Restatement of Consolidated Financial Statements

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

2. Restatement of Consolidated Financial Statements

Background

On February 27, 2013, Company management, in consultation with its Audit Committee, revised its prior position on accounting for warrants and concluded that its previously issued consolidated financial statements for all periods since mid-November 2009 (collectively, the “Affected Periods”) should not be relied on because of a misapplication in the guidance on accounting for Warrants (as defined below). The restated consolidated balance sheets only reflect previously reported and restated amounts for “Total liabilities” as “Current liabilities” were not impacted. However, the non-cash adjustments to the financial statements, in all of the Affected Periods, do not impact the amounts previously reported for the Company’s cash and cash equivalents, total assets, revenue, or net cash flows from operating, investing and financing activities.

The warrants at issue (collectively, the “Warrants”) include:

(i) warrants to purchase an aggregate of 5,522 and 414 shares of the Company’s common stock, issued in November 2009 at an exercise price of $650.00 and $575.00 per share, respectively;

(ii) warrants to purchase an aggregate of 10,500 and 630 shares of the Company’s common stock, issued in October 2010 at an exercise price of $300.00 and $312.50 per share, respectively;

(iii) warrants to purchase an aggregate of 10,673 and 640 shares of the Company’s common stock, issued in January 2011 at an exercise price of $160.00 and $162.50 per share, respectively;

(iv) warrants to purchase an aggregate of 26,628 and 799 shares of the Company’s common stock, issued in October 2011 at an exercise price of $44.80 and $59.13 per share, respectively;

(v) warrants to purchase an aggregate of 10,648 and 1,597 shares of the Company’s common stock, issued in February 2012 at an exercise price of $28.00 and $27.00 per share, respectively; and

(vi) warrants to purchase an aggregate of 483,657 shares of the Company’s common stock, issued in November 2012 at an exercise price of $6.53 per share;

The above warrant shares and exercise prices have been retroactively adjusted to reflect the 2011 and 2012 reverse stock splits.

Historically, the Warrants were reflected as a component of equity as opposed to liabilities on the balance sheets and the statements of operations did not include the subsequent non-cash changes in estimated fair value of the Warrants in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”). The Warrant agreements contain a provision for net cash settlement at the option of the holder in the event that there is a fundamental transaction (as contractually defined in the Warrant agreements). The Company had previously conducted in-depth analysis in prior years of its other warrants and concluded that all fundamental transactions were within the control of the Company and thus equity treatment for the warrants was appropriate. However, new insight on derivatives obtained by the Company during the process of analyzing the accounting guidance for the November 2012 warrants prompted the Company to re-assess its prior position.

Under the guidance of ASC 815, warrant instruments that could potentially require net cash settlement in the absence of express language precluding such settlement, should be initially classified as derivative liabilities as their estimated fair values, regardless of the likelihood that such instruments will ever be settled in cash. In periods subsequent to issuance, changes in the estimated fair value of the derivative instruments should be reported in the statement of operations. The Audit Committee, together with management, determined that the consolidated financial statements in the Affected Periods should be restated to reflect the Warrants as liabilities, with subsequent changes in their estimated fair value recorded as non-cash income or expense in each Affected Period.

The Company has restated its audited consolidated financial statements for the year ending December 31, 2011 and the related disclosures. The Company has not amended its previously filed Annual Reports on Form 10-K for the years ended December 31, 2010 and 2009 or its Quarterly Reports on Form 10-Q for the periods March 31, 2010, June 30, 2010, and September 30, 2010 to correct these misstatements.

               The impact of the restatement on the unaudited condensed consolidated statements of operations for the three-month periods ended March 31, June 30, and September 30, 2012 and 2011, and the condensed consolidated balance sheets as of March 31, June 30 and September 30, 2012 and 2011are presented below, as wells as the impact on the consolidated statements of operations for the years ended December 31, 2011, 2010, and 2009, and the consolidated balance sheets then ended. The restatement had no impact on net cash flows from operating, investing or financing activities as the adjustments resulting from the non-cash change in the fair value of the warrant liability for each period and the statements of operations only impacted net income (loss) from continuing operations. In addition to the restatement noted above, the consolidated statements of operations and the consolidated balance sheets have also been retroactively adjusted to give effect to the Company’s September 2012 reverse stock splits, and for the discontinued operations as discussed in note 1 “Summary of Significant Accounting Policies – Nature of Business and Basis of Presentation.”

