QS Energy, Inc. (QSEP)

Executive Summary / Key Takeaways

• Zero Revenue After Two Decades: QS Energy has developed its Applied Oil Technology (AOT) for over 20 years, completing multiple field tests and third-party validations, yet reported no revenue for the nine months ended September 30, 2025, highlighting a persistent commercialization failure that defines the investment risk.

• Existential Financial Crisis: With $49,000 in cash as of September 30, 2025, a $13.78 million nine-month net loss, $5.45 million stockholders' deficit, and $1.07 million in past-due notes payable, the company faces "substantial doubt" about its ability to continue as a going concern beyond October 2025 without immediate financing.

• Unfulfilled Partnership Promises: The June 2025 exclusive distributor agreement with VIPS Petroleum outlines potential multi-million dollar purchase orders, including a $10 million initial order for two AOT units, but as of the November 14, 2025 filing, QS Energy has received zero purchase orders and generated zero revenue from this partnership.

• Technology That Works But Doesn't Sell: Third-party tests demonstrate AOT can reduce crude oil viscosity by 8-56% and pipeline pressure loss, with recent 2022 component testing eliminating prior electrical arcing issues and achieving full 40.1kV operational voltage, yet commercial adoption remains elusive after repeated field test failures with TransCanada (TRP) and Kinder Morgan (KMI).

• Binary Outcome with No Middle Ground: The investment case boils down to whether QS Energy can secure financing and convert its VIPS partnership into actual revenue before cash runs out, making this a high-risk, potentially high-reward speculation rather than a traditional investment.

Setting the Scene: A Two-Decade Journey to Nowhere

QS Energy, originally incorporated as Mandalay Capital Corporation on February 18, 1998, has operated under its current name since August 2015, trading on the OTC Pink Sheets as QSEP. The company has pursued a singular mission for over two decades: commercializing Applied Oil Technology (AOT), a 100% solid-state system that reduces crude oil viscosity by applying a high-intensity electrical field to oil feedstock while in transit. This technology addresses a clear market need in the $7-8 billion flow assurance sector, where pipeline operators spend heavily on chemical diluents and drag-reducing agents to meet viscosity requirements and maximize throughput.

The value proposition is straightforward and compelling. AOT promises to reduce pipeline pressure loss, increase flow rates and capacity, decrease reliance on expensive diluents, and lower greenhouse gas emissions by reducing pumping energy requirements. In an industry facing increasing environmental scrutiny and pressure to improve economics, a non-chemical, electricity-based solution should theoretically command significant interest. Yet despite this clear value proposition and a development timeline spanning multiple oil price cycles, QS Energy has never generated meaningful revenue, positioning it as a perpetual science project rather than a commercial enterprise.

The company's place in the industry structure reveals its fundamental weakness. The flow assurance market is dominated by integrated oilfield services giants like Schlumberger (SLB), Baker Hughes (BKR), and Halliburton (HAL), each generating billions in revenue with established global sales networks, deep customer relationships, and comprehensive service offerings. These competitors provide chemical and mechanical flow assurance solutions that, while less environmentally friendly, are proven at scale and backed by substantial balance sheets. QS Energy's negligible market share and lack of commercial traction place it at the extreme periphery of the industry, competing against incumbents with resources that dwarf its own.

Technology, Products, and Strategic Differentiation: A Solution in Search of a Customer

QS Energy's AOT technology represents a genuine engineering achievement that has consistently demonstrated technical viability in controlled environments. Independent third-party tests by the U.S. Department of Energy, PetroChina (PTR) Pipeline R&D Center, and ATS RheoSystems have validated the core principle. ATS testing in September 2014 showed viscosity reductions of 8% to 23% depending on flow rates and crude oil types, while other tests have demonstrated reductions as high as 20-56%. The system operates at 40.1kV, applying an electrical field that temporarily alters crude oil's rheological properties without additives or heat.

The technology's economic impact could be material if deployed at scale. For pipeline operators transporting heavy crude, reducing viscosity without diluents translates to lower operating costs, increased throughput, and reduced environmental compliance costs. The "eDiluent" marketing strategy, trademarked in 2017, positions AOT as an electronic alternative to chemical diluents, targeting long-term recurring revenue from midstream operators seeking to reduce their carbon footprint while improving margins. This positioning aligns with industry trends toward sustainability and operational efficiency, potentially giving QS Energy a qualitative edge over chemical-dependent competitors.

