SHAREHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2012

Stockholders' Equity Note [Abstract]

SHAREHOLDERS' EQUITY

SHAREHOLDERS’ EQUITY

The Company is authorized to issue 90,000,000 shares of common stock with a par value of $0.001 per share, and 10,000,000 shares of preferred stock with a par value of $0.01 per share, which is issuable in series. Of the 10,000,000 shares of preferred stock authorized, 6,668,229 shares are designated as Series A Convertible Preferred Stock (“Series A Stock”), 1,493,779 shares are designated as Series B Convertible Preferred Stock (“Series B Stock”) and 1,571,523 are designated as Series C Convertible Preferred (“Series C Stock”).

The following table sets forth the number of the shares of the Company’s capital stock issued and outstanding at the end of each of the last two fiscal periods presented in these financial statements:

	Shares outstanding at			Shares outstanding at	Shares outstanding at
	Shares Authorized	Par Value		June 30, 2012	December 31, 2011
Common stock	90,000,000	$	0.001	12,904,455	13,042,313
Preferred Shares	10,000,000	$	0.01	—
Series A Preferred				6,668,229	6,668,229
Series B Preferred				1,493,779	1,493,779
Series C Preferred				1,571,523	1,571,523
Common stock underlying outstanding stock purchase warrants				2,221,349	2,301,012

The following is a summary of the material rights, preferences, privileges, and restrictions of the Company's three series of convertible preferred Stock. Three Series A Stockholders also hold warrants to purchase common stock that were issued with the Series A Stock.  See Note 10 for a description of the terms of these warrants and how they have been valued under the Black-Scholes methodology.

Series A Convertible Preferred Stock

Dividends. The Series A Stockholders are entitled to receive cash dividends at the rate of 5% of the stated liquidation preference amount ($1.81 per share). Dividends are cumulative, and will only accrue and be payable upon any liquidation of the Company. Dividends on Series A Stock will be paid before dividends on any junior stock.

Liquidation Rights. Upon any liquidation, dissolution or winding up of the affairs of the Company, the holder of Series A Stock is entitled to receive $1.81 per share, plus any accrued and unpaid dividends, before any amounts are paid on common stock or any junior stock. The amount of this preferential liquidation distribution would have been $2,727,927 through June 30, 2012 and $2,426,114 through December 31, 2011. These amounts have not been recorded in the financial statements.

Voting Rights. The Series A Stockholders have no voting rights, except that as long as there are 200,000 shares of Series A Stock outstanding, the affirmative vote of 75% of the Series A Stock is required for the Company to take the following actions:

• To authorize the issuance of a series of stock ranking equal or senior to the Series A Stock with respect to liquidation rights.

• To repurchase, redeem, or pay dividends on shares of common stock other than de minimus repurchases or contractual redemption obligations.

• To reclassify any outstanding securities in a way that materially and adversely affects the rights of Series A Stock.

• To make any unauthorized distribution to the holders of stock junior to the Series A Stock.

• To voluntarily file for bankruptcy, liquidate assets or make an assignment for the benefit of our creditors.

• To discontinue involvement in the Company's current business.

Conversion Rights. The Series A Stock is convertible into common stock at any time, in whole or in part, at the option of the holder. Each share of Series A Stock is convertible into the number of common shares equal to the quotient of: (1) $1.95, divided by (2) the conversion price then in effect.

The conversion price is initially $1.95 per share, but is subject to adjustment for certain events, including stock splits, stock dividends, distributions, reclassifications or reorganizations. In addition, the conversion price is subject to adjustment if the Company issues additional shares of common stock or securities convertible into, or exchangeable for, common stock, in either case at a price per common share less than the conversion price then in effect. The conversion price adjustment does not apply to the issuance of shares in certain transactions identified in the certificate of designations.

The Series A Stock cannot be converted if it would result in the holder beneficially owning in the aggregate more than 9.9% of our common stock outstanding unless the holder of the Series A Stock waives the restriction.

Buy-In Rights. If the Company fails to timely deliver common stock issuable upon conversion of Series A Stock, and the holder is required to purchase common stock to deliver in satisfaction of a sale of the shares to have been issued upon the conversion, then the Company must pay the holder in cash the difference between the total purchase price the holder paid to acquire the common stock to complete the sale and the amount obtained by multiplying (1) the number of shares of common stock issuable upon conversion of the Series A Stock times (2) the price at which the holder's sell order for those shares was executed.

