Research and development costs consist of costs of construction, development and testing of the AOT and Joule Heat technologies with internal resources and through the assistance of various third party entities. Costs incurred and expensed include fees such as 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 and Joule Heat prototypes. In addition, research and development costs also include licensing fees and research and development fees due to Temple University.

For the six-month periods ended June 30, 2016 and 2015, our research and development expenses were $148,177 and $420,435 respectively. For the three-month periods ended June 30, 2016 and 2015, our research and development expenses were $73,242 and $147,658 respectively.

AOT Product Development and Testing

In 2014, the Company entered into a lease agreement with Kinder Morgan Crude & Condensate, LLC for the manufacture and delivery of our AOT Prototype Equipment. The AOT Prototype Equipment is currently undergoing testing at a Kinder Morgan facility. See Note 0 for further discussion.

During the six-month periods ended June 30, 2016 and 2015, the Company incurred total expenses of $54,227 and $78,596, respectively, in the manufacture, delivery and testing of the AOT prototype equipment. During the three-month periods ended June 30, 2016 and 2015, the Company incurred total expenses of $26,367 and $49,704, respectively. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statements of operations.

Joule Heat Product Development and Testing

On October 15, 2014, the Company entered into a Joint Development Agreement with Newfield Pipeline Exploration Company (“Newfield”) to test the effectiveness of the Company’s Joule Heat technology under operating conditions on Newfield’s oil pipeline. The Company’s first Joule Heat prototype unit was delivered to Newfield in May 2015 for further testing. In December 2015, we temporarily suspended Joule Heat development activities to focus Company resources on finalizing commercial development of the AOT Midstream.

In December 2015, we temporarily suspended development activities for the Joule Heat technology in order to focus the Company resources on finalizing the commercial development of the AOT technology. We currently plan to resume Joule Heat development in the fourth quarter of fiscal 2016 depending on the availability of sufficient capital and other resources.

During the six-month periods ended June 30, 2016 and 2015, the Company incurred total expenses of $200 and $183,401, respectively, in the manufacture, delivery and testing of the Joule Heat prototype equipment. During the three-month periods ended June 30, 2016 and 2015, the Company incurred total expenses of $0 and $18,735, respectively, in the manufacture, delivery and testing of the Joule Heat prototype equipment. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations.

Temple University Licensing 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 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; (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 defer $37,500 of the amount due if the Company agreed 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 failure to commercialize the patent rights.

Total expenses recognized during each six-month period ended June 30, 2016 and 2015 pursuant to these two agreements amounted to $93,750. Total expenses recognized during each three-month period ended June 30, 2016 and 2015 pursuant to these two agreements amounted to $46,875. These expenses have been reflected in Research and Development expenses on the accompanying consolidated statements of operations.

As of June 30, 2016 and December 31, 2015, total unpaid fees due to Temple pursuant to these agreements amounted to $554,375 and $460,625, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. As of June 30, 2016, $184,375 of the $554,375 payable has been deferred until the Licensing Agreements are terminated and $370,000 is deemed past due. The Company is currently in negotiations with Temple to settle this amount.

There were no revenues generated from these two licenses during the six-month periods ended June 30, 2016 and 2015.

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, performed 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 were subjected 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. The agreement expired in August 2015.

During the six-month period ended June 30, 2015, the Company recognized a total expense of $64,688 pursuant to this agreement. During the three-month period ended June 30, 2015, the Company recognized a total expense of $32,344 pursuant to this agreement. These costs have been reflected in Research and Development expenses on the accompanying consolidated statements of operations. There was no such cost recorded during 2016 as a result of the expiration of the agreement in August 2015.

As of June 30, 2016 and December 31, 2015, total unpaid fees due to Temple pursuant to this agreement amounted to $129,376, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.  As of June 30, 2016, the entire $129,377 is deemed past due. The Company is currently in negotiations with Temple to settle this amount.