Commitments and Contingencies

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Note 11. Commitments and Contingencies

Lease Commitments.  At June 30, 2012, the Company had reduced its operations and does not maintain a corporate headquarters.   During 2011, Company was leasing a facility in Portland Oregon for its office and research and development lab space under an operating lease that expired September 30, 2011.

Rent expense is recognized on a straight-line basis over the initial lease term.  Rent expense related to operating leases during 2011, was $14,400 and $23,858 for the three and six months ended June 30, 2011, respectively.  Leasehold improvements have been included in fixed assets and are fully amortized.

Property and Equipment.  Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The Company’s property and equipment at June 30, 2012 and 2011 consisted of machinery and equipment with estimated useful lives of one to three years.

Depreciation expense for the three and six months ended June 30, 2012 was $4,098 and $10,027, respectively.  Depreciation expense for the three and six months ended June 30, 2011 was $5,479 and $17,630, respectively.

Expenditures for repairs and maintenance are expensed as incurred. 

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 June 30, 2012, the Company had issued warrants to purchase 2,800,000 shares of common stock, valued at $170,283, under this agreement.

On August 1, 2012, the consulting agreement was amended to extend the deferral period for accrued cash compensation from May 16, 2013 to December 31, 2013, and to replace the provision related to monthly warrant issuances in the amount of 200,000 with the issuance of 100,000 shares of restricted common stock for every two warrants issued under the terms of the consulting agreement.