However, the path from technical validation to commercial adoption has been littered with failures. The company's first commercial prototype, AOT Midstream, completed in May 2013, was leased to TransCanada Keystone Pipeline in 2013, but initial results in July 2014 were deemed flawed, leading to lease termination in October 2014. A subsequent lease with Kinder Morgan Crude Condensate beginning in July 2014 encountered electrical impedance issues due to conductive materials in crude oil, and despite modified equipment showing promising viscosity reductions in February 2016, the lease was eventually suspended due to limited data and short test duration.

These setbacks reveal a pattern: the technology works in principle but fails in practice due to real-world complexities. The electrical short circuit issues that plagued the demonstration project with a U.S.-based pipeline operator from December 2018 to July 2020, including damaged power supplies and internal grid pack problems, exemplify the gap between laboratory success and field reliability. The project's shutdown in July 2020 was attributed primarily to a lack of operating capital, underscoring how financial constraints have repeatedly derailed technical progress.

Recent developments suggest these issues may finally be resolved. After securing limited capital in 2021, engineers redesigned AOT internals to address insulating material swelling and arcing. By August 2022, testing of new components successfully eliminated arcing problems, allowing the AOT to achieve full operational voltage of 40.1kV. The company believes the AOT is now ready for customer oil testing and field deployment, though this claim has been made before without resulting revenue.

The VIPS Petroleum partnership represents the latest attempt to bridge the commercialization gap. The June 2025 exclusive distributor agreement for Malaysia, Ghana, India, and other territories was amended on September 3, 2025, to outline an initial pre-phase purchase order for two AOT units at $10 million, with subsequent phases potentially totaling $50 million for ten units. The agreement includes a warrant for 25 million shares at $0.07 and a rebate structure that could theoretically fund the warrant exercise. However, as of the filing date, no purchase orders have been received, no revenue has been generated, and the AOT product is not being used by any VIPS customers or anyone else.

Financial Performance & Segment Dynamics: A Business Without Revenue

QS Energy operates as a single reportable segment, making its consolidated financials synonymous with its AOT commercialization efforts. For the three months ended September 30, 2025, the company reported no revenue, identical to the prior year period. For the nine months ended September 30, 2025, revenue was also zero, unchanged from the prior year. This complete absence of top-line growth after two decades of development is the single most important financial fact, as it indicates the company has failed to achieve product-market fit despite repeated technical validations.

Operating expenses for the three months ended September 30, 2025, increased by $415,000 to $646,000, driven by a $135,000 increase in non-cash expenses (primarily stock compensation) and a $280,000 increase in cash expenses for consulting fees, salaries, and legal/accounting costs. For the nine-month period, operating expenses surged by $11.29 million to $12.05 million, reflecting an $8.93 million increase in non-cash stock compensation and a $2.36 million increase in cash expenses. These rising costs without corresponding revenue demonstrate the company's cash burn acceleration as it attempts to finalize commercialization.

Research and development expenses, which should be the engine of value creation for a pre-revenue technology company, increased dramatically to $1.24 million for the three months ended September 30, 2025, up from $48,000 in the prior year period. For the nine months, R&D expenses were $1.40 million, up from $143,000. This increase was primarily due to a significant rise in prototype product development costs, suggesting the company is finally investing in production-ready designs after years of field testing failures.

The net loss for the three months ended September 30, 2025, was $1.96 million, compared to $365,000 in the prior year period. For the nine months, the net loss ballooned to $13.78 million, up from $1.15 million. This accelerating loss trajectory, combined with zero revenue, indicates the company is burning cash at an unsustainable rate while its window for commercialization narrows.

The balance sheet reveals the depth of the crisis. As of September 30, 2025, QS Energy had $49,000 in cash, which management estimates will be sufficient only through October 2025. The company has a stockholders' deficit of $5.45 million and $1.07 million in past-due notes payable. Additionally, payments due to Temple University under licensing agreement amendments totaling $3.17 million were due on October 11, 2025, but had not been made as of the November 14, 2025 filing date. This unpaid obligation to its intellectual property licensor creates additional legal and operational risk.

