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Q1
RACK
RACKWISE, INC.
false
Smaller Reporting Company
2012
10-Q
2012-03-31
0001476638
--12-31
622184
1560030
430960
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b>Note 5 – Equity</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Consulting Agreements</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On August 21, 2011, the Company entered into a three-month
agreement for public relations and financial communications
services. In consideration of services to be rendered, the Company
agreed to pay $15,000 in cash per month in advance, for an
aggregate of $45,000, and, subject to the consummation of the
reverse merger, to issue 70,000 shares of vested Company common
stock per month, for an aggregate of 210,000 shares, of which,
70,000 shares remained unissued as of December 31, 2011.
Accordingly, during 2011, the Company accrued the equity issuance
liability of $15,960. During the three months ended March 31, 2012,
the remaining 70,000 shares were issued and the $15,960 issuance
date value of the shares was credited to equity.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On December 19, 2011, the Company renewed an agreement for public
relations and financial communications services for a three-month
term. In consideration of services to be rendered, the Company
agreed to pay $7,500 in cash per month in advance, for an aggregate
of $22,500, and to issue 25,000 shares of vested Company common
stock per month, for an aggregate of 75,000 shares. On February 3,
2012, after the Company had made an initial cash payment of $7,500
in December 2011, the Company terminated this agreement for
non-performance. No shares were issued and no stock-based
compensation expense was recorded related to this renewal
agreement.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On November 16, 2011, the Company entered into a twelve-month
agreement for investor relations services with a consultant. In
consideration of services to be rendered, the Company agreed to pay
$6,000 in cash per month in advance, for an aggregate of $72,000,
and to immediately issue 500,000 shares of vested Company common
stock, plus an additional 500,000 shares of common stock at the six
month anniversary of the agreement. The Company valued the shares
and recorded the full value of issued shares and cash payments as
consulting expense at the issuance date. For the year ended
December 31, 2011, the Company recorded stock-based compensation
expense of $114,000 (value of the first 500,000 shares), included
in general and administrative expenses in the accompanying
statements of operations. On January 11, 2012, the Company
terminated this agreement and on January 16, 2012, the Company
entered into a settlement agreement whereby the consultant agreed
to accept the initial $12,000 of 2011 cash payments and 250,000
shares of common stock (by returning 250,000 shares of common stock
to the Company for cancellation) in full satisfaction of the
terminated agreement. The Company reversed $57,000 of stock-based
compensation expense upon cancellation of the returned shares.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On November 30, 2011, the Company entered into a six-month
agreement for investor relations services. In consideration of
services to be rendered, the Company agreed to pay a minimum of
$7,000 in cash per month in advance (subject to supplemental
performance-based bonuses), for an aggregate of $42,000, and to
immediately issue 75,000 shares of vested Company common stock, of
which, 75,000 shares remained unissued as of December 31, 2011.
Accordingly, during 2011, the Company accrued the equity issuance
liability of $17,100. During the three months ended March 31, 2012,
the remaining 75,000 shares were issued and the $17,100 issuance
date value of the shares was credited to equity.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Second Private Offering</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<font style="color: black">During the three months ended March 31,
2012, the Company had three additional closings of a private
offering that commenced in December 2011 (the “Second Private
Offering”) pursuant to which an aggregate of 4,356,669
investor units (“Second Units”) were sold at a price of
$0.375 per Second Unit, resulting in $1,447,114 of aggregate net
proceeds (</font>$1,633,750 <font style="color: black">of gross
proceeds less $186,636 of issuance costs).</font> Each Second Unit
consists of one share of common stock (deemed to represent $0.345
of the per Second Unit cost) and a warrant to purchase one-quarter
share of common stock (deemed to represent $0.030 of the per Second
Unit cost) (the “Second Investor Warrants”), such that
an aggregate of 4,356,669 shares of common stock and Second
Investor Warrants to purchase 1,089,169 shares of common stock were
issued.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Second Private Offering was made on a “best
efforts” basis with respect to a maximum of 8,000,000 Second
Units ($3,000,000 of aggregate proceeds).  In addition,
in the event the maximum number of Second Units was sold, the
placement agent and the Company had the option to offer an
additional 2,666,667 Second Units ($1,000,000 of aggregate
proceeds).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Second Investor Warrants are exercisable for a period of five
years at an exercise price of $1.00 per full share of common
stock.  The Second Investor Warrants may be called for
redemption by the Company at any time upon not less than 30 or more
than 60 days prior written notice, provided that, at the time of
delivery of such notice, (i) there is a registration statement
covering the resale of the shares underlying the warrants; (ii) the
average closing bid price for the Company’s common stock for
each of the 20 consecutive trading days prior to the date of the
notice of redemption is at least $2.00, as proportionally adjusted
to reflect any stock splits, stock dividends, combinations of
shares or like events; and (iii) the average trading volume for the
Company’s common stock is at least 100,000 shares per day
during the 20 consecutive trading days prior to the date of the
notice of redemption and that during such 20-day period there is no
more than one trading day in which there is no trading in the
Company’s common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Second Investor Warrants, at the option of the holder, may be
exercised by cash payment of the exercise price to the Company.
