibit
99.1.
Our Business Strategy
QS Energy intends to continue
commercialization and marketing of its current technologies. Our current and primary product portfolio is 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. 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 and Joule
Heat product lines.
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. In 2014, we installed and operated AOT equipment on one of TransCanada’s North American pipeline,
proving our ability to build, deliver and operate our AOT equipment on a high-volume commercial pipeline and key players in the
pipeline industry continue to demonstrate strong 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. | Expand AOT Midstream field test operations on commercial pipeline operations. |
| 3. | Gain clearance from customers’ procurement divisions for expanded installation of AOT Midstream
based on field test results. |
| 4. | Complete laboratory testing of our Joule Heat product line. |
| 5. | Initiate and expand field testing of Joule Heat product on commercial pipeline operations. |
| 6. | Commercial deployment of our Joule Heat product line. |
| 7. | Publish material events, collaborative arrangements, framework agreements and joint development
agreements. |
| 8. | Co-Present with customers at various trade conferences in the United States. |
| 9. | Continue to make inroads and meet with key strategic potential customers in the following geographic
regions: |
| b. | Williston, Bakken Basin, USA |
| c. | Niobrara, Denver-Julesberg Basin, USA |
| 10. | 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. |
| 11. | Further develop additional AOT and Joule Heat product models beyond targeting upstream and gathering
energy production and transport sectors. |
| 12. | Continue to develop collaboratively additional scientific and technical whitepaper reports, product
development enhancements, and additional products with our engineering support, consultants and relationships. |
In July 2015, the
Company formed QS Energy Pool, Inc., a wholly owned subsidiary of QS Energy, Inc., for the sole purpose of taking advantage of
asset acquisition opportunities in the oil and gas operations market. QS Energy Pool is specifically targeting the acquisition
of one or more operating companies or properties with proven positive cash flow, providing operating income and bottom line revenue
which are both accretive to and synergistic with QS Energy, Inc.’s current operations. QS Energy has identified multiple
attractive opportunities to acquire producing oil and gas field operations. Our strategy is to acquire producing oil and gas fields
with production profiles of at least ten years, proven long-term development rights, and demonstrated positive cash flow at commodity
prices as low as $25/barrel of oil and $2.00/MCF of gas. Any such acquisitions would be subject to our ability to obtain acquisition
financing under acceptable terms and conditions. We can provide no assurances that such financing would be available to us.
Market Analysis Overview
The energy sector
continues to operate in a period of both rapid change and expansion. Due to the relatively recent and widespread adoption of advanced
oilfield drilling and completion technologies, known as enhanced oil recovery (EOR) techniques, enormous reserves of “tight”
oil and gas are now recoverable from shale formations throughout North America and the world. This historic surge in upstream crude
oil production has resulted in costly and persistent transportation bottlenecks when moving upstream production to downstream storage,
offloading facilities and refineries. This persistent and severe industrywide problem is stimulating investments in new and existing
pipeline infrastructure and a reliance on less desirable alternate forms of transport, including rail and freight truck.
Since the initial
use of EOR or tertiary recovery techniques in the 1970s, oil and gas producers have progressively relied more heavily on the application
of gas and chemical injection as well as thermal recovery. These extraction techniques, coupled with a much greater number of new
wells in active oilfields, has raised the output of reservoirs by 30 to 60 percent above traditional primary and secondary recovery
practices. Due to the rapid adoption of advanced extraction technologies throughout the U.S. energy industry, a 34-year decline
in domestic oil and gas production was reversed in 2006. Historically high output from massive shale formations such as North Dakota’s
Bakken, Texas’ Eagle Ford and Permian Basin, Colorado’s Green River and Utah’s Uintah Basin continues to the
present day.
Other nations with
significant exploitable shale formations include Russia, China, Argentina, Libya, Australia, Venezuela, Mexico and dozens of others,
providing a ready market for crude oil pipeline optimization technologies as production comes online. All told, the U.S. Energy
Information Administration estimates there to be 345 billion barrels of identified and recoverable shale oil worldwide.
Consequently, oil
production greatly exceeds the capacity of existing pipelines in the U.S., Canada and many other regions of the world, often resulting
in delivery delays to refineries, as well as reliance on less desirable rail and tanker truck transport.
Recently, the softening
of oil prices worldwide has incentivized producers and transporters to reduce costs and seek technologies that can provide greater
operational efficiencies. AOT and Joule Heat technologies are specifically designed to increase pipeline capacity, while reducing
pipeline operating costs and overhead, thereby increasing margins and delivering measurable competitive advantages.
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.
As of 2013, the
U.S. and Canadian midstream oil market was serviced by a total of 60,911 miles of crude oil pipelines, up 3,448 miles or 6 percent
over 2012 and up 11,647 miles or 23 percent over the past decade. Planned midstream pipeline projects are expected to bring an
additional 20,000 miles of pipeline capacity over the 5 to 10 years. However, the bulk of the active pipelines in the U.S. were
constructed several decades ago, necessitating enormous capital investments to maintain and update the aging pipeline infrastructure.
Studies by research firm IHS Global Inc. estimate that between 2014 and 2020, an average of greater than $80 billion will be invested
annually in U.S. midstream and downstream petroleum infrastructure.
Despite the recently
depressed price level of global oil benchmarks, experts forecast continued growth in crude oil pipeline capital expenditures. For
example, a study published by GlobalData in February of this year, ‘North America
and Russia to Dominate Global Oil and Gas Pipeline Construction by 2018’, estimates that U.S. oil and gas pipeline capital
expenditures for new construction will exceed $500 billion, resulting in the construction of 24,000 miles of new oil and gas pipeline
capacity.
QS Energy’s
AOT and Joule Heat Technologies are strategically aligned with the major requirements and challenges facing the petroleum pipeline
economy.
First, AOT allows
the midstream sector to increase capacity while remaining within maximum pressure requirements. The technology can increase capacity
for the industry and reduce reliance on truck and train transport, which has often proven inefficient and environmentally hazardous.
Second, AOT and Joule Heat help to reduce operating expenses for pipeline operators. These technologies optimize pipeline operating
efficiency, which is especially important given the current oil price environment.
Recently, the softening
of oil prices worldwide has incentivized producers and transporters to reduce costs and seek technologies that can provide greater
operational efficiencies. As noted by industry analysts, the drive to squeeze out better margins began in late 2013 when oil prices
fell to the $100 per barrel mark after a price expansion cycle that had been in place since 2000 (“Deloitte: Low Oil Prices
Creating Need for More Efficient Operations”, Rigzone.com, February 5, 2015). Capital-intensive extraction techniques
necessary for unlocking tight oil and gas have boosted costs across the industry since the shale boom began in earnest in 2008,
and today’s low spot prices have caused for upstream and midstream operators to aggressively reduce overhead.
In answer to the
energy industry’s pressing challenges, QS Energy is commercializing cost-efficient solutions for increasing the capacity
of existing and new pipeline gathering and transmission systems, capable of reducing operational overhead, increasing margins and
delivering measurable competitive advantages.
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 Energy’s
AOT and Joule Heat solutions.
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)
and optimizing flow by directly heating feedstock (Joule Heat). 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 entities
transport the bulk of the world’s 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 both AOT and Joule Heat, 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.
The potential benefits
of the AOT and Joule Heat technologies include 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).
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 transporter’s 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 Upstream technology.
Downstream Refineries / Offloading
Facilities
The third market
category of the industry that can potentially benefit from our technologies consists of downstream refineries and rail, truck and
marine offloading facilities. AOT viscosity reduction and Joule Heat technologies have the potential to benefit the Downstream
market sector through reduced reliance on chemical based flow assurance additives, reduced friction from turbulent pipelines, reduced
volatility, and subsequent evaporation mitigation practices and hardware requirements as mandated by the U.S. Environmental Protection
Agency.
Our Products and Technology
AOT Commercial Products
Beginning in the second
quarter of 2012, the Company began the design and engineering efforts required to transition from prototype testing to full-scale
commercial unit production. 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 have not proven 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. A copy of the
ATS summary report is available on the Company website at: https://wsenergy.box.com/ATS-AOT-SummaryRpt. 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 crude oil condensate. Testing and
re-engineering of this unit continued through the remainder of 2015, specifically addressing issues experienced treating crude
oil condensate, resulting in a value-engineered unit which was delivered to and installed on the Kinder Morgan condensate pipeline
in February 2016, with testing scheduled to begin in March 2016.
The Company continues
to optimize and value engineer its AOT product line, targeting both Midstream and Upstream markets. In 2016, the Company plans
to focus its efforts and resources on finalizing commercialization of the AOT Midstream product line. Development efforts of the
AOT Upstream product was temporarily suspended in December 2015. We currently plan to resume AOT Upstream development in the fourth
quarter of 2016 depending on the availability of sufficient capital and other resources.
Joule Heat Product Development
The Company
began development 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 Company is
designing and optimizing the Joule Heat technology for the upstream oil transportation market. The Company’s first
Joule Heat prototype was installed for testing purposes under a joint development agreement with Newfield Exploration Company
in June 2015 and the system is operational; however, changes to the prototype configuration will be required to determine
commercial effectiveness of this unit. In December 2015, we temporarily suspended Joule Heat development activities to focus
Company resources on finalizing commercial development of the AOT Midstream. We currently plan to resume Joule Heat development in the
fourth quarter of 2016 depending on the availability of sufficient capital and other resources.
AOT Commercial Supply Chain
The Company has
developed a well-established supply chain for fabrication of the commercial AOT and Joule Heat devices. 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 are 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 are 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 Houston, Texas and began consolidation and streamlining efforts
to manage intellectual properties. Since that time, QS Energy has filed two additional provisional patents related to our technologies’
method and apparatus.
QS Energy is currently
maintaining and licensing from Temple University 47 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. Each of these intellectual properties
are related to QS Energy’s AOT, Joule Heat and Fuel Injector technologies. The AOT and Joule Heat technologies are being
actively developed and marketed by the Company. Active development of QS Energy’s fuel injector technology was suspended
in 2013, but the Company continues to maintain a license agreement with Temple University with respect to the underlying 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 see ITEM 1A, Risk Factors below for a discussion of risks associated with these intellectual properties.
Summary of QS Energy Patents Granted and Pending |
Description of Patent |
|
Technology | |
Granted | | |
Pending | | |
Total | |
Device for Saving Fuel and Reducing Emissions |
|
Fuel Injector | |
| 9 | | |
| 5 | | |
| 14 | |
Electric-Field Assisted Fuel Atomization System and Method of Use |
|
Fuel Injector | |
| 4 | | |
| 3 | | |
| 7 | |
Method and Apparatus for Treatment of a Fluid |
|
AOT | |
| 7 | | |
| 6 | | |
| 13 | |
Increasing Fluidity of a Flowing Fluid |
|
AOT | |
| 1 | | |
| – | | |
| 1 | |
Electrical Interconnect and Method |
|
AOT, Joule Heat | |
| – | | |
| 1 | | |
| 1 | |
Joule Heating Apparatus and Method |
|
Joule Heat | |
| – | | |
| 1 | | |
| 1 | |
Apparatus and Method for Reducing Viscosity |
|
AOT | |
| – | | |
| 2 | | |
| 2 | |
Method for Reduction for Crude Oil Viscosity |
|
AOT | |
| 6 | | |
| 2 | | |
| 8 | |
|
|
| |
| 27 | | |
| 20 | | |
| 47 | |
A brief description of each of these
patents is as follows:
Device for Saving Fuel and Reducing
Emissions
| • | This patent is related to QS Energy’s fuel injector technology. |
| • | A copy of the U.S. patent can be found at https://www.google.com/patents/US6901917 |
Electric-Field Assisted Fuel Atomization
System and Method of Use
| • | This patent is related to QS Energy’s fuel injector technology. |
| • | Owned by Temple University; licensed to QS Energy under an exclusive worldwide license agreement. |
| • | A copy of the published, pending U.S. patent can be found at https://www.google.com/patents/US20100024783 |
Method and Apparatus for Treatment
of a Fluid
| • | This patent is related to QS Energy’s AOT technology. |
| • | Owned by Temple University; licensed to QS Energy under an exclusive worldwide license agreement. |
| • | A copy of the U.S. patent can be found at https://www.google.com/patents/US8173023 |
Increasing Fluidity of a Flowing
Fluid
| • | This patent is related to QS Energy’s AOT technology. |
| • | A copy of the U.S. patent can be found at https://www.google.com/patents/US8616239 |
Electrical Interconnect and Method
| • | This patent has applications in both QS Energy’s AOT and Joule Heat technologies. |
| • | A copy of the published, pending U.S. application can be found at https://www.google.com/patents/US20150184887 |
Joule Heating Apparatus and Method
| • | This patent is related to QS Energy’s Joule Heat technology. |
| • | A copy of the published, pending U.S. application can be found at https://www.google.com/patents/US20150163858 |
Apparatus and Method for Reducing
Viscosity
| • | This patent is related to QS Energy’s AOT technology. |
| • | A copy of the published, pending U.S. application can be found at https://www.google.com/patents/US20140318946 |
Method for Reduction for Crude Oil
Viscosity
| • | This patent is related to QS Energy’s AOT technology. |
| • | Owned by Temple University; licensed to QS Energy under an exclusive worldwide license agreement. |
| • | A copy of the U.S. patent can be found at http://www.google.com/patents/US8156954 |
Current Business Status
We are subject to non-disclosure
agreements with national and multi-national upstream and midstream energy production and transportation companies throughout the
USA and overseas for evaluation, testing and analysis of our AOT products' value to their systems. The Company has non-disclosure
agreements in place with companies located on the following continents:
North America
Europe
Africa
Asia
Australia
Many of these companies
have further demonstrated interest in our technology by electing to send crude oil samples to Temple University to test the potential
efficacy of AOT technology on oils typical to their operations, results of which are used to provide detailed benefits analysis
and determine baseline AOT configurations optimized for each company’s unique operating conditions. Oil samples tested under
these non-disclosure agreements include: African crude oil; refinery fuels; black wax and yellow wax crudes from the Uintah Basin;
#2 diesel fuel; ultra-low sulfur diesel; Central California crude oil; crude oil condensate; and sour crude oil. Results of laboratory
these tests vary greatly depending on properties of the oil samples (viscosity, water content, particulate matter, etc.), and pipeline
operating characteristics (oil temperature, flow rate, etc.). All samples tested demonstrated viscosity reductions, with half of
the samples measuring viscosity reductions for 40% or more; one quarter of the samples measuring viscosity reductions ranging from
15% to 25%; and one quarter of the samples measuring viscosity reduction ranging from 4% to 6%.
The Company is currently
in negotiations with a large crude oil and transportation company with operations in the Southern United States and gulf coast
region. Temple University has tested multiple oil samples provided under a non-disclosure agreement, demonstrating viscosity reductions
up to 46% in a laboratory setting.
A Company affiliate, Energy
Tech Africa, is actively marketing AOT technology in Africa and the Middle East. During the first and second quarters of 2015,
oil samples from a Middle Eastern oil company were provided under non-disclosure to Temple University for testing. These tests
demonstrated AOT viscosity reductions of 20% to 35% in a laboratory setting. Discussions with this Middle East oil company are
ongoing.
Through its affiliation
with Norrønt, the Company is currently in the process of negotiating a collaboration agreement with three Norwegian based
oil companies as well as a potential research grant with the Norwegian Research Council.
The Company is currently
in discussions regarding AOT technologies with eight additional top-tier national and multi-national oil and gas companies.
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
Energy’s Rocky Mountain Oilfield Testing Center (“RMOTC”), near Casper, Wyoming. This third-party testing
independently verified the efficacy of the Company’s 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% (RMOTC Report, Fig. 1, page 4)
and viscosity reduction of 40% (RMOTC Report, Fig. 2, page 4); 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 copy of the RMOTC April 4, 2012 Report is available
on the Company website at: https://qsenergy.box.com/DOE-STWA-RMOTC-Report. 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. A copy of the
RMOTC May 3, 2012 to May 4, 2012 report is available on the Company website at: https://qsenergy.box.com/DOE-STWA-RMOTC-Overnight.
Laboratory testing
of our AOT technology has been conducted by Dr. Rongjia Tao. Testing of the technology as applied to crude oil extraction
and 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.” (PetroChina
Report, page 15). A copy of the PetroChina Report is available online at: https://qsenergy.box.com/PetroChina-STWA-Report
As previously reported
in 2014, QS Energy installed and tested its commercial AOT equipment, leased and operated by TransCanada on TransCanada’s
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. Tao’s 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. Tao’s 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. A copy of the ATS summary
report dated February 5, 2015 is available on the Company website at: https://qsenergy.box.com/ATS-AOT-SummaryRpt. A copy of the
ATS field test report dated October 6, 2014, with certain confidential information redacted, is available on the Company website
at: https://qsenergy.box.com/ATS-AOT-Detailed-Report.
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 unit’s 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
temporarily suspended Joule Heat and AOT Upstream development activities to focus Company resources on finalizing commercial
development of the AOT Midstream. Testing terminated at SRI and all prototype equipment was returned to the Company. We currently plan
to resume Joule Heat and AOT Upstream development in the fourth quarter of 2016 depending on the availability of sufficient
capital and other resources.
Competition
The oil transportation
industry is highly competitive. We are aware of only three currently available competitive technologies in widespread
use for reducing the viscosity of oil throughout the world. Many of our competitors have greater financial, research,
marketing and staff resources than we do. For instance, oil pipeline operators use heat, diluents such as naphtha and/or natural
gasoline, and/or chemical viscosity reduction additives, or chemical drag-reducing agents to improve flow in pipelines. Our
research indicates that these methods are either very energy-intensive, or costly to implement on a day to day basis. Management
believes that the Company’s AOT technology presents advantages over traditional methods, yet the industry’s willingness
to experiment with new technology may pose some challenges in acceptance.
We are not aware of any
other technology using uniform electrical field crude oil viscosity reduction technology which is designed to significantly improve
pipeline operation efficiency. Although we are unaware of any technologies that compete directly with our technologies,
there can be no assurance that any unknown existing or future technology will not be superior to products incorporating our AOT
technology. Major domestic and international manufacturers and distributors of pipeline flow-improvement chemical solutions
include Pemex, Petrotrin, Pluspetrol, Repsol, Glencore, Conoco-Philips, and Baker-Hughes. According to our research, heater skid
manufacturers are generally local to the oilfield and pipeline regions, and are comprised of a large number of relatively small
businesses in a fragmented industry. Major heater skid manufacturers are Parker, KW International, Thermotech Systems, LTD.
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.
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,
2015, the Company had three (3) full-time employees. As of such date, we also utilized the services of six part-time consultants
to assist us with various matters, including engineering, 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 we have incurred recurring
net losses every year since our inception in 1998. For the fiscal years ended December 31, 2015, 2014, and 2013 we had net
losses of $4,228,954, $4,006,335, and $10,657,009 respectively. To date, we have dedicated most of our financial resources
to research and development, general and administrative expenses 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 Company’s 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.
Our independent
auditors have expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
In their report dated March
15, 2016, our independent auditors stated that our consolidated financial statements for the year ended December 31,
2015 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised
as a result of our recurring net losses and accumulated deficit from operations since inception. We had an accumulated deficit
of $101,274,152 as of December 31, 2015. 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.
The going concern qualification in the auditor’s report could materially limit our ability to raise additional capital. If
we fail to raise sufficient capital, we may have to liquidate our business and you may lose your investment.
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 positive
cash flow from operations since our inception in February 1998 and have relied on external sources of capital to fund operations.
We had $349,186 in cash at December 31, 2015 and negative cash flow from operations of $2,595,457 for the year ended December 31,
2015.
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.
As of December 31,
2015 and thereafter, our expenses ran, and are expected to continue to run, at an approximate “cash burn rate” of $120,000
per month, which amount could increase during 2016. In order to fund our capital needs, we conducted private offerings
of our securities in 2013, 2014 and 2015. 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 and Joule Heat technologies. 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 can 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.
The commercial viability
of QS Energy’s 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, have entered into a lease agreement with a second major oil pipeline operator to operate and test
AOT equipment in 2015, and initiated testing of our Joule Heat technology in laboratory and commercial operating conditions
in 2015, 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 and Joule Heat technologies, 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.
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, testing; |
| · | Kinder Morgan Crude and Condensate, testing, possible conversion to commercial use; |
| · | Newfield Exploration Company, testing and joint development; |
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.
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 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 2015 as we continue our research and development
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.
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
party’s 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 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.
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.
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, particularly Gregg Bigger, our President, Chief Executive Officer
and Chief Financial Officer. 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. There is intense
competition among specialized automotive companies for qualified personnel in the areas of our activities. 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 OTCQX marketplace and the OTC Bulletin Board, 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 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 $0.50 on March 17, 2015 to a
closing price of $0.16 on December 22, 2015, and a closing price of $0.19 on March 4, 2016. 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 shareholder’s 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.
We are authorized
to issue up to 300,000,000 shares of common 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 in the future for such consideration as the Board
of Directors may consider sufficient. The issuance of additional common stock in the future will reduce the proportionate ownership
and voting power of shareholders.
We may not be successful
in identifying, making, financing and integrating acquisitions.
A 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 management’s 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 purchaser’s
written consent to the transaction prior to sale, and make special 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 effect 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.
Item 1B. Unresolved
Staff Comments
None
Item 2. Properties
Our executive offices are
located at 735 State Street, Suite 500, Santa Barbara, California 93101. The Company also operated its ELEKTRA Research and Development
facility located at 235 Tennant Avenue, Morgan Hill, California 95037 until its closure in June 2013.
Total rent expense under
these leases in effect during the years ended December 31, 2015, 2014, and 2013, was $69,960, $81,851, and $160,535, respectively
which are included as part of Operating Expenses in the attached consolidated statements of operations. Remaining minimum lease
commitments under the non-cancellable office lease at December 31, 2015 were $180,730 through the end of 2018. The following is
a schedule by years of future minimum rental payments required under the non-cancellable office leases as of December 31, 2015.
Year ending |
|
Non-cancellable |
December 31, |
|
Office Leases |
2016 |
|
$ |
69,960 |
|
2017 |
|
|
69,960 |
|
2018 |
|
|
40,810 |
|
Total |
|
$ |
180,730 |
|
We believe our facilities
are adequate to meet our current and near-term needs.
Item 3. Legal
Proceedings
There is no litigation
of any significance with the exception of the matters that have arisen under, and are being handled in, the normal course of business.
Item 4. Mine Safety
Disclosures.
None.
PART
II
Item 5. Market for Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Through May 21, 2007,
our common stock was traded on the Over the Counter Bulletin Board (the “OTCBB” under the symbol “ZERO”.
Effective May 22, 2007, our common stock was removed from the OTCBB and placed on the “Pink Sheets”. Effective
February 8, 2010, our common stock was reinstated and currently trades on the OTCBB. On October 30, 2014, our common stock was
listed for trading on the OTCQX marketplace under the symbol “ZERO”. 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 Company’s common stock for the quarters indicated as quoted on the OTCBB or OTCQX, as applicable,
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.
| |
2015 | | |
2014 | | |
2013 | |
| |
High | | |
Low | | |
High | | |
Low | | |
High | | |
Low | |
First Quarter | |
$ | 0.51 | | |
$ | 0.34 | | |
$ | 1.12 | | |
$ | 0.76 | | |
$ | 1.13 | | |
$ | 0.77 | |
Second Quarter | |
$ | 0.47 | | |
$ | 0.30 | | |
$ | 0.89 | | |
$ | 0.64 | | |
$ | 1.50 | | |
$ | 0.77 | |
Third Quarter | |
$ | 0.38 | | |
$ | 0.15 | | |
$ | 0.84 | | |
$ | 0.50 | | |
$ | 1.88 | | |
$ | 1.05 | |
Fourth Quarter | |
$ | 0.34 | | |
$ | 0.13 | | |
$ | 0.74 | | |
$ | 0.34 | | |
$ | 1.39 | | |
$ | 0.83 | |
According to the records
of our transfer agent, we had approximately 1,009 stockholders of record of our common stock at March 4, 2016. The Company
believes that the number of beneficial owners 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.
Stock Performance Graph and
Cumulative Total Return
The graph below shows the
cumulative total stockholder return assuming the investment of $100 on the date specified (and the reinvestment of dividends thereafter)
in each of QS Energy common stock (symbol QSEP), the NASDAQ Composite Total Returns, and the S&P Oil & Gas Equipment &
Services Index. The stock performance graph does not include QS Energy’s peer group because peer group information is represented
and included in the S&P Oil & Gas Equipment & Services Index. The comparisons in the graph below are based upon historical
data and are not indicative of, or intended to forecast, future performance of our common stock.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 31, 2010 – December 31,
2015
|
12/2010 |
12/2011 |
12/2012 |
12/2013 |
12/2014 |
12/2015 |
QS Energy, Inc. |
100.00 |
68.52 |
181.48 |
198.15 |
87.04 |
35.19 |
NASDAQ Composite Total Returns |
100.00 |
99.17 |
116.48 |
163.21 |
187.27 |
200.31 |
S&P 500 Oil & Gas Equipment & Services Index |
100.00 |
88.32 |
88.32 |
115.39 |
106.39 |
86.14 |
Issuances of Unregistered
Securities in Current Fiscal Year and Prior Fiscal Year
During the year ended December
31, 2015, the Company issued an aggregate of 2,803,333 shares of its common stock as follows:
| · | On January 12, 2015, the Company issued 200,000 shares of its common stock to the holder of a warrant
upon exercise of the warrant at a price of $0.25 per share with proceeds of $50,000. |
| · | The Company issued 2,603,333 shares of its common stock valued at $668,800 at conversion prices
of $0.10-$0.48 per share upon voluntary conversion of certain of the Company’s convertible promissory notes as follows: |
Shares of Common
Stock Issued in Year Ended December 31,2015
Date of Issuance |
Principal and Interest Converted to Common Stock |
Conversion Price |
Shares of Common Stock Issued |
1/7/2015 |
$ |
52,800 |
$ |
0.48 |
110,000 |
6/22/2015 |
$ |
385,000 |
$ |
0.30 |
1,283,333 |
6/30/2015 |
$ |
165,000 |
$ |
0.30 |
550,000 |
12/15/2015 |
$ |
55,000 |
$ |
0.10 |
550,000 |
12/15/2015 |
$ |
5,500 |
$ |
0.10 |
55,000 |
12/15/2015 |
$ |
5,500 |
$ |
0.10 |
55,000 |
|
|
|
|
|
|
Total, 2015 |
$ |
668,800 |
$ |
0.26 |
2,603,333 |
| · | The Company issued convertible notes in aggregate value of $726,000 for net proceeds of $660,000,
convertible into 3,593,333 shares in common stock of the Company at a conversion prices of $0.10-$0.30 per share, and in connection
with these notes, issued warrants to purchase 1,796,667 shares of common stock of the Company at exercise prices of $0.10-$0.30
per share and expiring one year from the date of issuance, as follows: |
Convertible Notes
Issued in Year Ended December 31,2015
Date of Issuance |
Cash Proceeds |
Face Value of Note |
Conversion Price |
Convertible to Shares of Common Stock |
Warrants to Purchase Common Stock |
Warrant Exercise Price |
Warrant Expiration Date |
5/27/2015 |
$ |
350,000 |
$ |
385,000 |
$ |
0.30 |
1,283,333 |
641,667 |
$ |
0.30 |
5/27/2016 |
6/3/2015 |
$ |
150,000 |
$ |
165,000 |
$ |
0.30 |
550,000 |
275,000 |
$ |
0.30 |
6/3/2016 |
12/1/2015 |
$ |
50,000 |
$ |
55,000 |
$ |
0.10 |
550,000 |
275,000 |
$ |
0.10 |
12/1/2016 |
12/7/2015 |
$ |
5,000 |
$ |
5,500 |
$ |
0.10 |
55,000 |
27,500 |
$ |
0.10 |
12/7/2016 |
12/2/2015 |
$ |
5,000 |
$ |
5,500 |
$ |
0.10 |
55,000 |
27,500 |
$ |
0.10 |
12/2/2016 |
11/16/2015 |
$ |
30,000 |
$ |
33,000 |
$ |
0.10 |
330,000 |
165,000 |
$ |
0.10 |
11/16/2016 |
12/28/2015 |
$ |
70,000 |
$ |
77,000 |
$ |
0.10 |
770,000 |
385,000 |
$ |
0.10 |
12/28/2016 |
Total, 2015 |
$ |
660,000 |
$ |
726,000 |
$ |
0.20 |
3,593,333 |
1,796,667 |
$ |
0.20 |
|
During the year ended December
31, 2014, the Company issued an aggregate of 4,785,427 shares of its common stock as follows:
| · | In January and February 2014, warrants to acquire 4,690,947 shares of common stock were exercised resulting in gross proceeds
of $1,407,284. Each of these warrants had been issued in connection with convertible notes issued in January and February 2012
as previously reported in the Company’s SEC Form 8-K filings submitted on January 23, 2012 and February 8, 2012. The offering
documents were attached as exhibits to the aforementioned 8-K filings. Included in the exercise of these warrants was the issuance
of 100,000 shares of common stock valued at $30,000 and accounted for as partial settlement of unpaid fees recorded in prior years.
As a result, the aggregate net proceeds received amounted to $1,377,284. |
| | |
| · | In February 2014,
options to purchase 20,000 shares of common stock at an exercise price of $0.30 per share were exercised resulting in proceeds
of $6,000. These options had been issued to an employee in May 2012. |
| · | The Company issued 74,480 shares of its common stock in exchange for conversion of $35,750 of Convertible
Notes pursuant to the convertible notes at a conversion price of $0.48 per share, as follows: |
Shares of Common
Stock Issued in Year Ended December 31,2014
Date of Issuance |
Principal and Interest Converted to Common Stock |
Conversion Price |
Shares of Common Stock Issued |
12/8/2014 |
$ |
11,000 |
$ |
0.48 |
22,917 |
12/8/2014 |
$ |
11,000 |
$ |
0.48 |
22,917 |
12/8/2014 |
$ |
13,750 |
$ |
0.48 |
28,646 |
Total, 2014 |
$ |
35,750 |
$ |
0.48 |
74,480 |
| · | The Company issued convertible notes in aggregate value of $280,390 for net proceeds of
$254,900, convertible into 584,147 shares in common stock of the Company at a conversion price of $0.48 per share, and in
connection with these notes, issued warrants to purchase 146,037 shares of common stock of the Company at an exercise price
of $0.48 per share and expiring one year from the date of issuance, as follows: |
Convertible Notes
Issued in Year Ended December 31,2014
Date of Issuance |
Cash Proceeds |
Face Value of Note |
Conversion Price |
Convertible to Shares of Common Stock |
Warrants to Purchase Common Stock |
Warrant Exercise Price |
Warrant Expiration Date |
10/5/2014 |
$ |
10,000 |
$ |
11,000 |
$ |
0.48 |
22,917 |
5,729 |
$ |
0.48 |
10/5/2015 |
9/30/2014 |
$ |
14,400 |
$ |
15,840 |
$ |
0.48 |
33,000 |
8,250 |
$ |
0.48 |
9/30/2015 |
10/8/2014 |
$ |
10,000 |
$ |
11,000 |
$ |
0.48 |
22,917 |
5,729 |
$ |
0.48 |
10/8/2015 |
10/9/2014 |
$ |
48,000 |
$ |
52,800 |
$ |
0.48 |
110,000 |
27,500 |
$ |
0.48 |
10/9/2015 |
10/14/2014 |
$ |
10,000 |
$ |
11,000 |
$ |
0.48 |
22,917 |
5,729 |
$ |
0.48 |
10/14/2015 |
10/29/2014 |
$ |
12,500 |
$ |
13,750 |
$ |
0.48 |
28,646 |
7,162 |
$ |
0.48 |
10/29/2015 |
12/11/2014 |
$ |
150,000 |
$ |
165,000 |
$ |
0.48 |
343,750 |
85,938 |
$ |
0.48 |
12/11/2015 |
Total, 2014 |
$ |
254,900 |
$ |
280,390 |
$ |
0.48 |
584,147 |
146,037 |
$ |
0.48 |
|
The sales of the
securities described above were made in reliance on the exemptions from registration set forth in Section 4(2) of the Securities
Act of 1933, as amended (the “Act”), and/or Regulation S promulgated thereunder, in that the sales were made without
general advertising or solicitation in non-public offerings to accredited U.S. investors and/or to non-U.S. investors in transactions
outside the United States. The above described shares of common stock, convertible notes and warrants were issued by the Company
in furtherance of the terms and conditions of each such instrument, forms of which are attached to this form 10-K as Exhibits 10.117,
10.118 and 10.119.
Item 6. Selected Financial
Data
The selected consolidated
financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto
and management’s discussion and analysis included elsewhere in this Form 10-K annual report and in our annual reports
that have been filed for the prior years presented.
CONSOLIDATED STATEMENT
OF OPERATIONS
| |
Year ended December 31, | |
| |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
Net sales | |
$ | – | | |
$ | 240,000 | | |
$ | – | | |
$ | – | | |
$ | – | |
Costs and Expenses | |
| | | |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| 2,915,369 | | |
| 3,284,666 | | |
| 11,884,775 | | |
| 7,187,970 | | |
| 6,698,981 | |
Research and development expenses | |
| 577,501 | | |
| 893,452 | | |
| 2,011,486 | | |
| 963,184 | | |
| 1,318,783 | |
Loss before other income (expense) | |
| (3,492,870 | ) | |
| (3,938,118 | ) | |
| (13,896,261 | ) | |
| (8,151,154 | ) | |
| (8,017,764 | ) |
Other income (expense) | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest and financing expense | |
| (747,342 | ) | |
| (39,619 | ) | |
| (260 | ) | |
| (3,627,732 | ) | |
| (5,084,253 | ) |
Change in fair value of derivative liabilities | |
| – | | |
| – | | |
| (220,614 | ) | |
| (4,023,094 | ) | |
| 2,021,536 | |
Gain on extinguishment of derivative liabilities | |
| – | | |
| – | | |
| 3,441,752 | | |
| 2,445,095 | | |
| – | |
Other income (expense) | |
| 11,258 | | |
| (28,598 | ) | |
| 18,374 | | |
| 264,498 | | |
| 223,934 | |
Net loss | |
| (4,228,954 | ) | |
| (4,006,335 | ) | |
| (10,657,009 | ) | |
| (13,092,387 | ) | |
| (10,856,547 | ) |
Net loss per common share, basic and diluted | |
$ | (0.02 | ) | |
$ | (0.02 | ) | |
$ | (0.07 | ) | |
$ | (0.10 | ) | |
$ | (0.10 | ) |
Weighted average common shares outstanding, basic and diluted | |
| 182,267,719 | | |
| 180,386,712 | | |
| 160,958,284 | | |
| 128,667,391 | | |
| 104,103,109 | |
CONSOLIDATED BALANCE SHEET
| |
Year ending December 31, | |
Assets | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
Cash | |
$ | 349,186 | | |
$ | 2,247,557 | | |
$ | 4,137,068 | | |
$ | 1,601,791 | | |
$ | 617,797 | |
Property and Equipment, net of accumulated depreciation | |
| 21,798 | | |
| 21,946 | | |
| 35,771 | | |
| 55,674 | | |
| 75,609 | |
Other assets | |
| 57,076 | | |
| 78,055 | | |
| 62,760 | | |
| 50,462 | | |
| 88,237 | |
Total assets | |
$ | 428,060 | | |
$ | 2,347,558 | | |
$ | 4,235,599 | | |
$ | 1,707,927 | | |
$ | 781,643 | |
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 988,085 | | |
$ | 840,048 | | |
$ | 1,160,283 | | |
$ | 1,384,309 | | |
$ | 2,074,244 | |
Convertible debentures, net of discount | |
| 222,195 | | |
| 139,098 | | |
| – | | |
| – | | |
| 169,542 | |
Fair value of derivative liabilities | |
| – | | |
| – | | |
| – | | |
| 3,221,138 | | |
| 1,643,139 | |
Total Liabilities | |
$ | 1,210,280 | | |
$ | 979,146 | | |
$ | 1,160,283 | | |
$ | 4,605,447 | | |
$ | 3,886,925 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stockholders’ equity (deficiency) | |
| (782,220 | ) | |
| 1,368,412 | | |
| 3,075,316 | | |
| (2,897,520 | ) | |
| (3,105,282 | ) |
Total liabilities and stockholders’ equity | |
$ | 428,060 | | |
$ | 2,347,558 | | |
$ | 4,235,599 | | |
$ | 1,707,927 | | |
$ | 781,643 | |
Item 7. Management’s
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 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, 2015, and we undertake no duty to update this information.