The company's negative operating cash flow of $3.38 million for the nine months ended September 30, 2025, was financed by issuing convertible notes and exercising stock options and warrants. Management is actively seeking additional funds through debt and equity securities, but provides no assurance that such capital will be available on acceptable terms. The going concern warning is explicit: "The company's ability to continue as a going concern is in substantial doubt due to a net loss of $13.78 million and negative cash flow from operations of $3.38 million for the nine months ended September 30, 2025."

Outlook, Guidance, and Execution Risk: A Race Against Time

Management's commentary reveals a company aware of its precarious position but offering limited concrete guidance. The company anticipates needing "substantial additional capital through 2025, and beyond, to fund work on our AOT, our sales and marketing efforts, continuing research and development, and certain other expenses... until we are able to achieve a revenue base." This statement acknowledges that the path to profitability is undefined and potentially years away, even under optimistic scenarios.

The VIPS Petroleum partnership represents the primary near-term catalyst, but management provides no assurances that conditions for purchase or payment will be satisfied. The amended agreement's structure—requiring VIPS to make a $10 million payment for two units before any revenue recognition—creates a high hurdle. Given that the AOT product is not currently being used by any VIPS customers or anyone else, the partnership's value remains purely theoretical. The revenue sharing formula based on incremental barrels and carbon credits is meaningless without actual unit deployments.

The Corpus Christi flow loop deployment with ReadyFlo Systems offers another potential path to revenue. The 300-meter flow loop has been designed and implemented for operational trials using customer crude oil streams, and the system is operational with positive initial results. However, this remains a testing facility, not a commercial installation, and management has not announced any paying customers for the flow loop services.

Management believes the supply chain is ready for AOT production, contingent on securing deployment contracts. This readiness is irrelevant without purchase orders. The company's efforts are focused on reaching an agreement with a suitable development partner as the next step to develop and commercialize its AOT technology, suggesting that even after 20 years, QS Energy lacks the internal capabilities to bring its product to market independently.

The competitive context makes execution even more critical. Schlumberger, Baker Hughes, and Halliburton each generate billions in revenue with established flow assurance businesses, 10-15% net margins, and strong cash flow. Their chemical and mechanical solutions, while less environmentally friendly, are proven at scale and backed by global sales forces and deep customer relationships. QS Energy's negligible market share and lack of commercial traction mean it must not only perfect its technology but also build a sales and service organization from scratch—an impossible task without significant capital.

Risks and Asymmetries: How the Story Breaks

The primary risk is execution failure in its most literal sense: QS Energy may run out of cash before converting its technology into revenue. With $49,000 in cash and a $1.96 million quarterly burn rate, the company has weeks of runway, not months. The $13.78 million nine-month loss and $3.38 million negative operating cash flow demonstrate that even minimal operations consume capital far exceeding available resources. If financing is not secured immediately, the company will face insolvency, making the stock a zero.

The VIPS partnership risk is equally material. The agreement's structure requires VIPS to satisfy various conditions before making purchases, but the company provides no visibility into these conditions or VIPS's ability to meet them. The fact that no purchase orders have been received despite the agreement being signed in June 2025 and amended in September 2025 suggests either VIPS is unwilling or unable to commit, or that the AOT technology has not yet met the necessary performance criteria for commercial deployment. If this partnership fails to produce revenue, QS Energy will have exhausted its primary commercialization pathway.

Technology risk persists despite recent progress. While August 2022 component testing eliminated arcing issues and achieved full 40.1kV operation, the company has not demonstrated sustained, reliable performance in commercial crude oil streams at scale. The historical pattern of initial success followed by field failures suggests that unknown technical challenges may emerge once units are deployed in real-world conditions. The electrical impedance issues that plagued Kinder Morgan tests could resurface with different crude oil compositions, creating warranty and liability risks that a company with $49,000 in cash cannot possibly absorb.

Market risk is severe. Even if QS Energy perfects its technology and secures financing, it must compete against entrenched chemical solutions from Schlumberger, Baker Hughes, and Halliburton. These competitors can bundle flow assurance with other services, offer financing, and leverage decades of customer relationships. QS Energy's first-mover advantage in non-chemical viscosity reduction is meaningless without the resources to educate the market, prove long-term reliability, and build a service network. The company's small scale leads to high customer acquisition costs and dependency on partnerships for manufacturing and deployment, creating margin pressure and execution risk.

