Quarterly report pursuant to Section 13 or 15(d)

NOTE B - RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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NOTE B - RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6 Months Ended
Jun. 30, 2011
Restatement to Prior Year Income [Table Text Block]
NOTE B – RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company accounts for the correction of errors in previously issued financial statements in accordance with the provisions of ASC Topic 250, Accounting Changes and Error Corrections. In accordance with the disclosure provisions of ASC 250, when financial statements are restated to correct an error, an entity is required to disclose that its previously issued financial statements have been restated along with a description of the nature of the error, the effect of the correction on each financial statement line item and any per share amount affected for each prior period presented, and the cumulative effect on the accumulated deficit in the respective balance sheets as of the beginning of the earliest period presented.

Of the details to follow, the most significant adjustment was related to the Company’s failure to assess, collect and remit sales tax in accordance with state and local sales and use tax regulations.

Throughout this Form 10-Q/A, all amounts presented from prior periods and prior period comparisons that have been corrected are labeled “As Restated” and reflect the balances and amounts on a restated basis. The specific line-item effect of the restatement on the Company’s previously issued condensed consolidated financial statements as of June 30, 2011 and 2010 and the Company’s previously issued consolidated financial statements as of December 31, 2010 and for the three and six months ended June 30, 2011 and 2010 as filed on Form 10-Q on August 8, 2011 are as follows:

The following is a summary of the restatements for the periods ended June 30:

   
2011
 
   
For the
Three Months Ended
(Unaudited)
   
For the
Six Months Ended
(Unaudited)
 
             
Increase in sales tax, related penalties and interest
  $ (43,118 )   $ (79,679 )
                 
Incorrect application of ASC 840, Accounting for Leases, resulted in an overstatement of deferred lease liability
    89,312       82,802  
                 
Decrease in depreciation expense related to recording depreciation expense in improper periods
    17,417       34,834  
                 
Increase in expense related to improper recording of various accrued liabilities
    -       (30,531 )
                 
Total increase in net income for the stated period
  $ 63,611     $ 7,426  

   
2010
 
   
For the
Three Months Ended
(Unaudited)
   
For the
Six Months Ended
(Unaudited)
 
             
Increase in sales tax, related penalties and interest
  $ (47,312 )   $ (85,820 )
                 
Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability
    (10,747 )     (21,494 )
                 
Increase in depreciation expense related to recording depreciation expense in improper periods
    (17,417 )     (34,834 )
                 
Increase in expense related to improper recording of various accrued liabilities
    (105,344 )     (105,344 )
                 
Total decrease in net income and increase in net loss, respectively for the stated period
  $ (180,820 )   $ (247,492 )

The net income (loss) per common share effect of each individual correction has not been reported individually due to the fact that there was no effect on the per share amounts.

   
Effect on Condensed Consolidated Balance Sheets as of
 
    June 30, 2011 (Unaudited)    
December 31, 2010
 
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
 
Assets:
                                   
Current assets:
                                   
Prepaid expenses
  $ 265,475     $ 231,237     $ (34,238 )   $ 197,565     $ 163,327     $ (34,238 )
Total current assets
    2,988,982       2,954,744       (34,238 )     1,732,182       1,697,944       (34,238 )
                                                 
Property and equipment, net
    64,177       29,343       (34,834 )     112,997       43,329       (69,668 )
                                                 
Other assets:
                                               
Deposits
    -       34,238       34,238       -       34,238       34,238  
Total other assets
    13,533,263       13,567,501       34,238       13,710,835       13,745,073       34,238  
Total  assets
    16,586,422       16,551,588       (34,834 )     15,556,014       15,486,346       (69,668 )
                                                 
Current liabilities:
                                               
Accrued liabilities and expenses
    1,110,529       1,953,816       843,287       1,157,873       1,890,951       733,078  
Other current liabilities
    89,063       70,065       (18,998 )     170,033       151,035       (18,998 )
Total current liabilities
    3,156,558       3,980,847       824,289       5,894,602       6,608,682       714,080  
                                                 
Long-term liabilities:
                                               
