Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Note 11. Commitments and Contingencies

Lease Commitments. At September 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 $28,980 and $33,603 for the three and nine months ended September 30, 2011, respectively. Leasehold improvements have been included in fixed assets and are fully amortized.

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. Under the terms of the consulting agreement, however, amounts due thereunder were not paid, and instead were accrued, until the earlier to occur of such time as the Company's cash balance exceeded $1.5 million, or twenty-four months from the date of execution. For each month in which payment of the cash component was deferred, the Company's financial advisor was to be issued a warrant exercisable for 200,000 shares of the Company's common stock at an exercise price of the higher of $0.20 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 was five years.

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 the provision related to monthly warrant issuances was replaced with a provision requiring the Company to issue 100,000 shares of restricted stock monthly in lieu of the issuance of 200,000 warrants. In addition, all warrants previously issued under the consulting agreement were exchanged for shares of common stock at a ratio of one share of restricted common stock for every two warrants issued under the terms of the consulting agreement, resulting in the cancellation of warrants to issue 3.0 million shares of common stock and the issuance of a total of 1.5 million shares of restricted common stock.