Overview
In the second quarter
of 2014, we reached a major milestone in the Company’s evolution, generating revenues from our AOT technology for the first
time since our 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 2016.
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 2015 and will need to raise substantial additional capital in 2016, 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
Revenue Comparison, 2015
and 2014
The Company had
no revenues in the fiscal year ended 2015. The Company recognized $240,000 in revenues in the fiscal year ended December 31, 2014
pursuant to the lease of the AOT Equipment by TransCanada.
Operating Expense Comparison,
2015 and 2014
Operating expenses
were $2,915,369 for the fiscal year ended December 31, 2015, compared to $3,284,666 for the fiscal year ended December 31,
2014, a decrease of $369,297. This decrease was attributable to decreases in non-cash expenses of $2,912 and cash expenses of $365,585.
Specifically, the decrease in non-cash expenses is attributable to a decrease in valuation of warrants and options issued to employees,
directors and consultants of $2,149, and a decrease in depreciation of $763. The decrease in cash expenses is attributable to decreases
in salaries and benefits of $227,635, consulting fees of $81,397, rents, utilities and maintenance of $5,920, travel expenses of
$39,917, offset by an increase in general operating expenses of $7,322.
Research and development
expenses were $577,501 for the fiscal year ended December 31, 2015, compared to $893,452 for the fiscal year ended December 31,
2014, a decrease of $315,951. This decrease is attributable to decreases in product prototype development costs of $216,657 and
general testing and development costs of $34,587, and licensing and research fees of $64,707.
Other income was
$11,258 for the fiscal year ended December 31, 2015, compared to an expense of $28,598 for the fiscal year ended December 31,
2014, an increase of $9,758. This increase is attributable to an increase in gain from disposition of fixed assets of $9,758.
Interest expenses
were $747,342 for the fiscal year ended December 31, 2015, compared to $39,619 for the fiscal year ended December 31, 2014, an
increase of $707,723. This increase is attributable to an increase in non-cash interest and financing expense of $707,723.
We had a net loss
of $4,228,954 or $0.02 loss per share for the fiscal year ended December 31, 2015 compared to a net loss of $4,006,335 or $0.02
loss per share for the fiscal year ended December 31, 2014.
Revenue Comparison, 2014
and 2013
The Company recognized
$240,000 in revenues in the fiscal year ended December 31, 2014 pursuant to the lease of the AOT Equipment by TransCanada. There
were no similar transactions during the fiscal year ended December 31, 2013.
Operating Expense Comparison,
2014 and 2013
Operating expenses
were $3,284,666 for the fiscal year ended December 31, 2014, compared to $11,884,775 for the fiscal year ended December 31,
2013, a decrease of $8,600,109. This decrease is attributable to decreases in non-cash expenses of $7,298,848
and cash expenses of $1,301,261. Specifically, the decrease in non-cash expenses is attributable to a $3,108,351 decrease in settlements
paid through issuance of stock, a decrease in valuation of warrants, options and common stock issued to employees, directors and
consultants of $4,183,923, and a decrease in depreciation of $6,574. The decrease in cash expenses is attributable to decreases
in salaries and benefits of $774,820, consulting fees of $196,630, rents, utilities and maintenance of $109,770, travel expenses
of $12,123 and general operating expenses of $207,918.
Research and development
expenses were $893,452 for the fiscal year ended December 31, 2014, compared to $2,011,486 for the fiscal year ended December 31,
2013, a decrease of $1,118,034. This decrease is attributable to decreases in product prototype development costs of $526,423 and
general testing and development costs of $602,351, offset by an increase in licensing and research fees of $10,740.
Interest expenses
were $39,619 for the fiscal year ended December 31, 2014, compared to $260 for the fiscal year ended December 31, 2013, an increase
of $39,359. This increase is attributable to an increase in non-cash interest and financing expense of $39,619 and decrease in
other interest expenses of $260.
Gain on extinguishment
of derivative liabilities was $0 for the fiscal year ended December 31, 2014, compared to $3,441,752 for the fiscal year ended
December 31, 2013, a decrease of $3,441,752. This decrease is attributable to decrease in the gain on extinguishment of derivative
liabilities of $3,441,752.
Other income was
an expense of 28,598 for the fiscal year ended December 31, 2014, compared to income of $18,374 for the fiscal year ended December
31, 2013, a decrease of $46,872. This decrease is attributable to a decrease in gain from disposition of fixed assets of $41,923
and a decrease in debt cancellation and other miscellaneous income of $4,949.
We had a net loss
of $4,006,335 or $0.02 loss per share for the fiscal year ended December 31, 2014 compared to a net loss of $10,657,009, or $0.07
loss per share for the fiscal year ended December 31, 2013.
Liquidity and Capital Resources
General
We have incurred negative
cash flow from operations since our inception in 1998. As of December 31, 2015, we had cash of $349,186 and an accumulated
deficit of $101,274,152. Our operating cash flow in 2015 was funded primarily through cash reserves, the exercise of stock purchase
warrants 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 $4,228,954 and used cash in operations of $2,595,457 for the year ended December 31, 2015. These
factors raise 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. 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,
2015, the Company had cash on hand in the amount of $349,186. Management estimates that the current funds on hand will be sufficient
to continue operations through May 2016. 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 and Joule
Heat technologies; costs to manufacture and ship the products; costs to design and implement an effective system of internal controls
and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the
SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company has substantial contractual
commitments, including without limitation salaries to our executive officer pursuant to an employment agreement, and certain payments
to a former officer, during the remainder of 2016 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 has
certain contractual commitments for future periods, including office leases, minimum guaranteed compensation payments and other
agreements as described in the following table and associated footnotes:
Year ending | | |
Office | | |
License | | |
Compensation | | |
Total | |
December 31, | | |
Lease (1) | | |
Agreements (2) | | |
Agreements (3) | | |
Obligations | |
| 2016 | | |
$ | 69,960 | | |
$ | 187,500 | | |
$ | 350,000 | | |
$ | 607,460 | |
| 2017 | | |
| 69,960 | | |
| 187,500 | | |
| 305,429 | | |
| 562,889 | |
| 2018 | | |
| 40,810 | | |
| 187,500 | | |
| 290,000 | | |
| 518,310 | |
| 2019 | | |
| – | | |
| 187,500 | | |
| 54,375 | | |
| 241,875 | |
| 2020 | | |
| – | | |
| 187,500 | | |
| – | | |
| 187,500 | |
| Total | | |
$ | 180,730 | | |
$ | 937,500 | | |
$ | 999,804 | | |
$ | 2,118,034 | |
____________________________
(1) | Consists
of rent for the Company’s Santa Barbara Facility expiring on July 31, 2018. (For description of this property, see Part 1,
Item 2, “Properties”). |
(2) | 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. |
(3) | Consists of base salary and certain contractually-provided benefits, to i) an executive
officer, pursuant to an employment agreement at a base salary of $290,000 per year and, as amended by the Board on March
10, 2016, expires on March 8, 2019; and ii) and a severance agreement of a former officer in the
amount of $75,429. |
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 2 of the Notes to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”.
We believe the following
critical accounting policies, among others, require significant judgments and estimates used in the preparation of our consolidated
financial statements.
Estimates
The preparation of consolidated
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant
estimates were made in connection with preparing our consolidated financial statements as described in Note 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 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.
Research and Development
Costs
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, 2015, 2014 and 2013, research and development costs incurred were $577,501, $893,452 and $2,011,486 respectively.
Recent Accounting Pronouncements
See Note 2 of the
financial statements for discussion of recent accounting pronouncements.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
We issue from time
to time fixed rate discounted convertible notes. Our convertible notes and our equity securities are exposed to risk as set forth
above, in Item 1A, “Risk Factors.” Please also see Item 7, above, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
Item 8. Financial
Statements and Supplementary Data
Our consolidated financial
statements as of and for the years ended December 31, 2015. 2014 and 2013 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, evaluated, as of December 31, 2015,
the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable assurance
level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based
on the evaluation of the Company's disclosure controls and procedures as of December 31, 2015, management, the chief executive
officer and the chief financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable
assurance level at that date.
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 company's principal executive and principal financial officers and effected by the company's 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 acquisition, use or disposition of the company's assets that
could have a material effect on the financial statements.
QS Energy, Inc.'s internal
control system is designed to provide reasonable assurance to the Company's management and Board regarding the preparation and
fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations
which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management assessed
the effectiveness of QS Energy, Inc.'s internal controls over financial reporting as of December 31, 2015. In making this assessment,
it used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO") (2013 framework). Based on our assessment, we conclude that, as of December 31, 2015,
the Company has maintained effective internal control over financial reporting based on those criteria.
Our independent
registered public accounting firm, Weinberg & Company, P.A., has audited the Consolidated Financial Statements and has issued
an attestation report on QS Energy, Inc.'s internal controls over financial reporting as of December 31, 2015 as stated in its
reports which are included herein.
| (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, 2015 that has materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B. Other Information
None.
PART
III
Item 10. 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 Board consisted of
six (6) members elected by the holders of the common stock at the Company’s Meeting of Shareholders on June 19, 2015.
Our directors are elected by our stockholders at each annual meeting of stockholders and will serve until their successors are
elected and qualified, or until their earlier resignation or removal. 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, 2015:
Name |
|
Age |
|
Position |
|
Director Since |
Greggory Bigger |
|
47 |
|
Chief Executive Officer, Chief Financial Officer and Chairman, Director (Non-Independent) |
|
2013 |
Charles R. Blum (1) (2) (3) |
|
76 |
|
Director (Non-Independent) |
|
2007 |
Donald Dickson(2) |
|
58 |
|
Director (Independent) |
|
2013 |
Nathan Shelton (1) (2) (3) |
|
65 |
|
Director (Independent) |
|
2007 |
Mark Stubbs (1)(2) |
|
43 |
|
Director (Independent) |
|
2013 |
Thomas Bundros(1) |
|
59 |
|
Director (Independent) |
|
2015 |
(1)
Member of the Audit Committee
(2)
Member of the Compensation Committee
(3)
Member of the Nominating and Corporate Governance Committee
Biographical Information
Regarding Directors
Greggory Bigger, President,
CEO and CFO (Non-Independent Director) was appointed to the Board of Directors on September 16, 2013. Gregg Bigger was most
recently Founding Partner of Rocfin Advisors, a Strategic Management Consulting Company providing advice and direction to a variety
of clients including companies in the energy, clean tech, and emerging technology markets. Prior, Mr. Bigger was Founder and Board
Member of The Bank of Santa Barbara. Earlier in his career Mr. Bigger held a variety of key management and leadership positions
including U.S. Trust as a Vice-President in the Private Client Group, and First Republic Bank as a Vice President and Manager in
the Private Banking Group. Mr. Bigger also served in the United States Marine Corps' Special Operations in Amphibious Warfare and
Cliff Assault.
Charles R. Blum
(Non-Independent Director) was appointed on July 25, 2007 to the Board of directors and engaged as the President and Chief Executive
Officer of the Company. In January 2010, Mr. Blum resigned as Chief Executive Officer of the Company, and thereafter resigned as
President of the Company. Mr. Blum spent 22 years as the President/CEO of the Specialty Equipment Market Association
(SEMA). SEMA is a trade group representing 6500 business members who are actively engaged in the manufacture and distribution
of automotive parts and accessories. SEMA produces the world’s largest automotive aftermarket Trade Show which is held annually
in Las Vegas, Nevada. Mr. Blum led the association as its members grew from a handful of small entrepreneurial companies into an
industry membership that sells over 31 billion dollars of product at the retail level annually. Mr. Blum has a proven record of
accomplishment as a senior executive and brings a broad knowledge of the automotive aftermarket to the Company. Mr.
Blum attended Rutgers University.
Nathan Shelton (Independent
Director) has served as a director since February 12, 2007. Mr. Shelton has a long and distinguished career with a number of diverse
successful companies primarily related to the automotive industry, holding prominent positions. In 1987 he joined K&N
Engineering as President and part owner and built the company into an industry leader. In 2002 he sold his interest
in K&N Engineering and founded S&S Marketing, which is engaged in the automotive aftermarket parts rep business, which
he currently operates. Mr. Shelton is the recipient of numerous industry related prestigious awards, and in 1992, Specialty Equipment
Market Association (SEMA) invited him to join its board of directors, which includes serving in capacity as its Chairman from 2002
to 2004. In 2007 he was elected to the SEMA “Hall of Fame”. Mr. Shelton served honorably in the
United States Seabees from 1968 to 1972. He attended Chaffey Junior College.
Mark Stubbs (Independent
Director) was appointed to the Board of Directors and Chairman of the Audit Committee on July 3, 2013. Mr. Stubbs currently serves
as Chief Financial Officer for London Stock Exchange listed BBA Aviation's Aftermarket Services Division, a leading global aviation
services and aftermarket support provider. Prior to joining BBA in 2012, Mr. Stubbs served as Chief Financial Officer and Interim
Chief Executive Officer for CallWave, Inc., which was then a NASDAQ-listed company and a global provider of enhanced telecommunications
software and services. From 2005 to 2006, Mr. Stubbs was Chief Financial Officer of Sound ID, a privately held consumer electronics
company. Prior to Sound ID, Mr. Stubbs held a number of executive positions including Vice President Global Supply Chain and Vice
President and Managing Director EMEA (Europe, Middle East and Africa) at Somera, Inc., which at the time was a NASDAQ-listed company
and a leading global provider of telecommunications infrastructure and services. Previously, Mr. Stubbs held a number of financial
management positions at Kinko's Inc., which has since been acquired by NYSE-listed FedEx. Mr. Stubbs earned a BA in Finance and
MBA from Cal Poly San Luis Obispo and is a Certified Public Account (CPA).
Don Dickson
(Independent Director), appointed to Board of Directors on August 6, 2013, and currently is employed with Kinder Morgan,
Inc. working on the Northeast Energy Direct Project, after finishing the Cortez Expansion project as project manager / engineering
principal / construction support. The NED project will serve the Northeast United States delivering natural gas to the region,
while the Cortez expansion project will increase the volume of CO2 being shipped from Southwest Colorado to West Texas for oil
recovery. Prior to rejoining Kinder Morgan Mr. Dickson served as Chief Executive Officer for Advanced Pipeline Services (APS).
APS was established for the purpose of providing a full range of services to the oil and gas industry. Core business areas are
in new construction of pipeline and facilities, horizontal directional drilling and pipeline integrity/rehabilitation. Prior to
APS, Mr. Dickson worked for Kinder Morgan in their natural gas operations, retiring after twenty-six years. During his time at
Kinder Morgan served in different engineering capacities including as Director of Operations on two major pipeline projects, the
42” (REX) Rockies Mountain Express through the state of Illinois, and the 42” (MEP) Midcontinent Express Pipeline
through the state of Louisiana. He also was Director of Operations with Tetra Resources completing various onshore and offshore
oil and gas wells and a Senior Engineer with Halliburton Services. Mr. Dickson earned his B.S. in Engineering from Oklahoma State
University.
Thomas Bundros
(Independent Director), was appointed to the Board of Directors effective January 5, 2015. Mr. Bundros served as Chief
Financial Officer at Colonial Pipeline Company from July 2009 to September 2012, the world's largest pipeline operator transporting
100 million gallons of refined petroleum products daily across 5,500 miles of pipeline. Mr. Bundros currently holds the post of
Chief Executive Officer of Dalton Utilities (January 2016 to present), a provider of electricity, natural gas, water and telecommunications
services to the city of Dalton and portions of northwest Georgia. Prior to his appointment as Chief Executive Officer, Mr. Bundros
had served as Dalton Utilities’ Chief Operations Officer for Dalton Utilities since October 2012. Mr. Bundros was Chief
Financial Officer of Dalton Utilities from January 1997 to June 2009. Prior to Dalton Utilities, Mr. Bundros also held various
financial positions in the Atlanta and New York offices of the Southern Company System, the 16th largest utility company in the
world and the fourth largest in the U.S. with over 4 million customers in Alabama, Georgia, Florida, and Mississippi. He earned
his Master of Business Administration in Finance and Bachelor of Science in Economics and Business Administration at the University
of North Carolina at Greensboro.
Director Compensation Policy
Effective January 1, 2014,
the Board passed a resolution suspending the July 1, 2013 Board compensation policy. Effective May 6, 2014, the Board approved
a compensation policy which includes two annual grants of options, including i) an option to purchase a number of shares of common
stock equal to $25,000 divided by the per share closing price on the date of grant with an exercise price equal to the stock closing
price on the date of grant, a one year vesting period and an expiration date 10 years from the date of grant; and ii) an option
to purchase a number of shares of common stock equal to $25,000 divided by the per share fair market value of the option calculated
using the Black-Scholes Option Pricing Model based on market conditions, including stock closing price, risk free interest rate
and stock volatility, on the date of grant with an exercise price equal to the stock closing price on the date of grant, vesting
immediately and an expiration date 10 years from the date of grant. Also effective July 1, 2013, the Board approved an annual grant
of options to purchase 25,000 shares of common stock at a price equal to the stock’s closing price on the date of grant,
vesting immediately and expiring 10 years from the date of grant as compensation to the chairman of the Board’s Audit Committee.
Effective January 1, 2015, the Board amended the policy such that i) all options granted would vest over one year; and ii) options
granted mid-year due to appointment to the Board or appointment to Chairman of the Audit Committee would be adjusted such that
the number of shares would be calculated on a pro rata basis depending on the number of day remaining in the calendar year, and
the options would vest December 31 of the year of grant.
Executive Officers
The following table
sets forth certain information regarding our executive officers as of December 31, 2015:
Nam |
|
Age |
|
Position |
Greggory M. Bigger |
|
47 |
|
Chief Executive Officer, Chief Financial Officer and President |
For the biography
of Greggory Bigger, please see above under “Biographical Information Regarding Directors.”
CORPORATE GOVERNANCE
We maintain a corporate
governance page on our corporate website at www.qsenergy.com, which includes information regarding the Company’s corporate
governance practices. Our codes of business conduct and ethics, Board committee charters and certain other corporate governance
documents and policies are posted on our website. In addition, we will provide a copy of any of these documents without charge
to any stockholder upon written request made to Corporate Secretary, QS Energy, Inc., 735 State Street, Suite 500, Santa Barbara,
California 93101. 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, 2015 consisted of six (6) members. As of that date, the Board has affirmatively determined that Mr.
Dickson, Mr. Shelton, Mr. Stubbs and Mr. Bundros are independent directors. Mr. Bigger, our President, Chief Executive
Officer, and Chief Financial Officer and Mr. Blum, former Chief Executive Officer, are not considered independent.
Effective January
5, 2015, Thomas A. Bundros was elected to the Company’s Board of Directors. As of that date, the Board has affirmatively
determined that Mr. Bundros is an independent director.
Meetings of the Board
The Board held five (5)
meetings in 2015. A majority of the members attended all 5 board meetings held in 2015. The Board has held one meeting in 2016.
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. 735 State Street, Suite 500, Santa Barbara, California, 93101 or by e-mail to info@qsenergy.com.
Our 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., 735 State Street, Suite 500, Santa Barbara, California 93101 or by e-mail to info@qsenergy.com.
The Audit Committee has
established procedures, as outlined in the Company’s 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 Company’s employees may confidentially communicate concerns about any of these matters by
calling our toll-free number, +1 (844) OIL-QSEP, (+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.
Committees of the Board
The Board has a standing
Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Each of these committees operates under
a written charter. Copies of these charters, and other corporate governance documents, are available on our website, 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 Corporate
Secretary, QS Energy Inc., 735 State Street, Suite 500, Santa Barbara, California 93101.
The composition, functions
and general responsibilities of each committee are summarized below.
Audit Committee
The Audit
Committee currently consists of Mr. Stubbs (chairperson), Mr. Blum, Mr. Shelton and Mr. Bundros. The Board has determined
that Mr. Stubbs, Mr. Shelton and Mr. Bundros are considered independent under rules of the SEC. The Audit Committee
held a total of four (4) meetings during 2015, each attended by a majority of Audit Committee members. The Audit Committee has
met once during 2016 as of the date of this report.
The Audit Committee
operates under a written charter. The Audit Committee’s duties include responsibility for reviewing our accounting practices
and audit procedures. In addition, the Audit Committee has responsibility for reviewing complaints about, and investigating allegations
of, financial impropriety or misconduct. The Audit Committee works closely with management and our independent auditors. The Audit
Committee also meets with our independent auditors on a quarterly basis, following completion of their quarterly reviews and annual
audit, to review the results of their work. The Audit Committee also meets with our independent auditors to approve the annual
scope of the audit services to be performed.
As part of its responsibility,
the Audit Committee is responsible for engaging our independent auditor, as well as pre-approving audit and non-audit services
performed by our independent auditor in order to assure that the provision of such services does not impair the independent auditor’s
independence.
See “Audit
Committee Report” below, which provides further details of many of the duties and responsibilities of the Audit Committee.
Compensation Committee
The Compensation Committee
consists of Mr. Blum (chairperson), Mr. Stubbs, Mr. Shelton and Mr. Dickson. The Board has determined that Mr. Stubbs, Mr.
Shelton and Mr. Dickson are independent. The Compensation Committee held no meetings during 2015 and has not met during 2016 as
of the date of this report.
The Compensation Committee
administers the Company’s executive compensation program. The Compensation Committee has the authority to review and determine
the salaries and bonuses of the executive officers of the Company, including the Chief Executive Officer and the other executive
officers named in the Summary Compensation Table (the “Named Executive Officers”) appearing elsewhere in this 10-K,
and to establish the general compensation policies for such individuals.
The Compensation Committee
operates under a written charter. The charter reflects these various responsibilities, and the Committee is charged with periodically
reviewing the charter. In addition, the Committee has the authority to engage the services of outside advisors, experts and others,
including independent compensation consultants who do not advise the Company, to assist the Committee.
See “Compensation
Committee Report” below, which provides further details of many of the duties and responsibilities of the Compensation Committee.
Nominating and Governance
Committee
The Nominating and Corporate
Governance Committee consists of Mr. Shelton (chairperson) and Mr. Blum. The Board believes that Mr. Shelton meets independent
requirements under rules of the SEC. The Nominating and Corporate Governance Committee held no meetings during 2015
and has not met during 2016 as of the date of this report.
The Nominating and Corporate
Governance Committee operates under a written charter. The Nominating and Corporate Governance Committee has the primary responsibility
for overseeing the Company’s corporate governance compliance practices, as well as supervising the affairs of the Company
as they relate to the nomination of directors. The principal ongoing functions of the Nominating and Corporate Governance Committee
include developing criteria for selecting new directors, establishing and monitoring procedures for the receipt and consideration
of director nominations by stockholders and others, considering and examining director candidates, developing and recommending
corporate governance principles for the Company and monitoring the Company’s compliance with these principles and establishing
and monitoring procedures for the receipt of stockholder communications directed to the Board.
The Nominating and
Corporate Governance Committee is also responsible for conducting an annual evaluation of the Board to determine whether the Board
and its committees are functioning effectively. In performing this evaluation, the Nominating and Corporate Governance Committee
receives comments from all directors and reports annually to the Board with the results of this evaluation.
See “Nominating
and Governance Committee Report” below, which provides further details of many of the duties and responsibilities of the
Nominating and Governance Committee.
AUDIT COMMITTEE REPORT
The Audit Committee
is currently composed of four (4) directors, Mr. Stubbs (Chairperson), Mr. Charles R. Blum, Mr. Bundros and Mr. Shelton. The
Board has determined that Mr. Stubbs, Mr. Bundros and Mr. Shelton are considered independent within the rules of the SEC. The duties
and responsibilities of a member of the Audit Committee are in addition to his duties as a member of the Board.
The Audit
Committee operates under a written charter, which is available on the Company’s website. The Board and the Audit Committee
believe that the Audit Committee charter complies with the current standards set forth in SEC regulations. There may be further
action by the SEC during the current year on several matters that affect all audit committees. The Board and the Audit Committee
continue to follow closely further developments by the SEC in the area of the functions of audit committees, particularly as it
relates to internal controls for non-accelerated filers, and will make additional changes to the Audit Committee charter and the
policies of the Audit Committee as required or advisable as a result of these new rules and regulations. The Audit Committee met
four (4) times during 2015 and each was attended by a majority of committee members. The Audit Committee has met once during 2016
as of the date of this report.
The Audit
Committee’s primary duties and responsibilities are to:
| · | engage the Company’s independent auditor; |
| · | monitor the independent auditor’s independence, qualifications and performance; |
| · | pre-approve all audit and non-audit services; |
Management is responsible
for the Company’s internal controls and the financial reporting process. The Company’s independent auditor is responsible
for performing an independent audit of the Company’s financial statements in accordance with the standards of the Public
Company Accounting Oversight Board and issuing a report thereon. The Audit Committee’s responsibility is to monitor and oversee
these processes.
In February 2012,
the Company began the process of designing and implementing various financial controls from within our finance department under
the supervision of the Company’s Chief Executive Officer and Chief Financial Officer. Furthermore, the Company also hired
an outside consultant to further enhance these internal controls, policies and procedures. On March 19, 2013, the Company’s
Board of Directors approved and began the implementation of these internal controls, policies and procedures. In June 2013, the
Company began the process of designing and implementing additional internal controls based on a continuous process of assessment
and improvement under which board and management financial reporting objectives were defined and implemented, policies and procedures
were tested for effectiveness and deficiencies were identified and remediated. On December 16, 2013, the Board of Directors approved
a revised Internal Controls Policy based on policy refinements and improvements implemented under this assessment process. Additional
controls and policies designed and implemented in second and third quarters of 2013 have been tested and identified deficiencies
have been remediated. The Internal Controls Policy and Sarbanes-Oxley 302 matrix approved by the Board of Directors on March 19,
2013, as revised and approved by the board on December 16, 2013, have been implemented and are functioning as planned.
Our management evaluated,
with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
under the Securities Exchange Act of 1934 (the “Exchange Act”) were effective as of September 30, 2013 and continue
to be effective as of the date of this report.
Our Chief
Executive Officer, Chief Financial Officer and Controller conducted an assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2015 based on the framework in Internal Control – Integrated
Framework (“2013 Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our internal controls over financial reporting (as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”) were effective as of December 31, 2015.
With respect
to the Company’s independent auditors, the Audit Committee, among other things, discussed with Weinberg & Co., P.A.,
matters relating to its independence, including the written disclosures made to the Audit Committee as required by the Independence
Standards Board Standard No. 1 (Independence Discussions with Audit Committees). The Audit Committee also reviewed and approved
the audit and non-audit fees of that firm.
On the basis
of these reviews and discussions, the Audit Committee (i) appointed Weinberg & Co., P.A. as the independent registered
public accounting firm for the 2015 fiscal year and (ii) recommended to the Board that the Board approve the inclusion of
the Company’s audited financial statements in the 10-K for filing with the SEC.
|
Respectfully submitted: |
|
|
|
Mark Stubbs (Chairman) |
COMPENSATION COMMITTEE REPORT
The Compensation
Committee has furnished this report on executive compensation for the 2015 fiscal year.
The Compensation Committee
administers the Company’s executive compensation program. The Compensation Committee has the authority to review and determine
the salaries and bonuses of the executive officers of the Company, including the Chief Executive Officer and the other executive
officers named in the Summary Compensation Table (the “Named Executive Officers”) appearing elsewhere in this 10-K,
and to establish the general compensation policies for such individuals.
The Compensation Committee
currently consists of Mr. Blum (chairperson), Mr. Stubbs, Mr. Dickson and Mr. Shelton. The Board believes that Messrs. Stubbs,
Dickson and Shelton are independent. None of our executive officers served on the compensation committee of another
entity or on any other committee of the board of directors of another entity performing similar functions during 2015. The Compensation
Committee held no meetings during 2015 and has not met during 2016 as of the date of this report.
The Compensation Committee
operates under a written charter. The charter reflects these various responsibilities, and the Committee is charged with periodically
reviewing the charter. In addition, the Committee has the authority to engage the services of outside advisors, experts and others,
including independent compensation consultants who do not advise the Company, to assist the Committee.
The Compensation Committee
believes that the compensation programs for the Company’s executive officers should reflect the Company’s performance
and the value created for the Company’s stockholders. In addition, the compensation programs should support the short-term
and long-term strategic goals and values of the Company, reward individual contribution to the Company’s success and align
the interests of the Company’s officers with the interests of its stockholders. The committee believes that the Company’s
success depends upon its ability to attract and retain qualified executives through the competitive compensation packages it offers
to such individuals.
The principal factors that
were taken into account in establishing each executive officer’s compensation package for the 2015 fiscal year are described
below. However, the Compensation Committee may in its discretion apply entirely different factors, such as different measures of
financial performance, for future fiscal years. Moreover, all of the Company’s Named Executive Officers have entered into
employment agreements with the Company and many components of each such person’s compensation are set by such agreements.
Equity-Based Compensation.
The Committee believes in linking long-term incentives to an increase in stock value. Accordingly, it awards stock options with
an exercise price equal to the fair market value of the underlying stock on the date of grant that vest and become exercisable
over time. The Committee believes that these options encourage employees to continue to use their best efforts and to remain in
the Company’s employment. Options granted to executive officers generally vest and become exercisable in annual 25% increments
over a four-year period after grant.
The Committee relies substantially
on management of the Company to make specific recommendations regarding which individuals should receive option grants and the
amounts of such grants.
The Company grants stock
options to executive officers with a cumulative option price of up to $100,000 as incentive stock options and the remainder as
non-qualified stock options, both with an exercise price equal to the fair market value of the Company’s common stock on
the date of grant. Accordingly, those stock options will have value only if the market price of the Company’s common stock
increases after that date. In determining the size of stock option grants to executive officers, the Committee bases its decisions
on such considerations as similar awards to individuals holding comparable positions in our comparative groups, company performance
and individual performance, as well as the allocation of overall share usage attributed to executive officers.
Compliance with Code Section 162(m).
Section 162(m) of the Code disallows a tax deduction to publicly-held companies for compensation paid to certain of their
executive officers, to the extent that compensation exceeds $1 million per covered officer in any fiscal year. The limitation
applies only to compensation which is not considered to be performance based. Non-performance based compensation paid to the Company’s
executive officers for the 2015 fiscal year did not exceed the $1 million limit per officer, and the Compensation Committee
does not anticipate that the non-performance based compensation to be paid to the Company’s executive officers for the 2016
fiscal year will exceed that limit. Because it is unlikely that the cash compensation payable to any of the Company’s executive
officers in the foreseeable future will approach the $1 million limit, the Compensation Committee has decided at this time
not to take any action to limit or restructure the elements of cash compensation payable to the Company’s executive officers.
The Compensation Committee will reconsider this decision should the individual cash non-performance based compensation of any executive
officer ever approach the $1 million level.
The Board did not modify
any action or recommendation made by the Compensation Committee with respect to executive compensation for the 2015 fiscal year.
It is the opinion of the Compensation Committee that the executive compensation policies and plans provide the necessary total
remuneration program to properly align the Company’s performance and the interests of the Company’s stockholders through
the use of competitive and equitable executive compensation in a balanced and reasonable manner, for both the short and long term.
|
Respectfully submitted by: |
|
|
|
Charles Blum, Chairman |
NOMINATING AND CORPORATE GOVERNANCE
COMMITTEE REPORT
The Nominating and Corporate
Governance Committee currently consists of Mr. Shelton (chairperson) and Mr. Blum. The Board believes that Mr. Shelton
meet independent requirements under rules of the SEC. The Nominating and Corporate Governance Committee held no meetings
during 2015 and has not met during 2016 as of the date of this report.
The Nominating and Corporate
Governance Committee operates under a written charter. The Nominating and Corporate Governance Committee has the primary responsibility
for overseeing the Company’s corporate governance compliance practices, as well as supervising the affairs of the Company
as they relate to the nomination of directors. The principal ongoing functions of the Nominating and Corporate Governance Committee
include developing criteria for selecting new directors, establishing and monitoring procedures for the receipt and consideration
of director nominations by stockholders and others, considering and examining director candidates, developing and recommending
corporate governance principles for the Company and monitoring the Company’s compliance with these principles and establishing
and monitoring procedures for the receipt of stockholder communications directed to the Board.
The Nominating and Corporate
Governance Committee is also responsible for conducting an annual evaluation of the Board to determine whether the Board and its
committees are functioning effectively. In performing this evaluation, the Nominating and Corporate Governance Committee receives
comments from all directors and reports annually to the Board with the results of this evaluation.
Director Nominations
The Nominating and
Corporate Governance Committee seeks out appropriate candidates to serve as directors of the Company, and the Nominating and Corporate
Governance Committee interviews and examines director candidates and makes recommendations to the Board regarding candidate selection.
In considering candidates to serve as director, the Nominating and Corporate Governance Committee evaluates various minimum individual
qualifications, including strength of character, maturity of judgment, relevant technical skills or financial acumen, diversity
of viewpoint and industry knowledge, as well as the extent to which the candidate would fill a present need on the Board.
The Nominating and Corporate
Governance Committee will consider, without commitment, stockholder nominations for director. Nominations for director submitted
to this committee by stockholders are evaluated according to the Company’s overall needs and the nominee’s knowledge,
experience and background. A nominating stockholder must give appropriate notice to the Company of the nomination not less than
90 days prior to the first anniversary of the preceding year’s annual meeting. In the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date of the preceding year’s
annual meeting, the notice by the stockholder must be delivered not later than the close of business on the later of the 60th day
prior to such annual meeting or the tenth day following the day on which public announcement of the date of such annual meeting
is first made.
The stockholders’
notice shall set forth, as to:
| · | each person whom the stockholder proposes to nominate for election as a director: |
| · | the name, age, business address and residence address of such person, |
| · | the principal occupation or employment of the person, |
| · | the class and number of shares of the Company which are beneficially owned by such person, if any,
and |
| · | any other information relating to such person which is required to be disclosed in solicitations
for proxies for election of directors pursuant to Regulation 14A under the Exchange Act and the rules hereunder; and the stockholder
giving the notice |
| · | the name and record address of the stockholder and the class and number of shares of the Company
which are beneficially owned by the stockholder, |
| · | a description of all arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to which nomination(s) are to be made by such stockholder, |
| · | a representation that such stockholder intends to appear in person or by proxy at the meeting to
nominate the persons named in its notice, |
| · | any other information relating to such person which is required to be disclosed in solicitations
for proxies for election of directors pursuant to Regulation 14A under the Exchange Act and the rules thereunder. |
The notice must
be accompanied by a written consent of the proposed nominee to be named as a director.
We have adopted codes
of business conduct and ethics for our directors, officers and employees, which we believe meet requirements of a code of ethics. You
can access the Company’s Code of Business Conduct and Ethics and our Code of Ethics for Senior Executives and Financial
Officers on the Corporate Governance page of the Company’s website at www.qsenergy.com. Any shareholder who so requests
may obtain a printed copy of the Code of Conduct by submitting a request to the Company’s Corporate Secretary.
|
Respectfully submitted by: |
|
|
|
Nathan Shelton, Chairman |
Item 11. Executive Compensation
EXECUTIVE
COMPENSATION DISCUSSION AND ANALYSIS
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
($) | | |
Total
($) | |
Greggory Bigger (1) (3) (5) | |
| 2015 | | |
$ | 290,000 | | |
$ | – | | |
| – | | |
$ | – | | |
$ | – | | |
$ | 290,000 | |
President, | |
| 2014 | | |
$ | 290,000 | | |
$ | – | | |
| – | | |
$ | – | | |
$ | – | | |
$ | 290,000 | |
Chief Executive Officer and | |
| 2013 | | |
$ | 290,000 | | |
$ | 109,000 | | |
| – | | |
$ | – | | |
$ | 50,000 | | |
$ | 449,000 | |
Chief Financial Officer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cecil Bond Kyte (2) (3)(4) | |
| 2013 | | |
$ | 335,417 | | |
$ | – | | |
| – | | |
$ | – | | |
$ | 100,000 | | |
$ | 435,417 | |
Chief Executive Officer | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
_________________
(1) | On February 1, 2012, Mr. Bigger was appointed Chief Financial Officer. In 2012, Mr. Bigger received
options for 4,000,000 exercisable at $0.25 per share, vesting over four years. Of the 4,000,000 options, 500,000 vested on February
1, 2012, 500,000 vested on February 1 2013, 1,000,000 vested on February 1, 2014, 1,000,000 vested on February 1, 2015, and 1,000,000
vested on February 1, 2016. On March 10, 2016, the Board of Directors agreed to amend Mr.
