$3000 more dollars were sunk into that firm and after about 10 months ... concerning excuses about how what I am asking for is not technically possible
Seems to be a contradiction here. Why are you letting them get away with keeping money for a project they say is impossible?
When we subcontract work, if the results are not something we can use, they don't get paid. Period.
It sounds like you bit off way more than you could chew. As your client, I would not be at all happy that *I* have to pay for your mistake. Admittedly, it would be partially my fault for agreeing to a contract that allowed you to get paid for not producing anything usable (not something I would generally do, especially if I knew the other party would have to sub-contract the work).