Quarterly report pursuant to Section 13 or 15(d)

4. Leases

4. Leases	6 Months Ended
Jun. 30, 2014
Leases [Abstract]
4. Leases	TransCanada Keystone Pipeline, L.P. Lease On August 1, 2013, the Company entered into an Equipment Lease/Option to Purchase Agreement with TransCanada Keystone Pipeline, L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") and agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. TransCanada leased four AOT Midstream pressure vessels with a cumulative maximum flow capacity of 20,000 gallons per minute and a steal pipe header system which diverts oil from TransCanada’s pipeline through the AOT Midstream pressure vessels. The Company’s costs for the equipment leased to TransCanada totaled approximately $1.4 million, and represent costs associated with testing of a pre-production prototype and therefore are considered research and development costs (see Note 3). The initial term of the lease was for six months at an amount of $60,000 per month. TransCanada has an option to purchase the equipment during the term of the lease for approximately $4.3 million. In June 2014, the equipment was accepted by TransCanada and the lease commenced. The Company is accounting for the TransCanada lease as an operating lease, and recognized lease revenue of $60,000 for the three and six months ended June 30, 2014. The Company had no lease revenue in the three and six months ended June 30, 2013. During the initial term, either the Company or TransCanada may terminate the Agreement for any reason on 90 days written notice. On July 15, 2014, TransCanada notified the Company of TransCanada’s election to cancel, effective October 15, 2014. In exercising its termination right under the Lease, TransCanada stated “The justification for the early termination is due to the project working to expedite the required testing and believes the full term of the lease is unnecessary to successfully complete testing.” The lease continues to be effective through October 15, 2014, and testing of the Company’s equipment on TransCanada’s pipeline in Wichita, Kansas is ongoing. Data generated by, and results of the testing, have not yet been determined (See Note 8). Kinder Morgan Crude & Condensate, LLC Lease On July 15, 2014, the Company entered into an Equipment Lease/Option to Purchase Agreement with Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”). In accordance with the terms and conditions of the agreement, Kinder Morgan agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The Agreement provides for the Company to deliver the equipment to a location designated by Kinder Morgan no later than December 31, 2014. The equipment is to be installed and placed in operation by Kinder Morgan, at Kinder Morgan’s expense. The initial term of the Agreement is four months, with an option to extend the Lease for up to a maximum of 84 months. Lease payments shall be $20,000 per month; provided however, that in the event the Equipment is removed from service at its initial location during the Initial Term, the monthly lease payments shall be reduced to $5,000 until the Equipment is placed back in service at its new location, at which time the Lease payments shall resume at $20,000 per month. The agreement further provides that Kinder Morgan shall have an option to purchase the Equipment during the term of the Lease for a fixed price of between $600,000 and $1,200,000, depending upon the date of purchase. During the initial term, either the Company or Kinder Morgan may terminate the Agreement for any reason on 45 days’ written notice. Under terms of the agreement, Kinder Morgan and the Company will collaboratively share and analyze performance data collected by sensors attached to the AOT equipment and at several locations along Kinder Morgan’s pipeline. Data collected is protected by a mutual nondisclosure agreement. The Company will account for the lease with Kidder Morgan as an operating lease (see Note 8).

4. Leases

6 Months Ended

Jun. 30, 2014

TransCanada Keystone Pipeline, L.P. Lease

On August 1, 2013, the Company entered into an Equipment Lease/Option to Purchase Agreement with TransCanada Keystone Pipeline, L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") and agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. TransCanada leased four AOT Midstream pressure vessels with a cumulative maximum flow capacity of 20,000 gallons per minute and a steal pipe header system which diverts oil from TransCanada’s pipeline through the AOT Midstream pressure vessels. The Company’s costs for the equipment leased to TransCanada totaled approximately $1.4 million, and represent costs associated with testing of a pre-production prototype and therefore are considered research and development costs (see Note 3). The initial term of the lease was for six months at an amount of $60,000 per month. TransCanada has an option to purchase the equipment during the term of the lease for approximately $4.3 million.

In June 2014, the equipment was accepted by TransCanada and the lease commenced. The Company is accounting for the TransCanada lease as an operating lease, and recognized lease revenue of $60,000 for the three and six months ended June 30, 2014. The Company had no lease revenue in the three and six months ended June 30, 2013. During the initial term, either the Company or TransCanada may terminate the Agreement for any reason on 90 days written notice.

On July 15, 2014, TransCanada notified the Company of TransCanada’s election to cancel, effective October 15, 2014. In exercising its termination right under the Lease, TransCanada stated “The justification for the early termination is due to the project working to expedite the required testing and believes the full term of the lease is unnecessary to successfully complete testing.” The lease continues to be effective through October 15, 2014, and testing of the Company’s equipment on TransCanada’s pipeline in Wichita, Kansas is ongoing. Data generated by, and results of the testing, have not yet been determined (See Note 8).

Kinder Morgan Crude & Condensate, LLC Lease

On July 15, 2014, the Company entered into an Equipment Lease/Option to Purchase Agreement with Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”). In accordance with the terms and conditions of the agreement, Kinder Morgan agreed to lease and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The Agreement provides for the Company to deliver the equipment to a location designated by Kinder Morgan no later than December 31, 2014. The equipment is to be installed and placed in operation by Kinder Morgan, at Kinder Morgan’s expense.

The initial term of the Agreement is four months, with an option to extend the Lease for up to a maximum of 84 months. Lease payments shall be $20,000 per month; provided however, that in the event the Equipment is removed from service at its initial location during the Initial Term, the monthly lease payments shall be reduced to $5,000 until the Equipment is placed back in service at its new location, at which time the Lease payments shall resume at $20,000 per month. The agreement further provides that Kinder Morgan shall have an option to purchase the Equipment during the term of the Lease for a fixed price of between $600,000 and $1,200,000, depending upon the date of purchase. During the initial term, either the Company or Kinder Morgan may terminate the Agreement for any reason on 45 days’ written notice.

Under terms of the agreement, Kinder Morgan and the Company will collaboratively share and analyze performance data collected by sensors attached to the AOT equipment and at several locations along Kinder Morgan’s pipeline. Data collected is protected by a mutual nondisclosure agreement. The Company will account for the lease with Kidder Morgan as an operating lease (see Note 8).