Debt Instruments

12 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Debt Instruments

 As of September 30, 2013, the Company had the following outstanding debt instruments:

	Principal balance at issuance date		Principal  balance at September 30, 2013		Unamortized Debt Discount balance at September 30, 2013			Net Balance
Senior Secured Revolving Credit Facility	$	5,000,000	$	5,000,000	$	(92,000	)	$	4,908,000
Senior Subordinated Secured Convertible Promissory 2013 Notes		17,831,000		17,375,000		(1,582,000	)		15,793,000
Senior Subordinated Secured Promissory Notes		4,000,000		5,392,000		-			5,392,000
Subordinated Secured Convertible Promissory Notes		15,051,000		16,092,000		(7,522,000	)		8,570,000

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, $5.0 million 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 15.0 million 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 principal balance payable on the Maturity Date.

 Both Costa Brava Partnership III L.P. (“Costa Brava”) and The Griffin Fund LP (“Griffin”) have unconditionally guaranteed repayment of $2.0 million of the Company’s monetary obligations under the Loan Agreement with PFG, and are jointly and severally responsible.  As discussed in Note 3, Costa Brava deposited $1.0 million in an escrow account.  As of September 30, 2013, Costa Brava and Griffin are still contractually bound to guarantee an additional $1.0 million of the PFG line of credit.  See Note 20 for further discussion of events subsequent to the reporting date related to the Senior Secured Revolving Credit Facility.

 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.

 The Company was not in compliance with certain debt covenants. As such, the table below summarized the various waiver and forbearance extensions and all warrants issued to PFG. The exercise price of the Waiver Warrants is equal to the lower of the Next Equity Financing Effective Price (the "NEFEP") or a stated price per share determined at the date of issue of each forbearance extension.  Since the conversion price through the eighth forbearance extension each waiver warrant were considered to be derivative liabilities and the Company recorded $1.7 million in derivative liability related to these instruments.

Forbearance	Extension Through Date	Exercise Price per share	Exercisable Share
Waiver	September 30, 2012	Lower of NEFEP or $0.11		2,045,455
Forbearance Extension	October 31, 2012	Lower of NEFEP or $0.11		2,045,455
Second Forbearance Extension	December 15, 2012	Lower of NEFEP or $0.11		2,045,455
Third Forbearance Extension	January 31, 2013	Lower of NEFEP or $0.11		2,045,455
Fourth Forbearance Extension	February 28, 2013	Lower of NEFEP or $0.11		2,045,455
Fifth Forbearance Extension	March 31, 2013	Lower of NEFEP or $0.11		2,045,455
Sixth Forbearance Extension	April 30, 2013	Lower of NEFEP or $0.11		2,045,455
Seventh Forbearance Extension	May 31, 2013	Lower of NEFEP or $0.11		2,045,455
Eighth Forbearance Extension	June 30, 2013	Lower of NEFEP or $0.11		2,045,455
Ninth Forbearance Extension	October 28, 2013	$0.01		2,232,143
Total				20,641,238

 As of September 30, 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 Notes

 During Fiscal 2012 and Fiscal 2013, we issued Senior Subordinated Secured Convertible Promissory Notes (the “Senior Subordinated Convertible Notes”) in the aggregate principal amount of $17.8 million to certain accredited investors, including Griffin. The Senior Subordinated Convertible Notes accrue interest at a rate of 12% per annum, and are secured by all of the Company’s assets.  The Senior Subordinated Convertible Notes issued during Fiscal 2012 (the “2012 Notes”) were originally set to mature on November 31, 2012, while Senior Subordinated Convertible Notes issued during Fiscal 2013 (the “2013 Notes”) were originally set to mature on November 30, 2013. As additional consideration, each purchaser of Senior Subordinated Convertible Notes received shares of Common Stock equal to 25% of the principal amount notes purchased, resulting in the issuance of an aggregate total of 43,130,000 shares of Common Stock. During Fiscal 2013, $200,000 in principal was repaid.

 During the year ended September 30, 2013, J.P. Turner & Company, L.L.C. (“J.P. Turner”) (the "Placement Agent") acted as placement agent for the sale of Senior Subordinated Convertible Notes in the principal amount of $2.5 million.  As consideration for is services as Placement Agent, J.P. Turner received (i) cash commissions totaling $285,000, (ii) an expense allowance of $55,000, and (iii) warrants to purchase up to 707,000 shares of Common Stock for $0.09 per share.  

