9. Long-Term Debt

12 Months Ended

Mar. 31, 2013

9. Long-Term Debt

In September 2010 the Company entered into an agreement with BCA Mezzanine Fund LLP (“BCA”) to loan the Company $2.5 million in the form of a Promissory Note (“the “Note”). The Company incurred expenses of $541,604 in connection with this loan, including legal fees, investment banking fees and other transaction fees. The Company also issued to a third party warrants exercisable for 10,416 shares at $6.70 per share for five years in conjunction with the BCA loan as an additional finder’s fee. These expenses are included as deferred financing costs in the accompanying balance sheets, and are being amortized over the term of the loan using the straight-line method which approximates the effective interest rate method. For the years ended March 31, 2013 and 2012, the Company recorded amortization of deferred financing costs in the amount of $108,321. As of March 31, 2013, the Company had unamortized deferred financing costs in the amount of $264,784 of which $108,321 is classified as a current asset and $156,463 as long-term. As of March 31, 2012, the Company had unamortized deferred financing costs in the amount of $373,105 of which $108,321 is classified as a current asset and $264,784 as long-term.

In connection with the warrants issued with this debt, the Company recorded a debt discount of $267,848. The debt discount is being amortized over the life of the loan. For each of the years ended March 31, 2013 and 2012, the Company recorded amortization of debt discount in the amount of $53,570. As of March 31, 2013 and 2012, the Company had unamortized discount of $130,948 and $184,518, respectively, and are classified as a reduction of long-term debt in the accompanying consolidated balance sheets.

The features of the note are as follows:

The Note has a term of five (5) years with an annual interest rate of 14% on the outstanding principal amount. Payments for the first year are interest only and amounted to $28,762 monthly. In September 2011, the Company began making monthly payments of approximately $69,000 for interest and principal for the remaining term of the loan. BCA had agreed to allow the Company to defer principal payments for the three months ended September 30, 2012. BCA has also agreed to allow the Company to defer principal payments due on October 31 and November 30, 2012. These amounts are deferred until September 2015. BCA has also agreed to allow the Company to defer principal payments due on December 31, 2012 and January 31, 2013 to February 2013, at which time the Company paid these deferred principal payments

At inception, the Company issued BCA a nine-year warrant for 136,090 shares, based upon 4.5% of the fully –diluted outstanding shares of the Company’s common stock at $6.70 per share, the average closing price over the three days preceding the loan closing on the NYSE-MKT Exchange. In the event of specific major corporate events or the maturity of the five-year loan, BCA can require the Company to purchase the warrant and warrant shares at the higher of the then Exchange market price less the share exercise price, in the case of the warrant, or five times operating income per share. In connection with the warrant issued in conjunction with this debt, the Company recorded a debt discount (see above) and warrant liability, which is marked to fair value at the end of each period (see Note 18 to Notes to the Consolidated Financial Statements). The debt discount is being amortized over the life of the loan.

3.	Loan provisions also contain customary representations and warranties.

4.	BCA has a lien on all of the Company’s assets. In February 2011, BCA agreed to release part of its lien on Company assets to the U.S. Government to allow for progress billings up to $1,000,000.

The Company was required to pay prepayment fees if the Company decided to prepay a portion of the principal amount during the first two years of the loan. The Company may now prepay a portion of the principal amount without any prepayment penalty. Each payment must be not less than $25,000 or multiples of $25,000 in excess thereof.

Upon the occurrence of a Change of Control or within five (5) Business Days of an O’Hara Life Insurance Realization Event, the Company shall, in each case at the election of BCA, prepay by wire transfer the entire outstanding principal amount of the Note in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding principal amount being prepaid and shall pay 103% in the first loan year, 102% in the second loan year, and 100% thereafter), together with (x) Interest, if any, accrued and unpaid on the outstanding principal amount of the Note so prepaid through the date of such prepayment, (y) all reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment, and (z) all other costs, expenses and indemnities then payable under this Agreement (such amounts, collectively the “Mandatory Redemption Payment”). If a Change of Control or O’Hara Life Insurance Realization Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated above for such Loan Year multiplied by the principal amount which is being prepaid. At the election of BCA, all or any portion of the Mandatory Redemption Payment may be paid in the form of Marketable Securities in lieu of cash and to the extent available and to the extent not restricted by any SBIC Regulations. In the event BCA makes the election contemplated by the immediately preceding sentence, the Issuer shall issue to Purchaser that number of shares having an aggregate Current Market Price as of such issuance date equal to that portion of the Mandatory Redemption Payment subject to such election.

