Note 3: Revision of Prior Period Financial Statements

During the quarter ended September 30, 2013, management determined that the fair value of the anti-dilution provision embedded in the Company’s series C convertible preferred stock should have been valued as a derivative instrument. The Company has recorded $607,000 for the fair value at inception of the derivative instrument as derivative liabilities – long term and decreased additional paid-in capital for a corresponding amount to correct the presentation on the consolidated balance sheet as of September 30, 2013. Additionally, the decrease in the fair value of the derivative instrument from inception through September 30, 2013 of $279,000, of which $44,000 is related to the decrease in fair value of the derivative instrument from inception through June, 30, 2013, has been recorded as a decrease to derivative liabilities – long term and a corresponding amount recorded in change in fair value of derivative liabilities on the Company’s consolidated statement of operations. The error corrections are contained in this Quarterly Report on Form 10-Q. The Company will revise its consolidated balance sheet and consolidated statement of operations as of and for the three and six months ended June 30, 2013, to reflect this correction in all future filings that contain such consolidated financial statements. The adjustment increases the previously reported derivative liabilities – long term on the consolidated balance sheet by $607,000 and change in fair value of derivative liabilities on the consolidated statement of operations by $44,000 and decreases the previously reported additional paid in capital on the consolidated balance sheet by $563,000 as of and for the three and six months ended June 30, 2013. The impact of this error was limited to the quarter ended June 30, 2013.

In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated, the Company considered the guidance in Accounting Standards Codification (ASC) Topic 250, “Accounting Changes and Error Corrections,” ASC Topic 250-10-S99-1, “Assessing Materiality,” and ASC Topic 250-10-S99-2, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” The error did not have a material impact on the Company’s net income or cash flows for the three and six-month periods ended June 30, 2013, and management does not consider this correction to be qualitatively material to the Company’s prior period consolidated financial statements.