Note 5 – Sales, Billings, and Costs on Uncompleted Contracts

In the quarter ended March 31, 2016, the Company entered into a contract with a third party contractor to supply its Duplex technology to a major California oil producer to retrofit its enclosed wellhead ground flare. Payment for this installation was conditioned upon successful completion and acceptance of the unit by the oil producer customer. This unit was accepted and payment of the $260,000 contract amount was received in the quarter ended September 30, 2016. Since payment was conditional, all costs of this project through June 30, 2016, which totaled $144,000, were expensed as research and development costs. Costs incurred subsequent to June 30, 2016, which totaled $64,000, are reflected as cost of goods sold in the statement of operations resulting in a gross profit of $196,000. The gross profit would have totaled $52,000 if this contract was not conditional.

Following the acceptance of the first unit the Company entered into a multi-flare contract with the same customer to supply additional Duplex units. This contract is valued at approximately $900,000 and is expected to be completed over the next six months depending on the oil producer customer's schedule. In accordance with the completed contract method of accounting, billings to date of $360,000 at December 31, 2016 exceeded costs by $115,000 and are reflected on the balance sheet as billings on uncompleted contracts in excess of costs.

Over the course of prior years, the Company had entered into contracts to supply its Duplex technology with customer payments to be received upon completion. Several of these developmental units were accepted in the year ended December 31, 2016. Since payments aggregating $361,000 were conditional, all costs of these projects through June 30, 2016, which totaled $566,000, were expensed as research and development costs. Costs incurred subsequent to June 30, 2016, which totaled $421,000, are reflected as cost of goods sold in the statement of operations resulting in a gross loss of $60,000. The net loss would have totaled $626,000 if these contracts were not conditional.