AOT Testing

The Company has concluded conducting research and development of its AOT technology prototypes in a testing facility in Midwest, Wyoming, located at the U.S. Department of Energy Rocky Mountain Oilfield Testing Center, Naval Petroleum Reserve #3 (US DOE). The Company constructs the AOT technology prototypes through the assistance of various third party entities, located in Casper, Wyoming. Costs incurred and expensed included fees charged by the US DOE, purchase of test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment and other related equipment and various logistical expenses for the purposes of evaluating and testing its AOT prototypes.

The Company incurred costs of $582,174 and $327,751 for the six month period ended June 30, 2013 and 2012, respectively, and has been reflected in Research and Development expenses on the accompanying condensed consolidated statement of operations.

Temple University Research & Development 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. 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.

In January 2013, the Company and Temple agreed to defer payment of an amount due under the sponsored research agreement (discussed below) pending renegotiation of a separate research and development agreement with Temple.

Total expenses recognized during the six month period ended June 30, 2013 and 2012 pursuant to these two agreements amounted to $93,750 and $93,750 respectively and has been reflected in Research and Development expenses on the accompanying condensed consolidated statement of operations.

As of June 30, 2013, there were no revenues generated from these two licenses.

As of June 30, 2013, the Company accrued a total of $209,375 pursuant to these licensing agreements which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.

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 eight quarterly installments of $62,500.

In January 2013, the Company and Temple agreed to defer payment of the amount due pending renegotiation of the Research Agreement. In May 2013, parties mutually agreed to suspend further accruals of the amount due and restructure both the scope and cost of future research funding under this agreement as the Company moves from development mode towards commercial operations. The Company expects that a new Research Agreement will be finalized in September 2013 at a reduced rate. Furthermore, the Company made a $100,000 payment deemed to bring the Company current in its obligation to Temple and parties have mutually agreed the Company is not in default under the Research Agreement.

During the six months ended June 30, 2013 and 2012, the Company recognized a total of $83,333 and $62,500 respectively, pursuant to this agreement and has been reflected in Research and Development expenses on the accompanying condensed consolidated statement of operations.

As of June 30, 2013, the Company accrued a total of $170,833 pursuant to this agreement which is included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.