Debt Instruments

6 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 5 - Debt Instruments

As of March 31, 2013, the Company had the following outstanding debt instruments:

	Principal balance at issuance date		Principal  balance at March 31, 2013		Unamortized Debt Discount balance at March 31, 2013			Net Balance
Senior Secured Revolving Credit Facility	$	5,000,000	$	5,000,000	$	(267,000	)		4,733,000
Senior Subordinated Secured Convertible Promissory 2013 Notes		8,742,000		8,742,000		(1,638,000	)		7,104,000
Senior Subordinated Secured Promissory Notes		4,000,000		5,081,000		—			5,081,000
Subordinated Secured Convertible Promissory Notes		15,051,200		16,092,000		(8,756,000	)		7,336,000

Senior Secured Revolving Credit Facility

In December 2011, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Partners for Growth III, L.P. (“PFG”) pursuant to which the Company obtained a two-year, $5,000,000 revolving credit facility from PFG (the “Revolving Credit Facility”). As additional consideration for entering into the Revolving Credit Facility, the Company issued to PFG and two PFG affiliated entities 7-year warrants to purchase, for $0.11 per share, an aggregate of 15,000,000 shares of the Company’s common stock (the “PFG Warrants”).

The maturity date for the Revolving Credit Facility is December 14, 2013 (the “Maturity Date”). Interest on the loan accrues at the rate of 12% per annum, payable monthly, with the remaining balance payable on the Maturity Date. Each of Costa Brava Partnership III L.P. (“Costa Brava”) and The Griffin Fund LP (“Griffin”), major stockholders and debt holders of the Company, individually and collectively, jointly and severally, have unconditionally guaranteed repayment to PFG of $2,000,000 of the Company’s monetary obligations under the Loan Agreement.

To secure the payment of the Company’s obligations under the Loan Agreement, the Company granted to PFG a first position, continuing security interest in substantially all of the Company’s assets, including substantially all of its intellectual property. In addition, Costa Brava, Griffin and certain other existing creditors of the Company have agreed that, while any obligations remain outstanding by the Company to PFG under the Loan Agreement, their security interests in and liens on the Company’s assets shall be subordinated and junior to those of PFG.

As of March 31, 2013, the Company was not in compliance with the financial covenants in the Loan Agreement and Revolving Credit Facility. On August 21, 2012, the Company and PFG entered into a Forbearance, Limited Waiver and Consent under Loan Agreement (the “Waiver”) by which, subject to certain terms and conditions, PFG waived that default and consented to other actions taken or to be taken by the Company, including the issuance of securities to finance the acquisition of Bivio. The Company agreed to pay to PFG a $30,000 fee and issue to PFG warrants to purchase 2,045,455 shares of common stock (the “Waiver Warrants”). The exercise price of the Waiver Warrants was equal to the Next Equity Financing Effective Price (“NEFEP”) or $0.11 per share.

The Waiver, by its terms, expired on September 30, 2012.  As of September 28, 2012, in light of the Company’s continuing non-compliance with the financial covenants in the Loan Agreement, the Company and PFG entered into Extension of Forbearance under Loan and Security Agreement (the “Forbearance Extension”).  Subsequent to the Forbearance Extension, the company engaged in a monthly forbearance extension with PFG, with forbearance warrants in the amount of 2,045,455 provided per extension with an exercise price of $0.11 provided as consideration.  The table below summarized the various Forbearance Extensions along with the warrants issued to PFG.

Forbearance	Extension Through Date	Exercise Price per share [a]		Exercisable Share
Waiver	September 30, 2012	$	NEFEP or 0.11		2,045,455
Forbearance Extension	October 31, 2012	$	NEFEP or 0.11		2,045,455
Second Forbearance Extension	December 15, 2012	$	NEFEP or 0.11		2,045,455
Third Forbearance Extension	January 31, 2013	$	NEFEP or 0.11		2,045,455
Fourth Forbearance Extension	February 28, 2013	$	NEFEP or 0.11		2,045,455
Fifth Forbearance Extension	March 31, 2013	$	NEFEP or 0.11		2,045,455
Sixth Forbearance Extension	April 30, 2013	$	NEFEP or 0.11		2,045,455
Seventh Forbearance Extension	May 31, 2013	$	NEFEP or 0.11		2,045,455
Total					16,363,640

As of March 31, 2013, no shares have been exercised by PFG related to any of the shares issuable under the warrants related to the forbearance extensions.

