Restatements

12 Months Ended

Dec. 31, 2012

Restatement Of Prior Year Income [Abstract]

Restatements

Note 2 – Restatements

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 remaining unamortized debt discount of the original debt of approximately $72,200 and difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt of $1.4 million were 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 Annual Report on Form 10-K/A for the year ended December 31, 2012 incorporates corrections made in response to the accounting errors described above by restating our financial statements and other disclosures where necessary, to properly account for these issues as of and for the year ended December 31, 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 Year Ended December 31, 2011

	As Previously
	Reported on
	Form 10-K/A			Adjustments			Restated
Loss from operations	$	(6,713,961	)				$	(6,713,961	)
Other expenses:
Interest expense		156,645						156,645
Amortization of debt discounts		1,196,591			(394,285	)(a)		567,575
					(234,731	)(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		1,870,071			(492,111	)(e)		1,377,960
Total other expenses		3,223,307			1,026,058			4,249,365
Net loss		(9,937,268	)		(1,026,058	)		(10,963,326	)
Accretion of preferred dividends and beneficial conversion feature		(1,049,975	)					(1,049,975	)
Net loss attributable to common shareholders	$	(10,987,243	)	$	(1,026,058	)	$	(12,013,301	)
Weighted average common shares - basic and diluted		24,352,072			24,352,072			24,352,072
Basic and diluted net loss per share	$	(0.45	)	$	(0.04	)	$	(0.49	)

(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 Year Ended December 30, 2011

	As Previously
	Reported on
	Form 10-K/A			Adjustments			Restated
Cash flow from operating activities:
Net income (loss)	$	(9,937,268	)	$	(1,026,058	)	$	(10,963,326	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of convertible debt discount		692,685			(394,285	)(a)		298,400
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		1,870,071			(492,111	)(d)		1,377,960
Share-based compensation		3,280,933			(234,731	)(e)		3,046,202
Net cash used in operating activities	$	(4,940,241	)	$	-		$	(4,940,241	)

(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 reacquisition price of the new debt.

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

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