Bigger’s employment contract, effective March 10, 2016, such that the contract will terminate on March 8, 2019, the business
day immediately preceding the third anniversary of the effective date of the amendment. Prior to this amendment, Mr. Bigger’s
contract was scheduled to terminate on January 31, 2017, subject to automatic one-year extensions of the contract. A copy of this
contract amendment is attached to this Form 10-K as Exhibit 10.120.
|
(2) | Mr. Kyte was appointed Chief Executive Officer in January 2009. Effective September 1, 2013,
the Board approved Amendment Number 3 to Mr. Kyte’s Employment Agreement, increasing his salary to $350,000 per year. During
the year 2013, Mr. Kyte received a bonus of $100,000. Mr. Kyte’s employment terminated on November 15, 2013. Under terms
of his Separation Agreement, Mr. Kyte received severance payments totaling $350,000 paid semi-monthly through November 15, 2014. |
(3) | The number and value of vested restricted stock based upon the closing market price of the common
stock at December 31, 2013 of $1.07 were as follows: Mr. Kyte’s 10,569,000 vested shares at an execution price of $0.25 are
valued at $8,659,2000, and Mr. Bigger’s, 1,500,000 vested shares at an execution price of $0.25 are valued at $1,230,000. |
(4) | In connection with Mr. Kyte’s separation from the Company, Mr. Kyte have agreed that Mr.
Kyte’s Employment Agreement, dated January 30, 2009, and the three (3) amendments thereto, dated March 1, 2011, December
1, 2011 and September 1, 2013, respectively, would be terminated and be of no further force or effect. In exchange, the Company
agreed to pay Mr. Kyte an amount equal to $350,000, representing his salary for one (1) year, less withholding taxes, in twelve
(12) equal monthly installments, commencing November 15, 2013. The Company has also agreed to reimburse Mr. Kyte for his health
insurance premiums for a twelve (12) month period, also commencing November 15, 2013. Mr. Kyte retained his vested Company stock
options and warrants, but all unvested Company stock options and warrants were terminated and of no further force or effect, except
that 3,520,000 option shares previously granted to Mr. Kyte, and scheduled to vest on January 30, 2014, were deemed vested as of
November 15, 2013. The Company paid Mr. Kyte the sum of $25,000, less all applicable tax withholdings, on November 15, 2013, representing
payment for Mr. Kyte’s accrued vacation and sick days. |
(5) | Mr. Bigger also received stock options as a member of the Board of Directors of the Company. See
section below labeled, “Director Compensation”. |
OPTION GRANTS IN LAST FISCAL YEAR
No options
were granted to Named Executive Officers during the 2015 fiscal year as executive compensation; however, options were granted to
Greggory Bigger under the Company’s Board of Directors compensation policy as detailed in the Director Compensation section
below.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND YEAR-END OPTION VALUES
No options were exercised
by any of the Named Executive Officers during the 2015 fiscal year. The following table sets forth the number of shares of our
common stock subject to exercisable and unexercisable stock options which the Named Executive Officers held at the end of the 2015
fiscal year.
| |
Shares | | |
Value | | |
Number of Securities Underlying Unexercised Options at Fiscal Year-End (#) | | |
Value of Unexercised In-the-Money Options ($)(1) | |
| |
Acquired on | | |
Realized | | |
| | | |
| | | |
| | | |
| | |
Name | |
Exercise (#) | | |
($) | | |
Exercisable | | |
Unexercisable | | |
Exercisable | | |
Unexercisable | |
Greggory Bigger | |
$ | – | | |
$ | – | | |
| 3,147,351 | | |
| 1,052,083 | | |
$ | – | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
(1) Market
value of our common stock at fiscal year-end minus the exercise price. The closing price of our common stock on December 31,
2015 the last trading day of the year was $0.19 per share.
EMPLOYMENT AGREEMENTS
Employment Agreement with
Greggory M. Bigger
On February 1,
2012, the Company entered into an employment agreement with Greggory M. Bigger, pursuant to which he agreed to serve as the
Company’s Chief Financial Officer. The initial term of the agreement commenced February 1, 2012, and continues for one
(1) year. Thereafter, the agreement is renewable for successive one (1) year periods, unless either party gives
written notice of non-renewal, no later than sixty (60) days prior to the renewal date. The agreement provides for
the payment of a one-time acceptance bonus of $10,000. Base salary under the agreement is $10,000 per month, plus
an automobile allowance of $900 per month and other benefits generally available to senior employees of the Company. In
addition, the Company also granted Mr. Bigger an option to purchase 4,000,000 shares of common stock at $0.25/share (See Note
10 of the Company’s Financial Statement). The options were granted on February 1, 2012 and will expire ten years from
date of grant. The options vest subject to Mr. Bigger’s continued employment over a period of four years, with 500,000
shares vesting immediately upon grant, 500,000 shares vesting on February 1, 2013, and three tranches of 1,000,000 shares
each vesting on February 1, 2014, 2015 and 2016. On April 30, 2012, the Company raised Mr. Bigger’s salary to $15,000
per month for his extraordinary leadership and loyalty. On September 1, 2012, his salary was increased to $20,000 per month
for accepting the position of President of the Company in addition to being the Chief Financial Officer.
Amendment #1 to Bigger Employment
Agreement
Effective September
1, 2013, Mr. Bigger’s Employment Agreement, in recognition of his additional responsibilities as President of the Company,
was amended, as follows:
(i) Annual Base
Salary for Mr. Bigger was increased to $290,000. Mr. Bigger is also eligible to receive an annual cash bonus, within the discretion
of the Company’s Board. In exercising its discretion, the Board shall consider, among other things, the Company’s:
(a) revenue; (b) earnings; (c) contracts; (d) cash position; (e) liquidity; (f) customers; (g) NASDAQ or other
exchange listings; (h) market capitalization; (i) general financial condition; and (j) achievement of goals set forth in management’s
yearly budgets, plans and projections. Any award of bonus shall be paid no later than forty-five (45) days following the filing
of the Company’s Form 10-K.
(ii) Additionally,
in the event any person, including all affiliates of such person, directly or indirectly, becomes the beneficial owner of 50% or
more of the combined voting power of the Company’s outstanding shares, and otherwise on a Change of Control event as defined
in Mr. Bigger’s Employment Agreement, Mr. Bigger’s Employment Agreement and all amendments thereto shall be terminated
whereupon Mr. Bigger shall be paid an amount equal to two (2) times his annual Base Salary as in effect on the date of the Change
of Control event, and all of Mr. Bigger’s unvested stock options and warrants shall immediately vest effective on the date
of the Change of Control event.
(iii) Additionally,
if Mr. Bigger is terminated by the Company without cause or if he resigns for “good reason,” he shall be paid an amount
equal to three (3) times his annual Base Salary as in effect on the date of the termination, payable, at the discretion of the
Company, in one lump sum or in equal monthly installments during a term not to exceed thirty-six (36) months, less applicable withholding
taxes. Additionally, all of Mr. Bigger’s unvested options and warrants shall vest to the same extent as he would have become
vested if he had remained employed by the Company for an additional three (3) years. “Good Reason” shall be defined
to mean any reduction in Mr. Bigger’s then current annual Base Salary of ten percent (10%) or more, or relocation of the
Company’s principal executive office to a location more than twenty-five (25) miles outside of Santa Barbara, California,
or a substantial change in Mr. Bigger’s then current duties and responsibilities.
(iv) Additionally,
in the event of Mr. Bigger’s termination for Cause, Mr. Bigger shall be entitled to receive only his Base Salary accrued
through the date of such termination, and nothing more, and all of Mr. Bigger’s unvested options and warrants shall be canceled.
Amendment #2
to Bigger Employment Agreement
On March 10, 2016, the Board of Directors agreed to amend Mr. Bigger’s employment
contract, effective March 10, 2016, such that the contract will terminate on March 8, 2019, the business day immediately preceding
the third anniversary of the effective date of the amendment. Prior to this amendment, Mr. Bigger’s contract was scheduled
to terminate on January 31, 2017, subject to automatic one-year extensions of the contract. A copy of this contract amendment
is attached to this Form 10-K as Exhibit 10.120.
DIRECTORS COMPENSATION
The Company granted
options to purchase 738,552 shares of common stock to members of the Board of Directors under a new Board of Directors compensation
policy adopted by the Company on May 6, 2014 and as amended effective January 1, 2015. The options are exercisable at $0.48/share
and $0.46/share and expire ten years from the date of grant. A total of 738,552 options vested on December 31, 2015. Total fair
value of these options at grant date was approximately $296,787 using the Black-Scholes Option Pricing model with the following
assumptions: life of 5 years; risk free interest rate of 1.72% and 1.67%; volatility of 121% and dividend yield of 0%.
The table below
summarizes the compensation paid by the Company to its directors for the fiscal year ended December 31, 2015.
| |
Fees earned or paid in cash (1) | | |
Stock Awards | | |
Option Awards (2) | | |
Non-Equity Incentive Plan Compensation | | |
Change in Pension Value and Nonqualified Deferred Compensation Earnings | | |
All Other Compensation | | |
Total | |
Name | |
($) | | |
($) | | |
($) | | |
($) | | |
($) | | |
($) | | |
($) | |
Gregg Bigger (3) | |
| – | | |
| – | | |
$ | 46,354 | | |
| – | | |
| – | | |
| – | | |
$ | 46,354 | |
Charles Blum (4) | |
$ | 6,000 | | |
$ | – | | |
| 46,354 | | |
| – | | |
| – | | |
| – | | |
| 52,354 | |
Donald Dickson (5) | |
| 3,000 | | |
| – | | |
| 46,354 | | |
| – | | |
| – | | |
| – | | |
| 49,354 | |
Nathan Shelton (6) | |
| 6,000 | | |
| – | | |
| 46,354 | | |
| – | | |
| – | | |
| – | | |
| 52,354 | |
Mark Stubbs (7) | |
| 6,000 | | |
| – | | |
| 46,354 | | |
| – | | |
| – | | |
| – | | |
| 52,354 | |
Thomas Bundros (8) | |
| 3,000 | | |
| – | | |
| 43,663 | | |
| – | | |
| – | | |
| – | | |
| 46,663 | |
(1) | Effective July 1, 2013, the Board approved a compensation policy which includes a $500 monthly
fee paid to any member of the Board of Directors who serves on a Board Committee. Effective May 6, 2014, the Board approved a revised
compensation policy which continued this $500 monthly fee. |
(2) | Effective January 1, 2014, the Board passed a resolution suspending the July 1, 2013 Board compensation
policy. Effective May 6, 2014, the Board approved a compensation policy which includes two annual grants of options, including
i) an option to purchase a number of shares of common stock equal to $25,000 divided by the per share closing price on the date
of grant with an exercise price equal to the stock closing price on the date of grant, a one year vesting period and an expiration
date 10 years from the date of grant; and ii) an option to purchase a number of shares of common stock equal to $25,000 divided
by the per share fair market value of the option calculated using the Black-Scholes Option Pricing Model based on market conditions,
including stock closing price, risk free interest rate and stock volatility, on the date of grant with an exercise price equal
to the stock closing price on the date of grant, vesting immediately and an expiration date 10 years from the date of grant. Also
effective July 1, 2013, the Board approved an annual grant of options to purchase 25,000 shares of common stock at a price equal
to the stock’s closing price on the date of grant, vesting immediately and expiring 10 years from the date of grant as compensation
to the chairman of the Board’s Audit Committee. Effective January 1, 2015, the Board amended the policy such that i) all
options granted would vest over one year; and ii) options granted mid-year due to appointment to the Board or appointment to Chairman
of the Audit Committee would be adjusted such that the number of shares would be calculated on a pro rata basis depending on the
number of day remaining in the calendar year, and the options would vest December 31 of the year of grant. |
(3) | On January 1, 2015, Mr. Bigger was granted options to purchase 114,583 shares of common exercisable
at $0.48/share, vesting on December 31, 2015 and expiring ten years from the date of grant. Total fair value of these options at
grant date was approximately $46,354 using Black-Scholes Option Pricing. During the year ended December 31, 2015, the Company recognized
compensation costs of $46,354 based on the fair value of Mr. Bigger’s options that vested. |
(4) | Mr. Blum serves as chairman of the Compensation Committee and as a member of the Audit Committee
and the Governance and Nominating Committee. As a member of a Board Committee, Mr. Blum received compensation in the amount of
$500 per month for the twelve-month period of January 1, 2015 through December 31, 2015. On January 1, 2015, was granted options
to purchase 114,583 shares of common exercisable at $0.48/share, vesting on December 31, 2015 and expiring ten years from the date
of grant. Total fair value of these options at grant date was approximately $46,354 using Black-Scholes Option Pricing. During
the year ended December 31, 2015, the Company recognized compensation costs of $46,354 based on the fair value of Mr. Blum’s
options that vested and $6,000 for Mr. Blum’s Board Committee fees. |
(5) | Effective July 1, 2015, Mr. Dickson was appointed to the Compensation Committee. As a member of
a Board Committee, Mr. Dickson received compensation in the amount of $500 per month for the six-month period of July 1, 2015 through
December 31, 2015. On January 1, 2015, Mr. Dickson was granted options to purchase 114,583 shares of common exercisable at $0.48/share,
vesting on December 31, 2015 and expiring ten years from the date of grant. Total fair value of these options at grant date was
approximately $46,354 using Black-Scholes Option Pricing. During the year ended December 31, 2015, the Company recognized compensation
costs of $46,354 based on the fair value of Mr. Dickson’s options that vested. |
(6) | Mr. Shelton serves as chairman of the Compensation Committee and as a member of the Audit Committee
and the Governance and Nominating Committee. As a member of a Board Committee, Mr. Shelton received compensation in the amount
of $500 per month for the twelve-month period of January 1, 2014 through December 31, 2014. On May 6, 2014, Mr. Shelton was granted
options to purchase 114,583 shares of common exercisable at $0.48/share, vesting on December 31, 2015 and expiring ten years from
the date of grant. Total fair value of these options at grant date was approximately $46,354 using Black-Scholes Option Pricing.
During the year ended December 31, 2015, the Company recognized compensation costs of $46,354 based on the fair value of and $6,000
for Mr. Shelton’s Board Committee fees. |
(7) | Mr. Stubbs serves as chairman of the Audit Committee and as a member of the Compensation Committee.
As a member of a Board Committee, Mr. Stubbs received compensation in the amount of $500 per month for the twelve-month period
of January 1, 2014 through December 31, 2014. On January 1, 2015, Mr. Stubbs was granted options to purchase 114,583 shares of
common exercisable at $0.48/share, vesting on December 31, 2015 and expiring ten years from the date of grant. Total fair value
of these options at grant date was approximately $46,354 using Black-Scholes Option Pricing. As chairman of the Audit Committee,
Mr. Stubbs received an additional grant of options on January 1, 2015 to purchase 52,083 shares of common stock valued at $21,352
using Black-Scholes Option Pricing. These options are exercisable at $0.48/share, vested immediately upon grant and expire ten
years from the date of grant. During the year ended December 31, 2015, the Company recognized compensation costs of $67,706 based
on the fair value of Mr. Stubb’s options that vested and $6,000 for Mr. Stubb’s Board Committee fees. |
(8) | Mr. Bundros was appointed to the Board effective January 5, 2015, and was appointed to Compensation
Committee effective July 1, 2015. As a member of a Board Committee, Mr. Bundros received compensation in the amount of $500 per
month for the six-month period of July 1, 2015 through December 31, 2015. On January 20, 2015, was granted options to purchase
115,554 shares of common exercisable at $0.46/share, vesting on December 31, 2015 and expiring ten years from the date of grant.
Total fair value of these options at grant date was approximately $43,663 using Black-Scholes Option Pricing. During the year ended
December 31, 2015, the Company recognized compensation costs of $43,663 based on the fair value of Mr. Blum’s options that
vested and $3,000 for Mr. Bundros’s Board Committee fees. |
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, 2015.
| · | 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; |
| · | the Company’s Chief Executive Officer, who also holds the positions of Chief Financial Officer
and President, is the only person serving as a Named Executive as of December 31, 2015 whose total annual salary and bonus exceeded
$100,000, for services rendered in all capacities to the Company (such individuals are hereafter referred to as the “Named
Executive Officers”); and all of our 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) | |
Bigger, Greggory – Chief Executive Officer, Chief Financial Officer, President, Director (3) | |
| 4,320,443 | | |
| 2.30% | |
Charles R. Blum – Director (4) | |
| 2,186,455 | | |
| 1.18% | |
Dickson, Donald (5) | |
| 207,665 | | |
| 0.11% | |
Shelton, Nathan – Director (6) | |
| 671,234 | | |
| 0.35% | |
Stubbs, Mark – Director (7) | |
| 330,450 | | |
| 0.18% | |
Thomas Bundros – Director (8) | |
| 113,554 | | |
| 0.06% | |
All directors and executive officers as a group | |
| 7,829,801 | | |
| 4.09% | |
(1) | Unless otherwise indicated, the address of each listed person is c/o QS Energy, Inc., 735 State
Street, Suite 500, Santa Barbara, California 93101. |
| |
(2) | Percentage of beneficial ownership is based upon 183,831,577 shares of the Company’s common
stock outstanding as of December 31, 2015. 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 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 options, 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.
Bigger’s beneficial ownership includes 121,009 shares of common stock, exercisable options to purchase 3,199,434 shares of
common stock, and options to purchase 1,000,000 shares of the Company’s common stock exercisable within 60 days of December
31, 2015. |
| |
(4) | Mr.
Blum’s beneficial ownership includes 398,342 shares of common stock and exercisable options to purchase 1,788,113 shares
of common stock. |
| |
(5) | Mr.
Dickson’s beneficial ownership includes 14,620 shares of common stock and exercisable options to purchase 193,045 shares
of common stock. |
| |
(6) | Mr.
Shelton’s beneficial ownership includes 215,288 shares of common stock and exercisable options to purchase 455,946 shares
of common stock. |
| |
(7) | Mr.
Stubbs’ beneficial ownership includes 22,936 shares of common stock and exercisable options to purchase 307,514 shares of
common stock. |
| |
(8) | Mr.
Bundros’ beneficial ownership includes exercisable options to purchase 62,184 shares of common stock. |
Item 13. Certain
Relationships and Related Transactions, and Director Independence
Accrued Expenses and Accounts
Payable - Related Parties
As of December 31,
2015 and December 31, 2014, the Company had accounts payable to related parties in the amount of $76,089 and $80,589, respectively.
These amounts are unpaid Directors Fees and unpaid Company expenses incurred by Officers and Directors.
As of December 31,
2015 and December 31, 2014, the Company accrued the unpaid salaries, unused vacation and the corresponding payroll taxes of Officers
in the aggregate of $114,661, and $178,468, respectively. Included in these accruals are the unpaid salaries a former President
and current member of the Company’s Board of Directors of $75,429, and $135,429, respectively. The Company agreed to a monthly
payment of $5,000 the current Board member until his unpaid salary is fully settled.
Bonus Paid to Officers
General and administrative
expenses for the year ended December 31, 2013 include bonuses in the aggregate of $150,000 paid to Officers. There were no such
bonuses paid during the years ended December 31, 2015 and December 31, 2014.
Consulting Fees Paid to Related
Party
During the years ended
December 31, 2014 and 2013, the Company incurred consulting fees of $60,000 to a consulting firm controlled by former a member
of our Board of Directors. There were no such costs in 2015.
Director Independence
The Company believes
Mr. Dickson, Mr. Shelton, Mr. Stubbs and Mr. Bundros are independent, and Mr. Bigger and Mr. Blum are non-independent.
Item 14. Principal
Accounting Fees and Services
The Audit Committee has
selected Weinberg & Company, P.A. to audit our financial statements for the fiscal year ended December 31, 2016.
Weinberg & Company,
P.A. was first appointed in fiscal year 2003, and has audited our financial statements for fiscal years 2002 through 2015.
Audit and Other Fees
The following table summarizes
the fees charged by Weinberg & Company, P.A. for certain services rendered to the Company during 2015, 2014 and 2013.
| |
Amount | |
| |
Fiscal | | |
Fiscal | | |
Fiscal | |
Type of Fee | |
Year 2015 | | |
Year 2014 | | |
Year 2013 | |
Audit (1) | |
$ | 119,121 | | |
$ | 145,436 | | |
$ | 121,340 | |
Audit Related (2) | |
| – | | |
| – | | |
| – | |
Taxes (3) | |
| 18,767 | | |
| 9,579 | | |
| 6,430 | |
All Other (4) | |
| – | | |
| – | | |
| – | |
Total | |
$ | 137,888 | | |
$ | 155,015 | | |
$ | 127,770 | |
(1) |
This category consists of fees for the audit of our annual financial statements included in the Company’s annual report on Form 10-K and review of the financial statements included in the Company’s 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. |
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 Item 7 of this Form 10-K.
(b) Exhibits:
The exhibits listed below
are required by Item 601 of Regulation S-K.
Exhibit No. |
|
Description |
3.1(78) |
|
Articles of Incorporation, as amended, of the Registrant. |
3.1(87) |
|
Articles of Merger |
3.2(77) |
|
Amended and Restated Bylaws of the Registrant. |
10.1(2) |
|
Commercial Sublease dated October 16, 2003 between the Registrant and KZ Golf, Inc. |
10.2(9) |
|
Amendment dated June 15, 2004 to Exhibit 10.1 |
10.3 (10) |
|
Amendment dated August 14, 2005 to Exhibit 10.1 |
10.4(10) |
|
General Tenancy Agreement dated March 14, 2006 between the Registrant and Autumlee Pty Ltd. |
10.5(3) |
|
Agreement dated December 13, 2002 between the Registrant and RAND. |
10.6(2)** |
|
Agreement dated May 7, 2003 between the Registrant and RAND. |
10.7(5) |
|
Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5 |
10.8(5) |
|
Modification No. 2 dated as of October 17, 2003 to Exhibit 10.5 |
10.9(5) |
|
Modification No. 3 dated as of January 20, 2004 to Exhibit 10.5 |
10.10(4) |
|
Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts). |
10.11(4) |
|
Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart. |
10.12(11)† |
|
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Eugene E. Eichler. |
10.13(15)† |
|
Severance Agreement dated November 8, 2006 between the Registrant and Eugene E. Eichler |
10.14(11)† |
|
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Bruce H. McKinnon. |
10.15(6) |
|
Save the World Air, Inc. 2004 Stock Option Plan |
10.16(8) |
|
Form of Incentive Stock Option Agreement under 2004 Stock Option Plan |
10.17(8) |
|
Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan |
10.18(8) |
|
Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett |
10.19(7) |
|
License Agreement dated as of July 1, 2004 between the Registrant and Temple University – The Commonwealth System of Higher Education |
10.20(8) |
|
Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd. |
10.21(13) |
|
Amendment dated September 14, 2006 to Exhibit 10.20 |
10.22(8)† |
|
Employment Agreement dated September 1, 2004 with Erin Brockovich |
10.23(15)† |
|
Amendment dated as of July 31, 2006 to Exhibit 10.22 |
10.24(8) |
|
Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell |
10.25(8) |
|
Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell |
10.26(11)† |
|
Amended and Restated Employment Agreement dated as of March 1, 2006 between the Registrant and John Richard Bautista III |
10.27(9) |
|
Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson |
10.28(10) |
|
Amendment dated February 1, 2006 to Exhibit 10.27 |
10.29(10) |
|
Form of 9% Convertible Note issued in the 2005 Interim Financing |
10.30(10) |
|
Form of Stock Purchase Warrant issued in the 2005 Interim Financing |
10.31(10) |
|
Form of Stock Purchase Warrant issued in the 2005 Bridge Financing |
10.32(11) |
|
Form of Stock Purchase Warrant issued in 2006 Regulation S financing |
10.33(11) |
|
Form of Stock Purchase Warrant issued in 2006 PIPE financing |
10.34(12) |
|
Commercial Sublease between the Registrant and KZG Golf dated January 1, 2006 |
10.35(12) |
|
Investment Agreement dated September 15, 2006 between the Registrant and Dutchess Private Equities Fund |
10.36(12) |
|
Registration Rights Agreement dated September 15, 2006 between the registrant and Dutchess Private Equities Fund, LLP |
10.37(17) |
|
License Agreement between the Registrant and Temple University dated February 2, 2007 |
10.38(17) |
|
License Agreement between the Registrant and Temple University dated February 2, 2007 |
10.39(17) |
|
R&D Agreement between the Registrant and Temple University dated February 2, 2007 |
10.40(14) |
|
Note Purchase Agreement dated December 5, 2006 between the registrant and Morale Orchards LLC |
10.41(14) |
|
Form of Stock Purchase Warrant issued to Morale Orchards LLC |
10.42(14) |
|
Form of Convertible Note issued to Morale Orchards LLC |
10.43(16) |
|
Consulting Agreement dated January 4, 2007 between the Registrant and Spencer Clarke LLC |
10.44(15) |
|
Agreement dated as of July 15, 2006 between the Company and SS Sales and Marketing Group |
10.45(15) |
|
Engagement Agreement between the Registrant and Charles K. Dargan II |
10.46(15) |
|
Form of 10% Convertible Note issued in 2007 PIPE Offering |
10.47(15) |
|
Form of Stock Purchase Warrant issued in 2007 PIPE Offering |
10.48(18) |
|
Appointment of New Directors, Nathan Shelton, Steven Bolio and Dennis Kenneally |
10.49(19) |
|
Issuance of RAND Final Report |
10.50(20) |
|
Delisting from OTCBB to OTC Pink Sheets |
10.51(21) |
|
Resignation of Director, Dennis Kenneally |
10.52(22) |
|
Resignation of Officer, Bruce H. McKinnon |
10.53(23) |
|
Form of 10% Convertible Note issued in 2007 Spring Offering |
10.54(23) |
|
Form of Stock Purchase Warrant issued in 2007 Spring Offering |
10.55(24) |
|
Termination of North Hollywood Lease |
10.56(25) |
|
Modification Agreement of 10% 2007 PIPE Convertible Notes |
10.57(26) |
|
Form of 10% Convertible Note issued in 2007 Summer Offering |
10.58(26) |
|
Form of Stock Purchase Warrant issued in 2007 Summer Offering |
10.59(27) |
|
Resignation of Director, J. Joseph Brown |
10.60(28) |
|
Resignation of Chief Financial Officer and Appointment of Interim Chief Financial Officer |
10.61(29) |
|
Severance Agreement dated June 15, 2007 between Registrant and Bruce H. McKinnon |
10.62(30) |
|
Resignation of Director, Bruce H. McKinnon |
10.63(31) |
|
Second Modification Agreement of 10% 2007 PIPE Convertible Notes |
10.64(32) |
|
Form of 10% Convertible Note issued in 2007 Fall Offering |
10.65(32) |
|
Form of Stock Purchase Warrant issued in 2007 Fall Offering |
10.66(33) |
|
Resignation of Director, Joseph Helleis |
10.67(34) |
|
Form of 10% Convertible Note issued in 2007/8 Winter Offering |
10.68(34) |
|
Form of Stock Purchase Warrant issued in 2007/8 Winter Offering |
10.69(34) |
|
Modification and Satisfaction Agreement of Convertible Notes with Morale Orchards, LLP and Matthews & Partners |
10.70(35) |
|
Termination of employment relationship with John Bautista |
10.71(36) |
|
Form of 10% Convertible Note issued in 2008 Summer Offering |
|
|
Form of Stock Purchase Warrant issued in 2008 Summer Offering |
10.72(37) |
|
Form of 10% Convertible Note issued in 2008 Fall Offering |
|
|
Form of Stock Purchase Warrant issued in 2008 Fall Offering |
10.73(38) |
|
Form of 10% Convertible Note issued in 2008 Winter Offering |
|
|
Form of Stock Purchase Warrant issued in 2008 Winter Offering |
10.74(39) |
|
Letter Agreement with Temple University extending default date |
10.75(40) |
|
Notice of first payment to Temple University under Letter Agreement |
|
|
Announcement of date of 2010 Annual Shareholder Meeting |
|
|
Appointment of Cecil Bond Kyte as new Chief Executive Officer |
10.76(41) |
|
Form of 10% Convertible Note issued in 2009 Winter Offering |
|
|
Form of Stock Purchase Warrant issued in 2009 Winter Offering |
10.77(42) |
|
Employment Agreement with Cecil Bond Kyte |
10.78(43) |
|
Form of 10% Convertible Note issued in 2009 Winter #2 Offering |
|
|
Form of Stock Purchase Warrant issued in 2009 Winter #2 Offering |
10.79(44) |
|
Form of 10% Convertible Note issued in 2009 Spring Offering |
|
|
Form of Stock Purchase Warrant issued in 2009 Spring Offering |
10.80(45) |
|
Form of 7% Convertible Note issued in 2009 Summer Offering |
|
|
Form of Stock Purchase Warrant issued in 2009 Summer Offering |
10.81(46) |
|
Passing of Steven Bolio, Company Director |
10.82(47) |
|
Form of 7% Convertible Note issued in 2009 Wellfleet Offering |
|
|
Form of Stock Purchase Warrant issued in 2009 Wellfleet Offering |
10.83(48) |
|
Form of 7% Convertible Note issued in 2009 Fall Offering |
|
|
Form of Stock Purchase Warrant issued in 2009 Fall Offering |
10.84(49) |
|
Letter to Shareholders |
10.85(50) |
|
Form of 10% Convertible Note issued in 2010 Winter Offering |
|
|
Form of Stock Purchase Warrant issued in 2010 Winter Offering |
10.86(51) |
|
Settlement of Bruce H. McKinnon Arbitration Award |
10.87(52) |
|
Form of 10% Convertible Note Issued in 2010 Spring Offering |
|
|
Form of Stock Purchase Warrant issued in to2010 Spring Offering |
10.88(53) |
|
Form of 10% Convertible Note Issued in 2010 Summer Offering |
|
|
Form of Stock Purchase Warrant issued in 2010 Summer Offering |
10.89(54) |
|
Form of 10% Convertible Note issued in 2010 Fall Offering |
|
|
Form of Stock Purchase Warrant issued in 2010 Fall Offering |
10.90(55) |
|
Form of 10% Convertible Note issued in 2010 Fall Offering #2 |
|
|
Form of Stock Purchase Warrant issued in 2010 Fall Offering #2 |
10.91(56) |
|
Resignation of Director John A. Price |
10.92(57) |
|
Form of 10% Convertible Note issued in 2011 Winter Offering |
|
|
Form of Stock Purchase Warrant issued in 2011 Winter Offering |
10.93(58) |
|
Amendment to Employment Contract with Cecil Kyte |
|
|
Announcement of date of 2011 Annual Shareholder Meeting |
10.94(59) |
|
License Agreement between the Registrant and Temple University dated August 9, 2011 |
10.96(60) |
|
Form of 10% Convertible Note Issued in 2011 Spring Offering |
|
|
Form of Stock Purchase Warrant issued in 2011 Spring Offering |
10.97(61) |
|
Form of 10% Convertible Note Issued in 2011 Summer Offering |
|
|
Form of Stock Purchase Warrant Issued in 2011 Summer Offering |
10.94(62) |
|
Form of 10% Convertible Note Issued in 2011 Fall Offering |
|
|
Form of Stock Purchase Warrant Issued in 2011 Fall Offering |
10.95(63) |
|
Final Report of the Rocky Mountain Oilfield Testing Center of Viscosity Reduction Device (AOT) |
10.96(64) |
|
Form of 10% Convertible Note Issued in 2011 Fall#2 Offering |
|
|
Form of Stock Purchase Warrant Issued in 2011 Fall#2 Offering |
10.97(65) |
|
Letter of Intent between Registrant and Heng He Xing Ye Technology Development Co., Ltd. dated October 19,2011 |
10.98(66) |
|
Announcement of resignation of Eugene E. Eichler, Interim Chief Financial Officer for health reasons. |
10.99(67) |
|
Form of 10% Convertible Note Issued in 2011 Fall#3 Offering |
10.100(68) |
|
Form of Stock Purchase Warrant Issued in 2011 Fall#3 Offering |
10.101(69) |
|
Form of 10% Convertible Note Issued in 2012 Winter Offering |
10.102(70) |
|
Form of Stock Purchase Warrant Issued in 2012 Winter Offering |
10.103(71) |
|
Letter of Intent between Registrant and LG Partners LLC (“LGP”) |
10.104(72) |
|
Cooperation Framework Agreement between Registrant and Heng He Xing Technology Development Co., Ltd (TDC) dated March 9, 2012 |
10.105(73) |
|
Employment Agreement with Gregg Bigger, Chief Financial Officer |
10.106(74) |
|
U.S. Department of Energy Agreement dated February 6, 2012 |
10.107(75) |
|
Continental Divide, LLC Agreement dated January 2, 2013 |
10.108(76) |
|
Equipment Lease/Option to Purchase Agreement with TransCanada Keystone Pipeline, L.P. |
10.109(79) |
|
Amendment to Greggory M. Bigger Employment Contract. |
10.110(80) |
|
Cecil Bond Kyte Separation Agreement |
10.111(81) |
|
Equipment Lease/Option to Purchase Agreement, dated effective as of July 15, 2014, between Save The World Air, Inc. and Kinder Morgan Crude & Condensate LLC. |
10.112(82) |
|
Mutual Confidentiality Agreement, dated July 15, 2014, between Save The World Air, Inc. and Kinder Morgan Crude & Condensate LLC. |
10.113(83) |
|
Letter from TransCanada to Save The World Air, Inc., dated July 15, 2014. |
10.114(84) |
|
Newfield Exploration Company Joint Development Agreement. |
10.115(85) |
|
Haven Technology Solutions Joint Development Agreement. |
10.116(86) |
|
Registrant’s Business Plan |
10.117* |
|
Forms of Convertible Note, Warrant, and Securities Purchase Agreement in 2014 Fall Offering |
10.118* |
|
Forms of Convertible Note, Warrant, and Securities Purchase Agreement in 2015 Spring Offering |
10.119* |
|
Forms of Convertible Note, Warrant, and Securities Purchase Agreement in 2015 Winter Offering |
10.120* |
|
Amendment to Greggory M. Bigger Employment Contract dated March 10, 2016. |
10.121* |
|
Temple Research Agreement dated March 19, 2012, as amended March 19, 2013. |
21 |
|
List of Subsidiaries |
24* |
|
Power of Attorney (included on Signature Page) |
31.1* |
|
Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e). |
31.2* |
|
Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350. |
32.1* |
|
Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e). |
|
|
|
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Schema Document |
101.CAL |
|
XBRL Calculation Linkbase Document |
101.DEF |
|
XBRL Definition Linkbase Document |
101.LAB |
|
XBRL Label Linkbase Document |
101.PRE |
|
XBRL Presentation Linkbase Document |
|
|
|
* |
|
Filed herewith. |
** |
|
Confidential treatment previously requested. |
† |
|
Management contract or compensatory plan or arrangement. |
(1) |
|
Incorporated by reference from Registrant’s Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000. |
(2) |
|
Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002. |
(3) |
|
Incorporated by reference from Registrant’s Form 8-K filed on December 30, 2002. |
(4) |
|
Incorporated by reference from Registrant’s Form 8-K filed on November 12, 2002. |
(5) |
|
Incorporated by reference from Registrant’s Form 10-QSB for the quarter ended March 31, 2004. |
(6) |
|
Incorporated by reference from Appendix C of Registrant’s Schedule 14A filed on April 30, 2004, in connection with its Annual Meeting of Stockholders held on May 24, 2004. |
(7) |
|
Incorporated by reference from Registrant Form 8-K filed on July 12, 2004. |
(8) |
|
Incorporated by reference from registrant’s Form 10-KSB for the fiscal year ended December 31, 2004. |
(9) |
|
Incorporated by reference from Registrant’s Form 10-QSB for the quarter ended September 30, 2005 |
(10) |
|
Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2005 |
(11) |
|
Incorporated by reference from Registrant’s Form SB-2 filed on June 28, 2006 (SEC File No. 333- 333-135415) |
(12) |
|
Incorporated by reference from Registrant’s Form 8-K filed on September 21, 2006 |
(13) |
|
Incorporated by reference from Registrant’s Form SB-2 filed on October 6, 2006 (SEC File No. 333-137855) |
(14) |
|
Incorporated by reference from Registrant’s Form 8-K filed on December 11, 2006 |
(15) |
|
Incorporated by reference from Registrant’s Form 10KSB for the fiscal year ended December 31, 2006 |
(16) |
|
Incorporated by reference from Registrant’s form 8-K filed on January 10, 2007 |
(17) |
|
Incorporated by reference from Registrant’s form 8K filed on February 8, 2007 |
(18) |
|
Incorporated by reference from Registrant’s form 8K filed on February 16, 2007 |
(19) |
|
Incorporated by reference from Registrant’s form 8K filed on May 3, 2007 |
(20) |
|
Incorporated by reference from Registrant’s form 8K filed on May 22 2007 |
(21) |
|
Incorporated by reference from Registrant’s form 8K filed on June 8, 2007 |
(22) |
|
Incorporated by reference from Registrant’s form 8K filed on June 15, 2007 |
(23) |
|
Incorporated by reference from Registrant’s form 8K filed on July 2, 2007 |
(24) |
|
Incorporated by reference from Registrant’s form 8K filed on July 18, 2007 |
(25) |
|
Incorporated by reference from Registrant’s form 8K filed on August 30, 2007 |
(26) |
|
Incorporated by reference from Registrant’s form 8K filed on October 9, 2007 |
(27) |
|
Incorporated by reference from Registrant’s form 8K filed on October 23, 2007 |
(28) |
|
Incorporated by reference from Registrant’s form 8K filed on November 9, 2007 |
(29) |
|
Incorporated by reference form Registrant’s Form 10QSB for the nine months ended September 30, 2007 |
(30) |
|
Incorporated by reference from Registrant’s form 8K filed on November 15, 2007 |
(31) |
|
Incorporated by reference from Registrant’s form 8K filed on December 11, 2007 |
(32) |
|
Incorporated by reference from Registrant’s form 8K filed on December 20, 2007 |
(33) |
|
Incorporated by reference from Registrant’s form 8K filed on February 25, 2010 |
(34) |
|
Incorporated by reference from Registrant’s form 8K filed on March 11, 2010 |
(35) |
|
Incorporated by reference from Registrant’s form 8K filed on March 27, 2010 |
(36) |
|
Incorporated by reference from Registrant’s form 8K filed on September 3, 2010 |
(37) |
|
Incorporated by reference from Registrant’s form 8K filed on November 6, 2010 |
(38) |
|
Incorporated by reference from Registrant’s form 8K filed on December 11, 2010 |
(39) |
|
Incorporated by reference from Registrant’s form 8K filed on January 13, 2010 |
(40) |
|
Incorporated by reference from Registrant’s form 8K filed on January 27, 2010 |
(41) |
|
Incorporated by reference from Registrant’s form 8K filed on January 26, 2010 |
(42) |
|
Incorporated by reference from Registrant’s form 10K for the twelve months ended December 31, 2010 |
(43) |
|
Incorporated by reference from Registrant’s form 8K filed on March 12, 2010 |
(45) |
|
Incorporated by reference from Registrant’s form 8K filed on September 30, 2010 |
(46) |
|
Incorporated by reference from Registrant’s form 8K filed on November 24, 2010 |
(47) |
|
Incorporated by reference from Registrant’s form 8K filed on December 7, 2010 |
(48) |
|
Incorporated by reference from Registrant’s form 8K filed on February 3, 2010 |
(49) |
|
Incorporated by reference from Registrant’s form 8K filed on March 22, 2010 |
(50) |
|
Incorporated by reference from Registrant’s form 8K filed on April 8, 2010 |
(51) |
|
Incorporated by reference from Registrant’s form 8K filed on April 13, 2010 |
(52) |
|
Incorporated by reference from Registrant’s form 8K filed on May 7, 2010 |
(53) |
|
Incorporated by reference from Registrant’s form 8K filed on August 11, 2010 |
(54) |
|
Incorporated by reference from Registrant’s form 8K filed on November 11, 2010 |
(55) |
|
Incorporated by reference from Registrant’s form 8K filed on December 6, 2010 |
(56) |
|
Incorporated by reference from Registrant’s form 8K filed on February 25, 2011 |
(57) |
|
Incorporated by reference form Registrant’s form 8K filed on March 7, 2011 |
(58) |
|
Incorporated by reference from Registrant’s form 8K filed on March 9, 2011 |
(59) |
|
Incorporated by reference from Registrant’s form 8K filed on August 11, 2011 |
(60) |
|
Incorporated by reference from Registrant’s form 8K filed on June 9, 2011 |
(61) |
|
Incorporated by reference from Registrant’s form 8K filed on August 10, 2011 |
(62) |
|
Incorporated by reference from Registrant’s form 8K filed on October 21, 2011 |
(63) |
|
Incorporated by reference from Registrant’s form 8K filed on October 25, 2011 |
(64) |
|
Incorporated by reference from Registrant’s form 8K filed on December 14, 2011 |
(65) |
|
Incorporated by reference from Registrant’s form 8K filed on December 27, 2011 |
(66) |
|
Incorporated by reference from Registrant’s form 8K filed on January 4, 2012 |
(67) |
|
Incorporated by reference from Registrant’s form 8K filed on January 23, 2012 |
(68) |
|
Incorporated by reference from Registrant’s form 8K filed on January 23, 2012 |
(69) |
|
Incorporated by reference from Registrant’s form 8K filed on January 23, 2012 |
(70) |
|
Incorporated by reference from Registrant’s form 8K filed on February 8, 2012 |
(71) |
|
Incorporated by reference from Registrant’s form 8K filed on March 16, 2012 |
(72) |
|
Incorporated by reference from Registrant’s form 8K filed on March 20, 2012 |
(73) |
|
Incorporated by reference from Registrant’s Form 10K filed on March 30, 2012 |
(74) |
|
Incorporated by reference from Registrant’s Form 10K filed on March 30, 2012 |
(75) |
|
Incorporated by reference from Registrant’s Form 10K filed on March 22, 2013 |
(76) |
|
Incorporated by reference from Registrant’s form 8K filed on August 1, 2013 |
(77) |
|
Incorporated by reference from Registrant’s form 8K filed on July 8, 2013 |
(78) |
|
Incorporated by reference from Registrant’s form 8K filed on December 20, 2013 |
(79) |
|
Incorporated by reference from Registrant’s Form 10K filed on March 17, 2014 |
(80) |
|
Incorporated by reference from Registrant’s Form 10K filed on March 17, 2014 |
(81) |
|
Incorporated by reference from Registrant’s form 8K filed on July 21, 2014 |
(82) |
|
Incorporated by reference from Registrant’s form 8K filed on July 21, 2014 |
(83) |
|
Incorporated by reference from Registrant’s form 8K filed on July 21, 2014 |
(84) |
|
Incorporated by reference from Registrant’s form 10Q filed on November 10, 2014 |
(85) |
|
Incorporated by reference from Registrant’s form 10Q filed on November 10, 2014 |
(86) |
|
Incorporated by reference from Registrant’s form 8K filed on December 1, 2015 |
(87) |
|
Incorporated by reference from Registrant’s form 8K filed on August 11, 2015 |
SIGNATURES
In accordance
with Section 13 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 15, 2016 |
By: |
/s/ Greggory Bigger |
|
|
|
Greggory Bigger |
|
|
|
Chief Executive Officer |
|
|
|
|
|
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and appoints Greggory Bigger 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/ Greggory Bigger |
|
Chief Executive Officer and Chairman of the Board of Directors |
|
March 15, 2016 |
Greggory Bigger |
|
|
|
|
|
|
|
|
|
/s/ Charles R. Blum |
|
Director |
|
March 15, 2016 |
Charles R. Blum |
|
|
|
|
|
|
|
|
|
/s/ Donald Dickson |
|
Director |
|
March 15, 2016 |
Donald Dickson |
|
|
|
|
|
|
|
|
|
/s/ Nathan Shelton |
|
Director |
|
March 15, 2016 |
Nathan Shelton |
|
|
|
|
|
|
|
|
|
/s/ Mark Stubbs |
|
Director |
|
March 15, 2016 |
Mark Stubbs |
|
|
|
|
|
|
|
|
|
/s/ Thomas Bundros |
|
Director |
|
March 15, 2016 |
Thomas Bundros |
|
|
|
|
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
QS ENERGY, INC. AND SUBSIDIARIES
DECEMBER 31, 2015, 2014
AND 2013
|
Page |
|
|
Report of Independent Registered Public Accounting Firm |
F-2 |
|
|
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting |
F-3 |
|
|
Consolidated Balance Sheets |
F-4 |
|
|
Consolidated Statements of Operations |
F-5 |
|
|
Consolidated Statements of Stockholders’ Equity (Deficiency) |
F-6 |
|
|
Consolidated Statements of Cash Flows |
F-7 |
|
|
Notes to Consolidated Financial Statements |
F-8 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of
QS Energy, Inc. and Subsidiaries
We have audited the accompanying
consolidated balance sheets of QS Energy, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated
statements of operations, stockholders’ equity (deficiency) and cash flows for each of the years in the three-year period
ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of QS Energy, Inc. and Subsidiaries
as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), QS Energy, Inc. and Subsidiaries’
internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March
15, 2016 expressed an unqualified opinion.