Senior Subordinated Secured Convertible Promissory Notes

Effective as of September 28, 2012, the Company issued and sold to The Griffin Fund LP Senior Subordinated Secured Convertible Promissory Notes due November 30, 2012 in the aggregate principal amount of $1.2 million (the “2012 Notes”). The 2012 Notes are convertible at $0.12 per share, or the price of shares sold by the Company to one or more investors and raising gross proceeds to the Company of at least $1.0 million. During the 26-week period ended March 31, 2013 the Company issued an additional $4.2 million of the 2012 Notes.  Since the conversion price was not fixed, such instrument was considered to be a derivative.  As such, the Company recorded approximately $237,000 as a derivative liability and related debt discount.  The 2012 Notes were due March 31, 2013.

  On February 2, 2013, the Company authorized the issuance of Senior Subordinated Convertible 2013 Notes (the “2013 Notes”) that are a part of a series of notes, along with the 2012 Notes, in the aggregate amount of $10.0 million. On March 7, 2013, the aggregate principal amount of 2013 Notes available for issuance was increased from $10.0 million to $20.0 million. As a result, the Company’s board of directors authorized an increase in the shares of common stock reserved for issuance under the Subordinated Notes from 27,777,778 shares to 55,555,556 shares.  As additional consideration for the purchase of the 2013 Notes, the Company issued shares of its common stock to each investor with a value equal to 25% of the principal amount of the 2013 Notes purchased by such investor. All 2012 Notes outstanding in the principal balance of $5.4 million as well as $0.2 million in paid-in-kind interest were cancelled and exchanged by each investor for 2013 Notes.

The maturity date of the 2013 Notes is the earlier of 6 months after issuance, or the closing of a debt or equity financing resulting in gross proceeds to the Company in excess of $5.0 million (a “Qualified Financing”). However, the Holders may, at any time, convert the outstanding principal balance of their respective 2013 Notes into shares of the Company's common stock at a conversion price equal to $0.12 per share.  Further, within fifteen (15) business days after the closing of a Qualified Financing, each investor may convert the outstanding principal and interest under their 2013 Note into the securities issued in the Qualified Financing, on the same terms and conditions as the other investors in the Qualified Financing.  During the 26-week period ended March 31, 2013 the Company issued 2013 Notes in the amount of $3.1 million.  As of May 6, 2013 the Company has issued $6.1 million of the $20.0 million aggregate amount of these series of Notes.

Senior Subordinated Secured Promissory Notes

In March 2011, the Company issued and sold to two accredited investors, Costa Brava Partnership III L.P. (“Costa Brava”) and The Griffin Fund LP (“Griffin”) 12% Senior Subordinated Secured Promissory Notes due March 2013 (the “Senior Subordinated Notes”) in the aggregate principal amount of $4.0 million. In July 2011, the Senior Subordinated Notes were amended to permit the holders to demand repayment any time on or after July 16, 2012, in partial consideration for permitting the issuance of additional Subordinated Secured Convertible Promissory Notes as discussed below.  The owners of the SEnior Subordinated Notes have not demanded payment through March 31, 2013 and the date of the filing of these financial statements with the Securities and Exchange Commission.

The Senior Subordinated Notes bear interest at a rate of 12% per annum paid by adding the amount of such interest to the outstanding principal amount of the Senior Subordinated Notes as paid-in-kind interest. As a result of the addition of such interest, the outstanding principal amount of the Senior Subordinated Notes at March 31, 2013 was $5.1 million.

The Senior Subordinated Notes are secured by substantially all of the assets of the Company pursuant to Security Agreements dated March 16, 2011 and March 31, 2011 between the Company and Costa Brava as representative of the Senior Subordinated Note holders, but the liens securing the Senior Subordinated Notes are subordinate to the liens securing the indebtedness of the Company to PFG under the Senior Secured Revolving Credit Facility.

Subordinated Secured Convertible Promissory Notes

In December 2010, the Company entered into a Securities Purchase Agreement with Costa Brava and Griffin, pursuant to which the Company issued and sold to Costa Brava and Griffin 12% Subordinated Secured Convertible Notes due December 23, 2015 (the “Subordinated Notes”), in the aggregate principal amount of $7.8 million and, in March 2011, the Company sold additional Subordinated Notes to Costa Brava and Griffin for an aggregate purchase price of $1.2 million. In July 2011, the Company sold Subordinated Notes to five accredited investors, including Costa Brava and Griffin, in the aggregate principal amount of $5.0 million. In addition, holders of existing notes with a principal balance of $1.1 million converted certain other notes outstanding at the time into Subordinated Notes during the year ended September 30, 2011.