The BCA notes contain a number of affirmative and negative covenants which could restrict our operations. For the quarter ended March 31, 2013, the Company was not in compliance with four covenants related to EBITDA and maintaining agreed upon financial ratios for fixed charges, total leverage and debt service. In consideration for the waiver for non-compliance of the financial covenants as of March 31, 2013 and for the deferral of principal payments, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.33 per share and the warrants expire on September 10, 2019.

8.	The Company and BCA have amended certain provisions to ease some restrictions, including non-compliance with financial covenants, deferral of principal payments, and approval to obtain progress payments from the government.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2012, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.35 per share and the warrants expire on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant was charged to debt discount in the accompanying balance sheet in the amount of $26,477 for the year ended March 31, 2013 and will be amortized over the remaining term of the loan. (see Note 18).

In consideration for the waiver for non-compliance of the financial covenants as September 30, 2012 and for the deferral of principal payments due on October 31 and November 30, 2012 to the end of the term of the loan (maturity), BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrants is exercisable at a price of $3.56 per share and the warrant expires on September 10, 2019. Determining the warrant value to be recorded requires us to develop estimates to be used in calculating the fair value of the warrant. The fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant was charged to debt discount in the accompanying balance sheet in the amount of $21,441 for the year ended March 31, 2013 and will be amortized over the remaining term of the loan. (see Note 18).

In consideration for the waiver for non-compliance of the financial covenants as December 31, 2012 and for the deferral of principal payments due on December 31, 2012 and January 31, 2013, BCA received warrants to purchase 20,000 shares of the Company’s common stock. The common stock underlying the warrant is exercisable at a price of $3.58 per share and the warrants expire on September 10, 2019. Fair value of the warrant is calculated using the Black-Scholes valuation model. The value of the warrant was charged to debt discount in the accompanying balance sheet in the amount of $23,714 for the year ended March 31, 2013 and will be amortized over the remaining term of the loan. (see Note 18). In addition, the Company agreed to pay an additional closing fee of 1% of the original principal in the amount of $25,000.

All warrants issued to BCA are recorded as a liability and are marked to fair value each reporting period, and the resulting change is reflected in the consolidated statements of operations.

On July 26, 2012 the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a private investor (the “Private Investor”). Pursuant to the terms of the Purchase Agreement, the Company issued (i) a senior secured promissory note in favor of the Private Investor in the aggregate principal amount of $600,000, approximately $489,000 net of expenses, accruing interest at a rate of 14% per annum and (ii) a common stock purchase warrant to purchase 50,000 shares of the Company’s common stock, par value $0.10 per share. The Note, together with all unpaid interest and principal was due on March 31, 2013. The common stock underlying the warrant is exercisable at a price of $3.35 per share and the warrant expires on September 10, 2019. In conjunction with the Purchase Agreement the Company entered into an (i) Investor Rights Agreement, (ii) Securities Agreement, (iii) Intercreditor Agreement and (iv) Subordination Agreement. The Company reported the foregoing on its Current Report on Form 8-K on August 3, 2012.

In connection with the warrants issued in conjunction with this debt, the Company recorded a debt discount and warrant liability, which is being marked to fair value at the end of each period (see Note 18 to Notes to the Consolidated Financial Statements). The Company adjusts the value of the warrant liability (see Note 18) to fair value and recognizes the change in valuation in our statement of operations each reporting period. Determining the the fair value of the warrant liability requires estimates to be used utilizing the Black-Scholes valuation model and the value at issuance was $66,193. The corresponding debt discount is being amortized over the life of the loan and was fully amortized as of March 31, 2013.

The promissory note, dated July 26, 2012 with the Private Investor, contains a number of affirmative and negative covenants which restrict our operations. For the quarter ended March 31, 2013, the Company was not in compliance with four covenants related to maintaining agreed upon financial ratios for fixed charges, leverage and debt service as well as a requirement for earnings before interest, taxes, depreciation and amortization (EBITDA). However, the Company received a waiver on each of the above mentioned covenants.

The Company did not pay the $600,000 as of March 31, 2013. As a consequence the Company incurred a $25,000 penalty and the default interest of an additional 10%. The Company paid the default interest for the month of April. Effective May 31, 2013, the Private Investor converted the outstanding principal of $600,000, penalty of $25,000 and accrued interest for the month of May in the amount of $12,400 for a total of $637,400 in to 200,000 shares of common stock at a price of $3.19 per share.

The annual maturities of long-term debt for the five fiscal years subsequent to March 31, 2013 are as follows:

2014	$	1,229,643
2015		673,486
2016		678,643
2017		-

Total	$	2,581,772