The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has
experienced recurring operating losses and negative operating cash flows since inception, and has financed its working capital
requirements through the recurring sale of its debt and equity securities. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the
financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Weinberg
& Company, P.A.
Weinberg & Company, P.A.
Los Angeles, California
March 15, 2016
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors
and Stockholders of
QS Energy, Inc. and Subsidiaries
We have audited QS Energy,
Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
QS Energy, Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal
control over financial reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control
over financial reporting is a process designed 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.
A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) 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 (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, QS Energy,
Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December
31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of QS Energy, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders'
equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2015 and our report dated March
15, 2016 expressed an unqualified opinion, modified for a going concern uncertainty.
Weinberg & Company, P.A.
Los Angeles, California
March 15, 2016
QS ENERGY, INC.
CONSOLIDATED BALANCE
SHEETS
| |
December 31 | | |
December 31 | |
| |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 349,186 | | |
$ | 2,247,557 | |
Prepaid expenses and other current assets | |
| 50,596 | | |
| 72,225 | |
Total current assets | |
| 399,782 | | |
| 2,319,782 | |
Property and equipment, net of accumulated depreciation of $60,242 and $47,180 at December 31, 2015 and December 31, 2014, respectively | |
| 21,798 | | |
| 21,946 | |
Other assets | |
| 6,480 | | |
| 5,830 | |
Total assets | |
$ | 428,060 | | |
$ | 2,347,558 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable-license agreements | |
$ | 590,001 | | |
$ | 405,313 | |
Accounts payable and accrued expenses | |
| 207,334 | | |
| 175,228 | |
Accrued expenses and accounts payable-related parties | |
| 190,750 | | |
| 259,507 | |
Convertible debentures, net of discounts of $100,833 and $105,542 at December 31, 2015 and December 31, 2014, respectively | |
| 222,195 | | |
| 139,098 | |
Total current liabilities | |
| 1,210,280 | | |
| 979,146 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity (deficiency) | |
| | | |
| | |
Common stock, $.001 par value: 300,000,000 shares authorized 183,831,577 and 181,028,244 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | |
| 183,832 | | |
| 181,028 | |
Additional paid-in capital | |
| 100,308,100 | | |
| 98,232,582 | |
Accumulated deficit | |
| (101,274,152 | ) | |
| (97,045,198 | ) |
Total stockholders’ equity (deficiency) | |
| (782,220 | ) | |
| 1,368,412 | |
Total
liabilities and stockholders’ equity (deficiency) | |
$ | 428,060 | | |
$ | 2,347,558 | |
See notes to consolidated
financial statements.
QS ENERGY, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
| |
Year Ended | |
| |
December 31 | |
| |
2015 | | |
2014 | | |
2013 | |
Revenues | |
$ | – | | |
$ | 240,000 | | |
$ | – | |
Costs and Expenses | |
| | | |
| | | |
| | |
Operating expenses | |
| 2,915,369 | | |
| 3,284,666 | | |
| 11,884,775 | |
Research and development expenses | |
| 577,501 | | |
| 893,452 | | |
| 2,011,486 | |
Loss before other income (expense) | |
| (3,492,870 | ) | |
| (3,938,118 | ) | |
| (13,896,261 | ) |
Other income (expense) | |
| | | |
| | | |
| | |
Other income (loss) | |
| 11,258 | | |
| (28,598 | ) | |
| (23,549 | ) |
Interest and financing expense | |
| (747,342 | ) | |
| (39,619 | ) | |
| (260 | ) |
Change in fair value of derivative liabilities | |
| – | | |
| – | | |
| (220,614 | ) |
Gain on extinguishment of derivative liabilities | |
| – | | |
| – | | |
| 3,441,752 | |
Gain on disposition of equipment | |
| – | | |
| – | | |
| 41,923 | |
Net loss | |
$ | (4,228,954 | ) | |
$ | (4,006,335 | ) | |
$ | (10,657,009 | ) |
Net loss per common share, basic and diluted | |
$ | (0.02 | ) | |
$ | (0.02 | ) | |
$ | (0.07 | ) |
Weighted average common shares outstanding, basic and diluted | |
| 182,267,719 | | |
| 180,386,712 | | |
| 160,958,284 | |
See notes to consolidated
financial statements.
QS ENERGY, INC.
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE YEARS
ENDED DECEMBER 31, 2015, 2014, AND 2013
| |
| | |
Additional | | |
| | |
Total | |
| |
Common Stock | | |
Paid-in | | |
Accumulated | | |
Equity | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
(Deficiency) | |
Balance, January 1, 2013 | |
| 143,667,570 | | |
$ | 143,668 | | |
$ | 79,340,666 | | |
$ | (82,381,854 | ) | |
$ | (2,897,520 | ) |
Common stock issued upon exercise of warrants and options | |
| 29,152,389 | | |
| 29,152 | | |
| 8,448,066 | | |
| – | | |
| 8,477,218 | |
Common stock issued for services | |
| 50,000 | | |
| 50 | | |
| 48,950 | | |
| – | | |
| 49,000 | |
Common stock issued to employees and directors as compensation | |
| 325,455 | | |
| 325 | | |
| 369,788 | | |
| – | | |
| 370,113 | |
Common stock issued as settlement | |
| 3,047,403 | | |
| 3,048 | | |
| 3,105,299 | | |
| – | | |
| 3,108,347 | |
Fair value of options and warrants issued as compensation | |
| – | | |
| – | | |
| 4,495,545 | | |
| – | | |
| 4,495,545 | |
Fair value of warrants issued to settle payables | |
| – | | |
| – | | |
| 129,622 | | |
| – | | |
| 129,622 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (10,657,009 | ) | |
| (10,657,009 | ) |
Balance, December 31, 2013 | |
| 176,242,817 | | |
| 176,243 | | |
| 95,937,936 | | |
| (93,038,863 | ) | |
| 3,075,316 | |
Common stock issued upon exercise of warrants and options | |
| 4,710,947 | | |
| 4,711 | | |
| 1,408,573 | | |
| – | | |
| 1,413,284 | |
Common stock issued on conversion of notes payable | |
| 74,480 | | |
| 74 | | |
| 35,676 | | |
| – | | |
| 35,750 | |
Fair value of warrants and beneficial conversion feature of issued convertible notes | |
| – | | |
| – | | |
| 119,671 | | |
| – | | |
| 119,671 | |
Fair value of options and warrants issued as compensation | |
| – | | |
| – | | |
| 730,726 | | |
| – | | |
| 730,726 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (4,006,335 | ) | |
| (4,006,335 | ) |
Balance, December 31, 2014 | |
| 181,028,244 | | |
| 181,028 | | |
| 98,232,582 | | |
| (97,045,198 | ) | |
| 1,368,412 | |
Common stock issued upon exercise of warrants | |
| 200,000 | | |
| 200 | | |
| 49,800 | | |
| – | | |
| 50,000 | |
Common stock issued on conversion of notes | |
| 2,603,333 | | |
| 2,604 | | |
| 666,196 | | |
| – | | |
| 668,800 | |
Fair value of warrants and beneficial conversion feature of issued convertible notes | |
| – | | |
| – | | |
| 630,945 | | |
| – | | |
| 630,945 | |
Fair value of options and warrants issued as compensation | |
| – | | |
| – | | |
| 728,577 | | |
| – | | |
| 728,577 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (4,228,954 | ) | |
| (4,228,954 | ) |
Balance, December 31, 2015 | |
| 183,831,577 | | |
$ | 183,832 | | |
$ | 100,308,100 | | |
$ | (101,274,152 | ) | |
$ | (782,220 | ) |
See notes to consolidated
financial statements.
QS ENERGY, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
| |
Year Ended | |
| |
December 31 | |
| |
2015 | | |
2014 | | |
2013 | |
Cash flows from Operating Activities | |
| | | |
| | | |
| | |
Net loss | |
$ | (4,228,954 | ) | |
$ | (4,006,335 | ) | |
$ | (10,657,009 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | | |
| | |
Settlement of litigation and debt | |
| – | | |
| – | | |
| (346 | ) |
Stock based compensation expense | |
| 728,577 | | |
| 730,726 | | |
| 4,865,658 | |
Issuance of common stock for services | |
| – | | |
| – | | |
| 49,000 | |
Issuance of common stock as settlement | |
| – | | |
| – | | |
| 3,108,347 | |
Interest added to convertible notes | |
| 21,188 | | |
| – | | |
| – | |
Amortization of debt discounts | |
| 701,654 | | |
| 39,619 | | |
| – | |
Change in fair value of derivative liabilities | |
| – | | |
| – | | |
| 220,614 | |
Gain on extinguishment of derivative liabilities | |
| – | | |
| – | | |
| (3,441,752 | ) |
Gain on disposition of assets | |
| – | | |
| – | | |
| (41,923 | ) |
Depreciation and amortization | |
| 13,062 | | |
| 13,825 | | |
| 15,399 | |
Changes in operating assets and liabilities: | |
| | | |
| | | |
| | |
Prepaid expenses and other current assets | |
| 21,629 | | |
| (15,295 | ) | |
| 10,202 | |
Other assets | |
| (650 | ) | |
| – | | |
| 4,500 | |
Accounts payable and accrued expenses | |
| 32,106 | | |
| (107,577 | ) | |
| (43,408 | ) |
Accounts payable – license agreements | |
| 184,688 | | |
| 219,863 | | |
| (130,400 | ) |
Accounts payable and accrued expenses – related parties | |
| (68,757 | ) | |
| (402,521 | ) | |
| 128,750 | |
Net cash used in operating activities | |
| (2,595,457 | ) | |
| (3,527,695 | ) | |
| (5,912,368 | ) |
Cash flows from investing activities | |
| | | |
| | | |
| | |
Purchase of equipment | |
| (12,914 | ) | |
| – | | |
| (7,573 | ) |
Proceeds from sale of equipment | |
| – | | |
| – | | |
| 27,000 | |
Net cash provided by (used in) investing
activities | |
| (12,914 | ) | |
| – | | |
| 19,427 | |
Cash flows from financing activities | |
| | | |
| | | |
| | |
Net proceeds from issuance of convertible notes and warrants | |
| 660,000 | | |
| 254,900 | | |
| – | |
Net proceeds from exercise of warrants and options | |
| 50,000 | | |
| 1,383,284 | | |
| 8,428,218 | |
Net cash provided by financing activities | |
| 710,000 | | |
| 1,638,184 | | |
| 8,428,218 | |
Net decrease in cash | |
| (1,898,371 | ) | |
| (1,889,511 | ) | |
| 2,535,277 | |
Cash, beginning of period | |
| 2,247,557 | | |
| 4,137,068 | | |
| 1,601,791 | |
Cash, end of period | |
$ | 349,186 | | |
$ | 2,247,557 | | |
$ | 4,137,068 | |
| |
| | | |
| | | |
| | |
Supplemental disclosures of cash flow information | |
| | | |
| | | |
| | |
Cash paid during the year for: | |
| | | |
| | | |
| | |
Interest | |
$ | – | | |
$ | – | | |
$ | 260 | |
Income Taxes | |
$ | – | | |
$ | – | | |
$ | – | |
Non-cash investing and financing activities | |
| | | |
| | | |
| | |
Conversion of convertible debentures to common stock | |
| 668,800 | | |
| 35,750 | | |
| – | |
Exercise of options and warrants applied to accounts payable | |
| – | | |
| – | | |
| 49,000 | |
Fair value of warrants issued to settle payables | |
| – | | |
| 30,000 | | |
| 129,622 | |
Receivable from sale of equipment | |
| – | | |
| – | | |
| 27,000 | |
Fair value of warrants and beneficial conversion feature associated with issued convertible notes | |
| 630,945 | | |
| 119,671 | | |
| – | |
See notes to consolidated
financial statements.
QS ENERGY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER
31, 2015, 2014 AND 2013
1. | Description of Business |
Description of Business
QS Energy, Inc.
(“QS Energy”, “Company”) (formerly known as Save the World Air, Inc.) 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 effected
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 subsidiaries of the Company on July 6, 2015 to serve as a vehicle for the Company to
explore, review and consider acquisition opportunities. The Company’s common stock is quoted under the symbol “QSEP”
on the Over-the-Counter Bulletin Board. More information including the Company’s fact sheet, logos and media articles are
available at our corporate website, www.qsenergy.com.
QS Energy, Inc.
develops and commercializes energy efficiency technologies that assist in meeting increasing global energy demands, improving the
economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual property portfolio
includes 47 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.
AOT™ has been proven in U.S. Department of Energy tests to increase the energy efficiency of oil pipeline pump stations.
The AOT product has transitioned from the research and development stage to initial commercial production for the midstream pipeline
marketplace.
In 2014,
the Company began commercial development of a suite of products based around the Joule Heat technology. The Company
began fabrication of prototype equipment to be operated under a joint development agreement with a commercial entity in the
fourth quarter of 2014. The Company’s first Joule Heat prototype was installed for testing purposes at the Newfield
facility in June 2015 and the system is operational; however, changes to the prototype configuration will be required to
determine commercial effectiveness of this unit. In addition, the Company filed two additional provisional patents related to
the technology’s method and apparatus. The first of the two provisional patents was finalized and submitted
to non-provisional status on April 29, 2014. The second of the two provisional patents was finalized and submitted
to non-provisional status at the end of the third quarter of 2014. In December 2015, we temporarily suspended Joule Heat and
AOT Upstream development activities to focus Company resources on finalizing commercial development of the AOT Midstream. We currently plan to resume Joule Heat and
AOT Upstream development in the fourth quarter of 2016 depending on the availability of sufficient capital and other resources.
2. |
Summary of Significant Accounting Policies |
Consolidation Policy
The accompanying
consolidated financial statements of QS Energy Inc. include the accounts of QS Energy Inc. (the Parent) and its wholly owned subsidiaries,
QS Energy Pool, Inc. and STWA Asia Pte. Limited. Intercompany transactions and balances have been eliminated in consolidation.
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 year ended December 31, 2015, the Company incurred a net loss of $4,228,954, used cash in operations of $2,595,457 and
had a stockholders’ deficiency of $782,220 as of that date. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s
ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
At December 31,
2015, the Company had cash on hand in the amount of $349,186. Management estimates that the current funds on hand will be sufficient
to continue operations through May 2016. Management is currently seeking additional funds, primarily through the issuance of debt
and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection with
the license and research and development agreements with Temple; costs associated with product development and commercialization
of the AOT and Joule Heat technologies; costs to manufacture and ship the products; costs to design and implement an effective
system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing
periodic reports with the SEC and costs required to protect our intellectual property. In addition, as discussed below, the Company
has substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment
agreements, certain payments to a former officer and consulting fees, during the remainder of 2016 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 or equity financing.
Revenue Recognition Policy
The Company recognizes
lease revenue upon commencement of the lease. Revenue on future product sales will be recognized upon meeting the following criteria:
persuasive evidence of an arrangement exists; delivery has occurred or services rendered; the seller's price to the buyer is fixed
or determinable; and collectability is reasonably assured.
Property and Equipment and
Depreciation
Property and equipment
are stated at cost. 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.
We use various assumptions
in determining the current fair value of these assets, including future expected cash flows and discount rates, as well as other
fair value measures. Our impairment loss calculations require us to apply judgment in estimating future cash flows, including forecasting
useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
If actual results are not
consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to
future impairment losses that could be material to our results. Based upon management’s annual review, no impairments
were recorded for the years ended December 31, 2015, 2014 and 2013.
Loss per 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,
2015, 2014 and 2013, the dilutive impact of outstanding stock options of 21,535,148, 21,052,030 and 20,309,908; outstanding warrants
of 4,411,667, 5,692,087 and 11,763,966; and notes convertible into 509,667, -0- and -0- shares of our common stock, respectively, have
been excluded because their impact on the loss per share is anti-dilutive.
Income Taxes
Income taxes are recognized
for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the
future tax consequences of transactions that have been recognized in the Company’s consolidated financial statements or tax
returns. A valuation allowance is provided when it is more likely than not that some portion or entire deferred tax asset will
not be realized.
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 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.
Estimates
The preparation of financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include those related
to assumptions used in valuing equity instruments and derivative liabilities. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Effective January 1, 2008,
fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception
of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative
guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative
guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy
was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted
prices in active markets for identical assets or liabilities.
Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3—Unobservable
inputs based on the Company's assumptions.
The Company is required
to use of observable market data if such data is available without undue cost and effort.
The carrying
amounts for cash, accounts payable, accrued expenses and convertible debentures approximate their fair value due to their short
term nature.
Research and Development
Costs
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, 2015, 2014 and 2013 research and development costs were $577,501, $893,542 and $2,011,486, respectively.
Patent Costs
Patent costs consist of
patent-related legal and filing fees. Due to the uncertainty associated with the successful development of our AOT and Joule Heat
products, all patent costs are expensed as incurred. During the year ended December 31, 2015, 2014 and 2013, patent costs were
$53,044, $103,434 and $144,326, respectively, and were included as part of operating expenses in the accompanying consolidated
statements of operations.
Recent Accounting Pronouncements
On August 27, 2014,
the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which
provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard
requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within
one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise
substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective
for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted
In May 2014, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.
ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also
will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted
only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to
transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company
is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.In February
2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of
use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02
is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified
retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's
present or future consolidated financial statement presentation or disclosures.
3. |
Certain Relationships and Related Transactions |
Accrued Expenses and Accounts
Payable - Related Parties
As of December 31,
2015 and December 31, 2014, the Company had accounts payable to related parties in the amount of $76,089 and $80,589, respectively.
These amounts are unpaid Directors Fees and unpaid Company expenses incurred by Officers and Directors.
As of December 31,
2015 and December 31, 2014, the Company accrued the unpaid salaries, unused vacation and the corresponding payroll taxes of Officers
in the aggregate of $114,661, and $178,468, respectively. Included in these accruals are the unpaid salaries to a former President
and current member of the Company’s Board of Directors of $75,429, and $135,429, respectively. The Company agreed to a monthly
payment of $5,000 to the current Board member until his unpaid salary is fully settled.
Bonus Paid to Officers
General and administrative
expenses for the year ended December 31, 2013 include bonuses in the aggregate of $150,000 paid to Officers. There were no such
bonuses paid during the years ended December 31, 2015 and 2014.
Consulting Fees Paid to Related
Party
General and administrative
expenses for the year ended December 31, 2014 and 2013 include consulting fees of $60,000 for services rendered by a consulting
firm controlled by a member of our Board of Directors. There were no such costs in 2015.
4. |
Property and Equipment |
At December 31,
2015 and 2014, property and equipment consists of the following:
| |
December 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Office equipment | |
$ | 65,051 | | |
$ | 65,051 | |
Furniture and fixtures | |
| 4,075 | | |
| 4,075 | |
Testing Equipment | |
| 12,914 | | |
| – | |
Subtotal | |
| 82,040 | | |
| 69,126 | |
Less accumulated depreciation | |
| (60,242 | ) | |
| (47,180 | ) |
Total | |
$ | 21,798 | | |
$ | 21,946 | |
Depreciation expense for
the years ended December 31, 2015, 2014 and 2013 was $13,062, $13,825 and $15,399, respectively.
5. |
Convertible Notes and Warrants |
| |
December 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Convertible note | |
$ | 321,024 | | |
$ | 244,640 | |
Interest | |
| 2,004 | | |
| – | |
Subtotal | |
| 323,028 | | |
| 244,640 | |
Convertible note discount | |
| (100,833 | ) | |
| (105,542 | ) |
Total | |
$ | 222,195 | | |
$ | 139,098 | |
In 2014, the Company
conducted a private placement and issued an aggregate of $280,390 of its convertible notes for proceeds of $254,900 or an original
issue discount (“OID”) of $25,490. The notes do not bear any interest, however, the implied interest rate used was
10% since the notes were issued 10% less than its face value, are unsecured, and will mature in twelve months from issuance. The
notes are convertible, at the option of the note holder, into the Company’s common stock at a conversion price of $0.48 per
share, for a total of 584,146 shares of common stock. In addition, each note holder also received a warrant to purchase common
stock equivalent to 25% of the number of shares the notes are convertible into or a total of 146,037 shares of common stock. Each
warrant is exercisable on a cash basis only at a price of $0.48 per share, vests immediately upon issuance, and is exercisable
for one year from the date of issuance.
As a result, the
Company recorded a note discount of $145,160 to account for the relative fair value of the warrants, the notes’ beneficial
conversion feature (“BCF”), and OID. The note discounts are being amortized over the life of the note or will be amortize
in full upon the conversion of the corresponding notes to common stock. At December 31, 2014, total outstanding notes payable amounted
to $244,640 and unamortized note discount was $105,542.
In 2015, the Company
issued similar convertible promissory notes in the aggregate of $726,000 for cash proceeds of $660,000 or a discount of $66,000.
The notes do not bear any interest; however, the implied interest rate used was 10% since the notes were issued 10% less than its
face value, are unsecured, mature in twelve months from issuance and convertible at $0.30 and $0.10 per share. In addition, the
Company also granted these note holders warrants to purchase 1,796,667 shares of the Company’ common stock. The warrants
are fully vested, exercisable at $0.30 and $0.10 per share and will expire in one year. As a result, the Company recorded a note
discount of $696,945 to account for the relative fair value of the warrants, the notes’ BCF and OID. The note discounts are
being amortized over the life of the note or will be amortize in full upon the conversion of the corresponding notes to common
stock.
During the year
ended December 31, 2015, a total of $668,800 of notes payable were converted into 1.1 million shares of common stock and amortized
note discount of $701,654 was recorded as interest expense.
As of December 31,
2015, total outstanding notes payable amounted to $321,024 and unamortized note discount of $100,833. Three notes in the aggregate
of $211,024 had reached maturity without conversion as of December 31, 2015. As a result, the Company increased the principal amount
of each note by 10% under terms of the notes in the aggregate amount of $19,184, which the Company recorded as an interest expense.
As of the date of maturity, each of the notes commenced the accrual of interest thereon at an annual rate of 10% under terms of
the notes. As of December 31, 2015, interest accrued for these notes amounted to $2,004.
6. |
Research and Development |
The Company constructs,
develops and tests the AOT and Joule Heat technologies with internal resources and through the assistance of various third party
entities. Costs incurred and expensed include fees such as patent fees, U.S. Department of Energy testing fees, purchase of test
equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other
related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT prototypes.
For the years ended
December 31, 2015, 2014 and 2013, our research and development expenses were $577,501, $893,452 and $2,011,486, respectively.
AOT and Joule Heat Product
Development and Testing
The Company constructs,
develops and tests the AOT and Joule Heat technologies with internal resources and through the assistance of various third party
entities. Costs incurred and expensed include fees such as U.S. Department of Energy testing fees, purchase of test equipment,
pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other related
equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT and Joule Heat prototypes.
Total expenses incurred
during the years ended December 31, 2015, 2014 and 2013 on AOT and Joule Heat product development and testing amounted to $215,668,
$73,937 and $676,287 respectively and has been reflected as part of Research and Development expenses on the accompanying consolidated
statements of operations.
AOT Prototypes
In 2013, the Company
entered into a lease agreement with TransCanada Keystone Pipeline, L.P. for the manufacture and delivery of our AOT Prototype Equipment.
In 2014, the Company entered into another lease agreement with Kinder Morgan Crude & Condensate, LLC for the manufacture and
delivery of our AOT Prototype Equipment. See Note 7 for further discussion.
During the years
ended December 31, 2015, 2014 and 2013, the Company incurred total expenses of $109,645, $502,720 and $1,029,143, respectively,
in the manufacture and delivery of the AOT prototype equipment. These expenses have been reflected as part of Research and Development
expenses on the accompanying consolidated statements of operations.
Temple University Licensing
Agreement
On August 1, 2011, the
Company and Temple University (“Temple”) entered into two (2) Exclusive License Agreements (collectively, the “License
Agreements”) relating to Temple’s patent applications, patents and technical information pertaining to technology associated
with an electric and/or magnetic field assisted fuel injector system (the “First Temple License”), and to technology
to reduce crude oil viscosity (the “Second Temple License”). The License Agreements are exclusive and the
territory licensed to the Company is worldwide and replace previously issued License Agreements.
Pursuant to the two licensing
agreements, the Company agreed to pay Temple the following: (i) non-refundable license maintenance fee of $300,000; (ii) annual
maintenance fees of $187,500; (iii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements;
and (iv) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. Temple also
agreed to defer $37,500 of the amount due if the Company agrees to fund at least $250,000 in research or development of Temple’s
patent rights licensed to the Company. The term of the licenses commenced in August 2011 and will expire upon the expiration of
the patents. The agreement can also be terminated by either party upon notification under terms of the licensing agreements or
if the Company ceases the development of the patent or failure to commercialize the patent rights.
Total expenses recognized
during each year ended December 31, 2015, 2014 and 2013 pursuant to these two agreements amounted to $187,500 and has been reflected
in Research and Development expenses on the accompanying consolidated statements of operations.
As of December 31, 2015
and 2014, total unpaid fees due to Temple pursuant to these agreements amounted to $460,625 and $340,625, respectively, which are
included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. As of December
31, 2015, $165,125 of the $460,625 payable has been deferred under terms of the license agreements and $295,500 is deemed past
due. The Company is currently in negotiations with Temple to settle this amount.
In 2014, the Company
recognized revenues of $240,000 as a result of these two licenses. No royalty payment was due to Temple as the reported revenues
did not meet the threshold at which the Company would pay royalties in addition to the annual maintenance agreement. There were
no revenues generated from these two licenses during the years ended December 31, 2015 and 2013.
Temple University Sponsored
Research Agreement
On March 19,
2012, the Company entered into a Sponsored Research Agreement (“Research Agreement”) with Temple University
(“Temple”), whereby Temple, under the direction of Dr. Rongjia Tao, will perform ongoing research related to the
Company’s AOT device (the “Project”), for the period April 1, 2012, through April 1, 2014. All
rights and title to intellectual property resulting from Temple’s work related to the Project shall be subject to
the Exclusive License Agreements between Temple and the Company, dated August 1, 2011. In exchange
for Temple’s research efforts on the Project, the Company has agreed to pay Temple $500,000, payable in
quarterly installments of $62,500. A copy of the Temple Research Agreement dated March 19, 2012, as amended March 19, 2013 is
attached to this Form 10-K filing as Exhibit 10.121.
In August 2013, the Company
and Temple amended the Research Agreement. Under the amended agreement, parties agreed that total cost for Phase 1 of the agreement
was $241,408 and total cost for Phase 2 of the agreement was $258,592 payable beginning September 1, 2013 in eight quarterly installments
of $32,324.
During the years ended December
31, 2015, 2014 and 2013, the Company recognized a total expense of $64,688, $129,295 and $118,556, respectively, pursuant to this
agreement and such costs have been reflected in Research and Development expenses on the accompanying consolidated statements of
operations.
As of December
31, 2015 and 2014, total unpaid fees due to Temple pursuant to this agreement amounted to $129,377 and $64,688, respectively,
which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.
As of December 31, 2015, the entire $129,377 is deemed past due. The Company is currently in negotiations with Temple
to settle this amount.
TransCanada
Keystone Pipeline, L.P. Lease
On August 1, 2013,
the Company entered into an Equipment Lease/Option to Purchase Agreement (“Lease”) with TransCanada Keystone Pipeline,
L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") which agreed to lease and test the effectiveness of
the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. The initial term of the lease
was for six months at an amount of $60,000 per month. During the initial term, either the Company or TransCanada had the right
to terminate the Agreement for any reason on 90-days written notice. TransCanada had an option to purchase the equipment during
the term of the lease for approximately $4.3 million.
In June 2014, the
equipment was accepted by TransCanada and the lease commenced. The Company accounted the TransCanada Lease as an operating lease,
and recognized total lease revenue of $240,000 from June 2014 up to October 2014.