Impact of the Restatement

	Three Months Ended March 31, 2012
	As Previously						As
Statement of Operations Data (Unaudited):	Reported*			Adjustment			Restated
Selling, general and administrative expense	$	(674,856	)	$	(17,636	)	$	(692,492	)
Loss from operations	$	(1,046,259	)	$	(17,636	)	$	(1,063,895	)
Other Income from Change in Fair Value of Warrants	$	-		$	339,308		$	339,308
Loss from continuing operations	$	(1,045,237	)	$	321,672		$	(723,565	)
Net loss	$	(1,155,955	)	$	321,672		$	(834,283	)
Net loss per share, basic and diluted	$	(6.21	)	$	1.73		$	(4.48	)

	Three Months Ended June 30, 2012
	As Previously					As
Statement of Operations Data (Unaudited):	Reported*			Adjustment		Restated
Selling, general and administrative expense	$	(530,691	)	$	-	$	(530,691	)
Loss from operations	$	(668,940	)	$	-	$	(668,940	)
Other Income from Change in Fair Value of Warrants	$	-		$	342,884	$	342,884
Loss from continuing operations	$	(668,018	)	$	342,884	$	(325,134	)
Net loss	$	(747,575	)	$	342,884	$	(404,691	)
Net loss per share, basic and diluted	$	(3.59	)	$	1.64	$	(1.95	)

	Three Months Ended September 30, 2012
	As Previously					As
Statement of Operations Data (Unaudited):	Reported*			Adjustment		Restated
Selling, general and administrative expense	$	(542,538	)	$	-	$	(542,538	)
Loss from operations	$	(633,645	)	$	-	$	(633,645	)
Other Income from Change in Fair Value of Warrants	$	-		$	58,413	$	58,413
Loss from continuing operations	$	(632,815	)	$	58,413	$	(574,402	)
Net loss	$	(765,963	)	$	58,413	$	(707,550	)
Net loss per share, basic and diluted	$	(3.69	)	$	0.29	$	(3.40	)

* As retroactively adjusted for the 2012 reverse stock split and the 2012 discontinued operations

Impact of the Restatement

	Three Months Ended March 31, 2011
	As Previously						As
Statement of Operations Data (Unaudited):	Reported*			Adjustment			Restated
Selling, general and administrative expense	$	(737,680	)	$	(126,304	)	$	(863,984	)
Loss from operations	$	(1,093,183	)	$	(126,304	)	$	(1,219,487	)
Other Income from Change in Fair Value of Warrants	$	-		$	1,542,051		$	1,542,051
(Loss) income from continuing operations	$	(216,819	)	$	1,415,747		$	1,198,928
Net (loss) income	$	(235,336	)	$	1,415,747		$	1,180,411
Net (loss) income per share, basic and diluted	$	(1.92	)	$	11.56		$	9.64

	Three Months Ended June 30, 2011
	As Previously						As
Statement of Operations Data (Unaudited):	Reported*			Adjustment			Restated
Selling, general and administrative expense	$	(525,572	)	$	(-	)	$	(525,572	)
Loss from operations	$	(930,071	)	$	-		$	(930,071	)
Other Income from Change in Fair Value of Warrants	$	-		$	898,446		$	898,446
Loss from continuing operations	$	(920,828	)	$	898,446		$	(22,382	)
Net loss	$	(1,013,739	)	$	898,446		$	(115,293	)
Net loss per share, basic and diluted	$	(7.91	)	$	7.01		$	(0.90	)

	Three Months Ended September 30, 2011
	As Previously						As
Statement of Operations Data (Unaudited):	Reported*			Adjustment			Restated
Selling, general and administrative expense	$	(417,260	)	$	(-	)	$	(417,260	)
Loss from operations	$	(788,587	)	$	-		$	(788,587	)
Other Income from Change in Fair Value of Warrants	$	-		$	134,827		$	134,827
Loss from continuing operations	$	(787,992	)	$	134,827		$	(653,165	)
Net loss	$	(913,318	)	$	134,827		$	(778,491	)
Net loss per share, basic and diluted	$	(7.13	)	$	1.05		$	(6.08	)

* As retroactively adjusted for the 2012 reverse stock split and the 2012 discontinued operations

Impact of the Restatement

	Year Ended December 31, 2011
	As Previously						As
Statement of Operations Data:	Reported*			Adjustment			Restated
Selling, general and administrative expense	$	(2,317,403	)	$	(230,604	)	$	(2,548,007	)
Loss from operations	$	(3,963,342	)	$	(230,604	)	$	(4,193,946	)
Other Income from Change in Fair Value of Warrants	$	-		$	3,716,812		$	3,716,812
Loss on issuance of warrants	$	-		$	(4,983	)	$	(4,983	)
Income (loss) from continuing operations	$	(3,078,111	)	$	3,481,225		$	403,114
Net (loss) income	$	(3,461,640	)	$	3,481,225		$	19,585
Net (loss) income per share, basic	$	(26.37	)	$	26.52		$	0.15
Net (loss) income per share, diluted	$	(26.37	)	$	21.23		$	(5.14	)

