NOTE 12- COMMITMENTS AND CONTINGENCIES

Product Liability Insurance - We have only limited product liability insurance.  If a product claim were successfully made against us, there could be a material adverse effect on our financial condition given our liquidity and cash limitations.  

Office Lease - We are leasing office and production space located in Scottsdale, Arizona from a significant shareholder, Howard Baer, pursuant to an Amended and Restated Sublease that expires on February 9, 2020, subject to our unilateral right to terminate the Lease on March 31, 2013. Under the original terms of the Amended and Restated Sublease, the annual base rent for the 15,000 square foot facility was approximately $237,000, payable in equal monthly installments of approximately $20,000. The annual base rent is subject to increase annually in an amount equal to the greater of 2.5% of the prior year’s base rent and the percentage increase in the Consumer Price Index. We paid an additional security deposit of approximately $110,000. The Amended and Restated Sublease is a “net lease”, which means that we are responsible for the real estate taxes, maintenance, insurance and repairs related to the premises we are leasing.

In October, 2009, we and Mr. Baer agreed in principle to (i) reduce from 15,000 to 11,000 the square footage of the space we are occupying and (ii) reduce the base rent from $20,000 to $16,720 monthly (not including real estate taxes (currently $1,480 per month)).   In addition, the lessor has assumed the responsibility for maintenance and repairs for the building and we are obligated to reimburse the lessor for 70% of such expenses.  We incurred approximately $55,000 in rent expense during the first quarter of 2011.

In May of 2011 we and Mr. Baer agreed to (i) further reduce from 11,000 to 5,600 the square footage we are occupying, and (ii) reduce our rent to $12,320 (not including real estate taxes of $1,480 per month).  We incurred approximately $41,000 in rent expense during the second quarter of 2011.

The Company was leasing, on a month to month basis, a warehousing and bottling facility. The lease called for monthly rentals of $2,700, plus annual common area maintenance fees.   Rent expense under this lease for the quarter ended March 31, 2011 was approximately $9,550.  This building was vacated on April 1, 2011.  

In April of 2011 the Company signed a lease for new office and warehouse facilities.  This lease calls for deferred rent payments until September 1, 2011, to allow us time to finish tenant improvements.  Monthly rental is approximately $5,400 per month, and is for a term of 42 months.  The Company has not yet completed the tenant improvements necessary to occupy the space due to a shortage of funds.  We anticipate moving in late in the fourth quarter.

The Company’s future minimum lease payments are as follows:

Business Services Agreement

On October 19, 2009, the Registrant and Great Northern Reserve Partners, LLC (“GNRP”) entered into a Business Services Agreement (“Agreement”), which supersedes the prior agreement between them entered into in February, 2009 (“February Agreement”).

The Registrant entered into the Agreement to continue the pursuit of its strategic product and business development objectives.  GNRP was issued 500,000 shares of the Registrant’s Common Stock in connection with the execution of the Agreement, in full payment of any and all amounts owing under the February Agreement (approximately $142,000 per GNRP) and in recognition of GNRP’s contribution to the achievement of recent product testing results.  In addition, GNRP will be compensated based on hours expended, sales and other payments (licensing payments, etc.) received by the Registrant, and the achievement of specified milestones.

Workers’ Compensation – The Company does not carry workers’ compensation insurance, which covers on the job injury.

Guarantees – In May, 2010, we entered into an indemnity agreement under which we indemnified a significant stockholder, Howard Baer, for any liability incurred by him in connection with guarantying company obligations.  We also issued Mr. Baer warrants to purchase 500,000 shares of common stock as compensation for prior loan guarantees he made with respect to company indebtedness. These warrants have an exercise price of $.15 (cashless) and a term of 3 years. The warrants were valued at $405,925 using the Black Scholes pricing model with the following assumptions: volatility 137.66%; annual rate of dividends 0%; discount rate 3.1%.