Alternatively, the Second Investor Warrants may be exercised on a
cashless basis commencing one year after the date of the final
closing of the Second Private Offering if no registration statement
registering the shares underlying the investor warrants is then in
effect. The exercise price and number of shares of common stock
issuable on exercise of the investor warrants may be adjusted in
certain circumstances including stock splits, stock dividends, and
future issuances of the Company’s equity securities without
consideration or for consideration per share less than $0.375 (as
specified in the warrant agreement).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The placement agent for the Second Private Offering receives a cash
commission of 10% or 5% of the funds raised from investors in the
Second Private Offering that were directly attributable or referred
to the placement agent, respectively. In addition, the placement
agent receives five-year warrants to purchase shares of common
stock (the “Second Broker Warrants”) equal to 10% or 5%
of the Second Units sold to investors in the Second Private
Offering that were directly attributable or referred to the
placement agent, respectively. As a result of the foregoing
arrangement, in connection with the three 2012 closings, the
placement agent (1) was paid aggregate cash commissions of
$136,500; and (2) was issued Second Broker Warrants to purchase
364,000 shares of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Second Broker Warrants are identical to the Second Investor
Warrants in all material respects except that (i) the resale of the
common stock underlying them is not covered by a registration
statement; and (ii) they have an exercise price of $0.375 per share
of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
In connection with the Second Private Offering, the Company
executed a registration rights agreement, whereby the Company
committed to file a registration statement covering the resale of
the common stock underlying the Second Units sold or to be sold in
the Second Private Offering and the common stock that is issuable
upon exercise of the Second Investor Warrants (but not the common
stock that is issuable upon exercise of the Second Broker Warrants)
within 75 days of the final closing of the Second Private Offering,
and to use commercially reasonable efforts to cause the
registration statement to become effective no later than 150 days
after it is filed. The Company will be liable for monetary
penalties at the monthly rate of 1% (to a maximum of 10%) of each
holder’s investment in the Second Private Offering until the
failure to meet the above deadlines are cured or upon the
occurrence of certain other specified events. Notwithstanding the
foregoing, no payments shall be owed with respect to that portion
of a holder’s registrable securities (1) which may be sold by
such holder under Rule 144 or pursuant to another exemption from
registration; or (2) which the Company is unable to register due to
limits imposed by Rule 415 under the Securities Act (which shares
would then be eligible for “piggyback” registration
rights with respect to any registration statement filed by the
Company following the effectiveness of the original registration
statement). On January 17, 2012, the Company filed a registration
statement on Form S-1 that included the Second Private Offering
registrable securities.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Stock Warrants</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
During the three months ended March 31, 2011, the Company issued
warrants to purchase 50,654 shares of common stock at an exercise
price of $0.252 per share for a term of five years to two related
party note holders in connection with the issuance of convertible
notes payable aggregating $63,000 in principal amount (see Note 6
– Related Party Transactions). Using the binomial lattice
options pricing model, the Company determined that the relative
fair value of the warrants was $4,750. The fair value was recorded
as a debt discount and amortized over the term of the notes. The
assumptions used in the binomial lattice options pricing model were
as follows: risk-free rate of 1.77%; expected volatility of 70.0%;
expected term of 4.2 years; expected dividend yield of 0%.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
During the three months ended March 31, 2012, the Company issued
warrants to purchase an aggregate of 1,453,169 shares of common
stock at a weighted average exercise price of $0.843 per share. As
of March 31, 2012, there were 49,815,138 outstanding and
exercisable stock warrants with a weighted average exercise price
of $0.634 per share, a weighted average remaining contractual life
of 4.76 years and $96,140 of intrinsic value. The intrinsic value
is calculated on the difference between the fair market value of
the Company’s restricted stock, which was $0.345 per share as
of March 31, 2012, and the exercise price of the warrants.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Stock Options</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
During the three months ended March 31, 2011, the Company granted
no stock options.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
During the three months ended March 31, 2012, the Company granted
to its directors, officers, employees and consultants ten-year
options to purchase an aggregate of 23,275,000 shares of the
Company’s common stock at an exercise price of $0.345 per
share, of which 12,475,000 were granted under the Company’s
2011 Equity Incentive Plan (the “2011 Plan”) and the
remaining 10,800,000 (of which 6,900,000 were granted to the new
CEO) were not granted pursuant to an established plan. The options
vest as follows: (i) an option to purchase 6,900,000 shares of
common stock granted to the new CEO vested on an accelerated basis
in November 2011 based on the new CEO meeting specified performance
criteria; (ii) an option to purchase 2,500,000 shares of common
stock vests one-third immediately, one-third on September 21, 2012
and one-third on September 21, 2013; (iii) options to purchase an
aggregate of 13,325,000 shares of common stock vest one-third
0.7-1.0 years from the date of grant, one-third 1.7-2.0 years from
the date of grant and one-third 2.7-3.0 years from the date of
grant; and (iv) options to purchase an aggregate of 550,000 shares
of common stock vest ratably on a quarterly basis over a three-year
term.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<font style="color: black">The aggregate grant date value of
approximately $5,090,000 will be recognized proportionate to the
vesting terms.</font> The weighted average estimated fair value of
the stock options granted during the three months ended March 31,
2012 was $0.22 per share. <font style="color: black">The weighted
average assumptions used in the Black-Scholes option pricing model
were as follows: risk-free rate of 1.03%; expected volatility of
75.0%; expected term of 5.79 years; expected dividend yield of 0%.