 The Senior Subordinated Convertible Notes are convertible, at the option of each respective holder, into that number of shares of Common Stock equal to the outstanding principal and accrued interest of the Senior Subordinated Notes, divided by $0.12 per share (the “Conversion Price”). However, the 2012 Notes had a Conversion Price of $0.12 per share, or the price of shares sold by us to one or more investors in a subsequent financing resulting in gross proceeds in excess of $1.0 million. As the 2012 Notes had a floating conversion price, they were considered derivative liabilities and the Company recorded $237,000 as a derivative liability and related debt discount.  The 2013 Notes also had a floating conversion price, and $2.1 million was recorded as a derivative liability and related debt discount.

During Fiscal 2013, in order to extend the maturity date of the 2012 Notes to November 30, 2013, all 2012 Notes were cancelled and exchanged for 2013 Notes. Also during Fiscal 2013, the Company and each respective holder of remaining Senior Subordinated Convertible Notes, including notes sold to clients of the Placement Agent,  entered into an amendment to extend the maturity date of the notes to January 31, 2014 (the “Amended Senior Subordinated Convertible Notes”). As additional consideration for this extension, the Company issued warrants to those holders of the Amended Senior Subordinated Convertible Notes to purchase an aggregate total of 9.3 million shares of Common Stock for $0.042 per share. On December 6, 2013, holders of Amended Senior Subordinated Convertible Notes in the aggregate principal amount of approximately $1.0 million notified the Company of their position that the Series D Offering meets the definition of a Qualified Financing, as such term is defined in the Amended Senior Subordinated Convertible Notes, and, as a result, the Amended Senior Subordinated Convertible Notes matured on November 1, 2013, a position the Company disputes. For further information regarding this dispute, please see the risk factors in Item 1A of this Annual Report on Form 10-K and Note 20 herein.

As of September 30, 2013, $14.0 million of the Company’s debt had matured, and the remaining $3.4 million will mature between October 2013 and January 2014. The Company is in the process of working with the respective lenders of the debt to extend the maturity dates, however no assurances can be given that the Company will be successful in this effort. Subsequent to September 30, 2013, the Company was successful in negotiating a commitment from these lenders to convert this indebtedness into shares of Series D Preferred and Warrants on substantially the same terms offered in the Series D Offering. See Note 20 herein for further information regarding subsequent events relating to the Senior Subordinated Secured Convertible 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 July 31, 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. The owners of the Senior Subordinated Notes have not demanded payment as of September 30, 2013 and through the date of the filing of these financial statements with the Securities and Exchange Commission. See Note 20 for further discussion of events subsequent to the reporting date related to the Senior Subordinated Secured Promissory Notes.

 Interest is calculated 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 September 30, 2013 was $5.4 million.

 The Senior Subordinated Notes are secured by substantially all of our assets 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. However, the liens securing the Senior Subordinated Notes are subordinate to the liens securing the indebtedness of us to PFG under the 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. See Note 20 for further discussion of events subsequent to the reporting date related to the Subordinated Secured Convertible Promissory Notes.

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 Fiscal 2013, the Company paid approximately $1.9 million of interest costs in the form of 22,079,000 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.; as such, they are considered to be derivatives. 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 September 30, 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 the representative of the Subordinated Note holders. However, the liens securing the Senior Subordinated Notes are subordinate to the liens securing the indebtedness of us to PFG under the Revolving Credit Facility.

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 September 30, 2013, exclusive of the effect of debt discounts, was $16.1 million. During the year ended September 30, 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 September 30, 2013 was $8.6 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.

Omnibus Amendments and Priority of Outstanding Debt

 As of September 30, 2013, following the execution of the Fifth, Sixth and Seventh Omnibus Amendments on February 12, 2013, April 22, 2013 and August 7, 2013, respectively, our outstanding debt is ranked as follows: (i) the Revolving Credit Facility is senior to all other debt; (ii) the Senior Subordinated Convertible Notes and Subordinated Secured Notes rank pari passu with one another; and (iii) the Subordinated Notes rank junior to all other debt.

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 the Company to book a derivative liability upon issuance and re-measured the fair value of the derivative liability to be $19.2 million as of September 30, 2013 and $19.9 million 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 outlined below, to estimate the fair value of the derivative liability as of September 30, 2013 and September 30, 2012:  

	September 30, 2013			September 30, 2012
Risk free interest rate		0.40	%		0.35	%
Expected volatility		94.8	%		92.8	%
Expected dividends	None			None