	Year Ended December 31, 2010
	As Previously						As
Statement of Operations Data:	Reported*			Adjustment			Restated
Selling, general and administrative expense	$	(3,175,350	)	$	(165,365	)	$	(3,340,715	)
Loss from operations	$	(8,006,738	)	$	(165,365	)	$	(8,172,103	)
Other Income from Change in Fair Value of Warrants	$	-		$	1,556,161		$	1,556,161
Loss from continuing operations	$	(7,731,521	)	$	1,390,796		$	(6,340,725	)
Net loss	$	(7,736,242	)	$	1,390,796		$	(6,345,446	)
Net loss per share, basic and diluted	$	(85.67	)	$	15.40		$	(70.27	)

	Year Ended December 31, 2009
	As Previously						As
Statement of Operations Data:	Reported			Adjustment			Restated
Selling, general and administrative expense	$	(3,055,473	)	$	(136,752	)	$	(3,192,225	)
Loss from operations	$	(9,877,082	)	$	(136,752	)	$	(10,013,834	)
Other Income from Change in Fair Value of Warrants	$	-		$	957,422		$	957,422
Loss from continuing operations	$	(9,839,436	)	$	820,670		$	(9,018,766	)
Net loss	$	(9,148,631	)	$	820,670		$	(8,327,961	)
Net loss per share, basic and diluted	$	(124.36	)	$	11.16		$	(113.20	)

* As retroactively adjusted for the 2012 reverse stock split and the 2012 discontinued operations

Impact of the Restatement

	As of March 31, 2012
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	639,097	$	791,601		$	1,430,698
Paid-in capital in excess of par value	$	43,394,988	$	(6,805,964	)	$	36,589,024
Accumulated deficit	$	38,302,840	$	(6,014,363	)	$	32,288,477
Total stockholders' equity	$	4,627,383	$	(791,601	)	$	3,835,782

	As of June 30, 2012
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	679,960	$	448,717		$	1,128,677
Paid-in capital in excess of par value	$	43,401,195	$	(6,805,964	)	$	36,595,231
Accumulated deficit	$	39,050,415	$	(6,357,247	)	$	32,693,168
Total stockholders' equity	$	3,886,015	$	(448,717	)	$	3,437,298

	As of September 30, 2012
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	793,960	$	389,913		$	1,183,873
Paid-in capital in excess of par value	$	43,420,333	$	(6,805,964	)	$	36,614,369
Accumulated deficit	$	39,816,415	$	(6,415,697	)	$	33,400,718
Total stockholders' equity	$	3,139,190	$	(390,304	)	$	2,748,886

* As retroactively adjusted for the 2012 reverse stock split

Impact of the Restatement

	As of March 31, 2011
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	818,816	$	1,826,897		$	2,645,713
Paid-in capital in excess of par value	$	41,135,829	$	(5,454,110	)	$	35,681,719
Accumulated deficit	$	33,920,581	$	(3,627,213	)	$	30,293,368
Total stockholders' equity	$	6,750,475	$	(1,826,897	)	$	4,923,578

	As of June 30, 2011
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	741,041	$	928,451		$	1,669,492
Paid-in capital in excess of par value	$	41,135,586	$	(5,454,110	)	$	35,681,476
Accumulated deficit	$	34,934,320	$	(4,525,659	)	$	30,408,661
Total stockholders' equity	$	5,736,493	$	(928,451	)	$	4,808,042

	As of September 30, 2011
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	807,153	$	793,624		$	1,600,777
Paid-in capital in excess of par value	$	41,135,586	$	(5,454,110	)	$	35,681,476
Accumulated deficit	$	35,847,638	$	(4,660,486	)	$	31,187,152
Total stockholders' equity	$	4,823,175	$	(793,624	)	$	4,029,551

	As of December 31, 2011
	As Previously					As
Balance Sheet Data:	Reported*		Adjustment			Restated
Total liabilities	$	940,357	$	916,621		$	1,856,978
Paid-in capital in excess of par value	$	42,326,320	$	(6,609,312	)	$	35,717,008
Accumulated deficit	$	37,146,885	$	(5,692,691	)	$	31,454,194
Total stockholders' equity	$	4,714,665	$	(916,621	)	$	3,798,044

* As retroactively adjusted for the 2012 reverse stock split

Impact of the Restatement

	As of December 31, 2010
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	2,576,853	$	1,841,826		$	4,418,679
Paid-in capital in excess of par value	$	38,590,239	$	(4,053,292	)	$	34,536,947
Accumulated deficit	$	33,685,245	$	(2,211,466	)	$	31,473,779
Total stockholders' equity	$	4,440,219	$	(1,841,826	)	$	2,598,393

	As of December 31, 2009
	As Previously					As
Balance Sheet Data (Unaudited):	Reported*		Adjustment			Restated
Total liabilities	$	2,883,432	$	1,128,278		$	4,969,132
Paid-in capital in excess of par value	$	33,685,656	$	(1,948,948	)	$	31,736,708
Accumulated deficit	$	25,949,003	$	(820,670	)	$	25,128,333
Total stockholders' equity	$	7,271,876	$	(1,128,278	)	$	6,143,598

* As retroactively adjusted for the 2012 and 2011 reverse stock splits