Quarterly report pursuant to Section 13 or 15(d)

6. Research and Development

v3.20.2
6. Research and Development
9 Months Ended
Sep. 30, 2020
Research and Development [Abstract]  
Research and Development
  6. 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, prototype equipment fabrication and installation, 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 nine-month periods ended September 30, 2020 and 2019, our research and development expenses were $308,000 and $665,000 respectively. For the three-month periods ended September 30, 2020 and 2019, our research and development expenses were $81,000 and $82,000 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 year ended December 31, 2019, the Company incurred costs related to a work order for work to be performed by a pipeline operator under which the Company paid a $500,000 deposit in advance of work to be performed. During the period ended December 31, 2019, the Company amortized $483,000 of such amount as a research and development cost based on the progress of work performed as required by the contract, and reflected the $17,000 remaining amount on deposit as Prepaid expenses and other current assets in the accompanying consolidated balance sheet as of December 31, 2019.

 

During the period ended September 30, 2020, the work order was increased by $85,000 and the Company paid an additional $85,000 deposit in advance of work to be performed.

 

During the period ended September 30, 2020, the Company amortized the remaining $102,000 of amounts paid on deposit under the work order as a research and development cost based on the progress of work performed as required by the contract.

 

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 (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.

 

Total expenses recognized pursuant to these two License Agreements amounted to $141,000 during each nine-month periods ended September 30, 2020 and 2019. Total expenses recognized pursuant to these two License Agreements amounted to $47,000 during each three-month periods ended September 30, 2020 and 2019. Total expenses have been reflected in Research and Development expenses on the accompanying consolidated statements of operations. In the nine-month periods ended September 30, 2020 and 2019, the Company also recognized penalty interest on past-due balances of $36,000 and $45,000, respectively, which is included as part of interest and financing expense in the accompanying statements of operations.

 

As of September 30, 2020 and December 31, 2019, total unpaid fees due to Temple pursuant to these agreements are $1,432,000 and $1,255,000, respectively, which are included as part of Accounts Payable – license agreements in the accompanying consolidated balance sheets. With regards to the unpaid fees to Temple, a total of $135,000 are deferred until such time the Company achieves a revenue milestone of $835,000 or upon termination of the licensing agreements and the remaining $1,297,000 is deemed past due. The Company is currently in discussions with Temple to settle or cure the past due balance.

 

No revenues were earned from the two License Agreements during the three-month periods ended September 30, 2020 and September 30, 2019.