Restatements

9 Months Ended

Sep. 30, 2012

Restatement Of Prior Year Income [Abstract]

Restatements

Note 2 – Restatements

Current Report on Form 8-K, Dated May 14, 2011

On May 14, 2011, we filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K, to report our determination that our consolidated financial statements for the year ended December 31, 2011, included in our Annual Report on Form 10-K filed with the SEC on March 6, 2012 (the “2011 Form 10-K”), and the interim unaudited condensed consolidated financial statements included in our September 30, 2011 Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011 (the “September 30, 2011 Form 10-Q”) should not be relied upon because we failed (i) to initially record and subsequently fair value our derivative warrant liabilities in connection with the issuances of our 10% Convertible Preferred Stock (the “Preferred Stock”) on March 22, 2011, April 1, 2011, April 13, 2011 and April 21, 2011 and (ii) to recalculate the fair value of the beneficial conversion feature embedded in the Preferred Stock upon determination that the conversion price of the Preferred Stock was required to be reset. We determined that the historical consolidated financial statements for the year ended December 31, 2011 included in our 2011 Form 10-K and the interim unaudited condensed consolidated financial statements for the period ended September 30, 2011, included in our September 30, 2011 10-Q required restatement (i) to record the change in fair value of our derivative warrant liability and (ii) to recalculate the fair value of the beneficial conversion feature and the amortization thereon in our Consolidated Statement of Stockholder Deficit.

On May 21, 2012, we filed our Form 10-K/A for the year ended December 31, 2011 and Form 10-Q/A for the period ended September 30, 2011 restating our financial statements and other disclosures where necessary, to properly account for these issues.

Current Report on Form 8-K Dated August 15, 2012

On August 15, 2012, we filed with the Securities and Exchange Commission (“SEC”) a Current Report on Form 8-K, to report our determination that our consolidated financial statements for the interim periods ended March 31, 2011, June 30, 2011, September 30, 2011, the year ended December 31, 2011, and the interim period ended March 31, 2012, should not be relied upon because in connection with the terms of the amendment of our 10% convertible debentures (the “Debentures”) on January 14, 2011 we failed (i) to initially record and subsequently fair value our derivative liabilities for the bonus warrants and (ii) to properly account for the loss on extinguishment of the Debentures upon amendment. We determined that the historical consolidated financial statements for the interim periods ended March 31, 2011, June 30, 2011, September 30, 2011, for the year ended December 31, 2011 and for the interim period ended March 31, 2012 require restatement (i) to record the initial fair value upon amendment and the subsequent change in fair value of our derivative bonus warrant liability and (ii) to properly account for the loss on extinguishment of the Debentures upon amendment.

Our 10% convertible debentures (the “Debentures”) were issued under purchase agreements during the fiscal year ended September 30, 2009, together with warrants, for aggregate proceeds of $600,000. The total of the fair value of the warrants, as determined using the Black-Scholes pricing model, and the value of the beneficial conversion features contained in the debentures, representing the difference between the fair value of common stock issuable upon conversion at the date of purchase and the amount of proceeds allocated to the note, exceeded the proceeds received.  Accordingly, we recorded a discount on the debentures equal to the principal amount of the debentures.  This recorded discount on these debentures was amortized to interest expense on the interest method through their originally scheduled maturity dates in February and March 2011.

Effective January 14, 2011, the holders of our Debentures, agreed to extend the maturity dates to June 30, 2012 and to the elimination of the prohibition of paying dividends or distributions on any of our equity securities. We agreed to amend the interest rate to 15% if paid in cash and to 18% (from 12%) if paid with shares of our common stock at the rate of one share of common stock for each $0.60 (from $0.90) of interest. We also agreed to reduce the conversion price, as defined, to $0.60, from $0.90 and to amend the volume weighted average trading price at which we could force conversion to $2.50 from $2.00. In addition, for each calendar month after February or March 2011 that these debentures remained outstanding, we agreed to issue a bonus warrant exercisable for three years for a number of shares of our common stock equal to the 5% of the outstanding principal, divided by $0.90. These bonus warrants are exercisable at $0.90 per share.

Even though these modifications to our Debentures resulted in less than a ten percent difference in the present value of cash flows between the original terms and the modified terms, the fair value of the conversion options was substantially greater than ten percent. We have therefore, accounted for the modification of these Debentures as an extinguishment of the original debt and the establishment of new debt. The difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt was $1.4 million and was recognized as a loss in our statement of operations during the three months ended March 31, 2011, the period of amendment.