In October 2014,
the lease was mutually terminated by the Company and TranCanada and the AOT Equipment was returned to the Company.
Kinder Morgan Crude &
Condensate, LLC Lease
On July 15, 2014,
the Company entered into an Equipment Lease/Option to Purchase Agreement (“Lease”) with Kinder Morgan Crude & Condensate,
LLC (“Kinder Morgan”). In accordance with the terms and conditions of the agreement, Kinder Morgan agreed to lease
and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines.
Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons
per minute.
The initial term
(“Initial Term”) of the Lease is four months, with an option to extend the Lease for up to a maximum of 84 months.
During the Initial Term, either the Company or Kinder Morgan may terminate the Agreement for any reason on 45 days’ written
notice. Lease payments shall be $20,000 per month; provided however, that in the event the Equipment is removed from service at
its initial location during the Initial Term, the monthly lease payments shall be reduced to $5,000 until the Equipment is placed
back in service at its new location, at which time the Lease payments shall resume at $20,000 per month. The agreement further
provides that Kinder Morgan shall have an option to purchase the Equipment during the term of the Lease for a fixed price of between
$600,000 and $1,200,000, depending upon the date of purchase.
The AOT equipment
was delivered to Kinder Morgan in December 2014 and installed in March 2015. In April 2015, the AOT equipment experienced technical
issues that needed further modifications. In February 2016, the AOT equipment was installed at Kinder Morgan’s facility with
pre-start testing to begin in March 2016. The Company will account for the lease with Kinder Morgan as an operating lease once
the AOT equipment is accepted.
Pursuant to current accounting
pronouncements, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The FASB’s
guidance requires the fair value of these liabilities be re-measured at the end of every reporting period. The Company characterized the fair value of these warrants as derivative
liabilities upon issuance and re-measured every reporting period with the change in value reported in the accompanying statement
of operations.
In 2009 and 2010,
in connection with certain convertible note offerings, the Company granted warrants to purchase an aggregate of 8,522,500 shares
of the Company’s common stock. The warrants are initially exercisable at $0.30 per share with exercise prices that may fluctuate
based on the occurrence of future offerings or events. At December 31, 2012, a total of 4.4 million warrants remained outstanding
with a fair value of $3,221,138.
In January 2013, the remaining
4.4 million warrants expired or were exercised at which time the warrants had a fair value of $3,441,752, which resulted in a loss
of $220,614 due to the change in the fair value of the derivative liability. Furthermore, as a result of the exercise and expiration
of these warrants, the Company recorded a gain of $3,441,752 due to the extinguishment of the corresponding derivative liability.
There were no similar warrants issued or outstanding in 2015 and 2014.
The derivative liabilities
were valued using a probability weighted average of Black-Scholes Option Pricing models as a valuation technique, which approximates
the Monte Carlo and other binominal valuation techniques with the following assumptions:
|
|
January 15 |
|
|
2013 |
Risk-free interest rate |
|
|
0.12% |
|
Expected volatility |
|
|
92% |
|
Expected life (in years) |
|
|
0.75 - 1.00 |
|
Expected dividend yield |
|
|
0% |
|
Fair Value: |
|
|
|
|
2009 Warrants |
|
|
3,441,752 |
|
Total Fair Value |
|
$ |
3,441,752 |
|
The risk-free
interest rate is based on the yield available on U.S. Treasury securities. The Company estimates volatility based
on the historical volatility of its common stock. The expected life warrants are based on the expiration date of the related
warrants. The expected dividend yield was based on the fact that the Company has not paid dividends to
stockholders in the past nor is it expected to pay any dividends in the foreseeable future.
9. |
Common Stock Transactions |
2015
During the year ended December
31, 2015, the Company issued an aggregate of 2,803,333 shares of its common stock as follows:
| · | The Company issued 2,603,333 shares of its common stock in exchange
for conversion of $668,800 of Convertible Notes pursuant to the convertible notes conversion price ranging from $0.10 to $0.48
per share. |
| · | The Company issued 200,000 shares of its common stock upon exercise
of warrants at price of $0.25 per share for total cash proceeds of at $50,000. |
2014
During the year ended December
31, 2014, the Company issued an aggregate of 4,785,427 shares of its common stock as follows:
| · | The Company issued 74,480 shares of its common stock in exchange for
conversion of $35,750 of Convertible Notes pursuant to the convertible notes conversion price of $0.48 per share. |
| · | The Company issued 4,710,947 shares of its common stock for exercise
of options and warrants at price of $0.30 per share and valued at $1,413,284, of which, $30,000 was applied to an existing accounts
payable and $1,383,284 was received in cash. |
2013
During the year ended December
31, 2013, the Company issued an aggregate of 32,575,247 shares of its common stock as follows:
| · | The Company issued 29,152,389 shares of its common stock upon exercise
of options and warrants at a price of $0.25 up to $0.98 which resulted in net cash proceeds of $8,428,218 and settlement of unpaid
fees recorded in prior years of $49,000 for a total of $8,477,218. |
| · | The Company issued 375,455 shares of its common stock with a fair
value of $419,113 or $1.12 per share to employees, officers, members of the Board of Directors and a consultant for service rendered.
The shares were valued at market at the date of the agreement. |
| · | In December 2013, the Company issued 3,047,403 shares of common stock
with a fair value of $3,108,347 pursuant to a settlement with CEDE & Co (see Note 13). The shares were valued at market at
the date of issuance. |
In December 2013, the Company’s
stockholders agreed to increase the authorized shares of common stock of the Company from 200,000,000 to 300,000,000.
10. |
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
The Company previously
issued stock options to employees, directors and consultants under its 2004 Stock Option Plan (the Plan). The Company could issue
options under the Plan to acquire up to 7,000,000 shares of common stock as amended in May 2006. On March 2, 2014, the Plan expired
and the Board decided not to extend it.
Employee options vest according
to the terms of the specific grant and expire from 5 to 10 years from date of grant. Non-employee option grants vest upon
issuance up to 2 years. The weighted-average, remaining contractual life of employee and Non-employee options outstanding at December
31, 2015 was 5.2 years. Stock option activity for the period January 1, 2013 to December 31, 2015, was as follows:
| |
Weighted Avg. Options | | |
Weighted Avg. Exercise Price | |
Options, January 1, 2013 | |
| 27,278,098 | | |
$ | 0.27 | |
Options granted | |
| 207,819 | | |
| 1.17 | |
Options exercised | |
| (115,000 | ) | |
| 0.60 | |
Options forfeited | |
| (7,061,009 | ) | |
| 0.25 | |
Options, December 31, 2013 | |
| 20,309,908 | | |
$ | 0.28 | |
Options granted | |
| 852,122 | | |
| 0.80 | |
Options exercised | |
| (20,000 | ) | |
| 0.30 | |
Options forfeited | |
| (90,000 | ) | |
| 0.91 | |
Options, December 31, 2014 | |
| 21,052,030 | | |
$ | 0.20 | |
Options granted | |
| 838,552 | | |
| 0.46 | |
Options exercised | |
| – | | |
| – | |
Options forfeited | |
| (355,434 | ) | |
| 0.72 | |
Options, December 31, 2015 | |
| 21,535,148 | | |
$ | 0.30 | |
The weighted average exercise
prices, remaining contractual lives for options granted, exercisable, and expected to vest under the Plan as of December 31,
2015 were as follows:
| | |
Outstanding Options | | |
Exercisable Options | |
Option Exercise Price Per Share | | |
Shares | | |
Life
(Years)
| | |
Weighted
Average Exercise
Price
| | |
Shares | | |
Weighted
Average Exercise
Price
| |
$ 0.21 - $ 0.99 | | |
| 21,343,280 | | |
| 5.2 | | |
$ | 0.29 | | |
| 20,408,283 | | |
$ | 0.29 | |
$ 1.00 - $ 1.99 | | |
| 191,868 | | |
| 4.2 | | |
$ | 1.22 | | |
| 263,229 | | |
$ | 1.20 | |
| | |
| 21,535,148 | | |
| | | |
$ | 0.30 | | |
| 20,671,512 | | |
$ | 0.30 | |
As of December 31, 2015
the market price of the Company’s stock was $0.19 per share. At December 31, 2015 the aggregate intrinsic value of
the options outstanding was $0. Future unamortized compensation expense on the unvested outstanding options at December 31, 2015
is approximately $34,000.
2015
| · | From January through July 2015, the Company issued options to purchase a total of 838,552 shares
of common stock to employees, officers and members of the Board of Directors with a fair value of $323,787 using the Black-Scholes
Option Pricing model. The options are exercisable from $0.65 up to $0.99 per share, vesting within one year and expiring in ten
years from the date of grant. During the year ended December 31, 2015, the Company recognized compensation costs of $323,787 based
on the fair value of options that vested. |
| · | During the year ended December 31, 2015, the Company amortized $366,266 of compensation cost
based on the vesting of the options granted to employees and directors in prior years. |
2014
| · | In February 2014, options to purchase 20,000 shares of common stock were exercised resulting in
proceeds of $6,000. |
| · | From January up to October 2014, the Company issued options to purchase a total of 852,122 shares
of common stock to employees, officers and members of the Board of Directors with an estimated fair value of approximately $454,499
using the Black-Scholes Option Pricing model. The options are exercisable from $0.65 up to $0.99 per share, vesting within two
years and expire in two and ten years from the date of grant. During the year ended December 31, 2014, the Company recognized compensation
costs of $295,884 based on the fair value of options that vested. |
| · | During the year ended December 31, 2014, the Company amortized $376,247 of compensation cost
based on the vesting of the options granted to employees, directors and consultants in prior years. |
2013
| · | From April up to September 2013, options to purchase 115,000 shares of common stock were exercised
resulting in net proceeds of $19,500. Included in the exercise was issuance of 50,000 shares of common stock valued at $49,000
pursuant to an exercise of options and accounted for as partial settlement of a liability recorded in prior years. |
| · | From July up to September 2013, the Company issued options to purchase 207,819 shares of common
stock to consultants, employees, officers and members of the Board of Directors with a fair value of approximately $201,000 using
the Black-Scholes Option Pricing model. The options are exercisable at $1.09/share up to $1.71/share, vest over a period of one
year and expire in two years and ten years from the date of grant. During the year ended December 31, 2013, the Company recognized
compensation costs of $101,157 based on the fair value of options that vested. |
| · | In November 2013, pursuant to separation agreement with an Officer of the Company, the Company
cancelled unvested options to purchase 7,040,000 shares of common stock at $0.25 and modified the vesting period of unvested options
to purchase 3,520,000 shares of common stock at $0.25, both granted during 2011. |
| · | During the year ended December 31, 2013, the Company amortized $403,127 of compensation cost
based on the vesting of the options granted to employees, directors and consultants in prior years. |
Black-Scholes Option Pricing
The Company used the following
average assumptions in its calculation using the Black-Scholes Option Pricing model:
|
|
Years Ended |
|
|
2015 |
|
2014 |
|
2013 |
Expected life (years) |
|
5.0 – 5.5 |
|
|
1.5 – 5.5 |
|
|
1.5 – 5.5 |
|
Risk free interest rate |
|
1.56 – 1.72 |
% |
|
0.12 – 1.70 |
% |
|
0.34 – 1.65 |
% |
Volatility |
|
106 – 121 |
% |
|
123 – 135 |
% |
|
127 – 130 |
% |
Expected dividend yield |
|
0 |
% |
|
0 |
% |
|
0 |
% |
The expected life
is based on the expiration date of the related options. The risk-free interest rate is based on the yield
available on U.S. Treasury securities. The Company estimates volatility based on the historical volatility of its common
stock. The expected dividend yield was based on the fact that the Company has not paid dividends to stockholders in
the past nor is it expected to pay any dividends in the foreseeable future.
The weighted average
fair value for options granted in 2015, 2014 and 2013 was $0.39, $0.96 and $0.30, respectively.
Warrants
The following table summarizes
certain information about the Company’s stock purchase warrants.
| |
Warrants | | |
Weighted Avg. Exercise Price | |
Warrants outstanding, January 1, 2013 | |
| 42,205,507 | | |
$ | 0.31 | |
Warrants granted | |
| 150,000 | | |
| 0.30 | |
Warrants exercised | |
| (29,037,389 | ) | |
| 0.29 | |
Warrants cancelled | |
| (1,554,152 | ) | |
| 0.33 | |
Warrants outstanding, December 31, 2013 | |
| 11,763,966 | | |
$ | 0.34 | |
Warrants granted | |
| 761,037 | | |
| 0.71 | |
Warrants exercised | |
| (4,690,947 | ) | |
| 0.30 | |
Warrants cancelled | |
| (2,141,969 | ) | |
| 0.46 | |
Warrants outstanding, December 31, 2014 | |
| 5,692,087 | | |
$ | 0.36 | |
Warrants granted | |
| 1,796,667 | | |
| 0.20 | |
Warrants exercised | |
| (200,000 | ) | |
| 0.25 | |
Warrants cancelled | |
| (2,877,087 | ) | |
| 0.36 | |
Warrants outstanding, December 31, 2015 | |
| 4,411,667 | | |
$ | 0.31 | |
At December 31, 2015 the
price of the Company’s common stock was $0.19 per share and the aggregate intrinsic value of the warrants outstanding was
$79,200. Future unamortized compensation expense on the unvested outstanding warrants at December 31, 2015 is approximately $1,867.
| | |
Outstanding Warrants | | |
Exercisable Warrants | |
Warrant Exercise Price Per Share | | |
Shares | | |
Life
(Years)
| | |
Weighted
Average Exercise
Price
| | |
Shares | | |
Weighted
Average Exercise
Price
| |
$ 0.25 - $ 0.99 | | |
| 4,291,667 | | |
| 3.2 | | |
$ | 0.36 | | |
| 4,291,667 | | |
$ | 0.34 | |
$ 1.00 - $ 1.99 | | |
| 120,000 | | |
| 0.0 | | |
$ | 1.01 | | |
| 120,000 | | |
$ | 1.01 | |
| | |
| 4,411,667 | | |
| | | |
$ | 0.38 | | |
| 4,411,667 | | |
$ | 0.35 | |
2015
| · | In January 2015, warrants to acquire 200,000 shares of common stock were exercised resulting in
gross proceeds of $50,000. |
| · | In May through December 2015, pursuant to terms of convertible notes issued, the Company granted
warrants to purchase 1,796,667 shares with exercise prices of $0.30 per share and $0.10 per share, vesting immediately upon grant
and expiring one year from the date of grant. See Note 5 for further discussion. |
| · | During the year ended December 31, 2015, the Company amortized $38,524 of compensation cost
based on the vesting of the warrants granted to employees, directors and consultants in prior years. |
2014
| · | In January and February 2014, warrants to acquire 4,690,947 shares of common stock were exercised
resulting in gross proceeds of $1,407,284. Furthermore, included in the exercise was issuance of 100,000 shares of common stock
valued at $30,000 pursuant to an exercise of warrants and accounted for as partial settlement of unpaid fees recorded in prior
years. As a result, the aggregate net proceeds received amounted to $1,377,284. |
| · | From January up to October 2014, the Company granted consultants warrants to purchase a total of
315,000 shares with an average exercise price of $0.84 per share, vesting in six months up to two years and expiring in two years
up to ten years from the date of grant. The fair value of the warrants upon vesting amounted to $20,950 using the Black-Scholes
Option Pricing model with the following average assumptions: risk-free interest rate of 0.89%; dividend yield of 0%; volatility
of 66%; and an expected life of twenty-nine months. During the year ended December 31, 2014, the Company recognized an amortized
expense of $20,950 based on the fair value of warrants that vested. |
| · | In May 2014, the Company granted a consultant warrants to purchase 300,000 shares over
eighteen months at the rate of 50,000 shares every three months, with an exercise price of equal to the closing stock price
on the date of vesting, and expiring two years from the date of grant. The fair value of the warrants that vested at December
31, 2014 amounted to $21,000 using the Black-Scholes Option Pricing model with the following average assumptions: risk-free
interest rate of 0.50%; dividend yield of 0%; volatility of 65%; and an expected life of 18 months. During the year ended
December 31, 2014, the Company recognized an amortized expense of $21,000 based on the fair value of the warrants that
vested. |
| · | In October through December 2014, pursuant to terms of convertible notes issued, the Company granted
warrants to purchase 146,037 shares with an exercise price of $0.48 per share, vesting immediately upon grant and expiring one
year from the date of grant. See Note 5 for further discussion. |
| · | During the year ended December 31, 2014, the Company amortized $16,645 of compensation cost
based on the vesting of the warrants granted to employees, directors and consultants in prior years. |
2013
| · | In March 2013, pursuant to a settlement of debt agreement, the Company granted a consultant a warrant
to purchase 150,000 shares of its common stock with an exercise price of $0.30 per share, vesting immediately and expiring in two
years from grant date. The fair value of the warrant amounted to $129,622 using the Black-Scholes Option Pricing model with the
following average assumptions: risk-free interest rate of 0.26%; dividend yield of 0%; volatility of 132%; and an expected life
of two years. |
| · | During the year ended December 31, 2013, warrants to acquire 29,037,389 shares of common stock
were exercised resulting in proceeds of $8,408,718, net of direct costs incurred of $78,521. |
| · | During the year ended December 31, 2013, the Company recorded $52,314 of compensation cost
based on the vesting of the warrants granted to employees, directors and consultants in prior years. |
11. |
Commitments and Contingencies |
There is no current or
pending litigation of any significance with the exception of the matters that have arisen under, and are being handled in, the
normal course of business.
Leases
On August 1, 2013,
the Company entered into a non-cancellable lease with a 5-year term, expiring July 31, 2018 at a monthly rent of $13,075. On February
1, 2014, the Company amended its lease in order to reduce the leased area as well as the monthly lease to $5,830 per month.
Total rent expense during
the years ended December 31, 2015, 2014 and 2013, was $69,960, $81,851 and $160,535 respectively which are included as part of
Operating Expenses in the attached consolidated statements of operations. The following is a schedule by years of future minimum
rental payments required under the non-cancellable office lease as of December 31, 2015.
Year ending | | |
Non-cancellable | |
December 31, | | |
Office Leases | |
| 2016 | | |
| 69,960 | |
| 2017 | | |
| 69,960 | |
| 2018 | | |
| 40,810 | |
| Total | | |
$ | 180,730 | |
The Company did not record
an income tax provision for 2015, 2014 and 2013, other than $800 for the minimum state tax provision. A reconciliation of income
taxes with the amounts computed at the statutory federal rate follows:
| |
December 31, | |
| |
2015 | | |
2014 | | |
2013 | |
Computed tax provision (benefit) at federal statutory rate (34%) | |
$ | (1,065,000 | ) | |
$ | (1,133,000 | ) | |
$ | (1,993,000 | ) |
State income taxes, net of federal benefit | |
| (277,000 | ) | |
| (295,000 | ) | |
| (518,000 | ) |
Permanent items | |
| – | | |
| – | | |
| – | |
Valuation allowance | |
| 1,342,800 | | |
| 1,428,800 | | |
| 2,511,800 | |
Income tax provision | |
$ | 800 | | |
$ | 800 | | |
$ | 800 | |
The deferred tax assets
and deferred tax liabilities recorded on the balance sheet are as follows:
| |
December 31, | |
| |
2015 | | |
2014 | |
Net operating loss carry forwards | |
| 21,000,000 | | |
| 19,600,000 | |
Valuation allowance | |
| (21,000,000 | ) | |
| (19,600,000 | ) |
Total deferred taxes net of valuation allowance | |
$ | – | | |
$ | – | |
As of December
31, 2015, the Company had net operating losses available for carry forward for state and federal tax purposes of
approximately $51 million expiring through 2035. These carry forward benefits may 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, 2015,
the Company recorded valuation allowance of $21,000,000 for its deferred tax assets 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
Effective January 1, 2007,
the Company adopted 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, 2015, 2014 and 2013, 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 California. The Company is subject to U.S. federal or state income
tax examinations by tax authorities for years after 2002. 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 Company’s
policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2015, 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, 2015, 2014 or 2013.
13. |
Settlement with CEDE & Co. |
In 2001, a total
of 3,047,403 shares of common stock of the Company that were held in street (nominee) name by Cede & Co. of the Depository
Trust Co. (the “Cede Shares”) were ordered cancelled by a federal district court relating to litigation initiated by
the Securities and Exchange Commission against the Company and its former Chief Executive Officer (CEO). Either before or after
the court’s order (the timing of which is unknown to the Company), the Cede Shares, at that time were held directly or indirectly
by the former CEO and were placed with Cede & Co. in nominee name. In furtherance of the court’s order, the physical
certificates relating to the Cede Shares should have been returned to the Company’s stock transfer agent, NATCO, for cancellation.
This did not occur. Rather, Cede & Co. retained the stock certificates representing the Cede Shares and continued to treat
the Cede Shares as outstanding and free trading shares of the Company. Notwithstanding the foregoing, NATCO, in furtherance of
then Company counsel’s instructions, cancelled the Cede Shares on the Company’s books and records in 2005, and, in
furtherance thereof, reduced the Company’s outstanding shares of common stock by 3,047,403.
In 2013, Cede &
Co. has requested, in effect, that, inasmuch as the Cede Shares continue to be within its system, the Cede Shares be reinstated
on the Company’s books and records and that the outstanding shares of the Company be increased by 3,047,403. Although the
Company believes Cede & Co.’s request is misplaced, particularly since it appears that Cede & Co. had prior notice
of the court’s order cancelling the Cede Shares, the Company has elected to avoid litigation with Cede & Co. and instead
has elected to reinstate the Cede Shares.
In December 2013, the Company
approved the reinstatement of 3,047,403 shares of common stock of the Company with a fair value of $3,108,347 and recorded as part
of Operating Expenses in 2013 in the accompanying consolidated Statement of Operations. The fair value of the shares was determined
based on the trading price of the Company’s shares on December 16, 2013, the date of the Company’s Board of Directors
approved such reinstatement.
14. |
Settlement with Former Officer |
On November 15,
2013, Cecil Kyte voluntarily resigned as a Director, Chairman of the Board, a member of the Nominating and Corporate Governance
Committee, and Chief Executive Officer. Pursuant to his separation agreement, the Company recognized expense of $364,315 to account
for his severance pay plus corresponding payroll taxes which was recorded as part of Operating Expenses in the accompanying consolidated
Statement of Operations for 2013. The entire amount due to Mr. Kyte was paid in full in 2014.
At the time of separation,
Mr. Kyte also held unvested options which had been granted in January 2011 to purchase 10,560,000 shares of common stock at $0.25
per share, of which 3,520,000 shares were due to vest in January 2014 and 7,040,000 shares were due to fully vest by January 2016.
Under terms of the separation agreement, the Company accelerated the vesting of the 3,520,000 options to November 15, 2013 while
the remaining 7,040,000 options were forfeited. As a result, the Company recognized compensation expense of $3,809,325, to account
for the fair value of the options that were modified. The fair value was determined using a Black-Scholes Option Pricing model
with the following: risk-free interest rate of 2.06%; dividend yield of 0%; volatility of 130%; and an expected life of 7 years.
Previously recorded compensation recorded in 2013 related to the original vesting schedule of the 3,520,000 options was reversed,
and the $3,809,325 was recorded as part of Operating Expenses in the accompanying consolidated Statement of Operations for 2013.
15. |
Quarterly Information (unaudited) |
| |
First | | |
Second | | |
Third | | |
Fourth | |
| |
Quarter | | |
Quarter | | |
Quarter | | |
Quarter | |
Year Ended December 31, 2015: | |
| | | |
| | | |
| | | |
| | |
Net sales | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
Gross profit | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | – | |
Net loss | |
$ | (1,174,337 | ) | |
$ | (1,542,944 | ) | |
$ | (825,797 | ) | |
$ | (685,876 | ) |
Loss per share, Basic and Diluted (1) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
| |
First | | |
Second | | |
Third | | |
Fourth | |
| |
Quarter | | |
Quarter | | |
Quarter | | |
Quarter | |
Year Ended December 31, 2014: | |
| | | |
| | | |
| | | |
| | |
Net sales | |
$ | – | | |
$ | 60,000 | | |
$ | 180,000 | | |
$ | – | |
Gross profit | |
$ | – | | |
$ | 60,000 | | |
$ | 180,000 | | |
$ | – | |
Net loss | |
$ | (1,403,474 | ) | |
$ | (1,008,392 | ) | |
$ | (715,774 | ) | |
$ | (878,695 | ) |
Loss per share, Basic and Diluted (1) | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
| (1) | Per share data was computed independently for each of the quarters presented. Therefore, the sum
of the quarterly per share information may not equal the annual income per share. |
16. |
Contractual Obligations |
The Company has
certain contractual commitments for future periods, including office leases, minimum guaranteed compensation payments and other
agreements as described in the following table and associated footnotes:
Year ending | | |
Office | | |
Research and License | | |
Compensation | | |
Total | |
December 31, | | |
Lease (1) | | |
Agreements (2) | | |
Agreements (3) | | |
Obligations | |
| 2016 | | |
$ | 69,960 | | |
$ | 187,500 | | |
$ | 350,000 | | |
$ | 607,460 | |
| 2017 | | |
| 69,960 | | |
| 187,500 | | |
| 305,429 | | |
| 562,889 | |
| 2018 | | |
| 40,810 | | |
| 187,500 | | |
| 290,000 | | |
| 518,310 | |
| 2019 | | |
| – | | |
| 187,500 | | |
| 54,375 | | |
| 241,875 | |
| 2020 | | |
| – | | |
| 187,500 | | |
| – | | |
| 187,500 | |
| Total | | |
$ | 180,730 | | |
$ | 937,500 | | |
$ | 999,804 | | |
$ | 2,118,034 | |
___________________
| (1) | Consists
of rent for the Company’s Santa Barbara Facility expiring on July 31, 2018. |
| (2) | 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. |
| (3) | Consists of base salary and certain contractually-provided benefits, to i) an executive
officer, pursuant to an employment agreement at a base salary of $290,000 per year and, as amended by the Board on March
10, 2016, expires on March 8, 2019; and ii) and a severance agreement of a former officer in the
amount of $75,429. |
Increase in Outstanding Shares
From January 1, 2016 up
to March 15, 2016, the Company issued convertible notes in aggregate of $390,610 in exchange for cash of $355,100. The notes are
unsecured, convertible into 3,906,100 shares in common stock of the Company at a conversion price of $0.10 per share and matures
in one year. In connection with these notes, the Company also issued warrants to purchase 1,953,050 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. As a result, the Company will
record a note discount of $390,610 to account for the relative fair value of the warrants, the notes’ beneficial conversion
feature and original issue discount which will be amortized as interest expense over the life of the notes.
From January 1, 2016
up to March 15, 2016, Company issued 3,029,050 shares of common stock upon voluntary conversion of previously issued convertible
notes in aggregate value of $302,905.
EXHIBITS
Exhibit No. |
|
Description |
|
|
|
|
|
10.117 |
|
Securities Purchase Agreement |
|
|
|
|
|
31.1 |
|
Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e) |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e) |
|
|
|
|
|
32 |
|
Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350 |
|
|
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
|
|
101.SCH |
|
XBRL Schema Document |
|
|
|
|
|
101.CAL |
|
XBRL Calculation Linkbase Document |
|
|
|
|
|
101.LAB |
|
XBRL Label Linkbase Document |
|
|
|
|
|
101.PRE |
|
XBRL Presentation Linkbase Document |
|
|
|
|
|
101.DEF |
|
XBRL Definition Linkbase Document |
Exhibit
10.117
SECURITIES PURCHASE AGREEMENT
Convertible Promissory Notes and
Stock Purchase Warrants
THIS SECURITIES PURCHASE
AGREEMENT (this “Agreement”) is made and entered into as of the ___________ _____, 2014, by and between Save the World
Air, Inc., a Nevada corporation (the “Issuer”) and those individuals and entities who sign and deliver an executed
copy of this Agreement to the Issuer (each, a “Purchaser” and collectively, the “Purchasers”), with reference
to the following:
RECITALS
A. Purchasers desire
to purchase from Issuer and Issuer desires to sell to Purchaser certain of Issuer’s Convertible Notes, in the aggregate face
amount up to a maximum of Five Million Dollars ($5,000,000) in the form of Exhibit A attached hereto (individually, a “Note”
and collectively, the “Notes”), and certain of Issuer’s Stock Purchase Warrants to purchase up to a certain number
of shares of the common stock (the “Common Stock”) of the Issuer equal to 25% of the number of shares initially issuable
on conversion of the Notes, in the form of Exhibit B attached hereto (individually, the “Warrants” and collectively
with the Notes, the “Securities”). The face amount of the Note each Purchaser has committed to purchase, and the amount
of the purchase price thereof to be paid to the Issuer by the Purchaser (a “Commitment”) is listed on the signature
page such Purchaser executes and delivers to the Issuer.
B. Issuer’s
sale of the Securities to the Purchasers may be made in reliance upon the provisions of Section 4(a)(2) under the Securities Act
of 1933, as amended (the "Securities Act") or Rule 506 of Regulation D promulgated by the Securities and Exchange Commission
(the ”SEC”) thereunder, or other applicable rules and regulations of the SEC or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect to the transactions contemplated hereby.
C. At any time when
any amount of principal or interest of the Notes shall be outstanding, such unpaid amounts shall be convertible, at the election
of the Purchaser, into shares of the Issuer’s Common Stock at a price of $0.48 per share (the “Conversion Price”).
D. The Warrants
shall be issued at the same time each Note is issued to the Purchaser hereunder and shall be exercisable at $0.48 per share (the
“Exercise Price”), for such number of shares equal to 25% of the result obtained by dividing (i) the face amount of
the Notes issued simultaneously with the Warrant by (ii) the Conversion Price. The Warrants shall expire one (1) year from the
date of issuance thereof.
AGREEMENT
NOW THEREFORE, in consideration
of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth
hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Purchasers
and the Issuer hereby agree as follows
1. Purchase
of the Notes and Warrants. On the terms and subject to the conditions set forth in this Agreement and in the Notes and
Warrants, the Purchasers shall purchase from the Issuer and the Issuer shall sell to the Purchaser the Securities.
2. Purchaser’s
Representations, Warranties and Covenants. In order to induce the Issuer to sell and issue the Securities to the Purchaser
under one or more exemptions from registration under the Securities Act, the Purchasers, severally and not jointly, represent and
warrant to the Issuer, and covenant with the Issuer, that:
(a) (i) Such Purchaser
has the requisite power and authority to enter into and perform this Agreement, and each of the other agreements entered into by
the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "Transaction Documents"),
and to purchase the Securities in accordance with the terms hereof and thereof.
(ii) The execution
and delivery of the Transaction Documents by the Purchaser and the consummation by it of the transactions contemplated thereby
have been duly and validly authorized by the Purchaser's organizational documents and no further consent or authorization is required
by the Purchaser.
(iii) The Transaction
Documents have been duly and validly executed and delivered by the Purchaser.
(iv) The Transaction
Documents, and each of them, constitutes the valid and binding obligation of the Purchaser enforceable against the Purchaser in
accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement
of creditors' rights and remedies.
(b) The execution, delivery
and performance of the Transaction Documents by the Purchaser and the consummation by the Purchaser of the transactions contemplated
thereby will not conflict with or constitute a default under any agreement or instrument to which the Purchaser is a party or by
which the Purchaser is bound.
(c) The Purchaser is
acquiring the Securities for investment for its own account, and not with a view toward distribution thereof, and with no present
intention of dividing its interest with others or reselling or otherwise transferring or disposing of all or any portion of either
the Notes or Warrants. The undersigned has not offered or sold a participation in this purchase of either the Notes or Warrants,
and will not offer or sell any interest therein. The Purchaser further acknowledges that the Purchaser does not have in mind any
sale of either the Notes or Warrants currently or after the passage of a fixed or determinable period of time or upon the occurrence
or non-occurrence of any predetermined events or consequence; and that it has no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment providing for or which is likely to compel a disposition of either the Notes
or Warrants and is not aware of any circumstances presently in existence that are likely in the future to prompt a disposition
thereof.
(e) The Purchaser acknowledges
that the Securities have been offered to it in direct communication between itself and the Issuer and not through any advertisement,
article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or on the
Internet or broadcast over television or radio or presented in any seminar or any other general solicitation or general advertisement.
(f) The Purchaser acknowledges
that the Issuer has given it access to all information relating to the Issuer’s business that it has requested. The Purchaser
has reviewed all materials relating to the Issuer's business, finance and operations which it has requested and the Purchaser has
reviewed all of such materials as the Purchaser, in the Purchaser’s sole and absolute discretion shall have deemed necessary
or desirable. The Purchaser has had an opportunity ask questions of and to discuss the business, management and financial affairs
of the Issuer with the Issuer's management. Specifically but not by way of limitation, the Purchaser acknowledges the Issuer’s
publicly available filings made periodically with the SEC, which filings are available at www.sec.gov and which filings the Purchaser
acknowledges reviewing or having had the opportunity of reviewing.
(g) The Purchaser acknowledges
that it has, by reason of its business and financial experience, knowledge, sophistication and experience in financial and business
matters and in making investment decisions of this type that it is capable of (i) evaluating the merits and risks of an investment
in the Securities and making an informed investment decision in connection therewith; (ii) protecting its own interest; and (iii)
bearing the economic risk of such investment for an indefinite period of time for Securities which are not transferable or freely
tradable. The undersigned hereby agrees to indemnify the Issuer thereof and to hold each of such persons and entities, and the
officers, directors and employees thereof harmless against all liability, costs or expenses (including reasonable attorneys’
fees) arising by reason of or in connection with any misrepresentation or any breach of warranties of the undersigned contained
in this Agreement, or arising as a result of the sale or distribution of the Securities or the Common Stock issuable upon conversion
of the Notes or exercise of the Warrants, by the undersigned in violation of the Securities Act, the Securities Exchange Act of
1934, as amended (the “Exchange Act”), or any other applicable law, either federal or state. This subscription and
the representations and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns
of the Purchaser.
(h) The Purchaser is
familiar with the definition of an "accredited investor" as that term is defined in Rule 501(a) of Regulation D of the
Securities Act and represents and warrants to the Issuer that it is either (i) an accredited investor at such time it was offered
the Securities and will be on each date which it converts any of the Notes or exercises any of the Warrants as so defined or (ii)
a “qualified institutional buyer” as defined in Rule 144A under the Securities Act. Such Purchaser is not required
to be registered as a broker-dealer under Section 15 of the Exchange act. If the Purchaser is not a resident of the United States,
the Purchaser is not a “U.S. person[s]” as that term is defined in Rule 902 of Regulation S promulgated under
the Securities Act of 1933, as amended.
(i) During the term of
this Agreement and the other Transaction Documents, the Purchaser will comply with the provisions of Section 9 of the Exchange
Act, and the rules and regulations promulgated thereunder, with respect to transactions involving the Common Stock. Commencing
on the date on which the Purchaser received a term sheet from the Company or any representative or agent of the Company (written
or oral) setting forth the material terms of the transactions contemplated hereunder until the date hereof and during the term
of this Agreement and the other Transaction Documents, the Purchaser agrees not to sell the Issuer's Common Stock short or engage
in any hedging transactions in the Issuer’s Common Stock, either directly or indirectly, through its affiliates, principals,
agents or advisors.
(j) The Purchaser is
aware that the Notes and the Warrants, and the shares of Common Stock issuable upon conversion of the Notes or exercise of the
Warrants are restricted securities as defined under federal securities laws and are not freely tradeable and may only be disposed
of in compliance with state and federal securities laws. In connection with any transfer of the Notes and the Warrants, and the
shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants, other than pursuant to an effective registration
statement or Rule 144, the Issuer may require the transferor thereof to provide to the Issuer an opinion of counsel, the form and
substance of which opinion shall be reasonably satisfactory to the Issuer, to the effect that such transfer does not require registration
of such transferred Securities under the Securities Act. Further, the Purchaser understands and acknowledges that any certificates
evidencing the Notes, the Warrants or the shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants
will be restricted securities and not freely tradeable and will bear the legend in substantially the following form:
THE SECURITIES EVIDENCED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES
LAWS (COLLECTIVELY, “SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED
FOR SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS
OF SUCH SECURITIES LAWS.
(k) The Purchaser understands
and acknowledges that following the purchase of the Notes, the Warrants and any shares of Common Stock issuable upon conversion
of the Notes or exercise of the Warrants, each may only be disposed of pursuant to either (i) an effective registration statement
under the Securities Act or (ii) an exemption from the registration requirements of the Securities Act.