Redemption Rights. Upon the occurrence of a “major transaction,” each holder of Series A Stock can require the Company to redeem all or a portion of the holder's Series A Stock equal to 100% of the liquidation preference amount plus any accrued but unpaid dividends. The Company can elect to pay in common shares based on the conversion price then in effect. A “major transaction” includes a change of control of our company, the sale of more than 50% of our assets, or the purchase of more than 50% of the outstanding shares of our common stock.

Upon the occurrence of one of the triggering events listed below, each holder of Series A Stock can require the Company to redeem all or a portion of the holder's Series A Stock at a price per share equal to 120% of the liquidation preference amount plus any accrued but unpaid dividends and liquidated damages.

(1) The holder's common stock cannot be sold in the public securities market due to the lapse of the effectiveness or unavailability of a resale registration statement for 20 consecutive trading days, unless due to factors solely within the control of the holder.

(2) Our common stock is suspended from listing or trading on the OTC Bulletin Board or a stock exchange for five consecutive trading days.

(3) Our inability to convert Series A Stock into shares of common stock.

(4) Our failure to comply with a conversion notice for 15 days.

(5) Our common stock is deregistered under the Securities Exchange Act of 1934.

(6) We consummate a “going private” transaction so that our common stock is no longer registered under the Securities Exchange Act of 1934.

(7) We breach a term of the Series A Stock purchase agreement, the certificate of designation or any related agreement that has a materially adverse effect on the Series A Stock and is not curable or continues for more than 10 business days.

For triggering events (1), (2), (3), and (7), the Company can elect to pay in cash or shares of common stock (the price per share is the conversion price then in effect). For (4), (5), and (6), the Company will redeem for cash.

Registration Rights. The Company entered into a registration rights agreement with the Series A Stockholders at the time of their investment. The agreement required us to register shares of common stock issuable upon the conversion of the Series A Stock and the exercise of the accompanying warrants with the SEC for resale by the holders. The agreement also provides that the Series A Stockholders have certain “piggy-back” registration rights if the Company registers securities for an offering (other than registrations in connection with the acquisition of a business or with employee benefit plans).

In addition, Series A Stockholders may make a written request for registration of shares of common stock not previously registered that are issued upon the occurrence of a "major transaction" or "triggering event." A "major transaction" includes certain consolidation or merger transactions, the sale of more than 50% of the Company's assets, or the purchase of more than 50% of the outstanding shares of our common stock. “Triggering events” are events (1), (2), (3), and (7) listed under “Redemption Rights” above.

Series B Convertible Preferred Stock

Each share of Series B Stock converts into 4 shares of common stock at the present conversion price of $2.18 per share, which is subject to adjustment. The Series B Stock ranks equal to the Company’s common stock, but ranks junior to the Series A Stock and to our indebtedness. If the Company declares dividends, the Series B Stockholders will receive dividends on a pro rata basis with the common stockholders. Upon liquidation, dissolution or winding up of the Company, the holder of Series B Stock is entitled to an amount equal to the amount distributable per share of common stock multiplied by the number of shares of common stock into which the Series B Stock can be converted. The Series B Stock has no general voting rights.

Series C Convertible Preferred Stock

Each share of Series C Stock converts into 10 shares of common stock, which ratio is subject to adjustment. The Series C Stock ranks equal to the Company’s Series B Stock and common stock, but ranks junior to the Series A Stock and to our indebtedness. If the Company declares dividends, the Series C Stockholders will receive dividends on a pro rata basis with the common stockholders. Upon liquidation, dissolution or winding up of the Company, the holder of Series C Stock is entitled to an amount equal to the amount distributable per share of common stock multiplied by the number of shares of common stock into which the Series C Stock can be converted. The Series C Stock has no general voting rights.

See Note 10 for a detailed description of the terms of our stock purchase warrants issued and outstanding, including the accounting treatment.

On June 25, 2009, the Company announced that its Board of Directors had authorized the repurchase of up to one million shares of the Company’s common stock.  Through December 31, 2011 the Company had repurchased 488,239 shares in open market transactions at an average price per share of $2.17.  During the six months ended June 30, 2012, the Company acquired an additional 158,347 shares of its own common stock at an average price of $2.44 per share for a total cost of $386,200. The total number of shares repurchased since inception of the buyback program have been 646,586 shares at $2.72 per share average cost.  The Company has spent $1,755,756 on share repurchases since the inception of the buy-back program.