In March 2012, the Compensation Committee of the Company’s
Board of Directors determined that the New CEO’s options
became fully vested effective November 2011 as a result of the
execution of a strategic alliance with a major customer. Although
the option was not formally granted prior to December 31, 2011, the
New CEO had a contractual right to the vested options pursuant to
his employment agreement, and, accordingly, the Company accrued the
equity issuance liability of $1,526,970 at December 31, 2011 based
on the full value of the option as of December 31, 2011, when the
restricted stock was valued at $0.345 per share.</font> On January
9, 2012, the <font style="color: black">New CEO’s
options</font> were issued and the $1,444,170 issuance date value
of the options was credited to equity. <font style="color: black">The weighted average assumptions used in the
Black-Scholes option pricing model were as follows: risk-free rate
of 0.85%; expected volatility of 75.0%; expected term of 5.00
years; expected dividend yield of 0%.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The risk-free interest rate was based on rates of treasury
securities with the same expected term as the
options. Expected volatility is based on implied volatilities
from similar companies that operate within the similar industry
sector index. The Company calculated the historical volatility for
each comparable company to come up with an expected average
volatility and then adjusted the expected volatility based on
factors such as historical stock transactions, major business
transactions, and industry trends. The expected terms of the
options are estimated based on factors such as vesting periods,
contractual expiration dates and historical exercise behavior. The
expected dividend yield was based upon the fact that the Company
has not historically paid dividends, and does not expect to pay
dividends in the future.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
During the three months ended March 31, 2012 and 2011, the overall
stock-based compensation expense recorded by the Company associated
with options was $430,960 and $79,637, respectively. These amounts
have been included in operating expenses in the accompanying
statements of operations. As of March 31, 2012, there was
$3,131,626 unrecognized stock-based compensation expense that will
be amortized over a weighted average period of 2.5 years. As of
March 31, 2012, there were 23,275,000 outstanding stock options
with a weighted average exercise price of $0.345 per share, a
weighted average remaining contractual life of 9.8 years and no
intrinsic value. As of March 31, 2012, there were 7,733,333
exercisable stock options with a weighted average exercise price of
$0.345 per share, a weighted average remaining contractual life of
9.8 years and no intrinsic value.</p>
</div>
-213140
909073
42143
684149
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0.5in 0pt 0; text-align: justify">
<b>Note 8 – Commitments and Contingencies</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0.5in 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Employment Agreements</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company hired a new Chief Financial Officer (the “New
CFO”) on January 23, 2012. In connection with his
appointment, the New CFO received (i) an annual base salary of
$175,000; (ii) eligibility for bonus compensation; (iii) an option
to purchase 1,000,000 shares of the Company’s common stock,
vesting over a period of three years, under the 2011 Plan,
exercisable at a price of $0.345 per share; and (iv) 100,000 shares
of the Company’s restricted common stock with a grant date of
$34,500, which was recognized immediately. In addition, in the
event that the New CFO was terminated without reasonable cause, he
would be entitled to a severance payment equal to six months of his
base salary at the time of termination. On February 15, 2012, the
New CFO was granted an option to purchase 500,000 shares of the
Company’s common stock, vesting over a period of three years,
under the 2011 Plan, exercisable at a price of $0.345 per share.
Both of the New CFO’s options are included in the above
“Option Grants” discussion.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Operating Lease</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company leases facilities in Folsom, California, Las Vegas,
Nevada and Raleigh, North Carolina under non-cancelable operating
leases. For the three months ended March 31, 2012 and 2011,
rent expense was $61,359 and $74,306, respectively, and was
recorded as part of general and administrative expenses within the
statements of operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
In January 2012, the Company executed a 63-month lease for 3,465
square feet of new headquarters office space in Folsom, California.
The lease commenced on March 30, 2012. The base rent commences at
$6,757 per month and escalates to $7,833 per month over the lease
term. The Company is entitled to pay no base rent during each of
the 13th, 26th, and 39th months of the lease.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
In February 2012, the Company executed a 37-month sub-lease for the
remaining terms of its Las Vegas, Nevada office space. The
sub-lease rent income commences at $8,983 per month and escalates
to $9,818 per month over the lease term. During the three months
ended March 31, 2012, the Company recognized a charge of $155,000,
included in general and administrative expense in the accompanying
statements of operations, representing the aggregate differential
between the lease expense and sublease income over the life of the
leases.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
In February 2012, the Company executed a new five-year lease for
5,772 square feet of office space in Raleigh, North Carolina. The
base rent commences at $7,922 per month and escalates to $11,073
per month over the lease term. The landlord is spending up to
$132,760 on leasehold improvements in order to prepare the space
for occupancy and the lease has not yet commenced. The lease
contains an option which permits the Company to terminate the lease
on January 31, 2015, provided that the Company pay $102,795 and
provide nine months written advance notice.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Future minimum payments (exclusive of the benefit of the Las Vegas
sublease income) at March 31, 2012 required under the operating
leases are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<table cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 80%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="font-size: 10pt; text-align: left">Years ending March
31:</td>
<td style="font-size: 10pt"> </td>
<td colspan="2" style="font-size: 10pt"> </td>
<td style="font-size: 10pt"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="width: 82%; font-size: 10pt; text-align: left; padding-left: 0.75pt">
2013</td>
<td style="width: 1%; font-size: 10pt"> </td>
<td style="width: 1%; font-size: 10pt; text-align: left">$</td>
<td style="width: 15%; font-size: 10pt; text-align: right">
338,953</td>
<td style="width: 1%; font-size: 10pt; text-align: left">
 </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; text-align: left; padding-left: 0.75pt">2014</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">365,255</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="font-size: 10pt; text-align: left; padding-left: 0.75pt">2015</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">451,610</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; text-align: left; padding-left: 0.75pt">2016</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">81,216</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="font-size: 10pt; text-align: left; padding-left: 0.75pt">2017</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">91,257</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; padding-bottom: 1pt; padding-left: 0.75pt; text-align: left">
