NOTE 3

FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level one — Quoted market prices in active markets for identical assets or liabilities;

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

Assets and liabilities measured at fair value on a recurring basis using significant observable inputs (Level 2) from January 1, 2012 to March 31, 2012 are summarized as follows:

	Warrant Liability (Level 2)
Balance at January 1, 2012	$	615,000
Change in fair value included in earnings		430,000
Exercise of warrants		(385,000	)
Balance at March 31, 2012	$	660,000

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the condensed consolidated balance sheets at fair value in accordance with the relevant accounting standards.

The carrying values of cash and cash equivalents, trade receivables and payables approximate their fair values due to the short maturities of these instruments.

The Company estimates the fair value of its warrants as of March 31, 2012 using the Black-Scholes option pricing model using the following assumptions:

	March 31, 2012			December 31, 2011
Series A and B Warrants
Market price of common stock:	$	5.75		$	4.76
Exercise price:	$	3.50		$	3.50
Remaining contractual life (years):		1.58			1.83
Dividend yield:		-			-
Expected volatility:		37.37	%		39.58	%
Risk-free interest rate:		0.26	%		0.22	%
Fair value – Series A and B Warrants	$	612,000		$	586,000

Underwriter Warrants
Market price of common stock:	$	5.75		$	4.76
Exercise price:	$	4.80		$	4.80
Remaining contractual life (years):		2.43			2.68
Dividend yield:		-			-
Expected volatility:		34.85	%		36.39	%
Risk-free interest rate:		0.40	%		0.32	%
Fair value – Underwriter Warrants	$	48,000		$	29,000

Fair value – Total	$	660,000		$	615,000

During the three months ended March 31, 2012, 125,000 warrants were exercised on a cashless basis to purchase 48,402 shares of common stock. In accordance with ASC 470-50-40, “Debt – Modification and Extinguishments – Derecognition”, an aggregate gain of $73,291 was recognized. For details, please refer to the following table.

Exercise date:	February 7
Market price of common stock:	$	6.44
Exercise warrants:		125,000
Exercise price:	$	3.50
Remaining contractual life (years):		1.73
Dividend yield:		-	%
Expected volatility:		39.43	%
Risk-free interest rate:		0.21	%
Fair values:	$	3.08
Gain on extinguishment of warrant liabilities	$	73,291