The Company constructs, develops and tests the AOT technology with internal resources and through the assistance of various third-party entities. Costs incurred and expensed include fees such as license 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.

For the nine-month periods ended September 30, 2017 and 2016, our research and development expenses were $173,000 and $200,000 respectively. For the three-month periods ended September 30, 2017 and 2016, our research and development expenses were $53,000 and $52,000, respectively.

AOT Product Development and Testing

During the nine-month periods ended September 30, 2017 and 2016, the Company incurred total expenses of $30,000 and $59,000, respectively, in the manufacture, delivery and testing of the AOT prototype equipment. During the three-month periods ended September 30, 2017 and 2016, the Company incurred total expenses of $6,000 and $5,000, respectively. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statements 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 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. 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 nine-month period ended September 30, 2017 and 2016 pursuant to these two agreements amounted to $173,000. Total expenses recognized during each three-month period ended September 30, 2017 and 2016 pursuant to these two agreements amounted to $47,000, respectively. These expenses have been reflected in Research and Development expenses on the accompanying consolidated statements of operations.

As of December 31, 2016, total unpaid fees due to Temple pursuant to these agreements amounted to $727,000, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.

In July 2017, the Company and Temple amended the Second Temple License agreement. Pursuant to the amendment, the Company paid Temple $62,000 and Temple agreed to defer payment of the remaining $135,000 in unpaid licensing fee until such time the Company generates revenues totaling $835,000 from the license. In addition, the unpaid balance of $135,000 will accrue interest of 9% per annum.

As of September 30, 2017, total unpaid fees due to Temple pursuant to these agreements amounted to $786,000, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. With regards to the unpaid fees to Temple, a total of $108,000 are current, $370,000 are deferred until such time the Company achieves a revenue milestone of $835,000 or upon termination of the licensing agreements and the remaining $308,000 are deemed past due. The Company is currently in negotiations with Temple to settle or cure the past due balance.

The Company generated $50,000 in revenue from the viscosity reduction license during the nine-month period ended September 30, 2017. This amount is not sufficient to be subject to additional license fees under the license agreement. No revenues were earned from the two license agreements during the nine-month period ended September 2016.

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.

On July 14, 2017, the Company and Temple reached agreement to settle these past due amounts under a payment plan, paying the amount before the end of December 2017.

As of September 30, 2017 and December 31, 2016, total unpaid fees due to Temple pursuant to this agreement amounted to $29,000 and $78,000, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.

In addition, Temple continues to provide laboratory testing and support related to the Company’s commercialization efforts. This continuing work is provided on at a fixed price, on an ad hoc basis depending upon the scope of work. During the nine-month period ending September 30, 2017, the Company incurred a total of $2,000 in ad hoc testing with Temple University. No ad hoc testing was performed during the three-month period ending September 30, 2017. Temple ad hoc testing expense is reported as part of Research and development expenses in the accompanying consolidated statements of operations.