Commitments and Contingent Liabilities

3 Months Ended

Mar. 31, 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. The Company received a general release and release of mechanic’s lien from the contractor, which will be effective upon final payment. Approximately, $140,000 and an additional $46,000 in interest is included in accounts payable as of March 31, 2012.

During the three months ended March 31, 2012 and 2011, the Company recorded rent expense of $52,457 and $38,375, respectively.

Capital 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 capital leases as of March 31, 2012 are as follows:

For year ending December 31	Amortization
2012	$	57,546
2013		76,757
2014		76,727
2015		75,892
Thereafter		48,949
Total		335,871
Less: amount representing interest		87,872
Present value of  future minimum lease payments	$	247,999

As of March 31, 2012, the equipment has a net book value of $283,817, as additional costs were incurred and capitalized but not financed. Depreciation of assets held under capital leases in the amount of $5,094 is included in depreciation expense for the three months ended March 31, 2012.

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 the Company’s former stockholders, Rock Castle and Jason Smith (“Plaintiffs”), filed suit against the Company in the Hamilton County, Ohio Court of Common Pleas, alleging that the Company had breached the terms of certain incentive options the Company granted to the Plaintiffs in connection with the Company’s now-terminated oral consulting arrangements with the Plaintiffs, by among other things, refusing Plaintiffs’ purported exercise of options to purchase 233,332 shares of the Company’s common stock at an exercise price of $2.00 per share in December 2011.  Plaintiffs have not specified monetary damages, but have requested that, among other things, the court require the Company to permit the exercise of the 233,332 options.  The Company believes all of the Plaintiffs’ claims are without merit.  On March 13, 2012, the Company moved to dismiss all claims asserted against the Company in the Complaint.  On July 24, 2012 the Company filed a counter claim against the defendant.

On March 2, 2012, a former contractor filed suit against the Company in the Hamilton County, Ohio Court of Common Pleas, alleging that, among other things, the Company had 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 included in accounts payable as of March 31, 2012.

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. Currently, the Company is not involved in any such matters.