(l) The Purchaser understands
and acknowledges that the Issuer has neither filed a registration statement with the SEC or any state authorities nor agreed to
do so, nor contemplates doing so in the future for the transactions contemplated by this Agreement or the other Transaction Documents,
and in the absence of such a registration statement or exemption, the undersigned may have to hold the Notes, the Warrants and
any shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants, indefinitely and may be unable to
liquidate any of them in case of an emergency.
(m) The Purchaser is
purchasing the Notes and Warrants, and will acquire any shares of Common Stock issuable upon conversion of the Notes or exercise
of the Warrants, for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise
dispose of any of the Notes or the Warrants, or any shares of Common Stock issuable upon conversion of the Notes or exercise of
the Warrants, in accordance with the registration provisions of the Securities Act (or pursuant to an exemption from such registration
provisions).
(n) The Purchaser is
not and will not be required to be registered as a "dealer" under the Exchange Act, either as a result of its execution
and performance of its obligations under this Agreement or otherwise.
(o) The Purchaser understands
and acknowledges that proceeds raised in connection with this Agreement will be used by Issuer for general working capital purposes,
including without limitation, the payment of salaries and professional fees, overhead and general administrative expenses.
(p) The Purchaser understands
that it is liable for its own tax liabilities and has obtained no tax advice from the Issuer in connection with the purchase of
the Securities.
(q) The Purchaser will
not pay or receive any finder’s fee or commission in respect of the consummation of the transactions contemplated by this
Agreement.
(r) Purchaser hereby
agrees and acknowledges that it has been informed of the following: (i) there are factors relating to the subsequent transfer of
any of the Securities or shares of Common Stock underlying the Notes and Warrants that could make the resale of such Securities
or shares of Common Stock underlying the Notes and Warrants difficult; and (ii) there is no guarantee that the Purchaser will realize
any gain from the purchase of the Securities. The purchase of the Securities involves a high degree of risk and is subject to many
uncertainties. These risks and uncertainties may adversely affect the Company’s business, operating results and financial
condition. In such an event, the trading price for the Common Stock could decline substantially and Purchaser could lose all or
part of its investment. Purchaser is urged to review the risks identified under the Risk Factors section of Issuer’s Form
10-K for the year ended December 31, 2013, as filed with the SEC on March 17, 2014.
(s) Purchaser understands
and acknowledges that the Notes have an implied annual interest rate of 10%, inasmuch as the Notes will be issued and paid in an
amount equal to 110% of the Commitment, except that if a Note is not paid on the Maturity Date, which is twelve (12) months from
the date of issue of the Note, then the balance of the unpaid amount of the Note shall be increased by 10% and the Issuer shall
then commence paying interest thereon at the rate of 10% per annum until all sums due under the Note are paid.
3. Issuer’s
Representations, Warranties and Covenants. The Issuer represents and warrants to the Purchaser that:
(a) The Issuer is a corporation
duly organized and validly existing in good standing under the laws of the State of Nevada, and has the requisite corporate power
and authorization to own its properties and to carry on its business as now being conducted.
(b) (i) The Issuer
has the requisite corporate power and authority to enter into and perform this Agreement, and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by the Transaction Documents, and to issue the Notes
and Warrants in accordance with the terms hereof and thereof.
(ii) the execution
and delivery of the Transaction Documents by the Issuer and the consummation by it of the transactions contemplated hereby and
thereby, including without limitation the reservation for issuance and the issuance of the Notes and Warrants pursuant to this
Agreement, have been duly and validly authorized by the Issuer's Board of Directors and no further consent or authorization is
required by the Issuer, its Board of Directors, or its shareholders.
(iii) The Transaction
Documents have been duly and validly executed and delivered by the Issuer.
(iv) The Transaction
Documents, and each of them, constitutes the valid and binding obligation of the Issuer enforceable against the Issuer in accordance
with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
(c) The execution, delivery
and performance of the Transaction Documents by the Issuer and the consummation by the Issuer of the transactions contemplated
thereby will not conflict with or constitute a default under any agreement or instrument to which the Issuer is a party or under
any organizational documents of the Purchaser.
4. Closing and
Deliverables.
(a) Subject to the provisions
of Section 4(b) below, provided that the Issuer shall have received on or prior to October 31, 2014, (but the Company has the option
to extend this date to November 30, 2014), copies of this Agreement executed by Purchaser, there shall be a closing or closings
(each, a “Closing Date”) at which:
(i) Purchaser shall
deliver to the Issuer immediately available funds, by check or by wire transfer (bank wiring instructions to be provided by Issuer
on request) in an amount equal to the amount of the Purchaser’s Commitment as set forth beside the name of the Purchaser
on the Purchaser’s signature page hereto. Funds paid to Issuer under this Agreement will be deposited in Issuer’s operating
account and used as working capital.
(ii) The Issuer shall
deliver to the Purchaser (x) a Note, in the face amount equal to 110% of the Purchaser’s Commitment and (y) a Warrant to
purchase the exercisable amount of the Issuer’s Common Stock at the Exercise Price. The Note and Warrant will be dated as
of the Closing Date, as such date may be extended by us.
(b) The Issuer may continue
to accept Commitments from Purchasers and issue and sell Securities to Purchasers at Closings on the terms and subject to the conditions
set forth in this Agreement until (i) the aggregate amount of the Commitments equals $5,000,000 or (ii) on or before October 31,
2014, but the Company has the option to extend this date to November 30, 2014, whichever shall first occur.
5. Miscellaneous.
(a). Each party shall
pay the fees and expenses of its own advisers, counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and performance of the Transactions Documents.
(b) This Agreement may
be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature
or signature transmitted by e-mail shall be considered due execution and shall be binding upon the signatory thereto with the same
force and effect as if the signature were an original signature.
(c) The headings of this
Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever
required by the context of this Agreement, the singular shall include the plural and neutral shall include the masculine and feminine.
(d) If any provision
of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision
of this Agreement in any other jurisdiction.
(e) This Agreement and
the Notes and Warrants represent the final agreement between the Purchasers and the Issuer with respect to the terms and conditions
set forth herein, and, the terms of this Agreement and the Notes and Warrants may not be contradicted by evidence of prior, contemporaneous,
or subsequent oral agreements of the parties. No provision of this Agreement and the Notes and Warrants may be amended other than
by an instrument in writing signed by the Purchaser and the Issuer, and no provision hereof or thereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is sought.
(f) Any notices or other
communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have
been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit
with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
If to the Issuer:
Save the World Air, Inc.
735 State Street, Suite 500
Santa Barbara, CA 93101
Telephone: 805-845-3581
Facsimile: 805-845-4377
If to a Purchaser:
To the address set forth on the Purchaser’s
signature page hereto.
Each party shall provide five (5) days
prior written notice to the other party of any change in address or facsimile number.
(g) This Agreement may
not be assigned by Purchaser.
(h) This Agreement is
intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
(i) The representations
and warranties of the Purchaser and the Issuer contained herein shall survive each of the Closings and the termination of this
Agreement and the other Transaction Documents.
(j) The Purchaser and
the Issuer shall consult with each other in issuing any press releases or otherwise making public statements with respect to the
transactions contemplated hereby, except that no consultation shall be required if such disclosure is required by law or the rules
and regulations of the SEC.
(k). Each party shall
do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent
and accomplish the purposes of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated
hereby and thereby.
(l) The language used
in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party, as the parties mutually agree that each has had a full and fair opportunity to
review this Agreement and the other Transaction Documents and seek the advice of counsel on it and them.
(m) The Purchaser and
the Issuer each shall have all rights and remedies set forth in this Agreement and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which the Purchaser has by law. Any person
having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any default or breach of any provision of this Agreement, including
the recovery of reasonable attorneys’ fees and costs, and to exercise all other rights granted by law.
(n) This Agreement shall
be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed
wholly within such state.
[remainder of page intentionally left
blank]
IN WITNESS WHEREOF
the Purchasers and the Issuer have executed this Agreement as of the date first above written.
THE ISSUER
SAVE THE WORLD AIR, INC.
By: /s/ Greggory Bigger
Greggory
Bigger
Its: Chief Executive Officer
THE PURCHASER
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CONVERTIBLE NOTE
THE SECURITIES EVIDENCED BY THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS
(COLLECTIVELY, “SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED
FOR SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS
OF SUCH SECURITIES LAWS.
$____________ |
____________, 2014 (“Issuance Date”) |
FOR VALUE RECEIVED,
SAVE THE WORLD AIR, INC., a corporation organized under the laws of the State of Nevada (the “Company”), promises
to pay to the order of “Investor”, as that term is defined on the Acknowledgement and Acceptance page of this Convertible
Note (“Note”) (hereafter, together with any subsequent holder hereof, called “Holder”), at “Investor’s
Address”, as that term is set forth on such page or at such other place as Holder may direct, the amount noted above, payable
in full Twelve (12) Months from the Issuance Date (the “Maturity Date”).
If this Note is not
paid in full on or prior to the Maturity Date the remaining balance shall be increased by 10% and the Company shall pay interest
thereon at the rate of 10% per annum until all sums due hereunder are paid in full.
Payments of both principal
and interest will be made in immediately available funds in lawful money of the United States of America to the Holder at the Investor’s
Address.
The Note is subject
to the following additional provisions:
1. The Company shall
be entitled to withhold from all payments of principal and/or interest of this Note any amounts required to be withheld under the
applicable provisions of the U.S. Internal Revenue Code of 1986, as amended, or other applicable laws at the time of such payments.
2. This Note has
been issued subject to representations, warranties and covenants of the original Holder hereof as contained in that certain Securities
Purchase Agreement (“Agreement”) of even date herewith, and may be transferred or exchanged only in compliance with
the Securities Act of 1933, as amended, and applicable state and other securities laws. Prior to the due presentment for such transfer
of this Note, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Company's
Note register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not
this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. The transferee shall
be bound, as the original Holder by the same representations and terms described herein and under the Agreement.
3. The Holder
may, at such Holder’s option, at any time while any sums are outstanding and unpaid hereunder, convert the then-outstanding
principal amount of this Note or any portion thereof, and any interest and any penalties accrued and unpaid thereon (the “Conversion
Amount”), into a number shares of fully paid and nonassessable Common Stock of the Company (the “Conversion Shares”)
pursuant to the following formula: the Conversion Amount divided by $0.48 (the “Conversion Price”). The Holder may
exercise the right to convert all or any portion of the Conversion Amount by delivering to the Company (i) an executed and completed
notice of conversion in the form attached to this Note (the "Notice of Conversion") to the Company and (ii) this Note.
The business day on which a Notice of Conversion and this Note are delivered to the Company in accordance with the provisions hereof
shall be deemed a "Conversion Date". The Company will transmit the certificates representing Conversion Shares issuable
upon such conversion of this Note (together with the certificates representing the amount of this Note not so converted) to the
Holder via express courier within ten Business Days after the Conversion Date. No fractional shares shall be issued upon conversion
of this Note. The amount of any of the Conversion Amount which is less than a whole share of Common Stock shall be paid to the
Holder in cash. Any delay due to such circumstance shall not be an event of default under this Note.
4. The principal amount
of this Note, and any accrued interest thereon, shall be reduced as per that principal amount indicated on the Notice of Conversion
upon the proper receipt by the Holder of such Conversion Shares due upon such Notice of Conversion.
5. The number
of Conversion Shares shall be adjusted as follows:
a. If the Company
shall at any time after the Issuance Date subdivide its outstanding shares of Common Stock into a greater number of shares of Common
Stock, the number of Conversion Shares in effect immediately prior to such subdivision shall be proportionately increased, and
conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the
Conversion Price in effect immediately prior to such combination shall be proportionately reduced.
b. If the Company
shall at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each
such event the number of Conversion Shares issuable upon conversion of this Note shall be proportionately increased; provided,
however, that if such record date is fixed and such dividend is not fully paid, or if such distribution is not fully made on the
date fixed therefor, the number of Conversion Shares shall be recomputed to reflect that such dividend was not fully paid or that
such distribution was not fully made.
c. If Company at any
time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of Company other than shares of Common Stock, then
and in each such event provision shall be made so that Holder shall receive upon exercise of the conversion right of this Note,
in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of Company which Holder would
have received had the Conversion Amount of this Note been exercised on the date of such event and had it thereafter, during the
period from the date of such event to and including the date of conversion or purchase, retained such securities receivable during
such period.
d. If the Common Stock
issuable upon the conversion of this Note or option to purchase is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a transaction described elsewhere
in Section 5 of this Note), then, and in any such event, each Holder shall have the right thereafter, upon conversion of this Note
or purchase pursuant to option to receive the kind and amount of stock and other securities and property receivable upon such reorganization
or other change, in an amount equal to the amount that Holder would have been entitled to had it immediately prior to such reorganization,
reclassification or change converted this Note, but only to the extent this Note is actually converted, all subject to further
adjustment as provided herein.
6. No provision
of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, upon an Event of Default
(as defined below), to pay the principal of, and interest on this Note at the place, time, and rate, and in the coin or currency
herein prescribed.
a. Events of Default.
Each of the following occurrences is hereby defined as an “Event of Default”:
Nonpayment.
The Company shall fail to make any payment of principal, interest, or other amounts payable hereunder when and as due; or
Dissolutions,
etc. The Company or any subsidiary shall fail to comply with any provision concerning its existence or any prohibition against
dissolution, liquidation, merger, consolidation or sale of assets; or
Noncompliance
with this Agreement. The Company shall fail to comply in any material respect with any provision hereof, which failure does
not otherwise constitute an Event of Default; or
Insolvency.
The institution of bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or against Company, which proceedings shall not have
been vacated by appropriate court order within sixty (60) days of such institution.
If one or
more "Events of Default" shall occur, then, or at any time thereafter, and in each and every such case, unless such Event
of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default)
or cured as provided herein, at the option of the Holder, and in the Holder's sole discretion, the Holder may elect to consider
this Note (and all interest through such date) immediately due and payable. In order to so elect, the Holder must deliver written
notice of the election and the amount due to the Company via certified mail, return receipt requested, at the Company’s address
as set forth herein (or any other address provided to the Holder), and thereafter the Company shall have thirty (30) business days
upon receipt to cure the Event of Default or pay this Note, or convert the amount due on the Note pursuant to the conversion formula
set forth above.
7. In case any
provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable,
such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and
the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.
8. This Note does not
entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company prior to the conversion into Common
Stock thereof, except as provided by applicable law. If, however, at the time of the surrender of this Note and conversion the
Holder hereof shall be entitled to convert this Note, the Conversion Shares so issued shall be and be deemed to be issued to such
holder as the record owner of such shares as of the close of business on the Conversion Date.
9. The Holder shall
pay all issue and transfer taxes and other incidental expenses in respect of the issuance of certificates for Conversion Shares
upon the conversion of this Note, and such certificates shall be issued in the name of the Holder of this Note.
10. This Note may be
prepaid in whole or in part at any time or from time to time without premium or penalty upon 10 days’ prior written notice
from the Company to the Holder.
11. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and in case of
loss, theft or destruction of this Note, upon delivery of an indemnity agreement or security reasonably satisfactory in form and
amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Note, and upon reimbursement
to the Company of all reasonable expenses incidental thereto, the Company will make and deliver to the Holder, in lieu thereof,
a new Note in substantially identical form.
12. If the last
or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or
a Sunday or shall be a legal holiday in the United States or the State of California, then such action may be taken or such right
may be exercised on the next succeeding business day.
13. (a) This
Note shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made
and to be performed wholly within such state.
(b) Except as
otherwise provided herein, any notice or demand which, by the provisions hereof, is required or which may be given to or served
upon the parties hereto shall be in writing and, if by telegram, telecopy or telex, shall be deemed to have been validly served,
given or delivered when sent, if by personal delivery, shall be deemed to have been validly served, given or delivered upon actual
delivery and, if mailed, shall be deemed to have been validly served, given or delivered three (3) business days after deposit
in the United States mails, as registered or certified mail, with proper postage prepaid and addressed to the party or parties
to be notified.
(c) The Holder
acknowledges that the Conversion Shares acquired upon the exercise of this Note will have restrictions upon its resale
imposed by state and federal securities laws.
(d) With regard to
any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall
be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment
shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence.
(e) This Note may
not be amended, altered or modified except by a writing signed by the Company and the Holder.
IN WITNESS WHEREOF, the Company has caused
this Convertible Note to be duly executed by an officer thereunto duly authorized.
SAVE THE WORLD AIR, INC.
735 State Street, Suite 500
Santa Barbara, California 93101
By /s/ Greggory Bigger
Name: Greggory Bigger
Title: Chief Executive Officer
ACKNOWLEDGED
AND ACCEPTED:
_______________________________
Investor Name (Signature)
_______________________________
Print Name
_______________________________
_______________________________
Investor Address
NOTICE OF EXERCISE OF CONVERSION RIGHT
TO: SAVE THE WORLD AIR, INC.
(1) The undersigned hereby elects to
convert $______________ of the attached Note into ______________ shares of Common Stock (the "Shares") of Save the World
Air, Inc. (“Company”) pursuant to the terms of the attached Note.
(2) Please issue a certificate or certificates
representing the Shares in the name of the undersigned or in such other name as is specified below:
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_______________________________________________
(Print Name)
Address:
_______________________________________________
_______________________________________________
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(3) The undersigned confirms that the
Shares are being acquired for the account of the undersigned for investment only and not with a view to, or for resale in connection
with, the distribution thereof and that the undersigned has no present intention of distributing or selling the Shares.
(4) The undersigned accepts such shares
subject to the restrictions on transfer and other terms and conditions set forth in the attached Note and set forth in that certain
Securities Purchase Agreement between the Company and the undersigned dated as of the date of the attached Note.
__________________________
(Date) |
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(Signature) |
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(Print Name) |
STOCK PURCHASE WARRANT
THIS WARRANT AND ANY SHARES ISSUED
UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION
OF ANY SHARES ISSUED UPON EXERCISE HEREOF MAY BE AFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. THE TRANSFER
OF THIS WARRANT IS RESTRICTED AS SET FORTH HEREIN.
No. _____ |
_______________, 2014 |
SAVE THE WORLD AIR, INC.
WARRANT TO PURCHASE COMMON STOCK
VOID AFTER 5:00 P.M. P.S.T. ON ___________,
20___
THIS CERTIFIES that,
for the value received, the holder identified on the last page of this Warrant (the "Holder") is entitled, upon the terms
and subject to the conditions hereinafter set forth, at any time on or after the date of this Warrant and on or prior to 5:00 p.m.
P.S.T. on the first anniversary of the date of this Warrant (the "Expiration Time"), but not thereafter, to subscribe
for and purchase, from SAVE THE WORLD AIR, INC., a Nevada corporation (the "Company"), up to _________ shares of the
Company's Common Stock (the "Shares") at a purchase price per share equal to $0.48 (the "Exercise Price").
1. Exercise
of Warrant.
(a) The purchase rights
represented by this Warrant are exercisable by the Holder, in whole or in part, at any time after the date of this Warrant and
before the Expiration Time by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed at the office
of the Company, in Santa Barbara, California (or such other office or agency of the Company as it may designate by notice in writing
to the Holder at the address of the Holder appearing on the books of the Company), and upon payment of an amount equal to the aggregate
Exercise Price for the number of Shares thereby purchased (by cash or by check or certified bank check payable to the order of
the Company in an amount equal to the purchase price of the shares thereby purchased); whereupon the Holder shall be entitled to
receive a stock certificate representing the number of Shares so purchased. The Company agrees that if at the time of the surrender
of this Warrant and purchase of the Shares, the Holder shall be entitled to exercise this Warrant, the Shares so purchased shall
be and be deemed to be issued to such holder as the record owner of such Shares as of the close of business on the date on which
this Warrant shall have been exercised as aforesaid.
Upon partial exercise
of this Warrant, the Holder shall be entitled to receive from the Company a new Warrant in substantially identical form for the
purchase of that number of Shares as to which this Warrant shall not have been exercised. Certificates for Shares purchased hereunder
shall be delivered to the Holder within a reasonable time after the date on which this Warrant shall have been exercised as aforesaid.
2. No Fractional
Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.
With respect to any fraction of a share called for upon the exercise of this Warrant, an amount equal to such fraction multiplied
by the then current fair market value at which each Share may be purchased hereunder shall be paid in cash to the Holder.
(a) For purposes of this
Section 2, the fair market value of the Shares shall mean the closing price of a share of the Company's Common Stock on the OTC
Bulletin Board on which the Common Stock is listed at the time of exercise on the last business day prior to the date of exercise
of this Warrant pursuant to Section l or, if the Company's Common Stock is not then listed or quoted on the OTC Bulletin Board,
the closing price of the Company’s Common Stock as reported on the “Pink Sheets” published by the Pink OTC Markets,
Inc. (or a similar organization or agency succeeding to its functions of reporting prices) or in all other cases, the fair market
value of the Common Stock (without regard to the restrictions on transfer or number of Shares) as determined in good faith by the
Company's Board of Directors.
3. Charges, Taxes
and Expenses. The Holder shall pay all issue and transfer taxes and other incidental expenses in respect of the issuance of
certificates for Shares upon the exercise of this Warrant, and such certificates shall be issued in the name of the Holder of this
Warrant.
4. No Rights as
a Stockholder. This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company
prior to the exercise hereof.
5. Loss, Theft,
Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or destruction of this Warrant, upon delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender
and cancellation of such Warrant, and upon reimbursement to the Company of all reasonable expenses incidental thereto, the Company
will make and deliver to the Holder, in lieu thereof, a new Warrant in substantially identical form and dated as of such cancellation.
6. Saturdays,
Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the United States or the State of California, then
such action may be taken or such right may be exercised on the next succeeding business.
7. Merger, Reclassification,
etc.
(a) Merger, etc.
If at any time the Company proposes (A) the acquisition of the Company by another entity by means of any transaction or series
of related transactions (including, without limitation, any reorganization, merger, consolidation or stock issuance) that results
in the transfer of fifty percent (50%) or more of the then outstanding voting power of the Company; or (B) a sale of all or substantially
all of the assets of the Company, then the Company shall give the Holder ten (10) days notice of the proposed effective date of
the transaction. If, in the case of such acquisition of the Company, and the Warrant has not been exercised by the effective date
of the transaction, this Warrant shall be exercisable into the kind and number of shares of stock or other securities or property
of the Company or of the entity resulting from such merger or acquisition to which such Holder would have been entitled if immediately
prior to such acquisition or merger, it had exercised this Warrant. The provisions of this Section 7(a) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) Reclassification,
etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any
of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class
or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result
of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to
such subdivision, combination, reclassification or other change. If the Shares are subdivided or combined into a greater or smaller
number of Shares, the Exercise Price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately
increased in the case of combination of shares, in both cases by the ratio which the total number of Shares to be outstanding immediately
after such event bears to the total number of Shares outstanding immediately prior to such event.
(c) Cash Distributions.
No adjustment on account of cash dividends or interest on the Shares or other securities purchasable hereunder will be made to
the Exercise Price under this Warrant.
8. Restrictions
on Transfer.
(a) Restrictions on
Transfer of Shares. In no event will the Holder make a disposition of this Warrant or the Shares unless and until, if requested
by the Company, it shall have furnished the Company with an opinion of counsel satisfactory to the Company and its counsel to the
effect that appropriate action necessary for compliance with the Securities Act of 1933, as amended (the "Act") relating
to sale of an unregistered security has been taken. Notwithstanding the foregoing, the restrictions imposed upon the transferability
of the Shares shall terminate as to any particular Share when (i) such security shall have been sold without registration in compliance
with Rule 144 under the Act, or (ii) a letter shall have been issued to the Holder at its request by the staff of the Securities
and Exchange Commission or a ruling shall have been issued to the Holder at its request by such Commission stating that no action
shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration
under the Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no
subsequent restrictions on transfer are required, or (iii) such security shall have been registered under the Act and sold by the
Holder thereof in accordance with such registration.
(b) Subject to the provisions
of Section 8(a) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of the Warrant
with a properly executed assignment at the principal office of the Company.
(c) Restrictive Legends.
The stock certificates representing the Shares and any securities of the Company issued with respect thereto shall be imprinted
with legends restricting transfer except in compliance with the terms hereof and with applicable federal and state securities laws
substantially as follows:
“THE SHARES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY
TO THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT”.
9. Miscellaneous.
(a) Governing Law.
This Warrant shall be governed by and construed in accordance with the laws of the State of California applicable to contracts
made and to be performed wholly within such state.
(b) Restrictions.
The Holder acknowledges that the Shares acquired upon the exercise of this Warrant may have restrictions upon its resale imposed
by state and federal securities laws.
(c) Waivers Strictly
Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver
or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration,
modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise,
or other indulgence.
(d) Modifications.
This Warrant may not be amended, altered or modified except by a writing signed by the Company and the Holder of this Warrant.
IN WITNESS WHEREOF,
SAVE THE WORLD AIR, INC. has caused this Warrant to be executed by its duly authorized representative dated as of the date first
set forth above.
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SAVE THE WORLD AIR, INC.
735 State Street, Suite 500
Santa Barbara, California 93101
By: /s/ Greggory Bigger
Name: Greggory Bigger
Title: Chief Executive Officer |
NOTICE OF EXERCISE
TO: SAVE THE WORLD AIR, INC., a Nevada
corporation
(1) The undersigned
hereby elects to purchase ______________ shares of Common Stock (the "Shares") of Save the World Air, Inc. (“Issuer”)
pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable
transfer taxes, if any.
(2) Please issue
a certificate or certificates representing the Shares in the name of the undersigned or in such other name as is specified below:
_______________________________________________
(Print Name)
Address:
_______________________________________________
_______________________________________________
_______________________________________________
(3) The undersigned
confirms that he is an “accredited investor” as defined by Rule 501(a) under the Securities Act of 1933, as amended,
at the time of execution of this Notice.
(4) The undersigned
confirms that the Shares are being acquired for the account of the undersigned for investment only and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or selling
the Shares.
(5) The undersigned
accepts such Shares subject to the restrictions on transfer set forth in the attached Warrant.
(6) The undersigned
acknowledges that the Issuer has given it access to all information relating to the Issuer’s business that the undersigned
has requested. The undersigned has reviewed all materials relating to the Issuer’s business, financial condition and operations
which it has requested and the undersigned has reviewed all of such materials as the undersigned, in the undersigned’s sole
and absolute discretion has deemed necessary or desirable. The undersigned has had an opportunity to ask questions of and discuss
the business, management and financial affairs of the Issuer with the Issuer’s management. Specifically but not by way of
limitation, the undersigned acknowledges the Issuer’s publicly available filings made periodically with the SEC, which filings
are available at www.sec.gov and which filings the undersigned acknowledges reviewing or having had the opportunity of reviewing.
(7) The undersigned
acknowledges that it has, by reason of its business and financial experience, such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of this type that it is capable of (i) evaluating the merits
and risks of an investment in the Shares and making an informed investment decision in connection therewith; (ii) protecting its
own interest; and (iii) bearing the economic risk of such investment for an indefinite period of time for shares which are not
transferable or freely tradable. The undersigned hereby agrees to indemnify the Issuer and the officers, directors and employees
thereof harmless against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason of or
in connection with any misrepresentation or any breach of warranties or representations of the undersigned contained in this Notice,
or arising as a result of the sale or distribution of the Shares issuable upon exercise of the Warrants. The representations
and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned.
__________________________
(Date) |
__________________________
(Signature) |
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(Print Name) |
Exhibit 10.118
SECURITIES PURCHASE AGREEMENT
Convertible Promissory Notes and
Stock Purchase Warrants
THIS SECURITIES PURCHASE
AGREEMENT (this “Agreement”) is made and entered into as of the ___________ _____, 2015, by and between Save the World
Air, Inc., a Nevada corporation (the “Issuer”) and those individuals and entities who sign and deliver an executed
copy of this Agreement to the Issuer (each, a “Purchaser” and collectively, the “Purchasers”), with reference
to the following:
RECITALS
A. Purchasers desire
to purchase from Issuer and Issuer desires to sell to Purchaser certain of Issuer’s Convertible Notes, in the aggregate face
amount up to a maximum of Five Million Dollars ($5,000,000), in the form of Exhibit A attached hereto (individually, a “Note”
and collectively, the “Notes”), and certain of Issuer’s Stock Purchase Warrants to purchase up to a certain number
of shares of the common stock (the “Common Stock”) of the Issuer equal to 50% of the number of shares initially issuable
on conversion of the Notes, in the form of Exhibit B attached hereto (individually, the “Warrants” and collectively
with the Notes, the “Securities”). The face amount of the Note each Purchaser has committed to purchase, and the amount
of the purchase price thereof to be paid to the Issuer by the Purchaser (a “Commitment”) is listed on the signature
page the Purchaser executes and delivers to the Issuer. Minimum Commitment shall be no less than $50,000.
B. Issuer’s
sale of the Securities to the Purchasers may be made in reliance upon the provisions of Section 4(a)(2) under the Securities Act
of 1933, as amended (the "Securities Act"), or Rule 506 of Regulation D promulgated by the Securities and Exchange Commission
(the ”SEC”) thereunder, or other applicable rules and regulations of the SEC or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect to the transactions contemplated hereby.
C. At any time when
any amount of principal or interest of the Notes shall be outstanding, such unpaid amounts shall be convertible, at the election
of the Purchaser, into shares of the Issuer’s Common Stock at a price of $0.30 per share (the “Conversion Price”).
D. The Warrants
shall be issued at the same time each Note is issued to the Purchaser hereunder and shall be exercisable at $0.30 per share (the
“Exercise Price”), for such number of shares equal to 50% of the result obtained by dividing (i) the face amount of
the Notes issued simultaneously with the Warrant by (ii) the Conversion Price. The Warrants shall expire one (1) year from the
date of issuance thereof.
AGREEMENT
NOW THEREFORE, in consideration
of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth
hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Purchasers
and the Issuer hereby agree as follows
1. Purchase of
the Notes and Warrants. On the terms and subject to the conditions set forth in this Agreement and in the Notes and Warrants,
the Purchasers shall purchase from the Issuer and the Issuer shall sell to the Purchaser the Securities.
2. Purchaser’s
Representations, Warranties and Covenants. In order to induce the Issuer to sell and issue the Securities to the Purchaser
under one or more exemptions from registration under the Securities Act, the Purchasers, severally and not jointly, represent and
warrant to the Issuer, and covenant with the Issuer, that:
(a) (i) Such Purchaser
has the requisite power and authority to enter into and perform this Agreement, and each of the other agreements entered into by
the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "Transaction Documents"),
and to purchase the Securities in accordance with the terms hereof and thereof.
(ii) The execution
and delivery of the Transaction Documents by the Purchaser and the consummation by it of the transactions contemplated thereby
have been duly and validly authorized by the Purchaser's organizational documents and no further consent or authorization is required
by the Purchaser.
(iii) The Transaction
Documents have been duly and validly executed and delivered by the Purchaser.
(iv) The Transaction
Documents, and each of them, constitutes the valid and binding obligation of the Purchaser enforceable against the Purchaser in
accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement
of creditors' rights and remedies.
(b) The execution, delivery
and performance of the Transaction Documents by the Purchaser and the consummation by the Purchaser of the transactions contemplated
thereby will not conflict with or constitute a default under any agreement or instrument to which the Purchaser is a party or by
which the Purchaser is bound.
(c) The Purchaser is
acquiring the Securities for investment for its own account, and not with a view toward distribution thereof, and with no present
intention of dividing its interest with others or reselling or otherwise transferring or disposing of all or any portion of either
the Notes or Warrants. The undersigned has not offered or sold a participation in this purchase of either the Notes or Warrants,
and will not offer or sell any interest therein. The Purchaser further acknowledges that the Purchaser does not have in mind any
sale of either the Notes or Warrants currently or after the passage of a fixed or determinable period of time or upon the occurrence
or non-occurrence of any predetermined events or consequence; and that it has no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment providing for or which is likely to compel a disposition of either the Notes
or Warrants and is not aware of any circumstances presently in existence that are likely in the future to prompt a disposition
thereof.
(e) The Purchaser acknowledges
that the Securities have been offered to it in direct communication between itself and the Issuer and not through any advertisement,
article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or on the
Internet or broadcast over television or radio or presented in any seminar or any other general solicitation or general advertisement.
(f) The Purchaser acknowledges
that the Issuer has given it access to all information relating to the Issuer’s business that it has requested. The Purchaser
has reviewed all materials relating to the Issuer's business, finance and operations which it has requested and the Purchaser has
reviewed all of such materials as the Purchaser, in the Purchaser’s sole and absolute discretion shall have deemed necessary
or desirable. The Purchaser has had an opportunity to ask questions of and to discuss the business, management and financial affairs
of the Issuer with the Issuer's management. Specifically but not by way of limitation, the Purchaser acknowledges the Issuer’s
publicly available filings made periodically with the SEC, which filings are available at www.sec.gov and which filings the Purchaser
acknowledges reviewing or having had the opportunity of reviewing.
(g) The Purchaser acknowledges
that it has, by reason of its business and financial experience, knowledge, sophistication and experience in financial and business
matters and in making investment decisions of this type that it is capable of (i) evaluating the merits and risks of an investment
in the Securities and making an informed investment decision in connection therewith; (ii) protecting its own interest; and (iii)
bearing the economic risk of such investment for an indefinite period of time for Securities which are not transferable or freely
tradable. The undersigned hereby agrees to indemnify the Issuer thereof and to hold each of such persons and entities, and the
officers, directors and employees thereof harmless against all liability, costs or expenses (including reasonable attorneys’
fees) arising by reason of or in connection with any misrepresentation or any breach of warranties of the undersigned contained
in this Agreement, or arising as a result of the sale or distribution of the Securities or the Common Stock issuable upon conversion
of the Notes or exercise of the Warrants, by the undersigned in violation of the Securities Act, the Securities Exchange Act of
1934, as amended (the “Exchange Act”), or any other applicable law, either federal or state. This subscription and
the representations and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns
of the Purchaser.
(h) The Purchaser is
familiar with the definition of an "accredited investor" as that term is defined in Rule 501(a) of Regulation D of the
Securities Act and represents and warrants to the Issuer that it is either (i) an accredited investor at such time it was offered
the Securities and will be on each date which it converts any of the Notes or exercises any of the Warrants as so defined or (ii)
a “qualified institutional buyer” as defined in Rule 144A under the Securities Act. Such Purchaser is not required
to be registered as a broker-dealer under Section 15 of the Exchange act. If the Purchaser is not a resident of the United States,
the Purchaser is not a “U.S. person[s]” as that term is defined in Rule 902 of Regulation S promulgated under
the Securities Act of 1933, as amended.
(i) During the term of
this Agreement and the other Transaction Documents, the Purchaser will comply with the provisions of Section 9 of the Exchange
Act, and the rules and regulations promulgated thereunder, with respect to transactions involving the Common Stock. Commencing
on the date on which the Purchaser received a term sheet from the Company or any representative or agent of the Company (written
or oral) setting forth the material terms of the transactions contemplated hereunder until the date hereof and during the term
of this Agreement and the other Transaction Documents, the Purchaser agrees not to sell the Issuer's Common Stock short or engage
in any hedging transactions in the Issuer’s Common Stock, either directly or indirectly, through its affiliates, principals,
agents or advisors.
(j) The Purchaser is
aware that the Notes and the Warrants, and the shares of Common Stock issuable upon conversion of the Notes or exercise of the
Warrants are restricted securities as defined under federal securities laws and are not freely tradeable and may only be disposed
of in compliance with state and federal securities laws. In connection with any transfer of the Notes and the Warrants, and the
shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants, other than pursuant to an effective registration
statement, the Issuer may require the transferor thereof to provide to the Issuer an opinion of counsel, the form and substance
of which opinion shall be reasonably satisfactory to the Issuer, to the effect that such transfer does not require registration
of such transferred Securities or Common Stock issuable thereunder, under the Securities Act. Further, the Purchaser understands
and acknowledges that any certificates evidencing the Notes, the Warrants or the shares of Common Stock issuable upon conversion
of the Notes or exercise of the Warrants will be restricted securities and not freely tradeable and will bear the legend in substantially
the following form:
THE SECURITIES EVIDENCED BY
THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES
LAWS (COLLECTIVELY, “SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED
FOR SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS
OF SUCH SECURITIES LAWS.