The unpaid $3.17 million obligation to Temple University creates additional legal risk. As the licensor of QS Energy's core intellectual property, Temple University could potentially terminate the licensing agreement if payments are not made, leaving the company without access to the patents that constitute its primary competitive moat. This risk is compounded by the company's inability to make the payment by the October 11, 2025 deadline, suggesting a breakdown in the relationship with its most important technology partner.

Valuation Context: Speculation Without Fundamentals

At $0.16 per share, QS Energy trades at a market capitalization of $91.37 million and an enterprise value of $92.61 million. These valuation metrics are purely speculative, as the company has zero revenue, zero gross margin, zero operating margin, and zero profit margin. Traditional valuation multiples are meaningless: there is no price-to-sales ratio when sales are zero, and negative earnings make price-to-earnings ratios nonsensical.

The company's balance sheet provides the only concrete valuation framework. With $49,000 in cash, a stockholders' deficit of $5.45 million, and $1.07 million in past-due notes payable, the equity has negative book value. The price-to-book ratio of -17.00 reflects this fundamental insolvency. Return on assets of -49.86% demonstrates that every dollar of assets destroys value at a catastrophic rate.

For pre-revenue companies, investors typically look to cash position and burn rate to assess runway. QS Energy's $49,000 cash against a quarterly burn of approximately $1.5 million (net loss plus working capital changes) implies less than one month of operational runway. The company's survival depends entirely on its ability to secure immediate financing, making the stock a binary option on management's fundraising capability rather than a valuation-based investment.

Comparing QS Energy to its competitors highlights the absurdity of its valuation. Schlumberger trades at 1.65 times sales with 10.34% profit margins and 6.86% return on assets. Baker Hughes trades at 1.67 times sales with 10.43% profit margins and 5.77% return on assets. Halliburton trades at 1.09 times sales with 5.91% profit margins and 7.61% return on assets. QS Energy's $91.37 million valuation implies investors are paying infinite multiples for a company with no revenue, negative margins, and a business model that has failed to achieve commercial traction for two decades.

The VIPS partnership provides the only potential valuation anchor. If the initial $10 million order for two units were to materialize, it would represent approximately $5 million in revenue per unit. However, the agreement's rebate structure—where QS Energy must process a 15% post-sale rebate for every unit sold—means net revenue would be $4.25 million per unit, or $8.5 million for the initial order. Even this hypothetical revenue would not cover the company's annual burn rate, and the agreement's conditions may never be satisfied.

Conclusion: A Technology Story Without a Business Model

QS Energy represents the quintessential pre-revenue technology company: a genuinely innovative solution to a real industry problem, decades of R&D investment, third-party validation of technical efficacy, and a complete inability to convert these advantages into commercial revenue or financial sustainability. The company's 20-year history is a chronicle of repeated technical progress followed by commercial failure, with each field test revealing new challenges that management's limited resources could not overcome.

The central thesis hinges on whether QS Energy can achieve in weeks what it has failed to accomplish in two decades: secure sufficient capital to survive and convert its VIPS partnership into actual revenue. The technology appears to work, recent component testing has resolved prior electrical issues, and the Corpus Christi flow loop provides a platform for customer demonstrations. However, these technical achievements are meaningless without the financial resources to scale production, build a sales organization, and support commercial deployments.

For investors, this is a binary outcome with no middle ground. If QS Energy secures financing and VIPS executes on its purchase commitments, the stock could revalue dramatically upward as the company transitions from pre-revenue to generating meaningful sales in a large addressable market. If financing fails or the VIPS partnership proves illusory, the company will likely face insolvency within months, making the stock a zero.

The competitive landscape offers no shelter. Schlumberger, Baker Hughes, and Halliburton dominate flow assurance with proven, scalable solutions and strong financial positions. QS Energy's non-chemical differentiation provides a theoretical advantage in an ESG-conscious market, but without the resources to educate customers, prove long-term reliability, and build a service network, this advantage remains theoretical.

The investment decision reduces to a single question: Can management accomplish in the next 30 days what it has failed to do in 20 years? The answer will determine whether QS Energy becomes a case study in successful technology commercialization or another cautionary tale of innovation without execution. Investors should monitor financing announcements, VIPS purchase order receipt, and Corpus Christi trial results as the three variables that will decide the company's fate.