Senior Convertible Note	6 Months Ended
Jun. 30, 2011
Senior Convertible Note	NOTE 4 — Senior Convertible Note On November 19, 2010, the Company issued a senior secured convertible note having a principal amount of $1,000,000 in a private placement financing. The note was initially convertible all or in part at the option of the noteholder into 500,000 shares of common stock, at an initial conversion price of $2.00 per share. The conversion price is subject to resets under certain market conditions. The convertible note matures eighteen months from the date of issuance, and will bear interest at the rate of 10% per annum, which is payable quarterly in arrears. The proceeds from the note financing were used for working capital purposes. In conjunction with the convertible note, the Company issued to the investor a 5.5 year warrant to purchase 500,000 shares of common stock at $2.44 per share. In connection with the note financing, the Company issued to the private placement agent a 5.5 year warrant to purchase 50,000 shares of common stock with a fair value of $50,500. The private placement agent warrants have terms that are substantially the same as the warrant issued to the investor, except that the private placement agent’s warrant will allow for net exercise. The fair values of these warrants were derived using a binomial lattice valuation formula with the following assumptions: 0.0% dividend yield rate, 1.54% risk free interest rate, $2.11 fair value of common stock, $2.44 exercise price, a life of five and a half years, and a volatility of 65.32%. The convertible note was initially recorded on the Company’s balance sheet net of the associated debt discount of $726,096, which was comprised of the following: · allocated fair value of the warrant issued to the investor of $335,548; · beneficial conversion feature of $335,548 based on the allocation of the proceeds between the note and the fair value of the investor warrants; and · in-the-money beneficial conversion feature of $55,000. The debt discount is being amortized ratably over the life of the note, except in the case of conversion which may accelerate the amortization. The convertible note is secured by all the assets of the Company. In order to secure the note, the Company terminated its credit line facilities with its bank, who then released its security interest. The Company is required at all times to maintain collateralization of the convertible note with an amount equivalent to the unconverted principal plus accrued interest. Collateral consists of qualified accounts receivables of the Company, plus cash to the extent qualified accounts receivables are less than the unconverted principal plus interest due over the remaining life of the note. At June 30, 2011, the outstanding note was fully collateralized by the Company’s accounts receivable and therefore no cash was classified as restricted on the Company’s balance sheet. At December 31, 2010, $710,797 of the note proceeds was reserved as collateral under the terms of the note and classified as restricted cash. On January 12, 2011, the Company completed the registration of 1,310,398 shares which is an amount equal to the maximum shares issuable for the conversion of the note and warrants. On January 20, 2011, the date of the first conversion price reset, 85% of the lowest reported closing bid price in the five days preceding the reset date resulted in a conversion price reset of $1.50 per share which added an additional 166,666 shares to be issued upon conversion of the note for a total of 666,666 shares issuable upon conversion. As a result of the reset, a beneficial conversion feature with a fair value of $273,904 was added to debt discount in the quarter ended March 31, 2011 and is being amortized ratably over the remaining life of the note. The conversion price is subject to one additional price reset one year from date of closing subject to a conversion floor price of $1.31 per share and could result in an increase in the number of shares the Company is obligated to issue upon conversion of the note up to an additional 97,732 shares in aggregate. As the total debt discount is limited to the face value of the note, no additional debt discount will be recognized in the future. During the six month period ended June 30, 2011, the holder converted in total a $225,000 principal amount plus unpaid accrued interest which resulted in the issuance of 152,830 shares of common stock. Amortization of the debt discount during the three and six months ended June 30, 2011, totaled $152,740 and $468,956, respectively, which is classified as interest expense in the Company’s Condensed Statement of Operations. Interest expense on the note principal for the three and six months ended June 30, 2011 was $19,590 and $43,619, respectively. On August 3, 2011, the Company gave notice and called its senior convertible note (see “NOTE 12 — Subsequent Event”) for more information.