Thereafter</td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: left">
 </td>
<td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: right">
23,499</td>
<td style="padding-bottom: 1pt; font-size: 10pt; text-align: left">
 </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="font-size: 10pt; padding-left: 0.75pt; text-align: left">
 </td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; padding-bottom: 2.5pt; padding-left: 0.75pt; text-align: left">
 </td>
<td style="font-size: 10pt; padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: left">
$</td>
<td style="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: right">
1,351,790</td>
<td style="padding-bottom: 2.5pt; font-size: 10pt; text-align: left">
 </td>
</tr>
</table>
</div>
6910
613
-1656637
465460
57000
20954
-215313
34500
<div style="FONT: 10pt Times New Roman, Times, Serif">
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<b>Note 9 – Subsequent Events</b></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<u>Subsequent Events</u></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
The Company evaluates events that have occurred after the balance
sheet date but before the financial statements are issued. Based
upon the evaluation, the Company did not identify any recognized or
non-recognized subsequent events that would have required further
adjustment or disclosure in the consolidated financial
statements.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<u>Convertible Promissory Note Issuance</u></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
On April 20, 2012, the Company completed and closed an offering of
12% Convertible Promissory Notes in which it sold an aggregate
principal amount of $400,000 in notes to four persons. Each of the
notes matures 90 days after issuance and is convertible, at the
option of the holder, into Company units, at a price of $0.45 per
unit, each unit consisting of one share of the Company’s
common stock and one warrant representing the right to purchase one
share of the Company’s common stock for a period of five
years from issuance at an exercise price of $1.00 per share. The
warrants will be exercisable on a cashless basis and will contain
weighted average anti-dilution price protection.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<u>Option Grants</u></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
Subsequent to March 31, 2012, the Company committed to offer
ten-year options under the 2011 Plan to purchase an aggregate of up
to 550,000 shares of the Company’s common stock to two new
employees, with the exercise date to be determined on the date of
grant. The options will vest ratably on an annual basis over a
three-year term.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
Subsequent to March 31, 2012, the Company committed to offer
ten-year options, not pursuant to the 2011 Plan, to purchase
500,000 shares of the Company’s common stock to two new
advisory board members, with the exercise date to be determined on
the date of grant. The options vest ratably on a quarterly basis
over a three-year term.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<u>Consulting Agreement</u></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
In April 2012, the Company amended a consulting services agreement
pursuant to which, among other things, the Company agreed to issue
seven-year warrants to purchase an additional 500,000 shares of the
Company’s common stock at an exercise price of $1.00 per
share. The Company also agreed to pay a cash fee of $100,000 on or
before April 30, 2012.</p>
</div>
-2229115
8390
641112
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b>Note 3 – Significant Accounting Policies</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Accounts Receivable and Allowance for Doubtful Accounts</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company recognizes an allowance for doubtful accounts to ensure
that accounts receivable are not overstated due to
uncollectibility. At the time accounts receivable are originated,
the Company considers a reserve for doubtful accounts based on the
creditworthiness of customers. The provision for uncollectible
amounts is continually reviewed and adjusted to maintain the
allowance at a level considered adequate to cover future losses.
The allowance is management’s best estimate of uncollectible
amounts and is determined based on historical performance that is
tracked by the Company on an ongoing basis. During the three months
ended March 31, 2012 and 2011, the Company’s losses from bad
debts were not material. Actual losses could differ materially in
the near term from the amounts estimated in determining the
allowance.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
In addition, the Company also factors its receivables with full
recourse and, as a result, accounts for the factoring akin to a
secured borrowing, maintaining the gross receivable asset and due
to factor liability on its books and records. In connection with
the factoring of its receivables, the Company estimates an
allowance for factoring fees associated with the collections. These
fees range from 2% to 30% depending on the actual timing of the
collection. The actual recognition of such fees may differ from the
estimates depending upon the timing of collections.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
As of March 31, 2012, the Company had three customers representing
51%, 23% and 12% of accounts receivable. As of December 31, 2011,
the Company had two customers representing 46% and 46% of accounts
receivable.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Use of Estimates</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures
of contingent assets and liabilities, and reported amounts of
revenues and expenses in the consolidated financial statements and
the accompanying notes. Actual results could differ from those
estimates. The significant estimates and assumptions of the Company
are stock-based compensation, the useful lives of fixed assets and
intangibles, depreciation and amortization, the allowances for
factoring fees and income taxes, and the fair value of derivative
liabilities and warrants.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Derivative Financial Instruments</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company does not use derivative instruments to hedge exposures
to cash flow, market or foreign currency risks. The Company
evaluates all of its financial instruments to determine if such
instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
statements of operations. For stock-based derivative financial
instruments, the Company uses the binomial lattice options pricing
model to value the derivative instruments at inception and on
subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded
as liabilities or as equity, is evaluated at the end of each
reporting period.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Concentration of Credit Risk and Customers</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Financial instruments that potentially expose the Company to
concentration of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company’s cash and
cash equivalents are deposited with major financial institutions.