In addition, since it was probable that we would issue the bonus warrants which were part of the reacquisition costs of the new debt, at each month-end through the amended maturity date, we calculated the fair value of the bonus warrants using the Black-Scholes pricing model and recorded a derivative liability of approximately $797,000 on the date of amendment and recognized the amount as a loss in our statement of operations during the three months ended March 31, 2011, the period of amendment. The bonus warrant derivative liability does not qualify as a fair value or cash flow hedge under ASC 815, and accordingly, changes in the fair value of the derivative liability are immediately recognized in earnings and classified as a gain or loss on the derivative liability in the accompanying statements of operations. (See Note 7.)

This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2012 incorporates corrections made in response to the accounting errors described above by restating our consolidated balance sheet as of December 31, 2011 and our consolidated financial statements presented herein for the comparative periods of September 30, 2011.

Effect on Consolidated Balance Sheet

December 31, 2011

	As Previously
	Reported on
	Form 10-K/A			Adjustments			Restated
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	1,175,462					$	1,175,462
Accrued liabilities		359,715						359,715
Convertible revolving credit facility, net of discounts		160,794						160,794
Derivative liability - conversion option		113,271						113,271
Derivative liability - warrants		1,875,463						1,875,463
Derivative liability - bonus warrants		-			797,185	(e)		70,343
					(492,111	)(f)
					(234,731	)(g)
Convertible debt		566,785			600,000	(a)		772,500
					(394,285	)(b)
Total current liabilities		4,251,490			276,058			4,527,548
Fair value of 10% convertible preferred stock warrants		487,555						487,555
Total liabilities		4,739,045			276,058			5,015,103
Commitments and contingencies
10% Convertible preferred stock, no par value; authorized 880,000 shares;  752,273 issued and outstanding at December 31, 2011, net of discount		5,520,256						5,520,256
Redeemable common stock, no par value; 250,000 shares issued and outstanding at December 31, 2011		242,500						242,500
Stockholders' deficit:
Common stock, no par value; authorized, 100,000,000 shares; 25,007,261 shares issued and outstanding at December 31, 2011		23,660,071			1,350,000	(d)		24,410,071
					(600,000	)(a)
					(234,731	)(c)
					234,731	(g)
Accumulated deficit		(28,619,876	)		(1,350,000	)(d)		(29,645,934	)
					394,285	(b)
					(797,185	)(e)
					492,111	(f)
					234,731	(c)
Total stockholders' deficit		(4,959,805	)		(276,058	)		(5,235,863	)
Total liabilities and stockholders' deficit	$	5,541,996		$	-		$	5,541,996

(a) - to reverse the improper recording of debt discount.

(b) - to reverse the improper recording of and amortization of debt discount.

(c) - to reverse the improper recording of the fair value of bonus warrants at issuance.

(d) - to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt at the amendment date.

(e) - to record the fair value of the bonus warrants as of the amendment date as a component of the reacquisition price of the new debt.

(f) - to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants at period end.

(g) - to record the fair value of bonus warrants at date of issuance.

Effect on Consolidated Statement of Operations

for the Three Months Ended September 30, 2011

	As Previously
	Reported on
	Form 10-Q/A			Adjustments			Restated
Loss from operations	$	(1,430,518	)				$	(1,430,518	)
Other expenses:
Interest expense		26,714						26,714
Amortization of debt discounts		244,858			(102,857	)(a)		69,029
					(72,972	)(b)
Change in fair value of derivative liabilities		2,396,300			(68,699	)(c)		2,327,601
Total other expenses		2,667,872			(244,528	)		2,423,344
Net loss		(4,098,390	)		244,528			(3,853,862	)
Accretion of preferred dividends and beneficial conversion feature		(207,097	)					(207,097	)
Net loss attributable to common shareholders	$	(4,305,487	)	$	244,528		$	(4,060,959	)
Weighted average common shares - basic and diluted		24,715,584			24,715,584			24,715,584
Basic and diluted net loss per share	$	(0.17	)	$	0.01		$	(0.16	)

(a) - to reverse the improper amortization of debt discount.

(b) - to reverse the impact of the improper recording of the fair value of the Bonus Warrants upon issuance.

(c) - to recognize the gain on the change in the fair value of the derivative liability associated with the Bonus Warrants at period end.

