Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Commitments and Contingencies

Lease Commitments.  The Company had an operating lease agreement for office and research and development lab space with an expiration date of September 30, 2011. In connection with this facility lease, the Company made a security deposit of $5,000 which is included in long-term assets on the balance sheet.  In December 2010, the existing operating lease was amended to reduce the rent payments for February 2011 to September 2011 from $3,950 per month to $2,000 per month, accruing deferred rent that will be due immediately in the case of default on the lease, or to be negotiated in the lease renewal for a minimum of three years. In August 2011, the Company was in default on the lease, and the total deferred rent plus accrued interest at 1% is due and payable.  Deferred rent at September 30, 2011 was $15,626.

Rent expense is recognized on a straight-line basis over the initial lease term. Leasehold improvements have been included in fixed assets.  Rent expense related to operating leases was approximately $14,400 and $38,328 for the three and nine months ended September 30, 2011 and $28,980 and $33,602 for the three and nine months ended September 30, 2010, respectively. In connection with facility leases, the Company has made security deposits totaling $5,000, which are included in long-term assets in the balance sheet.

Professional Services Agreement.  On May 16, 2011, the Company entered into a consulting agreement with its financial advisor, pursuant to which it will provide certain business, corporate development, litigation support, financial and strategic consulting services to the Company for and in consideration of the payment of $12,000 per month; provided, however, such amount shall not be paid, and shall accrue, until the earlier to occur of such time as the Company's cash balance exceeds $1.5 million, or twenty-four months from the date of execution.  For each month in which payment of the cash component is deferred, the Company's financial advisor shall be issued a warrant exercisable for 200,000 shares of the Company's common stock at an exercise price of the higher of $.20 per share or 105% of the closing price on the date of issuance.  The term of the consulting agreement is 18 months, and the term of the warrants is five years.   At September 30, 2011, the Company had issued warrants to purchase 1,000,000 shares of common stock under this agreement.