Quarterly report pursuant to Section 13 or 15(d)

6. Research and Development

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6. Research and Development
3 Months Ended
Mar. 31, 2018
Research and Development [Abstract]  
Research and Development

The Company constructs, develops and tests the AOT technologies 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.

 

Costs incurred for research and development are expensed as incurred. Purchased materials that do not have an alternative future use are also expensed. Furthermore, costs incurred in the construction of prototypes with no certainty of any alternative future use and established commercial uses are also expensed.

 

For the three-month periods ended March 31, 2018 and 2017, our research and development expenses were $47,000 and $64,000 respectively.

 

AOT Product Development and Testing

 

The Company constructs, develops and tests the AOT 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 prototypes.

 

During the three-month periods ended March 31, 2017, the Company incurred total expenses of $17,000 in the manufacture, delivery and testing of the AOT prototype equipment. The Company incurred similar expenses in the three-month period ended March 31, 2018. 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 paid Temple a non-refundable license maintenance fee of $300,000 and agreed to pay (i) annual maintenance fees of $187,500; (ii) royalty fee ranging from 4% up to 7% from revenues generated from the licensing agreements; and (iii) 25% of all revenues generated from sub-licensees to secure or maintain the sub-license or option thereon. The term of the licenses commenced in August 2011 and will expire upon expiration of the patents. The agreements 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.

 

As of December 31, 2016, total unpaid fees due to Temple pursuant to these agreements amounted to $726,000. 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 December 31, 2017, all amounts owed under the Second Temple License agreement are either current or deferred under terms of the amendment.

 

Total expenses recognized during each three-month period ended March 31, 2018 and 2017 pursuant to these two agreements amounted to $47,000 and has been reflected in Research and Development expenses on the accompanying consolidated statements of operations. In the three-month periods ended March 31, 2018 and 2017, the Company also recognized penalty interest on past-due balances of $16,000 and $20,000, respectively, which is included as part of interest and financing expense in the accompanying statements of operations.

 

As of March 31, 2018, and December 31, 2017, total unpaid fees due to Temple pursuant to these agreements amounted to $905,000 and $842,000, respectively, which are included as part of Accounts payable – licensing agreements in the accompanying consolidated balance sheets. With regards to the unpaid fees to Temple, a total of $52,000 are current, $392,000 are deferred until such time the Company achieves a revenue milestone of $835,000 or upon termination of the licensing agreements and the remaining $461,000 are deemed past due. The past due amount of $460,000 is owed pursuant to the First Temple License. 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 three-month period ended March 31, 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 three-month period ended March 2018. 

 

Temple University Sponsored Research Agreement

 

From March 2012 through August 2015, the Company Temple University (“Temple”) provided research services at a fixed annual cost under a Sponsored Research Agreement (“Research Agreement”). The Research Agreement expired in August 2015. Temple University continues to perform laboratory tests on an as-needed basis, expenses are incurred on a per-test basis.

 

As of March 31, 2018, and December 31, 2017, total unpaid fees due to Temple pursuant to the Research Agreement were $10,000, which are included as part of Accounts payable – licensing agreements in the accompanying consolidated balance sheets. As of March 31, 2018, the entire $10,000 is deemed past due.