NOTE 2 Senior Convertible Note Financing	12 Months Ended
Dec. 31, 2011
Notes to Financial Statements
Senior Convertible Note Financing	NOTE 2 — Senior Convertible Note Financing 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 was subject to resets under certain market conditions. The convertible note matured eighteen months from the date of issuance, and bore interest at the rate of 10% per annum, which was 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 at $2.44 per share 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 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 was required at all times to maintain collateralization of the convertible note with an amount equivalent to the unconverted principal plus accrued interest. Collateral consisted of qualified accounts receivables of the Company, plus cash to the extent qualified accounts receivables were less than the unconverted principal plus interest due over the remaining life of the note. 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. The convertible note was recorded on the Company’s balance sheet net of the associated debt discount. Debt discount based on the fair values attributed to the warrants issued to the investors, the beneficial conversion feature based on the allocation of the proceeds between the note and the fair value of the investor warrants, and the in-the-money beneficial conversion features exceeded the face value of the note and thus was limited to $1,000,000. The debt discount was amortized ratably over the life of the note, except in the case of conversion which accelerated the amortization. On August 3, 2011, the Company gave notice to call its senior convertible note with a redemption date of September 6, 2011. The unconverted note principal at the notice date was $700,394. The note holder completed a full conversion of the note to common stock by the redemption date. Amortization of the related debt discount during the year ended December 31, 2011, totaled $944,351, which is classified as interest expense in the Company’s Condensed Statement of Operations. Interest expense on the note principal for the year ended December 31, 2011 was $56,107. In accordance with the terms of the convertible note, a premium was attached to the conversion upon redemption. This resulted in the additional interest expense recognized in the year ended December 31, 2011 of $89,387. An aggregate of 721,009 shares of common stock was issued during the year ended December 31, 2011 to satisfy the conversion of the entire principal amount of $1,000,000 plus $16,732 of accrued interest and $89,387 of additional interest expense. Subsequent to the redemption of the convertible note, the Company entered into a new credit agreement with its bank (see “NOTE 4 — Bank Financing Arrangements” for more information).

NOTE 2 Senior Convertible Note Financing

12 Months Ended

Dec. 31, 2011

NOTE 2 — Senior Convertible Note Financing

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 was subject to resets under certain market conditions. The convertible note matured eighteen months from the date of issuance, and bore interest at the rate of 10% per annum, which was 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 at $2.44 per share 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 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 was required at all times to maintain collateralization of the convertible note with an amount equivalent to the unconverted principal plus accrued interest. Collateral consisted of qualified accounts receivables of the Company, plus cash to the extent qualified accounts receivables were less than the unconverted principal plus interest due over the remaining life of the note. 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.

The convertible note was recorded on the Company’s balance sheet net of the associated debt discount. Debt discount based on the fair values attributed to the warrants issued to the investors, the beneficial conversion feature based on the allocation of the proceeds between the note and the fair value of the investor warrants, and the in-the-money beneficial conversion features exceeded the face value of the note and thus was limited to $1,000,000. The debt discount was amortized ratably over the life of the note, except in the case of conversion which accelerated the amortization.

On August 3, 2011, the Company gave notice to call its senior convertible note with a redemption date of September 6, 2011. The unconverted note principal at the notice date was $700,394. The note holder completed a full conversion of the note to common stock by the redemption date. Amortization of the related debt discount during the year ended December 31, 2011, totaled $944,351, which is classified as interest expense in the Company’s Condensed Statement of Operations. Interest expense on the note principal for the year ended December 31, 2011 was $56,107. In accordance with the terms of the convertible note, a premium was attached to the conversion upon redemption. This resulted in the additional interest expense recognized in the year ended December 31, 2011 of $89,387. An aggregate of 721,009 shares of common stock was issued during the year ended December 31, 2011 to satisfy the conversion of the entire principal amount of $1,000,000 plus $16,732 of accrued interest and $89,387 of additional interest expense.

Subsequent to the redemption of the convertible note, the Company entered into a new credit agreement with its bank (see “NOTE 4 — Bank Financing Arrangements” 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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