Deferred lease liability
    98,218       98,218       -       -       82,802       82,802  
Total long-term liabilities
    1,026,540       1,026,540       -       1,534,541       1,617,343       82,802  
                                                 
Stockholders' equity:
                                               
Additional paid-in-capital
    124,387,048       124,449,103       62,055       121,995,117       122,057,171       62,054  
Accumulated deficit
    (114,417,686 )     (115,338,864 )     (921,178 )     (115,513,353 )     (116,441,951 )     (928,604 )
Total stockholders’ equity
  $ 10,071,401     $ 9,212,278     $ (859,123 )   $ 6,583,025     $ 5,716,475     $ (866,550 )

   
Effect on Condensed Consolidated Statements of Operations
 
   
Three Months ended June 30, 2011
(Unaudited)
   
Three Months ended June 30, 2010
(Unaudited)
 
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
 
                                     
Revenues, net
                                   
Recurring
  $ 1,151,048     $ 1,151,048     $ -     $ 1,213,115     $ 1,122,371     $ (90,744 )
Total Revenue
    2,927,936       2,927,936       -       3,183,401       3,092,657       (90,744 )
                                                 
Cost of Sales
                                               
Product
    1,017,894       1,017,894       -       1,012,124       938,305       (73,819 )
Recurring
    291,247       291,247       -       326,062       321,190       (4,872 )
Total Cost of Sales
    1,309,141       1,309,141       -       1,338,186       1,259,495       (78,691 )
                                                 
Gross Profit
    1,618,795       1,618,795       -       1,845,215       1,833,162       (12,053 )
                                                 
Operating Expenses
                                               
Research and development
    184,207       182,625       (1,582 )     264,049       293,579       29,530  
Selling, general and administrative
    1,224,178       1,166,812       (57,366 )     1,304,845       1,416,947       112,102  
Depreciation and amortization
    86,235       68,818       (17,417 )     77,790       95,207       17,417  
Total Operating Expenses
    1,494,620       1,418,255       (76,365 )     1,646,684       1,805,733       159,049  
                                                 
Income (Loss) from Operations
    124,175       200,540       76,365       198,531       27,429       (171,102 )
                                                 
Other Income (Expenses)
                                               
Interest expense, net
    (10,986 )     (23,740 )     (12,754 )     (155,547 )     (165,265 )     (9,718 )
Total Other Income (Expense)
    (10,986 )     (23,740 )     (12,754 )     285,035       275,317       (9,718 )
                                                 
Income (Loss) Before Provision for Income Taxes
    113,189       176,800       63,611       483,566       302,746       (180,820 )
                                                 
Net Income (Loss)
    113,189       176,800       63,611       483,566       302,746       (180,820 )
Net income (loss) attributable to common stockholders
  $ (57,611 )   $ 6,000     $ 63,611     $ 444,219     $ 263,399     $ (180,820 )
                                                 
Net income per common share:
                                               
Net income per common share – basic
  $ 0.00     $ 0.00     $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Net income per common share – diluted
  $ 0.00     $ 0.00     $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Weighted Average Common Shares Outstanding – basic
    102,878,097       102,878,097       -       96,916,357       96,916,357       -  
Weighted Average Common Shares Outstanding – diluted
    104,404,580       104,404,580       -       97,140,595       97,140,595       -  

The weighted average per share effect of these changes has not been reported individually due to the fact that there is no effect on the per share amounts.

   
Effect on Condensed Consolidated Statements of Operations
 
   
Six Months ended June 30, 2011
 (Unaudited)
   
Six Months ended June 30, 2010
(Unaudited)
 
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
 
                                     
Revenues, net
                                   
Recurring
  $ 2,282,675     $ 2,282,675     $ -     $ 2,230,704     $ 2,073,029     $ (157,675 )
Total Revenue
    5,410,635       5,410,635       -       5,767,441       5,609,766       (157,675 )
                                                 
Cost of Sales
                                               
Product
    1,726,164       1,726,164       -       1,911,907       1,789,482       (122,425 )
Recurring
    555,116       555,116       -       631,907       620,301       (11,606 )
Total Cost of Sales
    2,281,280       2,281,280       -       2,543,814       2,409,783       (134,031 )
                                                 
