The Company constructs, develops and tests the AOT and Joule Heat technologies with internal resources and through the assistance of various third party entities. Research and development costs are expensed as incurred and include fees such as fees due to Temple University, patent 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.

Total expenses incurred during the three and nine month periods ending September 30, 2015 on Research and Development were $80,082 and $500,517, respectively.

Total expenses incurred during the three and nine month periods ending September 30, 2014 on Research and Development were $146,094 and $741,045, respectively.

AOT and Joule Heat Product Development and Testing

Total expenses incurred during the three and nine month periods ended September 30, 2015 on AOT and Joule Heat product development and testing amounted to $0, and $25,575, respectively, and have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations.

Total expenses incurred during the three and nine month periods ended September 30, 2014 on AOT and Joule Heat product development and testing amounted to $12,167, and $44,355, respectively, and have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations.

AOT Prototypes

During the three and nine month periods ended September 30, 2015, the Company incurred total expenses of $31,843 and $84,864, respectively, in the manufacture and delivery of AOT prototype equipment.

During the three and nine month periods ended September 30, 2014, the Company incurred total expenses of $54,708 and $458,706, respectively, in the manufacture and delivery of AOT prototype equipment.

These prototype equipment expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations.

Joule Heat Prototypes

During the three and nine month periods ended September 30, 2015, the Company incurred total expenses of $1,364 and $184,765, respectively, in the manufacture and delivery of Joule Heat prototype equipment. These expenses have been reflected as part of Research and Development expenses on the accompanying consolidated statement of operations. No such expenses were incurred in the three and nine month period ended September 30, 2014.

Temple University Licensing Agreements

On August 1, 2011, the Company and Temple University (“Temple”) entered into two 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. A license maintenance fee of $187,500 is due annually through the life of the underlying patents or until otherwise terminated by either party.

Total expenses recognized during the three-month period ended September 30, 2015 and 2014 pursuant to these two agreements amounted to $46,875 in each period. Total expenses recognized during the nine month period ended September 30, 2015 and 2014 pursuant to these two agreements amounted to $140,625 in each period. These expenses are reflected in Research and Development expenses on the accompanying consolidated statement of operations.

As of September 30, 2015 and December 31, 2014, total unpaid fees due to Temple pursuant to these agreements amounted to $413,750 and $340,625, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. Of the total unpaid fees due pursuant to these agreements as of September 30, 2015, a total of $257,500 is past due and payment of the remaining $156,250 is deferred until a minimum sales threshold of $500,000 has been met. The Company is currently in discussions with Temple University regarding settlement of these past due amounts.

There were no revenues generated from these two licenses during the three and nine month periods ended September 30, 2015. Revenues generated from these two licenses during the three and nine month periods ended September 30, 2014 were $180,000 and $240,000, respectively. Revenues generated in 2014 did not meet the annual minimum threshold for payment of license royalties. No license royalty fees accrued under these two license agreements in the three and nine month periods ended September 30, 2015 and 2014. 

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 through December 2013.

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 was $241,408 and total cost for Phase 2 of the agreement was $258,592 payable beginning September 1, 2013 in eight quarterly installments of $32,324 through September 2015.

During the three and nine month periods ended September 30, 2015 the Company recognized a total expense of $0 and $64,688, respectively, pursuant to this agreement. During the three and nine month periods ended September 30, 2014 the Company recognized a total expense of $32,344 and $97,359, respectively, pursuant to this agreement. These expenses are reflected in Research and Development expenses on the accompanying consolidated statement of operations.

As of September 30, 2015 and December 31, 2014, total unpaid fees due to Temple pursuant to this agreement amounted to $129,376 and $64,688, respectively, which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets. The unpaid fees of $129,376 were due September 1, 2015 and are past due. As of the date of this report, the Company is in discussions with Temple University regarding settlement of these past due amounts.