AOT Testing & Prototype

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 $1,095,959 and $456,372 for the nine month period ended September 30, 2013 and 2012, respectively, and has been reflected in Research and Development expenses on the accompanying condensed consolidated statement of operations. As of September 30, 2013, pursuant to existing contractual obligations, the Company is committed to expense approximately $314,000 in future periods for the construction of the AOT prototype.

Temple University License Agreements

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 License 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 of which $37,500 can be deferred until the Company generates significant revenues from these licenses; (iii) royalty fee ranging from 4% up to 7% from revenues generated from the License 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 License Agreements or if the Company ceases the development of the patent or failure to commercialize the patent rights. At December 31, 2012, total amount due pursuant to these agreements amounted to $115,625.

Total expenses recognized during the nine month period ended September 30, 2013 and 2012 pursuant to these License Agreements amounted to $140,625 in both periods has been reflected in Research and Development expenses on the accompanying condensed consolidated statement of operations.

As of September 30, 2013, the Company accrued a total of $106,250 pursuant to these License Agreements which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets, of which $25,000 will be payable on July 31, 2014 and $81,250 has been deferred under terms of the license agreements.

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 agreed to pay Temple $500,000, payable in eight quarterly installments of $62,500. At December 31, 2012, total amount due pursuant to this agreement amounted to $187,500.

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 expenses incurred in prior periods was $241,408, of which, $187,500 was already recognized in prior year 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 nine months ended September 30, 2013 and 2012, the Company recognized a total of $86,232 and $125,000 respectively pursuant to this agreement and has been reflected in Research and Development expenses on the accompanying condensed consolidated statement of operations. Furthermore, the Company also paid Temple a total of $181,250 pursuant to the amended agreement.

As of September 30, 2013, the Company accrued a total of $92,482 pursuant to this agreement which is included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets, the balance of which was paid in full subsequently in October 2013.