Gross Profit
    3,129,355       3,129,355               3,223,627       3,199,983       (23,644 )
                                                 
Operating Expenses
                                               
Research and development
    371,318       391,234       19,916       529,900       588,196       58,296  
Selling, general and administrative
    2,310,722       2,294,645       (16,077 )      2,995,584       3,108,674       113,090  
Depreciation and amortization
    165,180       130,346       (34,834 )     158,200       193,034       34,834  
Total Operating Expenses
    2,847,220       2,816,225       (30,995 )     3,683,684       3,889,904       206,220  
                                                 
Income (Loss) from Operations
    282,135       313,130       30,995       (460,057 )     (689,921 )     (229,864 )
                                                 
Other Income (Expenses)
                                               
Interest expense, net
    (190,406 )     (213,974 )     (23,568 )     (324,293 )     (341,921 )     (17,628 )
Gain on derivative liability
    172,477       172,476       (1 )     -       -       -  
Total Other Income (Expense)
    813,532       789,963       (23,569 )     271,756       254,128       (17,628 )
                                                 
Income (Loss) Before Provision for Income Taxes
    1,095,667       1,103,093       7,426       (188,301 )     (435,793 )     (247,492 )
                                                 
Net Income (Loss)
    1,095,667       1,103,093       7,426       (188,301 )     (435,793 )     (247,492 )
Net income (loss) attributable to common stockholders
  $ 781,800     $ 789,226     $ 7,426     $ (266,761 )   $ (514,253 )   $ (247,492 )
                                                 
Net income per common share:
                                               
Net income per common share – basic
  $ 0.01     $ 0.01     $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Net income per common share – diluted
  $ 0.01     $ 0.01     $ 0.00     $ 0.00     $ 0.00     $ 0.00  
Weighted Average Common Shares Outstanding – basic
    101,475,906       101,556,654       80,748       96,714,804       96,714,804       -  
Weighted Average Common Shares Outstanding – diluted
    103,002,389       103,083,137       80,748       96,714,804       96,714,804       -  

The weighted average per share effect of these changes has not been reported individually due to the fact that there is no effect on the per share amounts.

   
Effect on Condensed Consolidated Statements of Cash Flows
 
   
Six Months ended June 30, 2011
(Unaudited)
   
Six Months ended June 30, 2010
(Unaudited)
 
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
   
As Previously
Reported
   
As
Restated
   
Effect of
Correction
 
                                                 
Net income (loss)
  $ 1,095,667     $ 1,103,093     $ 7,426     $ (188,301 )   $ (435,793 )   $ (247,492 )
Gain (loss) on derivative liability
    (172,477 )     (172,476 )     1       (696,793 )     (696,793 )     -  
Depreciation
    44,340       9,506       (34,834     37,360       72,194       34,834  
Accounts payable, accrued expenses, net
    (579,096 )     (468,887 )     110,209       827,855       1,019,019       191,164  
Deferred lease liability
    98,218       15,416       (82,802 )     -       21,494       21,494  

The financial statement restatement process included a comprehensive review and restatement of the condensed consolidated balance sheet as of January 1, 2010 to address all errors that arose in 2009 and prior periods. The net adjustments to stockholders’ equity, resulting from this process and related error corrections was to increase accumulated deficit in stockholders’ equity by $(521,459) from $(113,741,481) as reported to a restated amount of $(114,262,940). The corrections mainly consisted of sales and use tax expense and other accrued liabilities and expenses.

The primary components of the net corrections to the accumulated deficit at January 1, 2010 are as follows:

Non tax effected corrections:
       
Increase in sales tax liability, penalties and interest
 
$
(449,453
Increase in deferred lease liability
   
  (55,085
)
Increase in accrued warranty
   
(51,000
)
Other unrecorded liabilities
   
34,079
 
Net adjustment to accumulated deficit
 
(521,459
)

Due to the Company’s accumulated net operating losses (NOLs) and related valuation allowance, there is no tax effect resulting from the restatement.