Line of Credit and Long Term Debt

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

9. Line of Credit and Long Term Debt

Commercial Loan Agreement Facility

On August 26, 2010, the Company entered into a new Debt Modification Agreement with Cardinal Bank (the “2010 Debt Modification Agreement”) to replace the 2009 Commercial Loan Agreement and to extend the repayment date of the Company’s revolving credit facility with Cardinal Bank from September 1, 2010 to September 30, 2011. Under this modification there were no changes in the amounts available under the credit facility.

On December 30, 2011, the Company entered into a new Commercial Loan Agreement (collectively referred to as the “Cardinal Loans”) to obtain a $4.0 million term loan (the “$4.0 Million Term Loan”) and to increase the revolving line of credit for net working capital from $5.0 million to $8.0 million (the “$8.0 Million Revolver”).

On December 21, 2012, the Company entered into a First Modification to Cardinal Loans that (i) extended the repayment date of the revolving credit facility from June 30, 2013 to June 30, 2014; (ii) modified our target net worth requirement from $5.5 million to $4.0 million as of December 31, 2012 and revised target net worth requirement from $5.5 million to $4.5 million as of December 31, 2013 (representing a reduction from the prior-existing $5.5 million target); and (iii) eliminated the Funded Debt to EBITDA covenant.

Advances made under the $4.0 Million Term Loan bear interest at 4.5% with monthly principal and interest payments of $74,694 and matures on December 30, 2016. Term loan advances were used to fund a portion of the purchase consideration paid in connection with the AGS business combination that closed on December 31, 2011.

Advances made under the $8.0 Million Revolver bear interest at a variable rate equal to the prime rate plus 0.5% and matures on June 30, 2013. There were advances and repayment against the $8.0 Million Revolver totaling approximately $3,031,000, respectively, for the year ended December 31, 2012. The commercial revolving line of credit capacity is based on eligible government and commercial accounts receivable (including unbilled accounts receivable) which are defined as customer balances aged less than 90 days.

Long-Term Debt

Long-term debt consisted of the following:

	DECEMBER 31
	2012			2011
Cardinal Bank Term Note Dated January 2, 2008 (1)	$	-		$	50,909
Cardinal Bank Mortgage Dated December 17, 2010 (2)		499,938			515,553
Cardinal Bank Term Note Dated December 31, 2011 (3)		3,271,535			4,001,000
Contingent Subordinated Seller Financed
Promissory Note Dated December 31, 2011 (4)		1,250,000			2,150,000
Non-Contingent Subordinated Seller Financed
Promissory Note Dated December 31, 2011 (5)		1,000,000			1,000,000
Total		6,021,473			7,717,462
Less: current portion		(1,102,741	)		(798,319	)
Long-term debt, net of current portion	$	4,918,732		$	6,919,143

(1) On January 2, 2008, the Company entered into a $2 million four-year term note with Cardinal Bank to fund the unpaid portion of the iSYS purchase price. The term note bore interest at 7.5% with monthly principal and interest payments of approximately $48,000, and matured on January 1, 2012. The term note was secured under a corporate security agreement. This term note was repaid on January 1, 2012.

(2) On December 17, 2010, the Company entered into a real estate purchase agreement to acquire iSYS’s call center facility in Columbus, Ohio for approximately $677,000. In connection with the real estate purchase agreement the Company entered into a $528,000 ten-year mortgage with Cardinal Bank to fund the unpaid portion of the purchase price. The mortgage loan bears interest at 6.0% with monthly principal and interest payments of approximately $3,800, and matures on December 17, 2020. The mortgage loan principal and interest payments are based on a twenty-year amortization with the unpaid balance due at maturity. The mortgage loan is secured by the real estate.

(3) On December 31, 2011, the Company entered into a $4 million 5-year term note with Cardinal Bank to fund a portion of the purchase price paid in connection with the asset purchase agreement with Avalon Global Solutions, Inc. dated December 30, 2011. The term note bears interest at 4.50% with monthly principal and interest payments of approximately $74,694, and matures on December 30, 2016. The term note is secured under a corporate security agreement.

(4) On December 31, 2011, the Company entered into a subordinated 3-year term contingent promissory note (“contingent obligation”) with a face value of $3.0 million with Avalon Global Solutions, Inc. (AGS) to fund a portion of the purchase price paid in connection with the asset purchase agreement dated December 30, 2011. The Company carries this contingent obligation at fair value on the consolidated balance sheet and reported a provisional value of $3.0 million at December 31, 2011 which was subsequently adjusted to fair value of $2.15 million (see Note 3 for additional information on the nature of adjustments to provisional amounts). AGS can earn up to $1.5 million in fiscal 2012 and 2013 with the attainment of Adjusted Gross Profit (“AGP”) of $5,428,000 in 2012 and $6,752,000 in 2013. AGP floor and ceiling targets were not meet in fiscal 2012 which entitled the Company to reduce the face value of the contingent obligation by $1.5 million. The Company estimated fair value of this contingent obligation (and subsequent changes in fair value) at approximately $1.25 million at December 31, 2012 as described in Note 4. The contingent obligation bears interest at 3.0%, with a fair value of remaining contingent annual principal payments of approximately $625,000 and $625,000 in 2014 and 2015, respectively, and matures on April 15, 2015. This contingent obligation is subordinated to the senior bank financing.

(5) On December 31, 2011, the Company entered into a $1 million subordinated 3-year term non-contingent note (“Term note” or “non-contingent obligation”) with Avalon Global Solutions, Inc. to fund a portion of the purchase price paid in connection with the asset purchase agreement with Avalon Global Solutions, Inc. dated December 30, 2011. The term note bears interest at 3.0% with estimated annual principal and interest payments of $323,530, $333,236 and $343,233 in 2013, 2014 and 2015, respectively, and matures on April 15, 2015. The term notes are subordinated to the senior bank financing.

Future repayments on long-term debt are as follows for fiscal years ending December 31:

2013	$	1,102,741
2014		1,773,494
2015		1,821,209
2016		893,773
2017		20,186
Thereafter		410,070
Total	$	6,021,473

Debt Covenant Compliance

The Cardinal Loans require the Company to maintain certain financial covenants, including maintaining (i) a debt service ratio of at least 1.2:1.0, (iii) a tangible net worth of at least $4.0 million at December 31, 2012, then increasing to $4.5 million at December 31, 2013 and (iv) a current ratio of at least 1.1:1.0. As of December 31, 2012, the Company was in full compliance with these financial covenants. 

Capital Lease Obligations

The Company has leased certain equipment under capital lease arrangements which expire in 2016. For the year ended December 31, 2012 the Company entered into an equipment capital lease agreement with a net present value of approximately $176,200. For the year ended December 31, 2012 there were disposals of certain expired equipment leases with a gross value and accumulated depreciation of approximately $130,700, respectively. The following sets forth the Company’s future obligations under capital lease agreement for fiscal years ending December 31:

2013	$	52,564
2014		51,464
2015		51,364
2016		8,561
Thereafter		-
Total		163,953
Less portion representing interest		(18,831	)
Present value of minimum lease payments under capital lease agreements		145,122
Less current portion		(42,878	)
Capital lease obligations, net of current portion	$	102,244

Amounts payable under capital lease arrangements was $23,579 for fiscal year 2011, of which $671 represents interest.