2. Basis of Presentation

6 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

2. Basis of Presentation

The accompanying unaudited financial statements, consisting of the consolidated balance sheet as of June 30, 2011, the consolidated statements of operations for the three and six months ended June 30, 2011 and 2010, and the consolidated statements of cash flows for the six months ended June 30, 2011 and 2010, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes typically found in the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates include those related to the allowance for doubtful accounts; valuation of inventories; valuation of goodwill, intangible assets and property and equipment; valuation of stock based compensation expense; the valuation of conversion features; and other contingencies.  On an on-going basis, management evaluates these estimates.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates under different assumptions or conditions. Operating results for the three and six months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2011.

On June 1, 2011, the Company affected a 1 for 75 reverse stock split of its common stock and preferred stock. As a result, the number of shares outstanding has been adjusted retrospectively to reflect the reverse stock split in all periods presented. Also, the exercise price and the number of common shares issuable under the Company’s share-based compensation plans and the authorized and issued share capital have been adjusted retrospectively to reflect the reverse stock split.

Liquidity:

The Company's cash balance as of June 30, 2011 was $2.1 million.  At that time, the Company had accounts receivable of $1.9 million and a working capital deficit of $3.3 million. However, current liabilities include certain items that will likely settle without future cash payments or otherwise not require significant expenditures by the Company including: deferred revenue of $1.0 million (primarily deferred up front customer activation fees), deferred rent of $0.1 million and accrued vacation of $0.5 million.  The aforementioned items represent $1.6 million of total current liabilities as of June 30, 2011.

Current liabilities as of June 30, 2011 also include debt payments on the 2010 Notes, due to our majority shareholder, of $2.4 million.  Additionally, based on an amendment in August 2011 (see Note 5), interest of $593,393 is also due to be paid on a monthly basis through June 2012.  Any substantial inability to execute our business plan could negatively impact our ability to make payments in accordance with the contractual terms. Further, the 2010 Notes include financial covenants the Company must meet on a quarterly basis.  The Company was not in compliance with certain covenants at June 30, 2011.  The Company received a waiver for the violations and is not considered in default.  Any potential inability to maintain compliance with the financial covenants or successfully obtain a waiver, if a violation occurs, could result in an event of default as defined in the agreement and negatively impact the Company’s ability to finance its operations.

The Company does not anticipate being in a positive working capital position in the next twelve months.  However, if the Company continues to generate revenue and gross profit consistent with its growth in 2010 and maintain control of its variable operating expenses, the Company believes that its existing capital, together with anticipated cash flows from operations, will be sufficient to finance its operations through at least July 1, 2012.

Reclassifications:

Certain previously reported amounts have been reclassified to conform to the current year’s presentation.  The reclassifications had no effect on previously reported net losses.

Recent Accounting Pronouncements:

In January 2010, the FASB issued guidance which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. See Note 5 – Fair Value Measurement for a discussion regarding Level 1, 2 and 3 fair-value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In December 2010, FASB issued ASU 2010-28, "Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force)." ASU 2010-28 provides amendments to Topic 350 that modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. As a result, goodwill impairments may be reported sooner than under current practice. ASU 2010-28 is effective for fiscal years and interim periods within those years, beginning after December 15, 2010, with early adoption not permitted. The adoption of ASU 2010-28 did not have a material impact on the Company's consolidated results of operation and financial condition.