(k) The Purchaser understands
and acknowledges that following the purchase of the Notes, the Warrants and any shares of Common Stock issuable upon conversion
of the Notes or exercise of the Warrants, each may only be disposed of pursuant to either (i) an effective registration statement
under the Securities Act or (ii) an exemption from the registration requirements of the Securities Act.
(l) The Purchaser understands
and acknowledges that the Issuer has neither filed a registration statement with the SEC or any state authorities nor agreed to
do so, nor contemplates doing so in the future for the transactions contemplated by this Agreement or the other Transaction Documents,
and in the absence of such a registration statement or exemption, the undersigned may have to hold the Notes, the Warrants and
any shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants, indefinitely and may be unable to
liquidate any of them in case of an emergency.
(m) The Purchaser is
purchasing the Notes and Warrants, and will acquire any shares of Common Stock issuable upon conversion of the Notes or exercise
of the Warrants, for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise
dispose of any of the Notes or the Warrants, or any shares of Common Stock issuable upon conversion of the Notes or exercise of
the Warrants, in accordance with the registration provisions of the Securities Act (or pursuant to an exemption from such registration
provisions).
(n) The Purchaser is
not and will not be required to be registered as a "dealer" under the Exchange Act, either as a result of its execution
and performance of its obligations under this Agreement or otherwise.
(o) The Purchaser understands
and acknowledges that proceeds raised in connection with this Agreement will be used by Issuer for general working capital purposes,
including without limitation, the payment of salaries and professional fees, overhead and general administrative expenses.
(p) The Purchaser understands
that it is liable for its own tax liabilities and has obtained no tax advice from the Issuer in connection with the purchase of
the Securities.
(q) The Purchaser will
not pay or receive any finder’s fee or commission in respect of the consummation of the transactions contemplated by this
Agreement.
(r) Purchaser hereby
agrees and acknowledges that it has been informed of the following: (i) there are factors relating to the subsequent transfer of
any of the Securities or shares of Common Stock underlying the Notes and Warrants that could make the resale of such Securities
or shares of Common Stock underlying the Notes and Warrants difficult; and (ii) there is no guarantee that the Purchaser will realize
any gain from the purchase of the Securities. The purchase of the Securities involves a high degree of risk and is subject to many
uncertainties. These risks and uncertainties may adversely affect the Company’s business, operating results and financial
condition. In such an event, the trading price for the Common Stock could decline substantially and Purchaser could lose all or
part of its investment. Purchaser is urged to review the risks identified under the Risk Factors section of Issuer’s Form
10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015.
(s) Purchaser understands
and acknowledges that the Notes have an implied annual interest rate of 10%, inasmuch as the Notes will be issued and paid in an
amount equal to 110% of the Commitment, except that if a Note is not paid on the Maturity Date, which is twelve (12) months from
the date of issue of the Note, then the balance of the unpaid amount of the Note shall be increased by 10% and the Issuer shall
then commence paying interest thereon at the rate of 10% per annum until all sums due under the Note are paid.
3. Issuer’s
Representations, Warranties and Covenants. The Issuer represents and warrants to the Purchaser that:
(a) The Issuer is a corporation
duly organized and validly existing in good standing under the laws of the State of Nevada, and has the requisite corporate power
and authorization to own its properties and to carry on its business as now being conducted.
(b) (i) The Issuer
has the requisite corporate power and authority to enter into and perform this Agreement, and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by the Transaction Documents, and to issue the Notes
and Warrants in accordance with the terms hereof and thereof.
(ii) the execution
and delivery of the Transaction Documents by the Issuer and the consummation by it of the transactions contemplated hereby and
thereby, including without limitation the reservation for issuance and the issuance of the Notes and Warrants pursuant to this
Agreement, have been duly and validly authorized and/or ratified by the Issuer's Board of Directors and no further consent or authorization
is required by the Issuer, its Board of Directors, or its shareholders.
(iii) The Transaction
Documents have been duly and validly executed and delivered by the Issuer.
(iv) The Transaction
Documents, and each of them, constitutes the valid and binding obligation of the Issuer enforceable against the Issuer in accordance
with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
(c) The execution, delivery
and performance of the Transaction Documents by the Issuer and the consummation by the Issuer of the transactions contemplated
thereby will not conflict with or constitute a default under any agreement or instrument to which the Issuer is a party or under
any organizational documents of the Purchaser.
4. Closing and
Deliverables.
(a) Subject to the provisions
of Section 4(b) below, provided that the Issuer shall have received on or prior to July 31, 2015, (but the Company has the option
to extend this date to August 30, 2015), copies of this Agreement executed by Purchaser, there shall be a closing or closings for
each individual Purchaser (each, a “Closing Date”) at which:
(i) Purchaser shall
deliver to the Issuer immediately available funds, by check or by wire transfer (bank wiring instructions to be provided by Issuer
on request) in an amount equal to the amount of the Purchaser’s Commitment as set forth beside the name of the Purchaser
on the Purchaser’s signature page hereto. Funds paid to Issuer under this Agreement will be deposited in Issuer’s operating
account and used as working capital.
(ii) The Issuer shall
deliver to the Purchaser (x) a Note, in the face amount equal to 110% of the Purchaser’s Commitment and (y) a Warrant to
purchase the exercisable amount of the Issuer’s Common Stock at the Exercise Price. The Note and Warrant will be dated as
of the Closing Date.
(b) The Issuer may continue
to accept Commitments from Purchasers and issue and sell Securities to Purchasers at Closings on the terms and subject to the conditions
set forth in this Agreement until (i) the aggregate amount of the Commitments equals $5,000,000 or (ii) on or before July 31, 2015,
but the Company has the option to extend this date to August 30, 2015, whichever shall first occur.
5. Miscellaneous.
(a). Each party shall
pay the fees and expenses of its own advisers, counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and performance of the Transactions Documents.
(b) This Agreement may
be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature
or signature transmitted by e-mail shall be considered due execution and shall be binding upon the signatory thereto with the same
force and effect as if the signature were an original signature.
(c) The headings of this
Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever
required by the context of this Agreement, the singular shall include the plural and neutral shall include the masculine and feminine.
(d) If any provision
of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision
of this Agreement in any other jurisdiction.
(e) This Agreement and
the Notes and Warrants represent the final agreement between the Purchasers and the Issuer with respect to the terms and conditions
set forth herein, and, the terms of this Agreement and the Notes and Warrants may not be contradicted by evidence of prior, contemporaneous,
or subsequent oral agreements of the parties. No provision of this Agreement and the Notes and Warrants may be amended other than
by an instrument in writing signed by the Purchaser and the Issuer, and no provision hereof or thereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is sought.
(f) Any notices or other
communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have
been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit
with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
If to the Issuer:
Save the World Air, Inc.
735 State Street, Suite 500
Santa Barbara, CA 93101
Telephone: 805-845-3581
Facsimile: 805-845-4377
If to a Purchaser:
To the address set forth on the Purchaser’s
signature page hereto.
Each party shall provide five (5) days
prior written notice to the other party of any change in address or facsimile number.
(g) This Agreement may
not be assigned by Purchaser.
(h) This Agreement is
intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
(i) The representations
and warranties of the Purchaser and the Issuer contained herein shall survive each of the Closings and the termination of this
Agreement and the other Transaction Documents.
(j) The Purchaser and
the Issuer shall consult with each other in issuing any press releases or otherwise making public statements with respect to the
transactions contemplated hereby, except that no consultation shall be required if such disclosure is required by law or the rules
and regulations of the SEC.
(k). Each party shall
do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent
and accomplish the purposes of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated
hereby and thereby.
(l) The language used
in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party, as the parties mutually agree that each has had a full and fair opportunity to
review this Agreement and the other Transaction Documents and seek the advice of counsel on it and them.
(m) The Purchaser and
the Issuer each shall have all rights and remedies set forth in this Agreement and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which the Purchaser has by law. Any person
having any rights under any provision of this Agreement shall be entitled to enforce such rights to recover damages by reason of
any default or breach of any provision of this Agreement and to exercise all other rights granted by law.
(n) This Agreement shall
be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed
wholly within such state.
[remainder of page intentionally left
blank]
IN WITNESS WHEREOF
the Purchaser and the Issuer have executed this Agreement as of the date first above written.
THE ISSUER
SAVE THE WORLD AIR, INC.
By /s/ Greggory Bigger
Greggory
Bigger
Its: Chief Executive Officer
THE PURCHASER
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CONVERTIBLE NOTE
THE SECURITIES EVIDENCED BY THIS
NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS
(COLLECTIVELY, “SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED
FOR SALE UNDER ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS
OF SUCH SECURITIES LAWS.
$____________ |
____________, 2015 (“Issuance Date”) |
FOR VALUE RECEIVED,
SAVE THE WORLD AIR, INC., a corporation organized under the laws of the State of Nevada (the “Company”), promises
to pay to the order of “Investor”, as that term is defined on the Acknowledgement and Acceptance page of this Convertible
Note (“Note”) (hereafter, together with any subsequent holder hereof, called “Holder”), at “Investor’s
Address,” as that term is set forth on such page or at such other place as Holder may direct, the amount noted above, payable
in full Twelve (12) Months from the Issuance Date (the “Maturity Date”).
If this Note is not
paid in full on or prior to the Maturity Date the remaining balance shall be increased by 10% and the Company shall pay interest
thereon at the rate of 10% per annum until all sums due hereunder are paid in full.
Payments of both principal
and interest will be made in immediately available funds in lawful money of the United States of America to the Holder at the Investor’s
Address.
This Note is subject
to the following additional provisions:
1. The Company shall
be entitled to withhold from all payments of principal and/or interest of this Note any amounts required to be withheld under the
applicable provisions of the U.S. Internal Revenue Code of 1986, as amended, or other applicable laws at the time of such payments.
2. This Note has
been issued subject to representations, warranties and covenants of the original Holder hereof as contained in that certain Securities
Purchase Agreement (“Agreement”) of even date herewith, and subject to all restrictions, terms, conditions and disclosures
in the Agreement, and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended, and applicable
state and other securities laws. Prior to the due presentment for such transfer of this Note, the Company and any agent of the
Company may treat the person in whose name this Note is duly registered on the Company's Note register as the owner hereof for
the purpose of receiving payment as herein provided and all other purposes, whether or not this Note is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary. The transferee shall be bound, as the original Holder,
by the same representations and terms described herein and under the Agreement.
3. The Holder
may, at such Holder’s option, at any time while any sums are outstanding and unpaid hereunder, convert the then-outstanding
principal amount of this Note or any portion thereof, and any interest and any penalties accrued and unpaid thereon (the “Conversion
Amount”), into a number shares of fully paid and nonassessable Common Stock of the Company (the “Conversion Shares”)
pursuant to the following formula: the Conversion Amount divided by $0.30 (the “Conversion Price”). The Holder may
exercise the right to convert all or any portion of the Conversion Amount by delivering to the Company (i) an executed and completed
notice of conversion in the form attached to this Note (the "Notice of Conversion") to the Company and (ii) this Note.
The business day on which a Notice of Conversion and this Note are delivered to the Company in accordance with the provisions hereof
shall be deemed a "Conversion Date.” The Company will transmit the certificates representing Conversion Shares issuable
upon such conversion of this Note to the Holder via express courier within a reasonable time after the Conversion Date. No fractional
shares shall be issued upon conversion of this Note. The amount of any of the Conversion Amount which is less than a whole share
of Common Stock shall be paid to the Holder in cash. Any delay due to such circumstance shall not be an event of default under
this Note.
4. The principal amount
of this Note, and any accrued interest thereon, shall be reduced as per that principal amount indicated on the Notice of Conversion
upon the proper receipt by the Holder of such Conversion Shares due upon such Notice of Conversion.
5. The number
of Conversion Shares shall be adjusted as follows:
a. If the Company
shall at any time after the Issuance Date subdivide its outstanding shares of Common Stock into a greater number of shares of Common
Stock, the number of Conversion Shares in effect immediately prior to such subdivision shall be proportionately increased, and
conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the
Conversion Price in effect immediately prior to such combination shall be proportionately reduced.
b. If the Company
shall at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each
such event the number of Conversion Shares issuable upon conversion of this Note shall be proportionately increased; provided,
however, that if such record date is fixed and such dividend is not fully paid, or if such distribution is not fully made on the
date fixed therefor, the number of Conversion Shares shall be recomputed to reflect that such dividend was not fully paid or that
such distribution was not fully made.
c. If Company at any
time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of Company other than shares of Common Stock, then
and in each such event provision shall be made so that Holder shall receive upon exercise of the conversion right of this Note,
in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of Company which Holder would
have received had the Conversion Amount of this Note been exercised on the date of such event and had it thereafter, during the
period from the date of such event to and including the date of conversion or purchase, retained such securities receivable during
such period.
d. If the Common Stock
issuable upon the conversion of this Note or option to purchase is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a transaction described elsewhere
in Section 5 of this Note), then, and in any such event, each Holder shall have the right thereafter, upon conversion of this Note
or purchase pursuant to option to receive the kind and amount of stock and other securities and property receivable upon such reorganization
or other change, in an amount equal to the amount that Holder would have been entitled to had it immediately prior to such reorganization,
reclassification or change converted this Note, but only to the extent this Note is actually converted, all subject to further
adjustment as provided herein.
6. No provision
of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, upon an Event of Default
(as defined below), to pay the principal of, and interest on this Note at the place, time, and rate, and in the coin or currency
herein prescribed.
a. Events of Default.
Each of the following occurrences is hereby defined as an “Event of Default:”
Nonpayment.
The Company shall fail to make any payment of principal, interest, or other amounts payable hereunder when and as due; or
Dissolutions,
etc. The Company or any subsidiary shall fail to comply with any provision concerning its existence or any prohibition against
dissolution, liquidation, merger, consolidation or sale of assets; or
Noncompliance
with this Agreement. The Company shall fail to comply in any material respect with any provision hereof, which failure does
not otherwise constitute an Event of Default; or
Insolvency.
The institution of bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or against Company, which proceedings shall not have
been vacated by appropriate court order within sixty (60) days of such institution.
If one or
more "Events of Default" shall occur, then, or at any time thereafter, and in each and every such case, unless such Event
of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default)
or cured as provided herein, at the option of the Holder, and in the Holder's sole discretion, the Holder may elect to consider
this Note (and all interest through such date) immediately due and payable. In order to so elect, the Holder must deliver written
notice of the election and the amount due to the Company via certified mail, return receipt requested, at the Company’s address
as set forth herein (or any other address provided to the Holder), and thereafter the Company shall have thirty (30) business days
upon receipt to cure the Event of Default or pay this Note, or, convert the amount due on the Note pursuant to the conversion formula
set forth above.
7. In case any
provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable,
such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and
the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.
8. This Note does not
entitle the Holder hereof to any voting rights or other rights as a shareholder of the Company prior to the conversion into Common
Stock thereof, except as provided by applicable law. If, however, at the time of the surrender of this Note and conversion the
Holder hereof shall be entitled to convert this Note, the Conversion Shares so issued shall be and be deemed to be issued to such
holder as the record owner of such shares as of the close of business on the Conversion Date.
9. The Holder shall
pay all issue and transfer taxes and other incidental expenses in respect of the issuance of certificates for Conversion Shares
upon the conversion of this Note, and such certificates shall be issued in the name of the Holder of this Note.
10. This Note may be
prepaid in whole or in part at any time or from time to time without premium or penalty upon 10 days’ prior written notice
from the Company to the Holder.
11. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and in case of
loss, theft or destruction of this Note, upon delivery of an indemnity agreement or security reasonably satisfactory in form and
amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Note, and upon reimbursement
to the Company of all reasonable expenses incidental thereto, the Company will make and deliver to the Holder, in lieu thereof,
a new Note in substantially identical form.
12. If the last
or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or
a Sunday or shall be a legal holiday in the United States or the State of California, then such action may be taken or such right
may be exercised on the next succeeding business day.
13. (a) This Note
shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to
be performed wholly within such state.
(b) Except as
otherwise provided herein, any notice or demand which, by the provisions hereof, is required or which may be given to or served
upon the parties hereto shall be in writing and, if by e-mail or facsimile transmission, shall be deemed to have been validly served,
given or delivered when sent, and if by personal delivery, shall be deemed to have been validly served, given or delivered upon
actual delivery and, if mailed, shall be deemed to have been validly served, given or delivered three (3) business days after deposit
in the United States mails, as registered or certified mail, with proper postage prepaid and addressed to the party or parties
to be notified.
(c) The Holder acknowledges
that the Conversion Shares acquired upon the exercise of this Note will have restrictions upon its resale imposed by state and
federal securities laws, together with other restrictions, terms, conditions and disclosures as fully set forth in the Agreement.
(d) With regard to
any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall
be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment
shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence.
(e) This Note may
not be amended, altered or modified except by a writing signed by the Company and the Holder.
IN WITNESS WHEREOF, the Company has caused
this Convertible Note to be duly executed by an officer thereunto duly authorized.
SAVE THE WORLD AIR, INC.
735 State Street, Suite 500
Santa Barbara, California 93101
By /s/ Greggory Bigger
Name: Greggory Bigger
Title: Chief Executive Officer
ACKNOWLEDGED
AND ACCEPTED:
_______________________________
Investor Name (Signature)
_______________________________
Print Name
_______________________________
_______________________________
Investor Address
NOTICE OF EXERCISE OF CONVERSION RIGHT
TO: SAVE THE WORLD AIR, INC.
(1) The undersigned hereby elects to
convert $______________ of the attached Note into ______________ shares of Common Stock (the "Shares") of Save the World
Air, Inc. (“Company”) pursuant to the terms of the attached Note.
(2) Please issue a certificate or certificates
representing the Shares in the name of the undersigned or in such other name as is specified below:
|
_______________________________________________
(Print Name)
Address:
_______________________________________________
_______________________________________________
_______________________________________________ |
|
(3) The undersigned confirms that the
Shares are being acquired for the account of the undersigned for investment only and not with a view to, or for resale in connection
with, the distribution thereof and that the undersigned has no present intention of distributing or selling the Shares.
(4) The undersigned accepts such shares
subject to the restrictions on transfer and other terms, conditions and disclosures set forth in the attached Note and set forth
in that certain Securities Purchase Agreement between the Company and the undersigned dated as of the date of the attached Note.
__________________________
(Date) |
__________________________
(Signature) |
|
|
|
__________________________
(Print Name) |
STOCK PURCHASE WARRANT
THIS WARRANT AND ANY SHARES ISSUED
UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION
OF ANY SHARES ISSUED UPON EXERCISE HEREOF MAY BE AFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. THE TRANSFER
OF THIS WARRANT IS RESTRICTED AS SET FORTH HEREIN.
No. _____ |
_______________, 2015 |
SAVE THE WORLD AIR, INC.
WARRANT TO PURCHASE COMMON STOCK
VOID AFTER 5:00 P.M. (Pacific Time) ON
___________, 20___
THIS CERTIFIES that,
for the value received, the holder identified on the last page of this Warrant (the "Holder") is entitled, upon the terms
and subject to the conditions hereinafter set forth, at any time on or after the date of this Warrant and on or prior to 5:00 p.m.
P.S.T. on the first anniversary of the date of this Warrant (the "Expiration Time"), but not thereafter, to subscribe
for and purchase, from SAVE THE WORLD AIR, INC., a Nevada corporation (the "Company"), up to _________ shares of the
Company's Common Stock (the "Shares") at a purchase price per share equal to $0.30 (the "Exercise Price").
1. Exercise
of Warrant.
The purchase rights represented
by this Warrant are exercisable by the Holder, in whole or in part, at any time after the date of this Warrant and before the Expiration
Time by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed at the office of the Company, in
Santa Barbara, California (or such other office or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company), and upon payment of an amount equal to the aggregate Exercise
Price for the number of Shares thereby purchased (by cash or by check or certified bank check payable to the order of the Company
in an amount equal to the purchase price of the shares thereby purchased); whereupon the Holder shall be entitled to receive a
stock certificate representing the number of Shares so purchased. The Company agrees that if at the time of the surrender of this
Warrant and purchase of the Shares, and the Holder shall be entitled to exercise this Warrant, the Shares so purchased shall be
and be deemed to be issued to such holder as the record owner of such Shares as of the close of business on the date on which this
Warrant shall have been exercised as aforesaid.
Upon partial exercise
of this Warrant, the Holder shall be entitled to receive from the Company a new Warrant in substantially identical form for the
purchase of that number of Shares as to which this Warrant shall not have been exercised. Certificates for Shares purchased hereunder
shall be delivered to the Holder within a reasonable time after the date on which this Warrant shall have been exercised as aforesaid.
2. No Fractional
Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.
With respect to any fraction of a share called for upon the exercise of this Warrant, an amount equal to such fraction multiplied
by the Exercise Price shall be paid in cash to the Holder.
3. Charges, Taxes
and Expenses. The Holder shall pay all issue and transfer taxes and other incidental expenses in respect of the issuance of
certificates for Shares upon the exercise of this Warrant, and such certificates shall be issued in the name of the Holder of this
Warrant.
4. No Rights as
a Stockholder. This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company
prior to the exercise hereof.
5. Loss, Theft,
Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or destruction of this Warrant, upon delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender
and cancellation of such Warrant, and upon reimbursement to the Company of all reasonable expenses incidental thereto, the Company
will make and deliver to the Holder, in lieu thereof, a new Warrant in substantially identical form and dated as of such cancellation.
6. Saturdays,
Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or
granted herein shall be a Saturday or a Sunday or shall be a legal holiday in the United States or the State of California, then
such action may be taken or such right may be exercised on the next succeeding business.
7. Merger, Reclassification,
etc.
(a) Merger, etc.
If at any time the Company proposes (A) the acquisition of the Company by another entity by means of any transaction or series
of related transactions (including, without limitation, any reorganization, merger, consolidation or stock issuance) that results
in the transfer of fifty percent (50%) or more of the then outstanding voting power of the Company; or (B) a sale of all or substantially
all of the assets of the Company, then the Company shall give the Holder ten (10) days notice of the proposed effective date of
the transaction. If, in the case of such acquisition of the Company, and the Warrant has not been exercised by the effective date
of the transaction, this Warrant shall be exercisable into the kind and number of shares of stock or other securities or property
of the Company or of the entity resulting from such merger or acquisition to which such Holder would have been entitled if immediately
prior to such acquisition or merger, it had exercised this Warrant. The provisions of this Section 7(a) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) Reclassification,
etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any
of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class
or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result
of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to
such subdivision, combination, reclassification or other change. If the Shares are subdivided or combined into a greater or smaller
number of Shares, the Exercise Price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately
increased in the case of combination of shares, in both cases by the ratio which the total number of Shares to be outstanding immediately
after such event bears to the total number of Shares outstanding immediately prior to such event.
(c) Cash Distributions.
No adjustment on account of cash dividends or interest on the Shares or other securities purchasable hereunder will be made to
the Exercise Price under this Warrant.
8. Restrictions
on Transfer.
(a) Restrictions on
Transfer of Shares. In no event will the Holder make a disposition of this Warrant or the Shares unless and until, if requested
by the Company, it shall have furnished the Company with an opinion of counsel satisfactory to the Company and its counsel to the
effect that appropriate action necessary for compliance with the Securities Act of 1933, as amended (the "Act") relating
to sale of an unregistered security has been taken. Notwithstanding the foregoing, the restrictions imposed upon the transferability
of the Shares shall terminate as to any particular Share when (i) such security shall have been sold without registration in compliance
with Rule 144 under the Act, or (ii) a letter shall have been issued to the Holder at its request by the staff of the Securities
and Exchange Commission or a ruling shall have been issued to the Holder at its request by such Commission stating that no action
shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration
under the Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no
subsequent restrictions on transfer are required, or (iii) such security shall have been registered under the Act and sold by the
Holder thereof in accordance with such registration.
(b) Subject to the provisions
of Section 8(a) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of the Warrant
with a properly executed assignment at the principal office of the Company.
(c) Restrictive Legends.
The stock certificates representing the Shares and any securities of the Company issued with respect thereto shall be imprinted
with legends restricting transfer except in compliance with the terms hereof and with applicable federal and state securities laws
substantially as follows:
“THE SHARES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY
TO THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT”.
9. Miscellaneous.
(a) Governing Law.
This Warrant shall be governed by and construed in accordance with the laws of the State of California applicable to contracts
made and to be performed wholly within such state.
(b) Restrictions.
The Holder acknowledges that the Shares acquired upon the exercise of this Warrant will have restrictions upon its resale imposed
by state and federal securities laws.
(c) Waivers Strictly
Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver
or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration,
modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise,
or other indulgence.
(d) Modifications.
This Warrant may not be amended, altered or modified except by a writing signed by the Company and the Holder of this Warrant.
IN WITNESS WHEREOF,
SAVE THE WORLD AIR, INC. has caused this Warrant to be executed by its duly authorized representative dated as of the date first
set forth above.
Holder:
__________________
|
SAVE THE WORLD AIR, INC.
735 State Street, Suite 500
Santa Barbara, California 93101
By: /s/ Greggory Bigger
Name: Greggory Bigger
Title: Chief Executive Officer |
NOTICE OF EXERCISE
TO: SAVE THE WORLD AIR, INC., a Nevada
corporation
(1) The undersigned
hereby elects to purchase ______________ shares of Common Stock (the "Shares") of Save the World Air, Inc. (“Issuer”)
pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable
transfer taxes, if any.
(2) Please issue
a certificate or certificates representing the Shares in the name of the undersigned or in such other name as is specified below:
_______________________________________________
(Print Name)
Address:
_______________________________________________
_______________________________________________
_______________________________________________
(3) The undersigned
confirms that he is an “accredited investor” as defined by Rule 501(a) under the Securities Act of 1933, as amended,
at the time of execution of this Notice.
(4) The undersigned
confirms that the Shares are being acquired for the account of the undersigned for investment only and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or selling
the Shares.
(5) The undersigned
accepts such Shares subject to the restrictions on transfer set forth in the attached Warrant.
(6) The undersigned
acknowledges that the Issuer has given it access to all information relating to the Issuer’s business that the undersigned
has requested. The undersigned has reviewed all materials relating to the Issuer’s business, financial condition and operations
which it has requested and the undersigned has reviewed all of such materials as the undersigned, in the undersigned’s sole
and absolute discretion has deemed necessary or desirable. The undersigned has had an opportunity to ask questions of and discuss
the business, management and financial affairs of the Issuer with the Issuer’s management. Specifically but not by way of
limitation, the undersigned acknowledges the Issuer’s publicly available filings made periodically with the SEC, which filings
are available at www.sec.gov, and which filings the undersigned acknowledges reviewing or having had the opportunity of reviewing.
(7) The undersigned
acknowledges that it has, by reason of its business and financial experience, such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of this type that it is capable of (i) evaluating the merits
and risks of an investment in the Shares and making an informed investment decision in connection therewith; (ii) protecting its
own interest; and (iii) bearing the economic risk of such investment for an indefinite period of time for shares which are not
transferable or freely tradable. The undersigned hereby agrees to indemnify the Issuer and the officers, directors and employees
thereof harmless against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason of or
in connection with any misrepresentation or any breach of warranties or representations of the undersigned contained in this Notice,
or arising as a result of the sale or distribution of the Shares issuable upon exercise of the Warrants. The representations
and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned.
__________________________
(Date) |
__________________________
(Signature) |
|
|
|
|
|
__________________________
(Print Name) |
Exhibit 10.119
SECURITIES PURCHASE AGREEMENT
Convertible Promissory Notes and Stock Purchase
Warrants
THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”)
is made and entered into as of the November 6, 2015, by and between QS Energy, Inc., a Nevada corporation (the “Issuer”)
and those individuals and entities who sign and deliver an executed copy of this Agreement to the Issuer (each, a “Purchaser”
and collectively, the “Purchasers”), with reference to the following:
RECITALS
A. Purchasers desire
to purchase from Issuer and Issuer desires to sell to Purchaser certain of Issuer’s Convertible Notes, in the aggregate face
amount up to a maximum of Five Million Dollars ($5,000,000) in the form of Exhibit A attached hereto (individually,
a “Note” and collectively, the “Notes”), and certain of Issuer’s Stock Purchase Warrants to purchase
up to a certain number of shares of the common stock (the “Common Stock”) of the Issuer equal to 50% of the number
of shares initially issuable on conversion of the Notes, in the form of Exhibit B attached
hereto (individually, the “Warrants” and collectively with the Notes, the “Securities”). The face amount
of the Note each Purchaser has committed to purchase, and the amount of the purchase price thereof to be paid to the Issuer by
the Purchaser (a “Commitment”) is listed on the signature page such Purchaser executes and delivers to the Issuer.
Minimum Commitment shall be no less than $25,000.
B. Issuer’s
sale of the Securities to the Purchasers may be made in reliance upon the provisions of Section 4(a)(2) under the Securities Act
of 1933, as amended (the "Securities Act") or Rule 506 of Regulation D promulgated by the Securities and Exchange Commission
(the ”SEC”) thereunder, or other applicable rules and regulations of the SEC or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect to the transactions contemplated hereby.
C. At any time when
any amount of principal or interest of the Notes shall be outstanding, such unpaid amounts shall be convertible, at the election
of the Purchaser, into shares of the Issuer’s Common Stock at a price of $0.10 per share (the “Conversion Price”).
D. The Warrants
shall be issued at the same time each Note is issued to the Purchaser hereunder and shall be exercisable at $0.10 per share
(the “Exercise Price”), for such number of shares equal to 50% of the result obtained by dividing (i) the face
amount of the Notes issued simultaneously with the Warrant by (ii) the Conversion Price. The Warrants shall expire one (1)
year from the date of issuance thereof.
AGREEMENT
NOW THEREFORE, in consideration
of the foregoing recitals, which shall be considered an integral part of this Agreement, the covenants and agreements set forth
hereafter, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Purchasers
and the Issuer hereby agree as follows
1. Purchase of the
Notes and Warrants. On the terms and subject to the conditions set forth in this Agreement and in the Notes and Warrants, the
Purchasers shall purchase from the Issuer and the Issuer shall sell to the Purchaser the Securities.
2. Purchaser’s
Representations, Warranties and Covenants. In order to induce the Issuer to sell and issue the Securities to the Purchaser
under one or more exemptions from registration under the Securities Act, the Purchasers, severally and not jointly, represent and
warrant to the Issuer, and covenant with the Issuer, that:
(a) (i) Such Purchaser has
the requisite power and authority to enter into and perform this Agreement, and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by this Agreement (collectively, the "Transaction Documents"),
and to purchase the Securities in accordance with the terms hereof and thereof.
(ii) The execution and
delivery of the Transaction Documents by the Purchaser and the consummation by it of the transactions contemplated thereby have
been duly and validly authorized by the Purchaser's organizational documents and no further consent or authorization is required
by the Purchaser.
(iii) The Transaction
Documents have been duly and validly executed and delivered by the Purchaser.
(iv) The Transaction Documents,
and each of them, constitutes the valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance
with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
(a) The execution, delivery
and performance of the Transaction Documents by the Purchaser and the consummation by the Purchaser of the transactions contemplated
thereby will not conflict with or constitute a default under any agreement or instrument to which the Purchaser is a party or by
which the Purchaser is bound.
(b) The Purchaser is acquiring
the Securities for investment for its own account, and not with a view toward distribution thereof, and with no present intention
of dividing its interest with others or reselling or otherwise transferring or disposing of all or any portion of either the Notes
or Warrants. The undersigned has not offered or sold a participation in this purchase of either the Notes or Warrants, and will
not offer or sell any interest therein. The Purchaser further acknowledges that the Purchaser does not have in mind any sale of
either the Notes or Warrants currently or after the passage of a fixed or determinable period of time or upon the occurrence or
non-occurrence of any predetermined events or consequence; and that it has no present or contemplated agreement, undertaking, arrangement,
obligation, indebtedness or commitment providing for or which is likely to compel a disposition of either the Notes or Warrants
and is not aware of any circumstances presently in existence that are likely in the future to prompt a disposition thereof.
(e) The Purchaser acknowledges
that the Securities have been offered to it in direct communication between itself and the Issuer and not through any advertisement,
article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or on the
Internet or broadcast over television or radio or presented in any seminar or any other general solicitation or general advertisement.
(f) The Purchaser acknowledges
that the Issuer has given it access to all information relating to the Issuer’s business that it has requested. The Purchaser
has reviewed all materials relating to the Issuer's business, finance and operations which it has requested and the Purchaser has
reviewed all of such materials as the Purchaser, in the Purchaser’s sole and absolute discretion shall have deemed necessary
or desirable. The Purchaser has had an opportunity ask questions of and to discuss the business, management and financial affairs
of the Issuer with the Issuer's management. Specifically but not by way of limitation, the Purchaser acknowledges the Issuer’s
publicly available filings made periodically with the SEC, which filings are available at www.sec.gov and which filings the Purchaser
acknowledges reviewing or having had the opportunity of reviewing.
(g) The Purchaser acknowledges
that it has, by reason of its business and financial experience, knowledge, sophistication and experience in financial and business
matters and in making investment decisions of this type that it is capable of (i) evaluating the merits and risks of an investment
in the Securities and making an informed investment decision in connection therewith; (ii) protecting its own interest; and (iii)
bearing the economic risk of such investment for an indefinite period of time for Securities which are not transferable or freely
tradable. The undersigned hereby agrees to indemnify the Issuer thereof and to hold each of such persons and entities, and the
officers, directors and employees thereof harmless against all liability, costs or expenses (including reasonable attorneys’
fees) arising by reason of or in connection with any misrepresentation or any breach of warranties of the undersigned contained
in this Agreement, or arising as a result of the sale or distribution of the Securities or the Common Stock issuable upon conversion
of the Notes or exercise of the Warrants, by the undersigned in violation of the Securities Act, the Securities Exchange Act of
1934, as amended (the “Exchange Act”), or any other applicable law, either federal or state. This subscription and
the representations and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns
of the Purchaser.
(h) The Purchaser
is familiar with the definition of an "accredited investor" as that term is defined in Rule 501(a) of Regulation D of
the Securities Act and represents and warrants to the Issuer that it is either (i) an accredited investor at such time it was
offered the Securities and will be on each date which it converts any of the Notes or exercises any of the Warrants as so defined
or (ii) a “qualified institutional buyer” as defined in Rule 144A under the Securities Act. Such Purchaser is not
required to be registered as a broker-dealer under Section 15 of the Exchange act. If the Purchaser is not a resident of the United
States, the Purchaser is not a “U.S. person[s]” as that term is defined in Rule 902 of Regulation S promulgated under
the Securities Act of 1933, as amended.
(i) During the term of
this Agreement and the other Transaction Documents, the Purchaser will comply with the provisions of Section 9 of the Exchange
Act, and the rules and regulations promulgated thereunder, with respect to transactions involving the Common Stock. Commencing
on the date on which the Purchaser received a term sheet from the Company or any representative or agent of the Company (written
or oral) setting forth the material terms of the transactions contemplated hereunder until the date hereof and during the term
of this Agreement and the other Transaction Documents, the Purchaser agrees not to sell the Issuer's Common Stock short or engage
in any hedging transactions in the Issuer’s Common Stock, either directly or indirectly, through its affiliates, principals,
agents or advisors.
(j) The Purchaser is aware
that the Notes and the Warrants, and the shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants
are restricted securities as defined under federal securities laws and are not freely tradeable and may only be disposed of in
compliance with state and federal securities laws. In connection with any transfer of the Notes and the Warrants, and the shares
of Common Stock issuable upon conversion of the Notes or exercise of the Warrants, other than pursuant to an effective registration
statement or Rule 144, the Issuer may require the transferor thereof to provide to the Issuer an opinion of counsel, the form and
substance of which opinion shall be reasonably satisfactory to the Issuer, to the effect that such transfer does not require registration
of such transferred Securities under the Securities Act. Further, the Purchaser understands and acknowledges that any certificates
evidencing the Notes, the Warrants or the shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants
will be restricted securities and not freely tradeable and will bear the legend in substantially the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS (COLLECTIVELY,
“SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED FOR SALE UNDER
ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES
LAWS.
(k) The Purchaser understands
and acknowledges that following the purchase of the Notes, the Warrants and any shares of Common Stock issuable upon conversion
of the Notes or exercise of the Warrants, each may only be disposed of pursuant to either (i) an effective registration statement
under the Securities Act or (ii) an exemption from the registration requirements of the Securities Act.
