Note 5. Liquidity

At December 31, 2011, the Company had a net working capital deficiency of approximately $1,673,000 and for 2011 incurred positive cash flows from operating activities of approximately $198,000. The Company recognizes that the timing of the realization of its receivables from customers and its vendor and debt obligation payments may not allow the Company to generate positive working capital in the near future. The term loan and lines of credit from the bank (described in Notes 8 and 9) are subject to certain loan covenants that require, among other things, compliance with fixed charge coverage and total debt coverage ratio, as well as minimum levels of EBITDA (earnings before interest, taxes, depreciation and amortization).

The Company is in compliance with the financial covenants of our term loan and credit lines.

The Company continued to raise equity capital in 2010 and 2011 issuing 37,850 shares of Series A, B and C convertible preferred stock during the years ended December 31, 2011 and 2010 for $1.0 and $2.0 million, respectively. The proceeds were used for both working capital purposes and for the exchange of its outstanding convertible debentures to shares of this convertible preferred stock. The holders of 100% of the outstanding debentures agreed to the exchange, and 15,250 shares of Series A convertible preferred stock were issued during 2010.

In October 2010, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as Series B Preferred stock. The issuance price of the Series B preferred stock is $100 per share and it is convertible into common stock by the holder at the earlier of:

(i)

The Common Stock is listed for trading on Nasdaq or any national securities exchange;

(ii)

The bid price of the Common Stock is equal to or exceeds $5.00 a share for 30 consecutive days, and thereafter so long as the bid price continues to equal or exceed $5.00 per share;

(iii)

The trading volume of the Common Stock is equal to or exceeds 10,000 shares a day for 30 consecutive days, and thereafter so long as the daily trading volume continues to equal or exceed 10,000 shares; or

(iv)

October 15, 2013.

At that time the Company may also elect to convert or redeem the series B preferred stock. The conversion price is $2.25 per share of common stock, subject to adjustment for stock dividends, stock splits and reorganizations.

The series B preferred stock ranks senior to the common stock and pari-passu with the series A preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company.

During 2010 and 2011, Company issued 6,000 and 4,000 shares of its Series B preferred stock to Patriot Rail Services Inc., respectively. The preferred shares were issued for $100 a share, or $1,000,000 in the aggregate. The proceeds of the money received in 2010 and 2011 were used to fund working capital requirements.

In July 2011, the Company filed a certificate of designation with the Delaware Secretary of State designating 10,000 shares of its preferred stock as Series C Preferred stock. The issuance price of the Series C Preferred stock is substantially the same as Series A and B Preferred stock with the exception of the conversion price and the date of conversion as June 30, 2014.

The conversion price will be the closing price of the Company’s Common Stock on the trading date preceding the issuance of that share of Series C Preferred Stock, subject to adjustment for stock dividends, stock splits and reorganizations. If the Common Stock is not quoted on any market or exchange, the Conversion Price will be determined by the Board of Directors on the date of issuance.

The Series C Preferred stock ranks senior to the common stock and pari-passu with the Series A and Series B Preferred stock of the Company as to dividends and distribution of assets upon the liquidation, dissolution or winding up of the Company.

During 2011, the Company issued 7,850 shares of its Series C Preferred stock to Patriot Rail Services, Inc. The preferred shares were issued for $100 per share, or $785,000 in the aggregate at a conversion price of ranging between $1.10 and $2.06 per share of common stock. The proceeds of the investments received in 2011 were used to fund working capital requirements.

As of December 31, 2011, Patriot Rail Services, Inc. owned 3,000, 10,000, 7,850 and 686,283 shares of Series A Preferred, Series B Preferred, Series C Preferred and Common stock, respectively. If converted Patriot Rail Services Inc. would own 1,763,497 shares of common stock.