Going Concern and Management's Liquidity Plans

3 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Going Concern and Management's Liquidity Plans

2. Going Concern and Management’s Liquidity Plans

Since inception, the Company has financed its operations primarily through product sales to customers, debt and equity financing agreements, and advances from stockholders. As of September 30, 2012 and December 31, 2011, the Company had negligible cash and a working capital deficiency of $7,659,552 and $2,404,464, respectively. For the nine months ended September 30, 2012, cash flows included net cash used in operating activities of $831,903 net cash provided by investing activities of $136,990 and net cash provided by financing activities of $698,181. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

On December 31, 2012 and January 15, 2013, the Company failed to make required payments aggregating $3,000,000 in principal and approximately $373,000 of accrued interest due on certain notes and convertible note agreements dated November 9, 2010 and September 2, 2011.  Accordingly, the Company was in default of its obligations under the loan documents.   In February 2013, the Company issued 3,501,975 shares of common stock in two private placements for aggregate proceeds of $3,501,975 (see Note 9).  Substantially all of these proceeds were used by the Company to satisfy its obligations under the notes and convertible notes payable which were previously in default.  Also, subsequent to September 30, 2012, the Company received proceeds from the sale of common stock in the amount of $100,000 and advances from a member of management in the amount of approximately $98,000.  In February 2013, the Company also converted an aggregate $833,000 of notes payable and other advances from stockholders and accounts payable outstanding into 833,000 units at a price of $1.00 per unit (see Note 9).

On February   13, 2013,  the  Company  received  a Notice  of Redemption   from  the  holders  of all 10,000  authorized  and outstanding   shares  of Series  C Preferred   Stock,  which  redemption   would result  in an aggregate  payment  of $1,000,000.  The Notice of Redemption was provided by the Series C Preferred  Stock holders pursuant to the terms  of the  Certificate of Designation of Preferences, Rights, and Limitations of Series C Preferred Stock entered into on October 14,2010 ("Series C Certificate of Designation"), which provides for the Company to, within ten (10)business days after receipt of the Notice of Redemption, apply all of its assets for 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). 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 Designation 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. 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. See Note 7 to the Company's unaudited condensed consolidated financial statements for additional information.

As discussed in Note 9, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) dated March 28, 2013 with a lender (the “Lender”).  Under the terms of the Loan Agreement, the Company borrowed $500,000 from the Lender (the “Loan”).  The Loan will be evidenced by a promissory note (the “Note”), and will bear interest on the unpaid principal balance of the Note until the full amount of principal has been paid at a floating rate equal to the Prime Rate plus four and one-quarter percent (4.25%) per annum with a default rate equal to five percent (5.0%) per annum above the otherwise applicable interest rate.  Under the terms of the Loan Agreement, the Company has agreed to make monthly payments of accrued interest on the first day of every month, beginning on May 1, 2013. The principal amount and all accrued interest on the Promissory Note is payable on March 1, 2015, or earlier on an event of default or a sale or liquidation of the Company.  The Loan may be prepaid in whole or in part at any time by the Company without penalty. In consideration of the Loan, the Company granted the Lender a warrant to purchase 750,000 shares of common stock at a purchase price of $0.35 per share.

The Company recognizes it will need to raise additional capital in order to reduce its debt, potentially renegotiate debt terms and execute its business plan. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.