21. Restatement of financial statements

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

21. Restatement of financial statements

On May 24, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with eight investors (collectively, the “Investors”) pursuant to which the Company sold 8,700 shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (“Original Series E”), the terms of which are set forth in the Certificate of Designations of Series E Preferred Stock (the “Certificate”), for $1,000 per share, or $8,700,000 in the aggregate. In October 2012, the Company sold 1,000 shares of Series E for $1,000,000 (“New Series E”). The Original Series E and New Series E together are referred to herein as “Series E”.

These Series E contain “full ratchet-down” liquidity protection that provides that if the Company issues securities for less than the existing conversion price for the Series E Preferred Stock or the strike price of the Series E warrants, then the conversion price for Series E Preferred Stock will be lowered to that lower price. Also, the strike price for Series E warrants will be decreased to that lower price and the number of Series E warrants will be increased such that the product of the original strike price times the original quantity equals the lower strike price times the higher quantity.

In preparing the financial statements for 2012, the Company has determined that the warrants for these financings included certain embedded derivative features as set forth in ASC 815, “Derivatives and Hedging,” (“ASC 815”) and that this conversion feature of the Series E was not an embedded derivative because this feature was clearly and closely related to the host (Series E) as defined in ASC 815. These derivative liabilities were initially recorded at their estimated fair value on the date of issuance and are subsequently adjusted each quarter to reflect the estimated fair value at the end of each period, with any decrease or increase in the estimated fair value of the derivative liability for each period being recorded as other income or expense. Since the value of the embedded derivative feature for the related warrants was higher than the value of both Series E transactions, there was no beneficial conversion feature recorded for either transaction, and the excess of the value of the embedded derivative feature over the value of the transaction was recorded in each year on the Statement of Operations as a separate line item for each year presented.

As the result of this determination, the Company had incorrectly accounted for the derivative liabilities embedded in the Series E and related warrants issued in the year 2011. The consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations for the year then ended were restated to reflect the correct treatment. The following table presents the effect of the restatement adjustment on the accompanying consolidated balance sheet as of December 31, 2011:

Consolidated Balance Sheet at December 31, 2011	As Previously Reported			Restated			Net Adjustment
Derivative liability	$	–		$	15,888,855		$	15,888,855
Other current liabilities		3,786,217			3,786,217			–
Total current liabilities	$	3,786,217		$	19,675,072		$	15,888,855
Shareholders’ deficit
Series C 10% Preferred Stock, $0.001 par value: 1,000,000 shares authorized, 0 shares outstanding	$	–		$	–		$	–
Series D 10% Preferred Stock, $0.001 par value: 500,000 shares authorized,18,999 shares outstanding		19			19			–
Series E 5% Preferred Stock, $0.001 par value: 10,000 shares authorized; 9,450 and 8,500 shares issued and outstanding		9			9			–
Common stock, $0.001 par value: 200,000,000 shares authorized 89,083,677 and 88,157,055 shares issued and outstanding		88,157			88,157			–
Additional paid-in capital		41,964,908			33,264,917			(8,699,991	)
Accumulated deficit		(42,196,523	)		(49,385,387	)		(7,188,864	)
Total Stratus shareholders' deficit	$	(143,430	)	$	(16,032,285	)	$	(15,888,855	)

The flowing table presents the effect of the restatement adjustment on the accompanying consolidated statement of operations for the year ended December 31, 2011:

Consolidated Statement of Operations for 2011	As Previously Reported			Restated			Net Adjustment
Loss from operations	$	(16,429,344	)	$	(16,429,344	)	$	–
Other (income)/expenses
Fair value of derivative liabilities in excess of proceeds		–			19,642,867			19,642,867
Adjustments to fair value of derivative securities		–			(12,454,003	)		(12,454,003	)
Other (income)/expenses		(1,012,909	)		(1,012,909	)		–
Interest expense		420,733			30,535			(390,198	)
Total other (income)/expenses		(592,176	)		6,206,490			6,798,666
Net loss	$	(15,837,168	)	$	(22,635,834	)	$	(6,798,666	)
Preferred dividends		–			390,198			390,198
Net loss attributable to common shareholders	$	(15,837,168	)	$	(23,026,032	)	$	(7,188,864	)
Basic and diluted loss attributable to common shareholders per share	$	(0.18	)	$	(0.26	)	$	(0.08	)
Basic weighted average shares outstanding		88,157,055			88,157,055
Fully-diluted weighted average shares outstanding		88,157,055			101,023,493			12,866,438

These corrections will be made to applicable prior period financial information in future filings with the SEC, including this filing.

The fair value of these derivative liabilities is calculated using the commonly-accepted Black Scholes pricing model that is based on the following as of the date of calculation: the closing price of the common stock, the strike price of the underlying instrument, the risk-free interest rate for the applicable remaining life of the underlying instrument (i.e., the U.S. treasury rate for that period) and the historical volatility of the Company’s common stock. These fair value results are extremely sensitive to all these input variables, particularly the closing price of the company’s common stock and the volatility of the Company’s common stock. Accordingly, the fair values of these derivative liabilities are subject to significant changes.