Item 8.01 Other Events.
As previously reported, in December 2018,
the QS Energy, Inc. (“Company”) entered into an agreement with a major U.S.-based pipeline operator under which the
Company installed its AOT equipment on a crude oil pipeline located in the Southern United States for testing and demonstration
purposes. Based on laboratory tests and operations of prototype equipment at other locations, we had a reasonable expectation that
the equipment would operate successfully and that test results would demonstrate quantifiable benefits to pipeline operators.
As reported in the Company’s Form
10-K and Form 10-Q filed with the SEC on March 31, 2020 and June 29, 2020, respectively, and in website updates published on the
Company’s website at https://qsenergy.com/updates, the Company has experienced a number of difficulties and delays at the
demonstration site. Despite identifying and implementing numerous design modifications over the past several months, the Company
has been unable to successfully operate its AOT equipment at the demonstration site.
In late June 2020, equipment modifications
intended to mitigate electrical short circuit issues identified in earlier tests were completed. During startup testing, the system
experienced a new failure mode in which the system could be operated at a baseline high voltage (well below operational voltage
required to treat heavy crude), but after a period of time, the system would drop to very low voltage indicating a reduction in
electrical resistance in the AOT. This voltage drop was both dynamic, developing over time as electrical current was applied; and
transient, in that the power supply could be shut-down and re-started with this voltage drop characteristic repeating. After reviewing
these results and running subsequent in-field tests at the direction of the power supply manufacturer, they recommended a configuration
modification to the control module of the system’s high-voltage power supply which, in their experience, could resolve the
system’s ability to maintain constant voltage under our unique operating conditions in which the AOT essentially acts as
a very large capacitor. During the first week of July, we modified the power supply control module at the direction of the power
supply manufacturer. Though this modification did appear to solve the voltage drop issue, the AOT could not achieve operational
voltage as the system control module indicated arc-faults when high voltage was applied above the baseline voltage levels. After
many attempts to bring the system up to operating voltage, arc-faults continued until the AOT demonstrated symptoms of what appeared
to be a dead short (electrical short-to-ground; voltage dropped to zero) and the system could no longer be re-started.
Our engineers have working concepts as
to what may be causing this most recent failure but will not be able to fully diagnose these issues at the demonstration site.
After discussions with our demonstration pipeline partner, it has been mutually agreed that the best course of action will be to
move the equipment from the demonstration site to another location where our engineers could disassemble and inspect the equipment.
We are working on plans to move the equipment to the Houston area for possible disassembly, inspection, and testing. Our demonstration
partner has indicated their continued interest in our AOT technology and may consider installation and operation of a new AOT demonstration
project if our operational issues can be resolved.
Though our engineers do have working concepts
as to what may be causing the most recent voltage drop and arc-fault issues, it is unknown whether these issues can be solved with
minor modifications to the current design. To fully diagnose and resolve these issues, new testing would likely need to be performed
in a laboratory setting. The time and cost of implementing such a plan would likely be significant. The Company does not currently
have sufficient capital to take on this endeavor.
If we are able to raise sufficient capital
we would also consider designing, testing and commercializing a smaller scale AOT unit targeting upstream, trucking and rail applications.
This strategy could reduce development time and costs, with the intention of moving back into the midstream crude oil pipeline
market subsequent to successful commercial operations at a smaller scale.
The Company currently has limited capital
resources and will need to raise substantial capital to continue operations. We are considering all options but can provide no
assurances that additional capital will be available to us, or if it is, that such additional capital will be offered at acceptable
terms, nor can we provide any assurances that if capital would be available to us on acceptable terms, any redesign and testing
of our AOT equipment would prove successful.
Forward-Looking Statements
The Registrant cautions you that statements
included in this Current Report on Form 8-K (including the exhibit hereto) that are not a description of historical facts are forward-looking
statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,”
“should,” “expect,” “plan,” “anticipate,” “could,” “intend,”
“target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negatives of these terms or other similar expressions. These statements
are based on current expectations, estimates and projections about our business based in part on assumptions made by management.
These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted
in the forward-looking statements due to numerous factors, including those set forth our periodic reports filed with the SEC. You
are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the
Registrant undertakes no obligation to revise or update this report to reflect events or circumstances after the date hereof. All
forward-looking statements are qualified in their entirety by this cautionary statement. This caution is made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.