At times, such deposits may be in excess of the Federal Deposit
Insurance Corporation insurable amount. The Company generally does
not require collateral from its customers and generally requires
payment in 30 days. The Company evaluates the collectability of its
accounts receivable and provides an allowance for potential credit
losses as necessary. Historically, such losses have been within
management’s expectations.  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Revenues derived from customers in the United Kingdom denominated
in U.S. dollars were approximately $9,000 and $15,000 during the
three months ended March 31, 2012 and 2011, respectively. Revenues
derived from customers in Austria denominated in U.S. dollars were
approximately $3,000 and $0 during the three months ended March 31,
2012 and 2011, respectively. Revenues derived from customers in
Australia denominated in U.S. dollars were approximately $13,000
and $12,000 during the three months ended March 31, 2012 and 2011,
respectively. Revenues derived from customers in Canada denominated
in U.S. dollars were approximately $2,000 and $3,000 during the
three months ended March 31, 2012 and 2011, respectively. Revenues
derived from customers in Russia denominated in U.S. dollars were
approximately $0 and $6,000 during the three months ended March 31,
2012 and 2011, respectively. All remaining revenues were derived
from customers in the United States of America. All of the
Company’s long-lived assets are located in the United States
of America. One customer provided 19% and 15% of revenues during
the three months ended March 31, 2012 and 2011, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Intangible Assets</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
All of the Company’s intangible assets consist of shapes
acquired from a graphics designer for the Company’s database
library that are schematics of specific computer equipment. These
shapes are utilized in the Company’s software with multiple
customers in order to enable them to visualize and differentiate
the specific computer equipment in their overall network. For
example, the Company’s software’s graphical user
interface displays a unique shape for each make and model of
computer server. Intangible assets are recorded at cost less
accumulated amortization. Amortization is computed using the
straight-line method over the estimated useful lives of 2.5
years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Revenue Recognition</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; background-color: white">
In accordance with ASC topic 985-605, “Software Revenue
Recognition,” perpetual license revenue is recognized when
(i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the sales price is
fixed or determinable; and (iv) collectability is reasonably
assured. Delivery is considered to have occurred when title and
risk of loss have been transferred to the customer, which generally
occurs after a license key has been delivered electronically to the
customer. The Company’s perpetual license agreements do not
(a) provide for a right of return, (b) contain acceptance clauses
or (c) contain refund provisions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; background-color: white">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; background-color: white">
In the case of the Company’s (a) subscription-based licenses,
and (b) maintenance arrangements, when sold separately, revenues
are recognized ratably over the service period. The Company defers
revenue for software license and maintenance agreements when cash
has been received from the customer and the agreement does not
qualify for recognition under ASC Topic 985-605. Such amounts are
reflected as deferred revenues in the accompanying financial
statements. The Company’s subscription license agreements do
not (a) provide for a right of return, (b) contain acceptance
clauses or (c) contain refund provisions.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; background-color: white">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; background-color: white">
The Company provides professional services to its customers. Such
services, which include training, installation, and implementation,
are recognized when the services are performed. The Company also
provides volume discounts to various customers. In accordance with
ASC Topic 985-605, the discount is allocated proportionally to the
delivered elements of the multiple-element arrangement and
recognized accordingly.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; background-color: white">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
For software arrangements with multiple elements, which in its case
are comprised of (1) licensing fees, (2) professional services, and
(3) maintenance/support, revenue is recognized dependent upon
whether vendor specific objective evidence (“VSOE”) of
fair value exists for separating each of the elements. Licensing
rights are generally delivered at time of invoice, professional
services are delivered within one to six months and maintenance is
for a twelve month contract. Accordingly, licensing revenues are
recognized upon invoice, professional services are recognized when
all services have been delivered and maintenance revenue is
amortized over a twelve month period. The Company determined that
VSOE exists for both the delivered and undelivered elements of its
multiple-element arrangements. The Company limits its assessment of
fair value to either (a) the price charged when the same element is
sold separately or (b) the price established by management having
the relevant authority. There may be cases, however, in which
there is objective and reliable evidence of fair value of the
undelivered item(s) but no such evidence for the delivered item(s).