(l) The Purchaser understands
and acknowledges that the Issuer has neither filed a registration statement with the SEC or any state authorities nor agreed to
do so, nor contemplates doing so in the future for the transactions contemplated by this Agreement or the other Transaction Documents,
and in the absence of such a registration statement or exemption, the undersigned may have to hold the Notes, the Warrants and
any shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants, indefinitely and may be unable to
liquidate any of them in case of an emergency.
(m) The Purchaser is purchasing
the Notes and Warrants, and will acquire any shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants,
for its own account for investment purposes and not with a view towards distribution and agrees to resell or otherwise dispose
of any of the Notes or the Warrants, or any shares of Common Stock issuable upon conversion of the Notes or exercise of the Warrants,
in accordance with the registration provisions of the Securities Act (or pursuant to an exemption from such registration provisions).
(n) The Purchaser is not
and will not be required to be registered as a "dealer" under the Exchange Act, either as a result of its execution and
performance of its obligations under this Agreement or otherwise.
(o) The Purchaser understands
and acknowledges that proceeds raised in connection with this Agreement will be used by Issuer for general working capital purposes,
including without limitation, the payment of salaries and professional fees, overhead and general administrative expenses.
(p) The Purchaser understands
that it is liable for its own tax liabilities and has obtained no tax advice from the Issuer in connection with the purchase of
the Securities.
(q) The Purchaser will
not pay or receive any finder’s fee or commission in respect of the consummation of the transactions contemplated by this
Agreement.
(r) Purchaser hereby agrees
and acknowledges that it has been informed of the following: (i) there are factors relating to the subsequent transfer of any of
the Securities or shares of Common Stock underlying the Notes and Warrants that could make the resale of such Securities or shares
of Common Stock underlying the Notes and Warrants difficult; and (ii) there is no guarantee that the Purchaser will realize any
gain from the purchase of the Securities. The purchase of the Securities involves a high degree of risk and is subject to many
uncertainties. These risks and uncertainties may adversely affect the Company’s business, operating results and financial
condition. In such an event, the trading price for the Common Stock could decline substantially and Purchaser could lose all or
part of its investment. Purchaser is urged to review the risks identified under the Risk Factors section of Issuer’s Form
10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015.
(s) Purchaser understands
and acknowledges that the Notes have an implied annual interest rate of 10%, inasmuch as the Notes will be issued and paid in an
amount equal to 110% of the Commitment, except that if a Note is not paid on the Maturity Date, which is twelve (12) months from
the date of issue of the Note, then the balance of the unpaid amount of the Note shall be increased by 10% and the Issuer shall
then commence paying interest thereon at the rate of 10% per annum until all sums due under the Note are paid.
3. Issuer’s Representations, Warranties and Covenants. The Issuer represents and warrants to the Purchaser that:
(a) The Issuer is a corporation
duly organized and validly existing in good standing under the laws of the State of Nevada, and has the requisite corporate power
and authorization to own its properties and to carry on its business as now being conducted.
(b) (i) The Issuer has
the requisite corporate power and authority to enter into and perform this Agreement, and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by the Transaction Documents, and to issue the Notes
and Warrants in accordance with the terms hereof and thereof.
(ii) the execution and
delivery of the Transaction Documents by the Issuer and the consummation by it of the transactions contemplated hereby and thereby,
including without limitation the reservation for issuance and the issuance of the Notes and Warrants pursuant to this Agreement,
have been duly and validly authorized by the Issuer's Board of Directors and no further consent or authorization is required by
the Issuer, its Board of Directors, or its shareholders.
(iii) The Transaction Documents have been duly and validly executed and delivered by the Issuer.
(iv) The Transaction
Documents, and each of them, constitutes the valid and binding obligation of the Issuer enforceable against the Issuer in accordance
with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
(c) The execution, delivery
and performance of the Transaction Documents by the Issuer and the consummation by the Issuer of the transactions contemplated
thereby will not conflict with or constitute a default under any agreement or instrument to which the Issuer is a party or under
any organizational documents of the Purchaser.
4. Closing and Deliverables.
(a) Subject to the provisions
of Section 4(b) below, provided that the Issuer shall have received on or prior to December 31, 2015, (but the Company has the
option to extend this date to January 31, 2016), copies of this Agreement executed by Purchaser, there shall be a closing or closings
(each, a “Closing Date”) at which:
(i) Purchaser shall deliver to the Issuer
immediately available funds, by check or by wire transfer (bank wiring instructions to be provided by Issuer on request) in an
amount equal to the amount of the Purchaser’s Commitment as set forth beside the name of the Purchaser on the Purchaser’s
signature page hereto. Funds paid to Issuer under this Agreement will be deposited in Issuer’s operating account and used
as working capital.
(ii) The Issuer shall
deliver to the Purchaser (x) a Note, in the face amount equal to 110% of the Purchaser’s Commitment and (y) a Warrant to
purchase the exercisable amount of the Issuer’s Common Stock at the Exercise Price. The Note and Warrant will be dated as
of the Closing Date, as such date may be extended by us.
(b) The Issuer may continue
to accept Commitments from Purchasers and issue and sell Securities to Purchasers at Closings on the terms and subject to the conditions
set forth in this Agreement until (i) the aggregate amount of the Commitments equals $5,000,000 or (ii) on or before December 31,
2015, but the Company has the option to extend this date to January 31, 2016, whichever shall first occur.
5. Miscellaneous.
(a). Each party shall pay
the fees and expenses of its own advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and performance of the Transactions Documents.
(b) This Agreement may
be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature
or signature transmitted by e-mail shall be considered due execution and shall be binding upon the signatory thereto with the same
force and effect as if the signature were an original signature.
(c) The headings of this
Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. Whenever
required by the context of this Agreement, the singular shall include the plural and neutral shall include the masculine and feminine.
(d) If any provision of
this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision
of this Agreement in any other jurisdiction.
(e) This Agreement and
the Notes and Warrants represent the final agreement between the Purchasers and the Issuer with respect to the terms and conditions
set forth herein, and, the terms of this Agreement and the Notes and Warrants may not be contradicted by evidence of prior, contemporaneous,
or subsequent oral agreements of the parties. No provision of this Agreement and the Notes and Warrants may be amended other than
by an instrument in writing signed by the Purchaser and the Issuer, and no provision hereof or thereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is sought.
(f) Any notices or other
communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have
been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) day after deposit
with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
If to the Issuer:
QS Energy, Inc.
735 State Street, Suite 500
Telephone: 805-845-3581
Facsimile: 805-845-4377
If to a Purchaser:
To the address set forth on the Purchaser’s signature page
hereto.
Each party shall provide five (5) days prior written notice to the
other party of any change in address or facsimile number.
(g) This Agreement may not be assigned by Purchaser.
(h) This Agreement is
intended for the benefit of the parties hereto and is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
(i) The representations
and warranties of the Purchaser and the Issuer contained herein shall survive each of the Closings and the termination of this
Agreement and the other Transaction Documents.
(j) The Purchaser and
the Issuer shall consult with each other in issuing any press releases or otherwise making public statements with respect to the
transactions contemplated hereby, except that no consultation shall be required if such disclosure is required by law or the rules
and regulations of the SEC.
(k). Each party shall do
and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent
and accomplish the purposes of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated
hereby and thereby.
(l) The language used
in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party, as the parties mutually agree that each has had a full and fair opportunity to
review this Agreement and the other Transaction Documents and seek the advice of counsel on it and them.
(m) The Purchaser and
the Issuer each shall have all rights and remedies set forth in this Agreement and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which the Purchaser has by law. Any person
having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any default or breach of any provision of this Agreement, including
the recovery of reasonable attorneys’ fees and costs, and to exercise all other rights granted by law.
(n) This Agreement shall
be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed
wholly within such state.
[remainder of page intentionally left blank]
IN WITNESS WHEREOF the
Purchasers and the Issuer have executed this Agreement as of the date first above written.
THE ISSUER
QS ENERGY, INC.
By: /s/ Greggory Bigger
Greggory
Bigger
Its: Chief Executive Officer
THE PURCHASER
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CONVERTIBLE NOTE
THE SECURITIES EVIDENCED BY THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED FOR SALE UNDER ANY STATE SECURITIES LAWS (COLLECTIVELY,
“SECURITIES LAWS”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED FOR SALE UNDER
ALL APPLICABLE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER, IN FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER, ANY SUCH OFFER, SALE OR OTHER TRANSFER IS EXEMPT FROM THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES
LAWS.
$__________ |
_____________, 2015 (“Issuance Date”) |
FOR VALUE RECEIVED, QS
ENERGY, INC., a corporation organized under the laws of the State of Nevada (the “Company”), promises to pay to
the order of ______________ “Investor”, as that term is defined on the Acknowledgement and Acceptance page of this
Convertible Note (“Note”) (hereafter, together with any subsequent holder hereof, called “Holder”), at
“Investor’s Address,” as that term is set forth on such page or at such other place as Holder may direct, the
amount noted above, payable in full Twelve (12) Months from the Issuance Date (the “Maturity Date”).
If this Note is not paid
in full on or prior to the Maturity Date the remaining balance shall be increased by 10% and the Company shall pay interest thereon
at the rate of 10% per annum until all sums due hereunder are paid in full.
Payments of both principal
and interest will be made in immediately available funds in lawful money of the United States of America to the Holder at the Investor’s
Address.
This Note is subject to
the following additional provisions:
1. The Company shall be
entitled to withhold from all payments of principal and/or interest of this Note any amounts required to be withheld under the
applicable provisions of the U.S. Internal Revenue Code of 1986, as amended, or other applicable laws at the time of such payments.
2. This Note has been
issued subject to representations, warranties and covenants of the original Holder hereof as contained in that certain Securities
Purchase Agreement (“Agreement”) of even date herewith, and subject to all restrictions, terms, conditions and disclosures
in the Agreement, and may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended, and applicable
state and other securities laws. Prior to the due presentment for such transfer of this Note, the Company and any agent of the
Company may treat the person in whose name this Note is duly registered on the Company's Note register as the owner hereof for
the purpose of receiving payment as herein provided and all other purposes, whether or not this Note is overdue, and neither the
Company nor any such agent shall be affected by notice to the contrary. The transferee shall be bound, as the original Holder,
by the same representations and terms described herein and under the Agreement.
3. The Holder may,
at such Holder’s option, at any time while any sums are outstanding and unpaid hereunder, convert the then-outstanding principal
amount of this Note or any portion thereof, and any interest and any penalties accrued and unpaid thereon (the “Conversion
Amount”), ________________ (#) into a number shares of fully paid and nonassessable Common Stock of the Company (the “Conversion
Shares”) pursuant to the following formula: the Conversion Amount divided by $0.10 (the “Conversion Price”).
The Holder may exercise the right to convert all or any portion of the Conversion Amount by delivering to the Company (i) an executed
and completed notice of conversion in the form attached to this Note (the "Notice of Conversion") to the Company and
(ii) this Note. The business day on which a Notice of Conversion and this Note are delivered to the Company in accordance with
the provisions hereof shall be deemed a "Conversion Date.” The Company will transmit the certificates representing Conversion
Shares issuable upon such conversion of this Note to the Holder via express courier within a reasonable time after the Conversion
Date. No fractional shares shall be issued upon conversion of this Note. The amount of any of the Conversion Amount which is less
than a whole share of Common Stock shall be paid to the Holder in cash. Any delay due to such circumstance shall not be an event
of default under this Note.
4. The principal amount
of this Note, and any accrued interest thereon, shall be reduced as per that principal amount indicated on the Notice of Conversion
upon the proper receipt by the Holder of such Conversion Shares due upon such Notice of Conversion.
5. The number of Conversion
Shares shall be adjusted as follows:
a. If the Company shall
at any time after the Issuance Date subdivide its outstanding shares of Common Stock into a greater number of shares of Common
Stock, the number of Conversion Shares in effect immediately prior to such subdivision shall be proportionately increased, and
conversely, in case the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the
Conversion Price in effect immediately prior to such combination shall be proportionately reduced.
b. If the Company shall
at any time or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such
event the number of Conversion Shares issuable upon conversion of this Note shall be proportionately increased; provided, however,
that if such record date is fixed and such dividend is not fully paid, or if such distribution is not fully made on the date fixed
therefor, the number of Conversion Shares shall be recomputed to reflect that such dividend was not fully paid or that such distribution
was not fully made.
c. If Company at any time
or from time to time after the Issuance Date makes, or fixes a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in securities of Company other than shares of Common Stock, then and in each
such event provision shall be made so that Holder shall receive upon exercise of the conversion right of this Note, in addition
to the number of shares of Common Stock receivable thereupon, the amount of securities of Company which Holder would have received
had the Conversion Amount of this Note been exercised on the date of such event and had it thereafter, during the period from the
date of such event to and including the date of conversion or purchase, retained such securities receivable during such period.
d. If the Common Stock
issuable upon the conversion of this Note or option to purchase is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a transaction described elsewhere
in Section 5 of this Note), then, and in any such event, each Holder shall have the right thereafter, upon conversion of this Note
or purchase pursuant to option to receive the kind and amount of stock and other securities and property receivable upon such reorganization
or other change, in an amount equal to the amount that Holder would have been entitled to had it immediately prior to such reorganization,
reclassification or change converted this Note, but only to the extent this Note is actually converted, all subject to further
adjustment as provided herein.
6. No provision of
this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, upon an Event of Default (as
defined below), to pay the principal of, and interest on this Note at the place, time, and rate, and in the coin or currency herein
prescribed.
a. Events of Default.
Each of the following occurrences is hereby defined as an “Event of Default:”
Nonpayment. The
Company shall fail to make any payment of principal, interest, or other amounts payable hereunder when and as due; or
Dissolutions, etc.
The Company or any subsidiary shall fail to comply with any provision concerning its existence or any prohibition against dissolution,
liquidation, merger, consolidation or sale of assets; or
Noncompliance with
this Agreement. The Company shall fail to comply in any material respect with any provision hereof, which failure does not
otherwise constitute an Event of Default; or
Insolvency. The
institution of bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy
law or any law for the relief of debtors shall be instituted by or against Company, which proceedings shall not have been vacated
by appropriate court order within sixty (60) days of such institution.
If one or more "Events
of Default" shall occur, then, or at any time thereafter, and in each and every such case, unless such Event of Default shall
have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) or cured
as provided herein, at the option of the Holder, and in the Holder's sole discretion, the Holder may elect to consider this Note
(and all interest through such date) immediately due and payable. In order to so elect, the Holder must deliver written notice
of the election and the amount due to the Company via certified mail, return receipt requested, at the Company’s address
as set forth herein (or any other address provided to the Holder), and thereafter the Company shall have thirty (30) business days
upon receipt to cure the Event of Default or pay this Note, or convert the amount due on the Note pursuant to the conversion formula
set forth above.
7. In case any provision
of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such
provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the
validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.
8. This Note does not entitle
the Holder hereof to any voting rights or other rights as a shareholder of the Company prior to the conversion into Common Stock
thereof, except as provided by applicable law. If, however, at the time of the surrender of this Note and conversion the Holder
hereof shall be entitled to convert this Note, the Conversion Shares so issued shall be and be deemed to be issued to such holder
as the record owner of such shares as of the close of business on the Conversion Date.
9. The Holder shall pay
all issue and transfer taxes and other incidental expenses in respect of the issuance of certificates for Conversion Shares upon
the conversion of this Note, and such certificates shall be issued in the name of the Holder of this Note.
10. This Note may be prepaid
in whole or in part at any time or from time to time without premium or penalty upon 10 days’ prior written notice from the
Company to the Holder.
11. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and in case of loss,
theft or destruction of this Note, upon delivery of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Note, and upon reimbursement to
the Company of all reasonable expenses incidental thereto, the Company will make and deliver to the Holder, in lieu thereof, a
new Note in substantially identical form.
12. If the last or appointed
day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal holiday in the United States or the State of California, then such action may be taken or such right may be exercised
on the next succeeding business day.
13. (a) This Note shall
be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed
wholly within such state.
(b) Except as otherwise
provided herein, any notice or demand which, by the provisions hereof, is required or which may be given to or served upon the
parties hereto shall be in writing and, if by e-mail or facsimile transmission, shall be deemed to have been validly served, given
or delivered when sent, and if by personal delivery, shall be deemed to have been validly served, given or delivered upon actual
delivery and, if mailed, shall be deemed to have been validly served, given or delivered three (3) business days after deposit
in the United States mails, as registered or certified mail, with proper postage prepaid and addressed to the party or parties
to be notified.
(c) The Holder acknowledges
that the Conversion Shares acquired upon the exercise of this Note will have restrictions upon its resale imposed by state and
federal securities laws, together with other restrictions, terms, conditions and disclosures as fully set forth in the Agreement.
(d) With regard to any
power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be
effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment
shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence.
(e) This Note may not
be amended, altered or modified except by a writing signed by the Company and the Holder.
IN WITNESS WHEREOF, the Company has caused this
Convertible Note to be duly executed by an officer thereunto duly authorized.
QS ENERGY, INC.
735 State Street, Suite 500
Santa Barbara, CA 93101
By /s/ Greggory Bigger
Name: Greggory Bigger
Title: Chief Executive Officer
ACKNOWLEDGED AND
ACCEPTED:
_______________________________
Investor Name (Signature)
_______________________________
Print Name
_______________________________
_______________________________
Investor Address
NOTICE OF EXERCISE OF CONVERSION RIGHT
TO: (Company Name)
(1) The undersigned hereby elects to convert
$______________ of the attached Note into ______________ shares of Common Stock (the "Shares") of QS Energy, Inc. (“Company”)
pursuant to the terms of the attached Note.
(2) Please issue a certificate or certificates
representing the Shares in the name of the undersigned or in such other name as is specified below:
|
_______________________________________________
(Print Name)
Address:
_______________________________________________
_______________________________________________
_______________________________________________ |
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(3) The undersigned confirms that the Shares
are being acquired for the account of the undersigned for investment only and not with a view to, or for resale in connection with,
the distribution thereof and that the undersigned has no present intention of distributing or selling the Shares.
(4) The undersigned accepts such shares
subject to the restrictions on transfer and other terms, conditions and disclosures set forth in the attached Note and set forth
in that certain Securities Purchase Agreement between the Company and the undersigned dated as of the date of the attached Note.
__________________________
(Date) |
__________________________
(Signature) |
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__________________________
(Print Name) |
STOCK PURCHASE WARRANT
THIS WARRANT AND ANY SHARES ISSUED UPON
ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION
OF ANY SHARES ISSUED UPON EXERCISE HEREOF MAY BE AFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. THE TRANSFER
OF THIS WARRANT IS RESTRICTED AS SET FORTH HEREIN.
No. ______ |
______________, 2015 |
QS ENERGY, INC.
WARRANT TO PURCHASE COMMON STOCK
VOID AFTER 5:00 P.M. (Pacific Time) ON ______________,
2016
THIS CERTIFIES that, for
the value received, the holder identified on the last page of this Warrant _____________ (the "Holder") is entitled,
upon the terms and subject to the conditions hereinafter set forth, at any time on or after the date of this Warrant and on or
prior to 5:00 p.m. P.S.T. on the first anniversary of the date of this Warrant (the "Expiration Time"), but not thereafter,
to subscribe for and purchase, from QS ENERGY, INC., a Nevada corporation (the "Company"), up to ________________ (#)
shares of the Company's Common Stock (the "Shares") at a purchase price per share equal to $0.10 (the "Exercise
Price").
1. Exercise of
Warrant.
The purchase rights represented
by this Warrant are exercisable by the Holder, in whole or in part, at any time after the date of this Warrant and before the Expiration
Time by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed at the office of the Company, in
Santa Barbara, California (or such other office or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company), and upon payment of an amount equal to the aggregate Exercise
Price for the number of Shares thereby purchased (by cash or by check or certified bank check payable to the order of the Company
in an amount equal to the purchase price of the shares thereby purchased); whereupon the Holder shall be entitled to receive a
stock certificate representing the number of Shares so purchased. The Company agrees that if at the time of the surrender of this
Warrant and purchase of the Shares, and the Holder shall be entitled to exercise this Warrant, the Shares so purchased shall be
and be deemed to be issued to such holder as the record owner of such Shares as of the close of business on the date on which this
Warrant shall have been exercised as aforesaid.
Upon partial exercise of
this Warrant, the Holder shall be entitled to receive from the Company a new Warrant in substantially identical form for the purchase
of that number of Shares as to which this Warrant shall not have been exercised. Certificates for Shares purchased hereunder shall
be delivered to the Holder within a reasonable time after the date on which this Warrant shall have been exercised as aforesaid.
2. No Fractional Shares
or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon the exercise of this Warrant, an amount equal to such fraction multiplied by
the Exercise Price shall be paid in cash to the Holder.
3. Charges, Taxes and
Expenses. The Holder shall pay all issue and transfer taxes and other incidental expenses in respect of the issuance of certificates
for Shares upon the exercise of this Warrant, and such certificates shall be issued in the name of the Holder of this Warrant.
4. No Rights as a
Stockholder. This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company
prior to the exercise hereof.
5. Loss, Theft, Destruction
or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction
or mutilation of this Warrant, and in case of loss, theft or destruction of this Warrant, upon delivery of an indemnity agreement
or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, and upon reimbursement to the Company of all reasonable expenses incidental thereto, the Company
will make and deliver to the Holder, in lieu thereof, a new Warrant in substantially identical form and dated as of such cancellation.
6. Saturdays, Sundays,
Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday in the United States or the State of California, then such action
may be taken or such right may be exercised on the next succeeding business.
7. Merger, Reclassification,
etc.
(a) Merger, etc. If
at any time the Company proposes (A) the acquisition of the Company by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization, merger, consolidation or stock issuance) that results
in the transfer of fifty percent (50%) or more of the then outstanding voting power of the Company; or (B) a sale of all or substantially
all of the assets of the Company, then the Company shall give the Holder ten (10) days notice of the proposed effective date of
the transaction. If, in the case of such acquisition of the Company, and the Warrant has not been exercised by the effective date
of the transaction, this Warrant shall be exercisable into the kind and number of shares of stock or other securities or property
of the Company or of the entity resulting from such merger or acquisition to which such Holder would have been entitled if immediately
prior to such acquisition or merger, it had exercised this Warrant. The provisions of this Section 7(a) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(b) Reclassification,
etc. If the Company at any time shall, by subdivision, combination or reclassification of securities or otherwise, change any
of the securities to which purchase rights under this Warrant exist into the same or a different number of securities of any class
or classes, this Warrant shall thereafter be to acquire such number and kind of securities as would have been issuable as the result
of such change with respect to the securities which were subject to the purchase rights under this Warrant immediately prior to
such subdivision, combination, reclassification or other change. If the Shares are subdivided or combined into a greater or smaller
number of Shares, the Exercise Price under this Warrant shall be proportionately reduced in case of subdivision of shares or proportionately
increased in the case of combination of shares, in both cases by the ratio which the total number of Shares to be outstanding immediately
after such event bears to the total number of Shares outstanding immediately prior to such event.
(c) Cash Distributions.
No adjustment on account of cash dividends or interest on the Shares or other securities purchasable hereunder will be made to
the Exercise Price under this Warrant.
8. Restrictions on Transfer.
(a) Restrictions on Transfer
of Shares. In no event will the Holder make a disposition of this Warrant or the Shares unless and until, if requested by the
Company, it shall have furnished the Company with an opinion of counsel satisfactory to the Company and its counsel to the effect
that appropriate action necessary for compliance with the Securities Act of 1933, as amended (the "Act") relating to
sale of an unregistered security has been taken. Notwithstanding the foregoing, the restrictions imposed upon the transferability
of the Shares shall terminate as to any particular Share when (i) such security shall have been sold without registration in compliance
with Rule 144 under the Act, or (ii) a letter shall have been issued to the Holder at its request by the staff of the Securities
and Exchange Commission or a ruling shall have been issued to the Holder at its request by such Commission stating that no action
shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration
under the Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no
subsequent restrictions on transfer are required, or (iii) such security shall have been registered under the Act and sold by the
Holder thereof in accordance with such registration.
(b) Subject to the provisions
of Section 8(a) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of the Warrant
with a properly executed assignment at the principal office of the Company.
(c) Restrictive Legends.
The stock certificates representing the Shares and any securities of the Company issued with respect thereto shall be imprinted
with legends restricting transfer except in compliance with the terms hereof and with applicable federal and state securities laws
substantially as follows:
“THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO THE
ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT”.
9. Miscellaneous.
(a) Governing Law.
This Warrant shall be governed by and construed in accordance with the laws of the State of California applicable to contracts
made and to be performed wholly within such state.
(b) Restrictions.
The Holder acknowledges that the Shares acquired upon the exercise of this Warrant will have restrictions upon its resale imposed
by state and federal securities laws.
(c) Waivers Strictly Construed.
With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension
of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification
or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence.
(d) Modifications.
This Warrant may not be amended, altered or modified except by a writing signed by the Company and the Holder of this Warrant.
IN WITNESS WHEREOF, QS
ENERGY, INC. has caused this Warrant to be executed by its duly authorized representative dated as of the date first set forth
above.
Holder:
_____________________
|
QS ENERGY, INC.
735 State Street, Suite 500
Santa Barbara, CA 93101
By: /s/ Greggory Bigger
Name: Greggory Bigger
Title: Chief Executive Officer |
NOTICE OF EXERCISE
TO: QS ENERGY, INC., a Nevada corporation
(1) The undersigned
hereby elects to purchase ______________ shares of Common Stock (the "Shares") of QS Energy, Inc. (“Issuer”)
pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable
transfer taxes, if any.
(2) Please issue a
certificate or certificates representing the Shares in the name of the undersigned or in such other name as is specified below:
_______________________________________________
(Print Name)
Address:
_______________________________________________
_______________________________________________
_______________________________________________
(3) The undersigned
confirms that he is an “accredited investor” as defined by Rule 501(a) under the Securities Act of 1933, as amended,
at the time of execution of this Notice.
(4) The undersigned
confirms that the Shares are being acquired for the account of the undersigned for investment only and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or selling
the Shares.
(5) The undersigned
accepts such Shares subject to the restrictions on transfer set forth in the attached Warrant.
(6) The undersigned
acknowledges that the Issuer has given it access to all information relating to the Issuer’s business that the undersigned
has requested. The undersigned has reviewed all materials relating to the Issuer’s business, financial condition and operations
which it has requested and the undersigned has reviewed all of such materials as the undersigned, in the undersigned’s sole
and absolute discretion has deemed necessary or desirable. The undersigned has had an opportunity to ask questions of and discuss
the business, management and financial affairs of the Issuer with the Issuer’s management. Specifically but not by way of
limitation, the undersigned acknowledges the Issuer’s publicly available filings made periodically with the SEC, which filings
are available at www.sec.gov, and which filings the undersigned acknowledges reviewing or having had the opportunity of reviewing.
(7) The undersigned
acknowledges that it has, by reason of its business and financial experience, such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of this type that it is capable of (i) evaluating the merits
and risks of an investment in the Shares and making an informed investment decision in connection therewith; (ii) protecting its
own interest; and (iii) bearing the economic risk of such investment for an indefinite period of time for shares which are not
transferable or freely tradable. The undersigned hereby agrees to indemnify the Issuer and the officers, directors and employees
thereof harmless against all liability, costs or expenses (including reasonable attorneys’ fees) arising by reason of or
in connection with any misrepresentation or any breach of warranties or representations of the undersigned contained in this Notice,
or arising as a result of the sale or distribution of the Shares issuable upon exercise of the Warrants. The representations
and warranties contained herein shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned.
__________________________
(Date) |
__________________________
(Signature) |
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__________________________
(Print Name) |
Exhibit 10.120
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment
to Employment Agreement (the “2nd Amendment”) is made and entered into by and between QS Energy, Inc. (the
“Company”) and Greggory M. Bigger (“Executive”), effective as of March 10, 2016 (the “2nd
Amendment Effective Date”), with reference to the following:
RECITALS
| A. | Effective as of February 1, 2012, the Company and Executive entered into that certain Employment
Agreement (the “Employment Agreement”); |
| B. | Effective as of September 1, 2013, the Company and Executive entered into that certain First Amendment
to Employment Agreement (the “1st Amendment”); |
| C. | It is the desire of the Company and Executive to amend the Employment Agreement again, pursuant
to the terms and conditions of this 2nd Amendment, effective as of the 2nd Amendment Effective Date. |
NOW, THEREFORE, the
parties hereto agree further to amend the Employment Agreement, as follows: (All capitalized terms used herein shall have the meanings
ascribed to such terms in the Employment Agreement.)
I. Section 1 of
the Employment Agreement is hereby amended and restated as follows:
Effective Date and
Term. Unless sooner terminated as provided in this Agreement, including as a result of the Company’s early termination
of this Agreement as provided in Section 4 below, the Company shall continue to employ Executive for an initial term commencing
on March 10, 2016 (the “Effective Date”), and continuing thereafter until the close of business on the day immediately
preceding the third anniversary of the Effective date (the “Expiration Date”). This Agreement shall in all respects
terminate on the Expiration Date, except for those obligations of either party that are expressly stated to continue after such
time or by nature will continue after such time. The period beginning on the Effective Date and ending on the earlier of the Expiration
Date or the date Executive's employment under this Agreement actually terminates is referred to as the “Term.” No less
than ninety (90) days prior to the Expiration Date, the Company and the Executive hereby undertake to meet and negotiate a mutually
acceptable extension of the Expiration Date.
II. If there are
any inconsistencies between the Employment Agreement and the 1st Amendment and the terms and conditions of this 2nd
Amendment, the terms and conditions of this 2nd Amendment shall control.
III. Except for
the changes set forth in this 2nd Amendment, all terms and conditions in the Employment Agreement and 1st
Amendment shall remain unchanged and in full force and effect.
Executed effective
as of the 2nd Amendment Effective Date.
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QS ENERGY, INC. |
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By: |
/s/ MARK STUBBS |
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Mark Stubbs, |
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Director and Chairman of the
Audit Committee, on behalf of the Board of Directors |
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/s/
GREGGORY M. BIGGER |
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Greggory M.
Bigger |
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Exhibit 10.121
AMENDMENT
NO. 1
THIS
Amendment No. 1 (hereinafter the “Amendment”) to the Sponsored Research Agreement effective March 19, 2013 (hereinafter
the “Agreement”) between Save The World Air, Inc. (“Sponsor”) and Temple University—Of The Commonwealth
System of Higher Education (“University”) is now agreed to by the parties as follows:
WHEREAS,
the parties wish to replace the original scope-of-work and budget as described in “Appendix A” of the Agreement with
“Exhibit A” (Revised Scope of Work and Budget) attached hereto.
WHEREAS,
the Revised Scope of Work and Budget in Exhibit A is the result of the parties’ decision to redirect efforts to support testing
related to the technology licensed by University to Sponsor, which was not in the Agreement scope of work;
WHEREAS,
the parties wish to continue research on the originally agreed-upon Agreement scope-of-work while establishing a process for Sponsor
to request additional support related to the technology licensed by University to Sponsor;
WHEREAS,
the parties wish to reaffirm the terms of the original Agreement which protect Proprietary Information between the parties;
NOW,
THEREFORE, in consideration of the premises and mutual covenants set forth below, the parties hereto agree to the following:
| 1. | The
revision to the original scope-of-work and budget in Appendix A of the Agreement: The project shall include additional activities
(“Licensed Product Support”) related to continued testing and development of intellectual property licensed to Sponsor
by University, which is otherwise beyond the original scope-of-work related to new technology development (hereinafter “Research”).
Such additional Licensed Product Support shall be described in the Revised Scope of Work and Budget. |
| 2. | The
Agreement is amended by replacing Appendix A of the Agreement with Exhibit A (Revised Scope-of-Work and Budget) attached to this
Amendment. |
| 3. | Amendment
to Article 2 of the Agreement, Period of Performance: Temple, in order to meet the new demands of the Licensed Product Support,
will require an extension to the Period of Performance, as defined in Article 2 of the Agreement. |
| 4. | The
Agreement is amended by extending the end date of the Period of Performance from April 1, 2014, to August 31, 2015. |
| 5. | Agreement
Article 5, Fiscal Considerations: Prior Licensed Product Support has resulted in an additional cost of Two Hundred Forty One Thousand
Four Hundred and Eight U.S. Dollars ($241,408.00). Payment of such amount shall be made in two consecutive steps. The first payment
has been made in the amount of One Hundred Thousand U.S. Dollars ($100,000.00) and is duly acknowledged by Temple. The second payment
in the amount One Hundred Forty One Thousand Four Hundred Eight U.S. Dollars ($141,408.00) shall be made within ten (10) signature
days of this Agreement. Thereafter, Sponsor shall make payments according to the quarterly Payment Schedule in Exhibit A to support
the Research. The parties mutually agree that any and all additional accrual(s) from April 1, 2013, owed to Temple, will be suspended
until ten (10) days after the last signature date of this Agreement. For any remaining balance from any prior research agreement,
currently estimated at Two Hundred Fifty Eight Thousand Five Hundred Ninety Two U.S. Dollars ($258,592.00), such balance shall be
paid over an eight fiscal quarter period, to begin on September 1, 2013, and in accordance with such event, the principal investigator,
Rongjia Tao, shall provide monthly reports no later than the beginning of each following month. |
Page
1 of 7
| 6. | Article 5, Fiscal Considerations: If additional Licensed Product Support is requested by Sponsor during the Period of Performance
and is not included in die Revised Scope of Work and Budget, such Licensed Product Support requests shall be made to University
and approved in writing using the form in Exhibit B attached hereto and payment shall be made by Sponsor to University according
to the terms set forth in Section 5.1 of the Agreement. |
| 7. | The parties agree that any future work not specifically defined in Exhibit A, shall be mutually agreed to, in writing, through
an amendment to the Agreement, or through a Licensed Product Support Request (Exhibit B) prior to the initiation of any work and
that University will provide timely monthly reports, at least every thirty (30) days, to ensure that the Research or Licensed Product
Support is progressing timely and as mutually agreed to. Reports concerning the Research or Licensed Product Support shall be delivered
by University to Sponsor using the Report Template as provided in Exhibit C. |
| 8. | The parties acknowledge that University personnel funded by Sponsor will not engage in competitive research related to Sponsor’s
business activities. |
| 9. | All business development activity related to Research, conducted by University on behalf of Sponsor, shall be solely directed
for the benefit of Sponsor. |
| 10. | University acknowledges and agrees that all researchers working for University on the Research supported by Sponsor shall continue
to be bound by all terms of the Agreement not amended hereto, specifically the terms regarding Confidentiality. |
Page
2 of 7
The
parties having agreed to modify the Agreement through the aforementioned terms and now manifest their intent to execute such amended
terms by their respective signatures below:
Temple
University - Of The Commonwealth System of Higher Education
_________________________________________
Kenneth
H. Kaiser Date
Vice-president,
Human Resources and Finance
Acknowledged
and Agreed
_________________________________________
Rongjia
Tao, Ph.D. Date
Principal
Investigator
Save The World Air,
Inc.
/s/ Cecil Bond Kyte
Cecil Bond Kyte Date
Chief Executive Officer, Save The World Air,
Inc.
Page 3
of 7
Exhibit 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULES 13A-14
AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Greggory Bigger,
certify that:
1. I
have reviewed this 10-K Report of QS Energy, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting) as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its condensed consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
|
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Date: March 15, 2016 |
/s/ GREGGORY BIGGER |
|
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Greggory Bigger |
|
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Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
AND RULES 13A-14
AND 15D-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Greggory Bigger,
certify that:
1. I
have reviewed this 10-K Report of QS Energy, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting) as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its condensed consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
|
|
|
Date: March 15, 2016 |
/s/ GREGGORY BIGGER |
|
|
Greggory Bigger |
|
|
Chief Financial Officer |
|
Exhibit 32
CERTIFICATION OF
PERIODIC FINANCIAL REPORT BY THE CHIEF EXECUTIVE
OFFICER AND CHIEF
FINANCIAL OFFICER
PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Solely
for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, we, the undersigned Acting Chief Executive Officer and the Chief Financial Officer of QS Energy, Inc. (the
“Company”), hereby certify, based on our knowledge, that the Annual Report on Form 10-K of the Company for the
year ended December 31, 2015 (the “Report”) fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: March 15, 2016 |
/s/ GREGGORY BIGGER |
|
|
Greggory Bigger |
|
|
Chief Executive Officer |
|
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|
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|
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|
Date: March 15, 2016 |
/s/ GREGGORY BIGGER |
|
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Greggory Bigger |
|
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Chief Financial Officer |
|
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