Senior Convertible Note

6 Months Ended

Jun. 30, 2011

NOTE 4 — Senior Convertible Note

On November 19, 2010, the Company issued a senior secured convertible note having a principal amount of $1,000,000 in a private placement financing. The note was initially convertible all or in part at the option of the noteholder into 500,000 shares of common stock, at an initial conversion price of $2.00 per share. The conversion price is subject to resets under certain market conditions. The convertible note matures eighteen months from the date of issuance, and will bear interest at the rate of 10% per annum, which is payable quarterly in arrears. The proceeds from the note financing were used for working capital purposes.

In conjunction with the convertible note, the Company issued to the investor a 5.5 year warrant to purchase 500,000 shares of common stock at $2.44 per share. In connection with the note financing, the Company issued to the private placement agent a 5.5 year warrant to purchase 50,000 shares of common stock with a fair value of $50,500. The private placement agent warrants have terms that are substantially the same as the warrant issued to the investor, except that the private placement agent’s warrant will allow for net exercise. The fair values of these warrants were derived using a binomial lattice valuation formula with the following assumptions: 0.0% dividend yield rate, 1.54% risk free interest rate, $2.11 fair value of common stock, $2.44 exercise price, a life of five and a half years, and a volatility of 65.32%.

The convertible note was initially recorded on the Company’s balance sheet net of the associated debt discount of $726,096, which was comprised of the following:

· allocated fair value of the warrant issued to the investor of $335,548;

· beneficial conversion feature of $335,548 based on the allocation of the proceeds between the note and the fair value of the investor warrants; and

· in-the-money beneficial conversion feature of $55,000.

The debt discount is being amortized ratably over the life of the note, except in the case of conversion which may accelerate the amortization.

The convertible note is secured by all the assets of the Company. In order to secure the note, the Company terminated its credit line facilities with its bank, who then released its security interest. The Company is required at all times to maintain collateralization of the convertible note with an amount equivalent to the unconverted principal plus accrued interest. Collateral consists of qualified accounts receivables of the Company, plus cash to the extent qualified accounts receivables are less than the unconverted principal plus interest due over the remaining life of the note. At June 30, 2011, the outstanding note was fully collateralized by the Company’s accounts receivable and therefore no cash was classified as restricted on the Company’s balance sheet. At December 31, 2010, $710,797 of the note proceeds was reserved as collateral under the terms of the note and classified as restricted cash.

On January 12, 2011, the Company completed the registration of 1,310,398 shares which is an amount equal to the maximum shares issuable for the conversion of the note and warrants. On January 20, 2011, the date of the first conversion price reset, 85% of the lowest reported closing bid price in the five days preceding the reset date resulted in a conversion price reset of $1.50 per share which added an additional 166,666 shares to be issued upon conversion of the note for a total of 666,666 shares issuable upon conversion. As a result of the reset, a beneficial conversion feature with a fair value of $273,904 was added to debt discount in the quarter ended March 31, 2011 and is being amortized ratably over the remaining life of the note. The conversion price is subject to one additional price reset one year from date of closing subject to a conversion floor price of $1.31 per share and could result in an increase in the number of shares the Company is obligated to issue upon conversion of the note up to an additional 97,732 shares in aggregate. As the total debt discount is limited to the face value of the note, no additional debt discount will be recognized in the future.

During the six month period ended June 30, 2011, the holder converted in total a $225,000 principal amount plus unpaid accrued interest which resulted in the issuance of 152,830 shares of common stock. Amortization of the debt discount during the three and six months ended June 30, 2011, totaled $152,740 and $468,956, respectively, which is classified as interest expense in the Company’s Condensed Statement of Operations. Interest expense on the note principal for the three and six months ended June 30, 2011 was $19,590 and $43,619, respectively.

On August 3, 2011, the Company gave notice and called its senior convertible note (see

“NOTE 12 — Subsequent Event”) for more information.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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