18. Restatement of financial statements

9 Months Ended

Sep. 30, 2013

Accounting Changes and Error Corrections [Abstract]

18. Restatement of financial statements

On May 24, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with eight investors (collectively, the “Investors”) pursuant to which the Company sold 8,700 shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (“Original Series E”), the terms of which are set forth in the Certificate of Designations of Series E Preferred Stock (the “Certificate”), for $1,000 per share, or $8,700,000. In October 2012, the Company sold 1,000 shares of Series E for $1,000,000 (“New Series E”). The Original Series E and New Series E together are referred to herein as “Series E”.

These Series E contained “full ratchet-down” liquidity protection that provides that if the Company issues securities for less than the existing conversion price for the Series E Preferred Stock or the strike price of the Series E warrants, then the conversion price for Series E Preferred Stock will be lowered to that lower price. Also, the strike price for Series E warrants will be decreased to that lower price and the number of Series E warrants will be increased such that the product of the original strike price times the original quantity equals the lower strike price times the higher quantity.

In preparing the financial statements for 2012, the Company determined that the warrants for these financings included certain embedded derivative features as set forth in ASC Topic 815 “Derivatives and Hedging” and that this conversion feature of the Series E was not an embedded derivative because this feature was clearly and closely related to the host (Series E) as defined in ASC 815. These derivative liabilities were initially recorded at their estimated FV on the date of issuance and were subsequently adjusted each quarter to reflect the estimated FV at the end of each period, with any decrease or increase in the estimated fair value of the derivative liability for each period being recorded as other income or expense. Since the value of the embedded derivative feature for the related warrants was higher than the value of both Series E issuances, there was no beneficial conversion feature recorded for either transaction, and the excess of the value of the embedded derivative feature over the value of the transaction was recorded in each period on the Statement of Operations.

As the result of this determination, the Company had incorrectly accounted for the derivative liabilities embedded in the Series E and related warrants. The consolidated balance sheet as of June 30, 2012 and the related consolidated statements of operations for the three months then ended were restated to reflect the correct treatment.   

The following table presents the effect of the restatement adjustment on the accompanying consolidated statement of operations for the three months ended September 30, 2012:

		Three Months Ended September 30, 2012
Consolidated Statement of Operations for Three Months Ended September 30, 2012		As Previously Reported			Restated			Net Adjustment
Loss from operations	$	(3,426,250	)	$	(3,426,250	)	$	–
Other (income)/expenses
Fair value of derivative liabilities in excess of proceeds		–			–			–
Adjustments to fair value of derivative securities		–			(2,022,790	)		(2,022,790	)
Other (income)/expenses		(133,770	)		(133,770	)		–
Interest expense		172,057			52,313			(119,744	)
Total other (income)/expenses		38,287			(2,104,247	)		(2,142,534	)
Net loss		(3,464,537	)		(1,322,003	)		2,142,534
Preferred dividends		–			119,744			119,744
Net loss atttributable to common shareholders	$	(3,464,537	)	$	(1,441,747	)	$	2,022,790
Basic and diluted loss attributable to common shareholders per share	$	(0.04	)	$	(0.02	)	$	0.02
Basic weighted average shares outstanding		89,748,496			89,748,496			–
Fully-diluted weighted average shares outstanding		89,748,496			117,915,163			28,166,667

The following table presents the effect of the restatement adjustment on the accompanying consolidated statement of operations for the nine months ended September 30, 2012:

		Nine Months Ended September 30, 2012
Consolidated Statement of Operations  for Nine Months Ended September 30, 2012		As Previously  Reported			Restated			Net Adjustment
Loss from operations	$	(8,221,091	)	$	(8,221,091	)	$	–
Other (income)/expenses
Fair value of derivative liabilities in excess of proceeds		–			–			–
Adjustments to fair value of derivative securities		–			13,845,208			13,845,208
Other (income)/expenses		626,926			626,926			–
Interest expense		469,848			104,431			(365,417	)
Total other (income)/expenses		1,096,774			14,576,565			13,479,791
Net loss		(9,317,865	)		(22,797,656	)		(13,479,791	)
Preferred dividends		–			365,417			365,417
Net loss attributable to common shareholders	$	(9,317,865	)	$	(23,163,073	)	$	(13,845,208	)
Basic and diluted loss attributable to common shareholders per share	$	(0.10	)	$	(0.26	)	$	(0.16	)
Basic weighted average shares outstanding		89,220,298			89,220,298			–
Fully-diluted weighted average shares outstanding		89,220,298			117,386,965			28,166,667

The FV of these derivative liabilities was calculated using the Black Scholes pricing model that is based on the closing price of the common stock, the strike price of the underlying instrument, the risk-free interest rate for the applicable remaining life of the underlying instrument (i.e., the U.S. treasury rate for that period) and the historical volatility of the Company’s common stock.