Effect on Consolidated Statement of Operations

for the Nine Months Ended September 30, 2011

	As Previously
	Reported on
	Form 10-Q/A			Adjustments			Restated
Loss from operations	$	(5,539,143	)				$	(5,539,143	)
Other expenses:
Interest expense		123,818						123,818
Amortization of debt discounts		914,907			(291,428	)(a)		436,457
					(187,022	)(b)
Loss on debt extinguishment					1,350,000	(c)		1,350,000
Fair value of bonus warrants at debt extinguishment					797,185	(d)		797,185
Change in fair value of derivative liabilities		2,396,300			(428,260	)(e)		1,968,040
Total other expenses		3,435,025			1,240,475			4,675,500
Net loss		(8,974,168	)		(1,240,475	)		(10,214,643	)
Accretion of preferred dividends and beneficial conversion feature		(414,653	)					(414,653	)
Net loss attributable to common shareholders	$	(9,388,821	)	$	(1,240,475	)	$	(10,629,296	)
Weighted average common shares - basic and diluted		24,091,129			24,091,129			24,091,129
Basic and diluted net loss per share	$	(0.39	)	$	(0.05	)	$	(0.44	)

(a) - to reverse the improper amortization of debt discount.

(b) - to reverse the impact of the improper recording of the fair value of the Bonus Warrants upon issuance.

(c)- to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt at the amendment date.

(d)- to record the fair value of the bonus warrants as of the amendment date as a component of the reacquisition price of the new debt.

(e)- to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants at period end.

Effect on Consolidated Statement of Cash Flows

for the Nine Months Ended September 30, 2011

	As Previously
	Reported on
	Form 10-Q/A			Adjustments			Restated
Cash flow from operating activities:
Net income (loss)	$	(8,974,168	)	$	(1,240,475	)	$	(10,214,643	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of convertible debt discount		589,830			(291,428	)(a)		298,402
Loss on debt extinguishment		-			1,350,000	(b)		1,350,000
Fair value of bonus warrants at debt extinguishment		-			797,185	(c)		797,185
Change in fair value of derivative liabilities - Bonus Warrants		-			(428,260	)(e)		(428,260	)
Share-based compensation		3,026,954			(187,022	)(d)		2,839,932
Net cash used in operating activities	$	(4,095,828	)	$	-		$	(4,095,828	)

(a) - to reverse the improper amortization of debt discount.

(b) - to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt, at amendment date.

(c) - to record the fair value of the bonus warrants as of the amendment date as a component of the reacuisition price of the new debt.

(d) - to reverse the impact of the improper recording of the fair value of the bonus warrants upon issuance.

(e) - to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants at period end.

Effect on Consolidated Balance Sheet

September 30, 2011

	As Previously
	Reported on
	Form 10-Q/A			Adjustments			Restated
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	1,097,637					$	1,097,637
Accrued liabilities		275,608						275,608
Notes payable		50,640						50,640
Derivative liability - warrants		2,396,300						2,396,300
Derivative liability - bonus warrants		-			797,185	(e)		181,903
					(428,260	)(f)
					(187,022	)(g)
Convertible debt		463,928			600,000	(a)		772,500
					(291,428	)(b)
Total current liabilities		4,284,113			490,475			4,774,588
Fair value of 10% convertible preferred stock warrants		487,555						487,555
Total liabilities		4,771,668			490,475			5,262,143
Commitments and contingencies
10% Convertible preferred stock, no par value; authorized 880,000 shares; 759,773 shares issued and outstanding at September 30, 2011, net of discount		6,594,341						6,594,341
Stockholders' deficit:
Common stock, no par value; authorized, 100,000,000 shares; 24,947,261 shares issued and outstanding at September 30, 2011		22,256,845			1,350,000	(d)		23,006,845
					(600,000	)(a)
					(187,022	)(c)
					187,022	(g)
Accumulated deficit		(27,656,776	)		(1,350,000	)(d)		(28,897,251	)
					291,428	(b)
					(797,185	)(e)
					428,260	(f)
					187,022	(c)
Total stockholders' deficit		(5,399,931	)		(490,475	)		(5,890,406	)
Total liabilities and stockholders' deficit	$	5,966,078		$	-		$	5,966,078

(a) - to reverse the improper recording of debt discount.

(b) - to reverse the improper amortization of debt discount.

(c) - to reverse the improper recording of the fair value of bonus warrants at issuance.

(d) - to record the difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt at the amendment date.

(e) - to record the fair value of the bonus warrants as of the amendment date as a component of the reacquisition price of the new debt.

(f) - to recognize the gain on the change in the fair value of the derivative liability associated with the bonus warrants at period end.

(g) - to record the fair value of bonus warrants at date of issuance.