In those cases, the selling price method is used to allocate the
arrangement consideration, if all other revenue recognition
criteria are met. Under the selling price method, the amount of
consideration allocated to the delivered item(s) is calculated
based on estimated selling prices.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b> </b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company manages the business as a single segment, but it has
revenues from multiple sources. </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Fair Value of Financial Instruments</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The carrying amounts of financial instruments, including cash and
cash equivalents, receivables, accounts payable, accrued expenses
and deferred revenue, approximated fair value as of the balance
sheet date presented, because of the relatively short maturity
dates on these instruments. The carrying amounts of the financing
arrangements issued approximate fair value as of the balance sheet
date presented, because interest rates on these instruments
approximate market interest rates after consideration of stated
interest rates, anti-dilution protection and associated
warrants.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Debt Discount and Amortization of Debt Discount</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Debt discount represents the fair value of embedded conversion
options of various convertible debt instruments and attached
convertible equity instruments issued in connection with debt
instruments. The debt discount is amortized over the earlier of (i)
the term of the debt or (ii) conversion of the debt, using the
straight-line method which approximates the interest method. The
amortization of debt discount is included as a component of other
expenses in the accompanying statements of operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Stock-Based Compensation</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company has an equity plan which allows for the granting of
stock options to its employees, directors and consultants for a
fixed number of shares with an exercise price equal to the fair
value of the shares at date of grant. The Company measures the cost
of services received in exchange for an award of equity instruments
based on the fair value of the award. For employees and directors,
the fair value of the award is measured on the grant date and for
non-employees, the fair value of the award is generally re-measured
on interim financial reporting dates until the service period is
complete. The fair value amount is then recognized over the period
during which services are required to be provided in exchange for
the award, usually the vesting period. Since the shares underlying
the Company’s equity are not currently registered, the fair
value of the Company’s restricted equity instruments was
estimated based on historical observations of cash prices paid for
the Company’s restricted common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Stock-based compensation for directors is reflected in general and
administrative expenses in the consolidated statements of
operations. Stock-based compensation for employees and consultants
could be reflected in (a) sales and marketing expenses; (b)
research and development expenses; or (c) general and
administrative expenses in the consolidated statements of
operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<u>Net Loss Per Common Share</u></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Basic net loss per share is computed by dividing the net loss
applicable to common shares by the weighted average number of
common shares outstanding during the period. Weighted average
shares outstanding for the three months ended March 31, 2012
excludes the weighted average impact of the 3,000,000 escrowed
shares. Weighted average shares outstanding for the three months
ended March 31, 2011 includes the weighted average underlying
shares exercisable with respect to the 1,609,747 warrants
exercisable at prices of $0.01 per share or less. In accordance
with the accounting literature, (1) the Company has given effect to
the issuance of these warrants in computing basic net loss per
share because the underlying shares are issuable for little or no
cash consideration; and (2) the Company has excluded the impact of
the escrowed shares because they are contingently returnable.
Diluted net loss per common share adjusts basic net loss per common
share for the effects of potentially dilutive financial
instruments, only in the periods in which such effects exist and
are dilutive. At March 31, 2012, outstanding stock options and
warrants to purchase 23,275,000 and 49,815,183 shares of common
stock were excluded from the calculation of diluted net loss per
common share because their impact would have been anti-dilutive. At
March 31, 2011, outstanding stock options and warrants to purchase
13,575,986 and 11,889,752 shares of common stock, respectively,
were excluded from the calculation of diluted net loss per common
share because their impact would have been anti-dilutive.</p>
</div>
61965
-673
1560030
188888
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b>Note 4 – Derivative Liabilities – Related
Parties</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
In accordance with ASC 815-40, “<i>Derivatives and Hedging -
Contracts in Entity’s Own Equity</i>”, instruments
which do not have fixed settlement provisions are deemed to be
derivative instruments. The Company has determined that embedded
conversion options of various notes payable which do not have fixed
settlement provisions and accordingly are not indexed to its own
stock, are deemed to be derivative liabilities. The embedded
conversion options of the various notes issued by the Company do
not have fixed settlement provisions as the conversion and exercise
prices are not fixed and determinable on the date of issuance. In
accordance with ASC Topic 718, “Stock Compensation”
(“ASC 718”), the conversion options of the notes were
bifurcated from their respective host contracts and recognized as
derivative liabilities. The warrants issued in connection with the
notes payable were not deemed to be derivative liabilities because
they have a fixed settlement provision. The fair values of these
derivative liabilities are re-measured at the end of every
reporting period with the change in value reported in the statement
of operations.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The fair values of the embedded conversion options, which are
associated with notes payable issued to related parties, were
measured using the binomial lattice options pricing model with the
following assumptions:  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 50%; border-collapse: collapse">
<tr style="background-color: white">
<td nowrap="nowrap" style="width: 68%; vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
 </td>
<td nowrap="nowrap" style="width: 32%; vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: center">
For The Three</td>
</tr>
<tr style="background-color: white">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
 </td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: center">
Months Ended</td>
</tr>
<tr style="background-color: white">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
 </td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: center">
March 31,</td>
</tr>
<tr style="background-color: white">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
 </td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1pt solid; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: center">
2011</td>
</tr>
<tr style="background-color: white">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
 </td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
 </td>
</tr>
<tr style="background-color: rgb(204,255,204)">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
Risk free rate</td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: right">
0.10% - 0.17%</td>
</tr>
<tr style="background-color: White">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
Expected volatility</td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: right">
65% - 70%</td>
</tr>
<tr style="background-color: rgb(204,255,204)">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
Expected life (in years)</td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: right">
 0.13 - 0.38</td>
</tr>
<tr style="background-color: White">
<td nowrap="nowrap" style="vertical-align: top; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt">
Expected dividend yield</td>
<td nowrap="nowrap" style="vertical-align: bottom; padding-top: 0.75pt; padding-right: 0.75pt; padding-left: 0.75pt; text-align: right">
0%</td>
</tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The risk-free interest rate was based on the rates of treasury
securities with the same terms as the terms of the instruments. The
Company based expected volatility on the historical volatility for
ten comparable publicly traded company’s common stock. The
expected life of the notes was based on the maturity of the notes.
