Related Party Transactions

3 Months Ended

Sep. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

7. Related Party Transactions

Between June 2009 and April 2012, an employee who is the son of the managing member of a limited liability company that beneficially owns approximately 12% of the Company’s common stock received advances from the Company in various forms. Through September 30, 2012, such advances totaled $388,967 including interest, and as of September 30, 2012, the outstanding balance of these advances was $155,218. The Company also provided fulfillment services at no charge to a business partly owned by a member of his household through September 30, 2012. As of September 30, 2012, the Company has an open payable of $38,168 to this business. The Company’s Board of Directors determined that not all of these advances were approved in accordance with the Company’s policy on related party transactions, documented appropriately or recorded correctly in the Company’s accounting system. As a result, the Company was not able to monitor the outstanding amount of these advances on a continuous basis. In April 2012, this employee voluntarily resigned from the Company. Principal repayments towards the outstanding advances aggregating $235,000 have been made through September 30, 2012. The individual agreed to repay the remaining balance by September 30, 2012 with interest based on prime rate on the first business day of the calendar quarter, and provided security for his repayment obligation. The remaining balance has not been paid in full through the date of this report. Previously included in accounts payable, the amount has been reclassified under Stockholders’ Deficiency as the Company has determined to exercise its rights through a pledge agreement for 42,860 shares as collateral.

On October 31, 2012, the Company entered into a letter agreement (the “Series C Letter”) relating to its Series C Preferred Stock with New Atlantic Venture Fund III, L.P., New Atlantic Entrepreneur Fund III, L.P. and NAV Managers Fund, LLC (together, “New Atlantic”).  New Atlantic and its affiliates beneficially own 10,000 shares of the Company’s Series C Preferred Stock, which is all the outstanding shares of such stock, and approximately 22.45% of the Company’s common stock, on a fully diluted basis. Pursuant to the Series C Letter, New Atlantic agreed to exchange (the “Exchange”) all its shares of Series C Preferred Stock for common stock of the Company if (i) the Company receives at least $4 million in proceeds from qualifying private placements of common stock (as defined) on or prior to December 31, 2012 (the “Private Placements”) and (ii) all the Company’s 7% Senior Secured Convertible Promissory Notes due December 31, 2012 and all the Company’s 7% Senior Secured Promissory Notes due January 15, 2013 cease to be outstanding, and would not be replaced with other debt securities, other than debt securities issued to lenders approved by New Atlantic. If the Exchange had occurred, for each share of Series C Preferred exchanged, New Atlantic would have received a number of shares of common stock equal to $100 divided by the weighted average price of the shares of common stock sold in the Private Placements. As of February 1, 2013, the Company satisfied all its obligations under the 2010 Loan Documents and the 2011 Loan Documents.  However, the Company failed to raise the funds required in the Series C Letter. The Company is bound by the Series C Certificate of Designation entered into on October 14, 2010, to apply all of its assets to any such redemption, and to no other corporate purpose, except to the extent prohibited by Delaware law governing distributions to stockholders (other than those assets required to pay its debts as they come due, including the Senior Convertible Notes and Senior Secured Notes and to continue as a going concern under applicable Delaware law), should the Company receive a redemption request. To the extent that Delaware law governing distributions to stockholders prevents the Company from redeeming all shares of Series C Preferred Stock, the Series C Certificate of Designations provides for the Company to ratably redeem the maximum number of shares that it may redeem consistent with Delaware law as soon as it may lawfully do so.  On February 13, 2013, the Company received a Notice of Redemption of Series C Preferred Stock. The Company has determined that no corporate funds are available under Delaware law for the redemption of any shares of Series C Preferred  Stock The Company is currently reviewing its alternatives, including, but not  limited to, raising capital in order to satisfy its obligations related to the Series C Redeemable Preferred Stock.  There is no assurance that our plan will be successful or that the Company will be able to satisfy the redemption notice.

During the nine months ended September 30, 2012, the Company received and repaid advances of $605,000 and $293,812, respectively, from certain stockholders. Such advances are due on demand and are non-interest bearing.