Annual report pursuant to Section 13 and 15(d)

NOTE B - RESTATEMENT OF 2010 FINANCIAL STATEMENTS

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NOTE B - RESTATEMENT OF 2010 FINANCIAL STATEMENTS
12 Months Ended
Dec. 31, 2011
Restatement to Prior Year Income [Table Text Block]
NOTE B – RESTATEMENT OF 2010 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 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.

All amounts presented as of and for the year ended December 31, 2010 that have been corrected are labeled “As Restated”. The specific line-item effect of the restatement on the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2010 included in our 2010 Annual Report on Form 10-K filed on March 30, 2011, are as disclosed in the following tables:

   
For the Year
Ended
December 31, 2010
 
       
Increase in sales tax, penalties and interest
  $ (168,415 )
         
Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability
    (27,717 )
         
Increase in depreciation expense related to recording depreciation expense in improper periods
    (69,668 )
         
Incorrect application of ASC 450, Accounting for Contingencies, resulting in an understatement of accrued warranty expense
    (7,000 )
         
Increase in expense related to improper recording of various accrued liabilities
    (134,345 )
         
Total increase in net loss for the stated period
  $ (407,145 )

The net 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 Consolidated Balance Sheet as of
December 31, 2010
 
   
   
As Previously
Reported
   
As
Restated
   
Reference*
   
Effect of
Correction
 
Assets:
                       
Current assets:
                       
Prepaid expenses
  $ 197,565     $ 163,327     (6)     $ (34,238 )
Total current assets
    1,732,182       1,697,944             (34,238 )
                               
Property and equipment, net
    112,997       43,329     (4)       (69,668 )
                               
Other assets:
                             
Deposits
    -       34,238     (6)       34,238  
Total other assets
    13,710,835       13,745,073             34,238  
Total  assets
    15,556,014       15,486,346             (69,668 )
                               
Current liabilities:
                             
Accrued liabilities and expenses
    1,157,873       1,890,951     (1)(2)(5)       733,078  
Deferred revenue
    -       51,265     (5)(6)       51,265  
Customer deposits
    -       99,770     (6)       99,770  
Other current liabilities
    170,033       -     (5)(6)       (170,033 )
Total current liabilities
    5,894,602       6,608,682             714,080  
                               
Long-term liabilities:
                             
Deferred lease liability
    -       82,802     (3)       82,802  
Total long-term liabilities
    1,534,541       1,617,343             82,802  
                               
Stockholders' equity:
                             
Additional paid-in-capital
    121,995,117       122,057,171     (5)       62,054  
Accumulated deficit
    (115,513,353 )     (116,441,957 )           (928,604 )
Total stockholders’ equity
  $ 6,583,025     $ 5,716,475           $ (866,550 )

* Description of the references can be found at the end of Note B.

Effect on Consolidated Statement of Operations for the Year Ended
December 31, 2010
 
   
   
As Previously
Reported
   
As
Restated
   
Reference
   
Effect of
Correction
 
                         
Revenues net
                       
Product
  $ 6,632,107     $ 6,632,108           $ (1 )
Recurring
    4,626,669       4,328,080     (6)       298,589  
Total Revenues
    11,258,776       10,960,188             298,588  
                               
Cost of Sales
                             
Product
    4,133,533       3,902,183     (2)(6)       (231,350 )
Recurring
    1,285,575       1,258,610     (6)       (26,965 )
Total Cost of Sales
    5,419,108       5,160,793             (258,315 )
                               
Gross Profit
    5,839,668       5,799,395             40,273  
                               
Operating Expenses
                             
Research and development
    1,010,719       1,130,383     (6)       119,664  
Selling, general and administrative
    5,577,194       5,720,141     (1)(3)(5)(6)       142,947  
Depreciation and amortization
    283,714       353,382     (4)       69,668  
Total Operating Expenses
    6,871,627       7,203,906             332,279  
                               
Loss from Operations
    (1,031,959 )     (1,404,511 )           (372,552 )
                               
Other Income (Expense)
                             
Interest expense, net
    (607,674 )     (642,267 )   (1)       (34,593 )
Total Other Income (Expense)
    (739,913 )     (774,506 )           (34,593 )
                               
Loss Before Provision for Income Taxes
    (1,771,872 )     (2,179,017 )           (407,145 )
                               
Net Loss
    (1,771,872 )     (2,179,017 )           (407,145 )
Net loss attributable to common stockholders
  $ (1,771,872 )   $ (2,443,738 )         $ (671,866 )
Net loss per common share:
                             
Net loss per common share – basic
  $ (0.02 )   $ (0.02 )         $ 0.00  
Net loss per common share – diluted
  $ (0.02 )   $ (0.02 )         $ 0.00  
Weighted Average Common Shares Outstanding – basic
    98,233,829       98,233,829             -  
Weighted Average Common Shares Outstanding – diluted
    98,233,829       98,233,829             -  

The net 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 Consolidated Statement of Cash Flows for the Year Ended
December 31, 2010
 
 
 
   
As Previously
Reported
   
As
Restated
   
Reference
   
Effect of
Correction
 
                         
Net loss
  $ (1,771,872 )   $ (2,179,017 )         $ (407,145 )
Depreciation
    42,033       111,701     (4)       69,668  
Provision for doubtful accounts 
    -       196,108     (6)       196,108  
Accounts receivable, trade and other
    (615,163 )     (811,271 )   (6)       (196,108 )
Deferred revenue
    (33,893 )     (52,891 )   (5)       (18,998 )
Accounts payable, accrued expenses, net
    (522,705 )     (193,947 )   (1)(2)(5)       328,758  
Deferred lease liability
    -       27,717     (3)       27,717  

(1)
The Company had understated accrued sales tax, penalties, interest and related expenses.

(2)
Incorrect application of ASC 450, Accounting for Contingencies, resulted in an understatement of accrued warranty and related expenses.

(3)
Incorrect application of ASC 840, Accounting for Leases, resulted in an understatement of deferred lease liability and related rent expense.

(4)
Errors related to the improper recording of depreciation expense and related understatement of accumulated depreciation.

(5)
Errors related to improper recording of various accrued liabilities and expenses, as well as other current liabilities, resulting in a net understatement of such liabilities and related expenses.

(6)
Additionally, certain reclassifications have been made in prior year’s consolidated financial statements to conform to classifications used in the current reporting periods.  These amounts are not considered by management to be corrections and do not have a significant impact on the reported results contained in this Form 10-K.

The financial statement restatement process included a comprehensive review and restatement of the 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 taxes, penalties, and interest 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)
 
Decrease 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.