Debt Instruments

3 Months Ended

Dec. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 5 - Debt Instruments

 In October 2013, the Company implemented the Senior Note Conversion and Junior Note Conversion discussed above in Note 1, “Recent Developments”, and exchanged certain outstanding debt totaling approximately $23.1 million in principal and accrued interest for shares of Series D Preferred, Series D Warrants and/or shares of restricted Common Stock (“Restricted Stock”). The following table summarizes the Senior Note Conversion and Junior Note Conversion activity during the quarter ended December 31, 2013:

	Principle balance, net of unamortized discount at September 30, 2013		(Repayment) Proceeds			Debt converted into Series D Preferred			Debt converted to restricted Common Stock			Amortization/ extinguishment of debt discount		Principle balance, net of unamortized discount as of December 31, 2013
Senior Secured Revolving Credit Facility	$	4,908,000	$	(2,000,000	)	$	-		$	-		$	165,000	$	3,073,000
Senior Subordinated Secured Convertible Promissory 2013 Notes		15,793,000		175,000			(16,199,000	)		-			1,841,000		1,610,000
Senior Subordinated Secured Promissory Notes		5,392,000		-			(5,392,000	)		-			-		-
Subordinated Secured Convertible Promissory Notes		8,570,000		-			(381,000	)		(14,357,000	)		6,950,000		782,000
Total Gross Debt		34,663,000		(1,825,000	)		(21,972,000	)		(14,357,000	)		8,956,000		5,465,000
Accrued interest converted to equitiy		-		-			(1,084,000	)		(146,000	)		-		-
Gross adjustment to paid-in capital(1)						$	(23,056,000	)	$	(14,503,000	)

(1) The net amount presented excludes the impact of unamortized debt discount, derivative liability and deferred issuance costs.

Senior Subordinated Secured Convertible Promissory 2013 Notes

 Through October 31, 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 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 the conversion price set forth in the note (the “Conversion Price”). The Senior Subordinated Convertible Notes issued during Fiscal 2012 (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 (a “Qualified Financing”). The Senior Subordinated Convertible Notes issued during Fiscal 2013 (the “2013 Notes”) have a floating price based on the next Qualified Financing. Since both the 2012 Notes and 2013 Notes have a floating conversion price, the embedded conversion feature was considered a derivative liability, and was bifurcated from the host until October 31, 2013 when the price was fixed at $0.042 as a result of the Series D Offering and the 2012 Notes and 2013 Notes were no longer considered derivatives.

 On October 31, 2013, pursuant to the Senior Note Conversion, Senior Subordinated Convertible Notes  in the aggregate total of approximately $17.2 million of principal and accrued interest (the “Outstanding Balance”) were canceled and exchanged for approximately 1,720 shares of Series D Preferred. The Company accounted for the conversion of these Senior Subordinated Convertible Notes, which was deemed an extinguishment of debt, in one of two methods. For the Senior Subordinated Convertible Notes in the aggregate principal amount of $5.5 million held by investors not otherwise related to the Company, the Company removed the net carrying value of the debt, including accrued interest, deferred financing cost and the derivative liability, and recorded the fair value of the shares of Series D Preferred issued in exchange for the cancellation thereof. The resulting difference of $0.4 million was recognized as a gain on debt extinguishment. The remaining Senior Subordinated Convertible Notes in the aggregate total of $11.7 million, which notes were held by related parties, were accounted for as capital transactions whereby the net carrying value of the debt, including accrued interest, deferred financing cost and the derivative liability, totaling $13.1 million,  was recorded as an increase to paid in capital.

 During Fiscal 2013, the Company and each respective holder of remaining Senior Subordinated Convertible Notes, including those sold to clients of J.P. Turner & Company, L.L.C. (“J.P. Turner”), 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 63.8 million shares of Common Stock for $0.001 per share. On December 6, 2013, holders of certain Amended Senior Subordinated Convertible Notes sold to clients of J.P. Turner 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. See Note 13 herein for further information regarding subsequent events relating to these Amended Senior Subordinated Convertible Notes.

 As of December 31, 2013, $0.5 million of the outstanding Senior Subordinated Convertible Notes had matured. The Company is in the process of working with the respective holders of these notes to extend the maturity dates or convert the debt into shares Series D Preferred and Series D Warrants; however no assurances can be given that the Company will be successful in this effort. See Note 13 herein for further information regarding subsequent events relating to the Senior Subordinated Secured Convertible Notes.

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. Subsequently, 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 certain of the Company’s then outstanding debt, with a principal balance of $1.1 million, converted such debt into Subordinated Notes during the year ended September 30, 2011.

 As of December 31, 2013, the principal and accrued but unpaid interest of the remaining unconverted Subordinated Notes was convertible at the option of the holder into shares of 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., and as such, are considered to be derivatives. Upon completion of the Series D Offering, the conversion price was adjusted to $0.042 per share.  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 December 31, 2013, the Company has not met the equity conditions to force the conversion of the Subordinated Notes.

