Quarterly report pursuant to Section 13 or 15(d)

3. Research and Development

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3. Research and Development
9 Months Ended
Sep. 30, 2014
Research and Development [Abstract]  
Research and Development
3. Research and Development

 

The Company has developed a technology called Applied Oil Technology (AOT), which is designed to enhance the flow of crude oil through pipelines.

 

For the three and nine month periods ended September 30, 2014, total expenses incurred on research, testing and development of the AOT™ Midstream commercial design and new product development amounted to $146,094 and $741,045, respectively and are reflected as research and development expenses on the accompanying condensed consolidated statements of operations. For the three and nine month periods ended September 30, 2013, such expenses totaled $563,559 and $1,322,816, respectively.

 

For the three and nine month periods ended September 30, 2014 and 2013, the following are the major components of the Company’s Research and Development expenses:

 

AOT Prototype

 

Total expenses incurred during the three and nine month periods ended September 30, 2014 amounted to $54,708 and $ 458,706, respectively. Total expenses incurred during the three and nine month periods ended September 30, 2013 amounted to $458,706. The cost of these prototypes was expensed as incurred because of the uncertainty of recovery and the imprecise nature of prototypes. The prototypes were developed to be used in leases the Company signed with TransCanada Keystone Pipeline, L.P. ("TransCanada") and Kinder Morgan Crude & Condensate, LLC (“Kinder Morgan”) (see Note 4).

 

AOT Testing

 

The Company constructs, develops and tests the AOT technology prototypes through the assistance of various third party entities. Costs incurred and expensed include fees such as U.S. Department of Energy testing fees, purchase of test equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT prototypes.

 

During the three and nine month periods ended September 30, 2014, the Company recognized $12,167 and $44,682, respectively, of AOT testing expenses. During the three and nine month periods ended September 30, 2013, the Company recognized $ 55,835 and $ 577,944, respectively, of such costs.

 

Temple University Licensing 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 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. Under terms of the License Agreements, the royalty is credited against the annual maintenance fees. As such, no royalty is due until the total value of royalties earned in any calendar year exceeds the annual maintenance fee. 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. 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 fails to commercialize the patent rights.

 

During the three and nine month periods ended September 30, 2014 total expenses recognized pursuant to these two agreements amounted to $46,875 and $140,625, respectively. During the three and nine month periods ended September 30, 2013, total such expenses amounted to $46,875 and $140,625, respectively. These expenses have been reflected in Research and Development expenses on the accompanying consolidated statement of operations.

 

As of September 30, 2014 and December 31, 2013, total unpaid fees due to Temple pursuant to these agreements amounted to $293,750 and $153,125, respectively, 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 quarterly installments of $62,500.

 

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 seven quarterly installments of $32,344 and a final payment on June 1, 2015 of $32,184.

 

During the three and nine month periods ended September 30, 2014, the Company recognized a total of $32,344 and $97,032, respectively, pursuant to this agreement and has been reflected in Research and Development expenses on the accompanying consolidated statement of operations. During the three and nine month periods ended September 30, 2013, such expenses totaled $32,324 and $115,657, respectively, of such costs.

 

As of September 30, 2014 and December 31, 2013, total unpaid fees due to Temple pursuant to this agreement amounted to $32,344 and $32,325, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.