Commitments and Contingent Liabilities

3 Months Ended

Sep. 30, 2012

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingent Liabilities

5. Commitments and Contingent Liabilities

Operating Leases

The Company’s leasehold interest in its office and warehouse space was subject to a mechanic’s lien in favor of the contractor that assisted with the construction of the facility. The amount the Company owed to the contractor was in dispute. On June 14, 2012, the Company reached a written settlement and agreed to pay the contractor the total amount of $189,000 in three equal installments. As of September 30, 2012, $63,000 remained to be paid and was included in liabilities. Such amount was paid on November 2, 2012. The Company received a general release and release of mechanic’s lien from the contractor.

During the three months ended September 30, 2012 and 2011, the Company recorded rent expense of $50,136 and $19,907, respectively, and for the nine months ended September 30, 2012 and 2011, $148,900 and $114,347, respectively.

Equipment Leases

At December 31, 2011, the Company had $257,583 included in Accounts Payable - Trade relating to certain equipment acquired. In January 2012, the Company renegotiated the terms of the payable into a lease agreement for the same equipment. The lease term is five years with a principal amount of $257,583 and an effective interest rate of 14.7% per annum.

Future minimum lease payments, by year and in the aggregate, under equipment leases, which includes capital leases, as of September 30, 2012, are as follows:

For year ending December 31,	Amount
2012	$	19,153
2013		76,757
2014		76,727
2015		75,892
2016		48,949
Total		297,478
Less: amount representing interest		70,866
Present value of  future minimum lease payments	$	226,612

As of September 30, 2012, the equipment has a net book value of $286,566. Depreciation of assets held under capital leases in the amount of $5,094 and $15,282 is included in depreciation expense for the three and nine months ended September 30, 2012, respectively.

Litigation

On November 29, 2011, NMN Advisors, Inc. (“Plaintiff”) filed a complaint against the Company alleging that it breached a consulting agreement. The complaint seeks damages of $70,000 plus pre-judgment interest. On February 6, 2012, the Company filed its answer to the complaint denying that the Company owes any amounts under the contract, and the Company also filed a cross-complaint against the plaintiff asserting a number of causes of action, including breach of contract. Plaintiff filed its answer to the Company cross-complaint on March 5, 2012. Both the Company and the Plaintiff agreed to attempt to resolve the dispute by court mediation and on August 21, 2012, the Company paid $35,000 in full settlement of all outstanding balances.

On February 9, 2012, two of our former shareholders, Rock Castle Holdings, LLC and Jason Smith (“Plaintiffs”), filed suit against us in the Hamilton County, Ohio Court of Common Pleas, alleging that we have breached the terms of certain incentive options we granted to them in connection with our now-terminated oral consulting arrangements with them, by among other things, refusing Plaintiffs’ purported exercise of options to purchase 233,332 shares of our common stock at an exercise price of $2.00 per share in December 2011 (the "Rock Castle Litigation"). Plaintiffs have requested that the court require us to permit the exercise of the 233,332 options, and in the alternative, award damages in the amount of $2,086,000. We believe the Plaintiffs’ claims are without merit and that their damages figure is overstated and unsupported by the law applicable to the case. On March 13, 2012, the Company moved to dismiss the Rock Castle Litigation. On June 6, 2012, the Court of Common Pleas informed the parties that our motion to dismiss would be denied in its entirety if the Plaintiffs make certain amendments to the Complaint. Plaintiff made those amendments on June 12, 2012. On July 19, 2012 the Company filed a counterclaim against the Plaintiffs. On July 24, 2012, the Company filed a complaint against Dennis Smith, alleging that Mr. Smith breached a contract with the Company whereby he agreed to provide certain services to the Company in exchange for Company stock. This action was consolidated with the Rock Castle Litigation. On October 9, 2012, Dennis Smith moved to dismiss the claims asserted against him. On December 6, 2012, the Court of Common Pleas denied Dennis Smith's motion to dismiss. Discovery is proceeding as to all claims.

On March 2, 2012, a former contractor of the Company filed suit against the Company in the Hamilton County, Ohio Court of Common Pleas, alleging that, among other things, the Company failed to pay amounts due on certain credit cards that were issued in plaintiff’s name but for which the Company agreed to assume financial responsibility. Although the Company denies any responsibility for the payments owed, the Company resolved this dispute by entering into a settlement agreement with the plaintiff, and the suit was voluntarily dismissed on May 30, 2012. The settlement amount of $31,321 was paid as of June 30, 2012.

On October 9, 2012, American Express Travel Related Services Company, Inc. brought legal action against the Company in the Boone County, Kentucky Circuit Court. The action seeks to recover the unpaid balance on a credit card account in the amount of $87,029, plus interest and costs. The Company has not yet filed an answer in this action, but intends to attempt to resolve this dispute. As of September 30, 2012, this amount is included in Accounts Payable – Trade.

On November 5, 2012, HD Smith, Inc., one of the Company’s vendors, (“Plaintiff”) filed a complaint against the Company alleging that it breached its vendor credit agreement. The Plaintiff is seeking damages of $170,316 plus pre-judgment interest and attorneys’ fees. The Company is currently working with the Plaintiff on a payment schedule to pay down the balance in full. As of September 30, 2012, the Company has approximately $162,000 included in Accounts Payable – Trade representing the amounts due to the Plaintiff for product acquired through that date. No additional provision has been made as of September 30, 2012 relating to this matter.

On March 18, 2013, a former vendor filed suit against the Company in the Hamilton County, Ohio Court of Common Pleas, alleging that the Company had breached its contract. The plaintiff is seeking damages of $17,800 plus pre-judgment interest and other costs and expenses. The Company has not yet filed an answer to this action, but intends to resolve this dispute.  As of September 30, 2012, this amount is included in Accounts Payable - Trade.

On March 20, 2013, two of the Company's  stockholders,    HWH Lending,  LLC and Milfam I L.P., (the “Plaintiffs”)filed suit against the Company  in the Delaware  Court of Chancery.  The complaint brings action pursuant to 8 Del. C. § 211 to compel the Company to hold an annual meeting of stockholders for the election of directors and to consider such other matters as properly come before the meeting.  On April 12, 2013, the Company filed an answer (the “Answer”) with the Delaware Court of Chancery to respond to the allegations in the complaint filed by the Plaintiffs on March 20, 2013. As part of the Answer, the Company also sought relief from the Delaware Court of Chancery to, among other things, deny the relief sought by the stockholders in the complaint and to dismiss it with prejudice. The Company will continue to defend the complaint filed by the Plaintiffs, however, no assurance can be provided that eh Company will be successful in doing so.

In the normal course of business the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties,  and outcomes are not predictable with assurance. Legal fees for such matters are expensed as incurred. Currently, other than discussed above, the Company is not involved in any such matters, which are expected to have a material impact in the Company’s condensed consolidated financial statements.