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Notes Payable

9 Months Ended

Sep. 30, 2012

Note 7. Notes Payable

Subsequent to September 30, 2012, on October 16, 2012, the Company issued a new Promissory Note (the “Note”) in the amount of $213,000 to The Huntington National Bank, as Lender, with a maturity date of February 28, 2014. This Note replaced an existing promissory note to the Huntington National Bank which had a balance of $213,000 at September 30, 2012 and an original maturity date of December 31, 2012.

The Note is collateralized by the Company’s inventories, equipment and accounts receivable. Among other items, the Note provides for the following:

Interest subject to change from time to time based on changes in LIBOR. The interest rate applied to the unpaid principal balance is at a rate of 4.0 percentage points over LIBOR. Under no circumstance will the interest rate be less than 5.00% per annum or more than the maximum rate allowed by applicable law.

Interest only payments through December 31, 2012, with a $25,000 principal payment due December 31, 2012 and $25,000 due January 31, 2013. Monthly payments of approximately $5,000, including interest, beginning in January 2013 with remaining principal due at maturity in February 2014.

Debt maturities at September 30, 2012 reflect the terms of the above Note.

During 2010, the Company applied and was approved for a 166 Direct Loan to borrow up to $744,250 with the Ohio Department of Development (ODOD). This loan was finalized in February 2011. The term of the loan is 84 months at a fixed interest rate of 3%. There is also a 0.25% annual servicing fee charged monthly on the outstanding principal balance. Payments of approximately $10,100, including interest, are payable monthly through November 2018. The loan is collateralized by the related project equipment. As of September 30, 2012 there was an outstanding balance of $676,089 on this loan. During October 2012 the Company received the final draw on this loan in the amount of $22,183.

During 2010, the Company also applied and was approved for a 166 Direct Loan through the Advanced Energy Program with the Ohio Air Quality Development Authority (OAQDA) to borrow up to approximately $1.4 million (this maximum commitment by the OAQDA was subsequently reduced to $368,906 on March 20, 2012). The original loan was finalized in February 2011. The interest rate was 3% at December 31, 2011 and increased to 10% effective with the first amendment dated March 20, 2012. A second amendment dated June 12, 2012 returned the interest rate to 3% effective April 10, 2012. There is also an annual servicing fee of $1,600 charged quarterly. The loan is being amortized over 84 months through March 2018. Payments were interest only through March 2012. Thereafter, payments of approximately $16,900, including interest, are payable quarterly. The loan is collateralized by the related project equipment. As of September 30, 2012 there was an outstanding balance of $340,627 on this loan.

An Intercreditor Agreement exists as part of the above mentioned loans with agencies of the State of Ohio. The OAQDA and ODOD agree to shared lien and security interest through mutual covenants. These covenants include, but are not limited to, the creation of an agreed upon number of jobs, filing of quarterly and annual reports and various financial covenants. On March 20, 2012, the Company and OAQDA entered into The First Amendment to Loan Documents which, among other things, waived the debt service coverage requirement for all quarters through and including December 31, 2012. The Company is required to maintain a certain debt to tangible net worth ratio during 2012. On September 11, 2012, the OAQDA adopted a resolution which reduced the debt service coverage ratio effective March 31, 2013. The Company expects to maintain compliance with all covenants through September 30, 2013.

During 2006, the Company was approved for a 166 Direct Loan from the Ohio Department of Development in the amount of $400,000. These funds were received in July of 2008 and were used for the purchase of production equipment and to reduce the Company’s capital lease obligations on certain equipment. The term of the loan is 84 months at a fixed interest rate of 3%. There is also a 0.25% annual servicing fee to be charged monthly on the outstanding principal balance. The Company is making monthly servicing fee, interest and principal payments of approximately $6,000. The loan principal balance will be fully amortized at the end of the term in August 2015. The loan is collateralized by the related project equipment. As of September 30, 2012 the loan had a balance of $203,428. This loan is also subject to certain covenants, including job creation and retention. Due to market conditions the Company has informed ODOD that it does not expect to meet the agreed upon job creation covenant by December 31, 2012. Per the agreement, if the Company is unable to meet this requirement, the interest rate on the outstanding balance of the loan shall, at the option of ODOD, increase up to the rate of 6% per annum. ODOD has informed the Company that it will not increase the interest rate as a result of this information.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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