The Subordinated Notes bear interest at a rate of 12% per annum, due and payable quarterly. For the first two years of the term of the Subordinated Notes, the Company has the option to pay all or a portion of the interest due on each interest payment date in shares of Common stock, with the price per share calculated based on the weighted average price of the Common stock over the last 20 trading days ending on the second trading day prior to the interest payment date. While the Revolving Credit Facility is outstanding, interest on the Subordinated Notes that is not paid in shares of Common stock must be paid by adding the amount of such interest to the outstanding principal amount of the Subordinated Notes as PIK interest. During the 26-week period ended March 31, 2013, the Company paid approximately $963,000 of interest costs in the form of 8,774,000 shares of common stock. The principal and accrued, but unpaid interest under the Subordinated Notes is convertible at the option of the holder into shares of the Common stock at an initial conversion price of $0.07 per share. The conversion price is subject to a full price adjustment feature for certain price dilutive issuances of securities by the Company, and proportional adjustment for events such as stock splits, dividends, combinations, etc. Beginning after the first two years of the term of the Subordinated Notes, the Company may force the conversion of the Subordinated Notes into Common stock if certain customary equity conditions have been satisfied and the volume weighted average price of the Common stock is $0.25 or greater for 30 consecutive trading days. As of March 31, 2013, the Company has not met the equity conditions to force the conversion of the Subordinated Notes.

The Subordinated Notes are secured by substantially all of the assets of the Company pursuant to a Security Agreement dated December 23, 2010 and July 1, 2011, as applicable, between the Company and Costa Brava as representative of the holders of Subordinated Note, but the liens securing the Subordinated Notes are subordinate in right of payment to Loans issued pursuant to the Senior Secured Revolving Credit Facility and the Senior Subordinated Notes.

 As a result of the issuances of Subordinated Notes, including the 2013 Notes discussed above, the conversion of existing notes to Subordinated Notes and the application of PIK interest, the aggregate principal balance of the Subordinated Notes at March 31, 2013, exclusive of the effect of debt discounts, was $16.1 million. During the 26-week period ended March 31, 2013, approximately $30,000 in principal of Subordinated Notes was converted into approximately 438,000 shares of common stock.  The balance of the Subordinated Notes, net of unamortized discounts comprised of derivative liability, at March 31, 2013 was $7.3 million. The debt discounts will be amortized over the term of the Subordinated Notes, unless such amortization is accelerated due to earlier conversion of the Subordinated Notes pursuant to their terms. The Company paid a total of $1.0 million in cash commissions to an investment banker for services related to issuance of the Subordinated Notes, $682,000 of which was recorded as a deferred financing cost and the balance recorded as an offset to equity.

Fifth Omnibus Amendment

     The Company entered into a Fifth Omnibus Amendment, dated as of February 12, 2013, (the “Fifth Omnibus Amendment”)with the representative of the holders of the 12% Subordinated Secured Convertible Notes due 2015 (the "Promissory Notes"), and each of the holders of the Promissory Notes, the 12% Senior Subordinated Promissory Notes due 2013 (the "Senior Subordinated Notes") and the 2013 Notes, which amends and modifies the terms of the Promissory Notes, the Senior Subordinated Notes and the Security Agreements (as defined in the Fifth Omnibus Amendment) to permit the issuance of the 2013 Notes, subordinate the liens securing the Promissory Notes to the 2013 Notes, and make the Senior Subordinated Notes and the 2013 Notes rank pari passu with one another.

     The Company entered into a Sixth Omnibus Amendment and Seventh Omnibus Amendment subsequent to March 31, 2013.  See Note 15.

Derivative Liability

     Certain instruments, including debt and warrants, contain provisions that adjust the conversion or exercise price in the event of certain dilutive issuances of securities or exercise/conversion prices that are not fixed.  These provisions required that the Company book a derivative liability upon issuance and has re-measured the fair value of the derivative liability to be $17,893,000 as of March 31, 2013 and $19,925,000 as of September 30, 2012.

The Company estimated the fair value of the derivative liability using the Binomial Lattice pricing model with the following significant inputs, as outline below, to estimate the fair value of the derivative liability as of March 31, 2013 and September 30, 2012:  

	March 31, 2013	September 30, 2012
Risk free interest rate	0.30%		0.35	%
Expected volatility	80.54%		92.78	%
Expected dividends	None	None