The expected dividend yield of zero was based upon the fact that
the Company has not historically paid dividends, and does not
expect to pay dividends in the future. The gain on change in fair
value of derivative liabilities, included in other income in the
accompanying statements of operations was $42,719 for the three
months ended March 31, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On September 21, 2011, immediately prior to, and conditioned upon
the effectiveness of the reverse merger, all of the outstanding
non-bridge convertible notes and the related accrued interest
converted into equity. At that time the derivative liability
associated with the embedded conversion options of notes issued to
related parties was revalued at $1,133,186 and was reclassified to
equity.</p>
</div>
572478
35571
186636
24252
-2237505
183701
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b>Note 1 – <font style="color: black; background-color: white">Organization, Operations,
and Basis of Presentation</font></b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<font style="background-color: white"><u>Organization and
Operations</u></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<font style="background-color: white"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Rackwise, Inc. and Subsidiary (collectively “Rackwise”
or the “Company”) is headquartered in Folsom,
California, with a software development and data center in Research
Triangle, North Carolina. The Company creates Microsoft
applications for network infrastructure administrators that provide
for the modeling, planning, and documentation of data centers. The
Company sells its applications in four primary products: Rackwise
Standard Edition, Rackwise Enterprise Edition, Rackwise Data Center
Manager and Rackwise Web edition.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On August 24, 2010, MIB Digital, Inc., a Florida public corporation
formed on September 23, 2009, merged with Cahaba Pharmaceuticals,
Inc., a Nevada corporation formed on August 20, 2010
(“Cahaba”), for the sole purpose of effecting the
merger. Cahaba was the survivor in the merger and the principal
purposes of the merger were to change the domicile of the company
from Florida to Nevada and to effect a recapitalization. On July 8,
2011, Cahaba merged with its newly formed, wholly owned subsidiary,
Visual Network Design, Inc., a Nevada corporation. Cahaba was the
survivor in the merger, but changed its name in the merger to
Visual Network Design, Inc. (“Visual”). On September
21, 2011, Visual effected a merger with Visual Network Design,
Inc., a Delaware corporation d/b/a Rackwise (“VNDI”).
As a result of the merger, Visual acquired the business of VNDI and
continued the existing business operations of VNDI, as its wholly
owned subsidiary. On September 29, 2011, Visual merged with its
newly formed, wholly owned subsidiary, Rackwise, Inc., a Nevada
corporation formed on September 28, 2011. Visual was the survivor
in the merger, but changed its name in the merger to Rackwise,
Inc.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<font style="background-color: white"><u>Basis of
Presentation</u></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<font style="background-color: white"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”)
for interim financial information. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, such
statements include all adjustments (consisting only of normal
recurring items) which are considered necessary for a fair
presentation of the consolidated financial statements of the
Company as of March 31, 2012. The results of operations for
the three months ended March 31, 2012 are not necessarily
indicative of the operating results for the full year. It is
recommended that these condensed financial statements be read in
conjunction with the financial statements and related disclosures
for the year ended December 31, 2011 included in the Annual Report
on Form 10-K filed with the Securities and Exchange Commission
(“SEC”) on March 30, 2012.</p>
</div>
9063
45172
-423276
40181
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b>Note 7 - Accrued Expenses</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Accrued expenses consist of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<table cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 80%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="font-size: 10pt; text-align: justify"> </td>
<td style="font-size: 10pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center">March
31,</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center">
December 31,</td>
<td style="font-size: 10pt"> </td>
</tr>
<tr style="vertical-align: bottom">
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center; border-bottom: Black 1pt solid">
2012</td>
<td style="padding-bottom: 1pt; font-size: 10pt"> </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center; border-bottom: Black 1pt solid">
2011</td>
<td style="padding-bottom: 1pt; font-size: 10pt"> </td>
</tr>
<tr style="vertical-align: bottom">
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center; padding-bottom: 1pt">
(unaudited)</td>
<td style="padding-bottom: 1pt; font-size: 10pt"> </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center; padding-bottom: 1pt">
 </td>
<td style="padding-bottom: 1pt; font-size: 10pt"> </td>
</tr>
<tr style="vertical-align: bottom">
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center; padding-bottom: 1pt">
 </td>
<td style="padding-bottom: 1pt; font-size: 10pt"> </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td colspan="2" style="font-size: 10pt; text-align: center; padding-bottom: 1pt">
 </td>
<td style="padding-bottom: 1pt; font-size: 10pt"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="width: 64%; font-size: 10pt; text-align: justify; padding-left: 0.75pt">
Accrued commissions</td>
<td style="width: 1%; font-size: 10pt"> </td>
<td style="width: 1%; font-size: 10pt; text-align: left">$</td>
<td style="width: 15%; font-size: 10pt; text-align: right">
140,606</td>
<td style="width: 1%; font-size: 10pt; text-align: left">
 </td>
<td style="width: 1%; font-size: 10pt"> </td>
<td style="width: 1%; font-size: 10pt; text-align: left">$</td>
<td style="width: 15%; font-size: 10pt; text-align: right">
164,123</td>
<td style="width: 1%; font-size: 10pt; text-align: left">
 </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; text-align: left; padding-left: 0.75pt">Accrued
payroll</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">337,704</td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">328,942</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="font-size: 10pt; text-align: justify; padding-left: 0.75pt">
Accrued payroll taxes(1)</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">519,135</td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">537,289</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; text-align: left; padding-left: 0.75pt">Accrued
vacation</td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">163,966</td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right">150,207</td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="font-size: 10pt; text-align: justify; padding-bottom: 1pt; padding-left: 0.75pt">
Accrued professional fees</td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: left">
 </td>
<td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: right">
63,570</td>
<td style="padding-bottom: 1pt; font-size: 10pt; text-align: left">
 </td>
<td style="font-size: 10pt; padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: left">
 </td>
<td style="border-bottom: Black 1pt solid; font-size: 10pt; text-align: right">
259,733</td>
<td style="padding-bottom: 1pt; font-size: 10pt; text-align: left">
 </td>
</tr>
<tr style="vertical-align: bottom; background-color: White">
<td style="font-size: 10pt; padding-left: 0.75pt"> </td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
<td style="font-size: 10pt; text-align: right"> </td>
<td style="font-size: 10pt; text-align: left"> </td>
</tr>
<tr style="vertical-align: bottom; background-color: rgb(204,255,204)">
<td style="font-size: 10pt; text-align: left; padding-bottom: 2.5pt; padding-left: 0.75pt">
Total accrued expenses</td>
<td style="font-size: 10pt; padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: left">
$</td>
<td style="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: right">
1,224,981</td>
<td style="padding-bottom: 2.5pt; font-size: 10pt; text-align: left">
 </td>
<td style="font-size: 10pt; padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: left">
$</td>
<td style="border-bottom: Black 2.5pt double; font-size: 10pt; text-align: right">
1,440,294</td>
<td style="padding-bottom: 2.5pt; font-size: 10pt; text-align: left">
 </td>
</tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<table cellpadding="0" cellspacing="0" width="100%" style="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt">
<tr style="vertical-align: top">
<td style="width: 0.5in"></td>
<td style="width: 0.25in">(1)</td>
<td style="text-align: justify">Includes accrual for interest and
penalties.</td>
</tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
Accrued expenses include liabilities for unpaid payroll taxes along
with an estimate of related interest and penalties. In 2011, the
IRS placed Federal tax liens aggregating approximately $502,000
against the Company in connection with these unpaid payroll taxes.
