Quarterly report pursuant to sections 13 or 15(d)

7. Research and development

v2.3.0.11
7. Research and development
3 Months Ended
Mar. 31, 2012
Research and Development Expense, Policy [Policy Text Block]

7.  Research and development


The Company has entered into a research and development testing facility in Midwest, Wyoming, located at the U.S. Department of Energy Rocky Mountain Oilfield Testing Center, Naval Petroleum Reserve #3. The Company constructs the AOT technology prototypes with the help of various third party entities, located in Casper, Wyoming. The Company has purchased test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment and other related equipment for the purpose of evaluating and testing its AOT prototypes.


The Company has research and development facilities in Morgan Hill, California. The Company has tested ELEKTRA technologies and legacy products incorporating its ZEFS, MK IV, ELEKTRA for multiple makes and models diesel engines, motorbikes, boats, generators, lawn mowers and other small engines. The Company has purchased test vehicles, test engines and testing equipment. 


The Company incurred costs of $167,466 and $471,355 for the three months ended March 31, 2012 and 2011, respectively, on its research and development activities and $7,612,463 from February 18, 1998 (inception) to March 31, 2012.


Temple University Research & Development Agreement


The Company has entered into a research and development agreement (R&D Agreement) with Temple University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple University will conduct a 24-month research project towards expanding the scope of, and developing products utilizing, the technologies covered under the License Agreements, including design and manufacture of prototypes utilizing electric fields to improve diesel, gasoline and kerosene fuel injection in engines using such fuels and a device utilizing a magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed base) and edible oil flow in pipelines. If the research project yields results within the scope of the technologies licensed pursuant to the License Agreements, those results will be deemed included as rights licensed to the Company pursuant to the License Agreements. If the research project yields results outside of the scope of the technologies covered by the License Agreements, the Company has a six-month right of first negotiation to enter into a new worldwide, exclusive license agreement with Temple University for the intellectual property covered by those results. Pursuant to the R & D Agreement, the Company will make payments to Temple University in the aggregate amount of $500,000. At March 31, 2012 the Company has completed payment in full of $500,000 under the R & D Agreement.


On August 9, 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 cancel $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. As of March 31, 2012, the Company has not made a determination to provide the funding. The term of the licenses commences in August 2011 through the expiration of the patents contemplated thereunder, or unless sooner terminated under terms of the licensing agreements.


As of March 31, 2012, the Company recorded the entire $300,000 non-refundable license maintenance fee as part of its research and development costs, of which, $200,000 was paid in November 2011 and $100,000 was subsequently paid in February 2012. Further, the Company also accrued $125,000 of the annual maintenance fees of $187,500 which will become due in August 2012.


As of March 31, 2012, there were no revenues generated from these two licenses nor the Company has made a determination to provide the $250,000 funding in research or development to Temple’s patent rights licensed to the Company.


Effective April 1, 2012 the Company entered into an agreement with Temple University in the amount of $500,000 to be paid over a two year period to engage the University as well as Physics Department Chairman Dr. Rongia Tao. This agreement specifies that the Company and Temple University will work collaboratively regarding further research and development of the AOT device. This agreement allows the Company to have access to Temple University proprietary research and intellectual property.


AOT Testing


In mid-July, 2010, the Company entered into a Letter of Intent with the U.S. Department of Energy-Naval Petroleum Reserve/Rocky Mountain Oilfield Testing Center (RMOTC) in Wyoming. On December 22, 2010, a formal Agreement was entered into with RMOTC for testing of our Applied Oil Technology (AOT). Third-party vendors were used to build the AOT 1.X prototype(s) to be used at for full scale testing purposes. Third-party vendors were also used to furnish hardware, electrical supplies, oil tanks and engineering testing devices, and other testing-related equipment. Costs incurred for the testing during the three months ended March 31, 2012 was $114,562. Testing began in July 2011 and is scheduled to be completed in December 31, 2016.