10. Long-Term Debt

12 Months Ended

Mar. 31, 2014

10. Long-Term Debt

BCA Mezzanine Fund LLP

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, including third party warrants exercisable for 10,416 shares at $6.70 per share for five years in conjunction with the BCA loan as a 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, 2014 and 2013, the Company recorded amortization of deferred financing costs in the amount of $108,321. As of March 31, 2014, the Company had unamortized deferred financing costs in the amount of $156,463 of which $108,321 is classified as a current asset and $48,142 as long-term. 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 $146,463 as long-term.

The Company also issued warrants to BCA for 136,920 shares at $6.70 per share for nine years in conjunction with the loan. In connection with the initial 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, 2014 and 2013, the Company recorded amortization of debt discount in the amount of $53,570. As of March 31, 2014 and 2013, the Company had unamortized discount of $77,378 and $130,948, 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 were 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, 2012 November 30, 2012, and June 30, 2013. 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 136,920 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 20 to Notes to the Consolidated Financial Statements). The debt discount is being amortized over the life of the loan.

Loan provisions also contain customary representations and warranties.

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, 2014, the Company was not in compliance with two covenants related to maintaining agreed upon financial ratios for fixed charges and debt service. In June 2014, the Company was granted a waiver for non-compliance of the financial covenants as of March 31, 2014.

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.

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.

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 20). In addition, the Company agreed to pay an additional closing fee of 1% of the original principal in the amount of $25,000, which is also being amortized over the remaining term of the loan.

In consideration for the waiver for non-compliance of the financial covenants at March 31, 2013, on July 12, 2013, 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 $3.33 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 will be recorded as a debt discount of $19,523, and will be amortized over the remaining life of the loan.

In consideration for the waiver for non-compliance of the financial covenants at June 30, 2013, on August 12, 2013, 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 $3.69 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 will be recorded as a debt discount of $21,587, and will be amortized over the remaining life of the loan.

In consideration for the waiver for non-compliance of the financial covenants at September 30, 2013, on November 12, 2013, the Company incurred an incremental fee of $10,000, which was recorded as a debt discount and will be amortized over the remaining life of the loan.

For the quarter ended December 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). On February 13, 2014 the Company received a waiver from BCA on each of the above mentioned covenants. In consideration for this waiver for non-compliance of the financial covenants, the Company incurred an incremental fee of $10,000, which was recorded as a debt discount and will be amortized over the remaining life of the loan.

Total amortization expense associated with the initial warrants, additional warrants and fees were $104,644 and $57,570 for the years ended March 31, 2014 and 2013, respectively. As of March 31, 2014 and 2013, the Company had unamortized discount associated with the initial warrants, additional warrants and fees of $174,046 and $217,580, respectively, and are classified as a reduction of long-term debt in the accompanying consolidated balance sheets.

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 (see Note 20).

Private Investor

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.

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 20 to Notes to the Consolidated Financial Statements). The Company adjusts the value of the warrant liability (see Note 20) 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 was 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 due 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 2013 in the amount of $12,400 for a total of $637,400 into 200,000 shares of the Company’s common stock at a price of $3.187 per share. The fair value of these shares at the date of conversion was $3.32 per share. As such, the Company recorded a loss on the extinguishment of debt in the amount of $26,600 and this amount is included in the accompanying statement of operations. As further consideration to the Private Investor, the Company agreed that each time the Company issues any new shares of its common stock in the next two years (excluding the exercise of existing stock options and warrants currently outstanding), at a price lower than a purchase price of $3.187 per share, the Company will issue additional shares to the Private Investor, for no additional consideration, based on the differential between the $3.187 price and the price paid for the newly issued shares of common stock. No new shares have been issued to the Private Investor.

Automobile Loan

In March 2014, the Company entered into a loan with Ford Credit for its van in the amount of $23,712. The Note has a term of five (5) years with an annual interest rate of 8.79% with monthly payments of $492. The outstanding balance at March 31, 2014 was $23,538.

The annual maturities of long-term debt for the five fiscal years subsequent to March 31, 2014 are as follows:

2015	$	718,848
2016		755,375
2017		4,751
2018		5,186
2019		5,260

Total Principal		1,489,420
Less: Debt Discount		(174,046	)
Total Debt	$	1,315,374