The Company is currently in discussions with the IRS to implement
an installment payment plan.</p>
</div>
2859689
15632
<div style="font: 10pt Times New Roman, Times, Serif">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
<b>Note 6 – Related Party Transactions</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company was obligated to pay management fees to a stockholder
of $10,000 per month for general business consulting, which
represented $30,000 for the three months ended March 31, 2011. This
agreement was terminated in September 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
On January 1, 2012, the Company entered into a new agreement with
the stockholder to provide financial advisory services to the
Company. The Company agreed to pay fees of $10,000 per month for
twelve months, as well as a one-time fee of $40,000, which
represented $70,000 for the three months ended March 31, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
 </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">
The Company was obligated to pay financing fees to a stockholder
equal to 10% of the proceeds from note issuances (see Note 5
– Equity – Stock Warrants for information about the
related warrant issuances) to another related party. During the
three months ended March 31, 2011, the Company issued $60,000 of
notes to the other related party and issued $3,000 of notes to the
stockholder and accrued another $3,000 fee to satisfy the financing
fee obligation.</p>
</div>
1309504
1446501
-0.02
1447114
1447114
57000
95848182
<div style="FONT: 10pt Times New Roman, Times, Serif">
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<b>Note 2 - Liquidity, Going Concern and Management’s
Plans</b></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
<b> </b></p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
The Company has incurred substantial recurring losses since its
inception. The Company’s current strategy is to raise capital
and invest that capital in such a way that the Company rapidly
grows its market share and revenues, eventually resulting in
profits and cash from operations. However, this strategy requires a
rapid build-up of infrastructure that will initially exacerbate the
Company’s operating deficit and use of cash in operations,
because the expected revenue expansion will lag the investment in
infrastructure. The capital that the Company has raised, and likely
will continue to raise, will be used to invest in an expanded
salesforce, to fund development of the software product, to fund
incremental legal and accounting costs associated with being a
public company and to fund the Company’s operating deficit
and general working capital requirements.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
During the three months ended March 31, 2012 and the twelve months
ended December 31, 2011, the Company raised net proceeds of
$1,447,114 (gross proceeds of $1,633,750 less issuance costs of
$186,636) and $6,089,753 (gross proceeds of $6,545,012 less
issuance costs of $455,259), respectively, in private offerings of
common stock and warrants. This capital has permitted the Company
to proceed with its infrastructure investments. During the three
months ended March 31, 2012, the Company hired 14 people, including
11 salespersons, which brought the Company to a full complement of
sales staff in the United States and Latin America markets.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
As expected, the Company’s net losses and usage of cash has
expanded, while it awaits the expected benefits of its investment.
During the three months ended March 31, 2012 and 2011, the Company
recorded net losses of approximately $2,229,000 and $899,000,
respectively, while revenues expanded to approximately $684,000
from $536,000, respectively. During the three months ended March
31, 2012 and 2011, the Company used cash in operating activities of
approximately $1,657,000 and $105,000, respectively. As of March
31, 2012, the Company’s cash balance, working capital
deficiency, accumulated deficit and stockholders’ deficiency
were approximately $190,000, $2,864,000, $36,116,000 and
$2,465,000, respectively. Subsequent to March 31, 2012, the Company
raised an additional $400,000 of gross proceeds from a private
offering of convertible promissory notes.</p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
 </p>
<p style="TEXT-ALIGN: justify; MARGIN: 0pt 0px; FONT: 10pt Times New Roman, Times, Serif">
The Company believes it will be successful in these efforts;
however, there can be no assurance that it will meet its revenue
forecasts or, if necessary, be successful in raising additional
debt or equity financing to fund its operations on terms agreeable
to the Company. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. The
financial statements do not include any adjustments that might be
necessary if the Company were unable to continue as a going
concern.</p>
</div>
154465
625
1633750
77078
11891
-2229115
250000
100000
25
10
14
145000
436
4356669
430960
56975
34490
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shares
iso4217:USD
iso4217:USD
shares
Gross proceeds of $1,633,750, less issuance costs of $186,636.