 On October 31, 2013, Subordinated Notes in the aggregate total of $14.5 million in principal and accrued interest due to Costa Brava and Griffin were cancelled in exchange for approximately 101.5 million shares of Restricted Stock. The Restricted Stock will vest in the event the trading price of the Company’s Common Stock reaches $0.143. Because the managing members of Costa Brava and Griffin served on the Company’s board of directors during the quarter ended December 31, 2013, Costa Brava and Griffin are related parties to the Company. As such, the canceled $14.5 million principal and accrued interest, and the related discount and derivative liability was treated as a contribution to paid in capital.

 Also, on October 31, 2013, the holder of a Subordinated Note totaling $0.4 million in principal and accrued interest, not otherwise related to the Company, exchanged such note for approximately 40 shares of Series D Preferred. The Company removed the net carrying value of the debt including accrued interest, deferred financing cost and the derivative liability, recorded the fair value of the Series D Preferred and the resulting difference of $37,000 was recognized as a loss on debt extinguishment.

 As of December 31, 2013, Subordinated Notes in the aggregate principal amount of $1.4 million remain outstanding, of which $0.2 million mature during December 2015, $0.2 million mature during January 2016, $0.1 million mature during April 2016 and $0.9 million mature during July 2016.  The balance of the unconverted Subordinated Notes, net of unamortized discounts at December 31, 2013 was $0.8 million. The debt discounts will be amortized over the term of the unconverted Subordinated Notes, unless such amortization is accelerated due to earlier conversion of the Subordinated Notes pursuant to their terms.

Senior Subordinated Secured Promissory Notes

 In March 2011, the Company issued and sold 12% Senior Subordinated Secured Promissory Notes (the “Senior Subordinated Notes”) to two accredited, related party investors, Costa Brava and Griffin. 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 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 Company’s indebtedness to PFG under the Revolving Credit Facility. 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 October 31, 2013 was $5.4 million.

 On October 31, 2013, the outstanding balance was converted to approximately 545 shares of Series D Preferred.  Since the note holders are related parties to the Company, the Company accounted for the conversion of these notes as a capital transaction whereby the net carrying value of the debt including accrued interest was recorded as an increase to contributed capital.

Priority of Outstanding Debt

 As of December 31, 2013, 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.

Revolving Credit Facility

 In December 2011, the Company entered into the Loan Agreement with PFG to obtain 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 Revolving Credit Facility was originally set to mature on December 14, 2013, however, in connection with the PFG Loan Modification, the maturity date was extended to December 31, 2014. Interest on the Revolving Credit Facility accrues at the rate of 12% per annum, payable monthly, with the principal balance payable on the Maturity Date. See Note 1 above and Note 13 below for further discussion of events during and subsequent to the quarter ended December 31, 2013 related to the 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.

 As of and prior to the quarter ended December 31, 2013, the Company was not in compliance with certain debt covenants of the Revolving Credit Facility. As such, the table below summarizes the various waiver and forbearance extensions and all warrants (the “Waiver 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 on the date of issuance of each forbearance extension.  Prior to the consummation of the Series D Offering, the exercise price of the Waiver Warrants was not fixed, causing each Waiver Warrant to be accounted for as a derivative liability.  However, upon consummation of the Series D Offering, the exercise price of each Waiver Warrant became fixed at $0.042 per share and the Company reclassified the fair value totaling $2,834,000 to paid in capital. With the ninth forbearance and in connection with the loan modification, PFG waived its rights with respect with debt covenant compliance through December 31, 2014.

Forbearance	Extension Through Date	Exercise Price per share	Exercisable Share
Waiver	September 30, 2012	$0.042		2,045,455
Forbearance Extension	October 31, 2012	$0.042		2,045,455
Second Forbearance Extension	December 15, 2012	$0.042		2,045,455
Third Forbearance Extension	January 31, 2013	$0.042		2,045,455
Fourth Forbearance Extension	February 28, 2013	$0.042		2,045,455
Fifth Forbearance Extension	March 31, 2013	$0.042		2,045,455
Sixth Forbearance Extension	April 30, 2013	$0.042		2,045,455
Seventh Forbearance Extension	May 31, 2013	$0.042		2,045,455
Eighth Forbearance Extension	June 30, 2013	$0.042		2,045,455
Ninth Forbearance Extension	October 28, 2013	$0.01		2,232,142
Total				20,641,237

 As of December 31, 2013, PFG has not exercised any Waiver Warrants.

Derivative Liability

 Certain instruments, including the embedded conversion feature in certain of the Compay's outstanding debt and warrants, contain provisions that adjust the respective conversion or exercise prices in the event of certain dilutive issuances of securities, or exercise/conversion prices that are not fixed.  These provisions required the Company to record a derivative liability upon issuance.  The Company re-measured the fair value of the derivative liability to be $0.1 million as of December 31, 2013 and $19.2 million as of September 30, 2013. See Note 11 below for a description of the Company’s fair value measurements.

 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 December 31, 2013 and September 30, 2013:  

	December 31, 2013			September 30, 2013
Risk free interest rate		0.38	%		0.40	%
Expected volatility		133.0	%		94.8	%
Expected dividends	None			None