Equity

12 Months Ended

Mar. 31, 2012

Equity

9.  Equity

Warrants

The schedule below shows the outstanding warrants at March 31, 2012 and March 31, 2011:

Warrants Outstanding & Exercisable

	Shares 2012		Shares 2011		Exercise Price 2012		Exercise Price 2011		Remaining Life (in yrs) at 3/31/12
Convertible Note – 2nd  Tranche *		--		712,682		--	$	1.700		--
2007 Warrants		629,829		629,829	$	1.790	$	1.790		0.7
2010 Warrants		267,196		267,196	$	1.404	$	1.404		3.7
Total		897,025		1,609,707

* Expired on September 20, 2011

In fiscal years 2005 and 2006, warrants (the Convertible Note Warrants) were issued in connection with the issuance of convertible debt.  The second and final tranche of the Convertible Note Warrants expired during fiscal 2012 and there were 712,682 of shares related to the warrants outstanding at March 31, 2011.  The exercise price for the Convertible Note Warrants was initially $1.744 and subject to adjustment based on a formula contained in the convertible note agreement if common stock was issued below the $1.744 exercise price.  Such adjustments could not reduce the exercise price below $1.70 without obtaining shareholder approval. The price was reduced to $1.70 and the number of shares related to the warrants was correspondingly increased to 712,682 in June 2010 as a result of the issuance of Class A Common Stock to the MEDC and MSF at a price of $0.54 per share.  As a result of the exercise price reset feature, the fair value of the warrants was recorded as a liability.

On September 14, 2007, the Company completed a private placement (the 2007 Offering). Each unit sold by the Company in the 2007 Offering consisted of four (4) shares of the Company’s Class A Common Stock, par value $0.001 per share (the 2007 Offering Shares) and one (1) five year warrant exercisable for one share of Class A Common Stock at an exercise price of $1.85 (each a 2007 Warrant). The Company sold a total of 741,332 units consisting of 2,965,332 (2007) Offering Shares and 741,332 (2007) Warrants, of which 33,000 units consisting of 132,000 (2007) Offering Shares and 33,000 (2007) Warrants were to related parties at the prevailing closing stock price of $1.83 per share, for an aggregate purchase price of $4.5 million.  The offer and sale of the 2007 Offering Shares and 2007 Warrants were made pursuant to Rule 506 promulgated pursuant to the Securities Act and each of the investors is an accredited investor as defined by Rule 501 promulgated pursuant to the Securities Act.  The exercise price for the 2007 Warrants was subject to adjustment based on a formula contained in the Private Placement agreement if common stock was issued in the future below the $1.85 exercise price.  The exercise price was reduced to $1.79 in June 2010 as a result of the issuance of Class A Common Stock to the MEDC and MSF at a price of $0.54 per share.  In addition, the number of warrants increased by 24,095 as a result of the change in exercise price.  Future adjustments cannot reduce the exercise price below $1.79.  Since the exercise price of the 2007 warrants are no longer variable, the fair value of the warrants as of June 2010 (approximately $32,000) were reclassified to equity as Additional Paid in Capital during fiscal 2011.

As described in Note 6, on November 29, 2010, the Company issued 267,196 warrants to Robin Risser and Steve Williamson (the 2010 Warrants).  Each 2010 Warrant is exercisable over a five year period for one share of the Company’s Class A Common Stock at an exercise price of $1.404 subject to adjustment, based on a formula in the warrants agreement, if Common Stock is issued in the future below $1.404.  Future adjustments cannot reduce the exercise price below $1.17.  As a result of the exercise price reset feature, the fair values of the warrants are recorded as a liability.

The Company records the change in the fair value of warrants accounted for as liabilities as a charge or credit to its statement of operations.  Such amounts were a credit of $706,000 and a charge of $491,000 for the years ended March 31, 2012 and 2011, respectively.  The fair value of the Related Party warrants, the only remaining liability warrants, was approximately $26,000 at March 31, 2012.

The fair value of the liability warrants was estimated using the Monte Carlo option pricing model using the following assumptions:

	March 31, 2012	March 31, 2011
Contractual term in years	3.7	0.5 – 4.7
Volatility	73.3%	68.2% - 73.8%
Expected dividend	--	--
Risk-free interest rate	2.0%	0.58% - 2.0%

Expected volatility is based primarily on historical volatility using the weekly stock price for the most recent period equivalent to the term of the warrants.  A dividend yield of zero has been assumed based on the Company’s actual past experience and the fact that the Company does not anticipate paying a dividend on its shares in the future.  The Company has based its risk-free interest on the implied yield available on U.S. Treasury issues with equivalent contractual term.

The inputs used to determine the fair value of the warrants are classified as Level 3 inputs in the FASB’s fair value hierarchy, primarily regarding the computation of historical volatility. Management classified these as Level 3 measurements as they are based on unobservable inputs and involve management judgment.

The following chart represents the activity in the Company’s Level 3 warrants during the years ended March 31, 2012 and 2011.

	Year Ended March 31,
	2012			2011
Level 3 Warrants, beginning of period	$	732,000		$	112,000
Addition – 2010 Warrants, initial fair value		--			161,000
Transfer to Additional Paid in Capital-2007 Warrants		--			(32,000	)
Change in fair value of warrant liability		(706,000	)		491,000
Level 3 Warrants, end of period	$	26,000		$	732,000

IQT Securities Purchase Agreement

The Company entered into a Securities Purchase Agreement (the IQT SPA) with In-Q-Tel, Inc. (IQT) on November 4, 2010, pursuant to which in exchange for a payment of $200,000 (the IQT Purchase Price) API agreed to issue and IQT agreed to purchase the number of shares of the Company’s Class A Common Stock, par value $0.001 per share (Common Stock), determined by dividing the IQT Purchase Price by the volume-weight average price per share of the Company’s Common Stock on the NYSE Amex Stock exchange for the five (5) trading days (the 5-Day VWAP) ending on the business day immediately preceding the signing of the IQT SPA.  The closing of the purchase and sale transactions contemplated by the IQT SPA was subject to the receipt of NYSE Amex approval of an additional listing application covering the shares issued pursuant to the IQT SPA (the IQT Additional Listing Application) and other closing conditions customary for transactions of this nature.  On November 10, 2010, NYSE Amex approved the IQT Additional Listing Application and the parties satisfied the other closing conditions to the transaction on November 12, 2010, the following business day.  The 5-Day VWAP calculated in the aforementioned manner was determined to be $1.0074 and accordingly, the Company issued IQT 198,524 shares of Common Stock upon the closing of the IQT SPA on November 12, 2010.  In November 2010, the Company entered into a $1.8 million development contract and licensing agreement with IQT to develop an anomaly detector targeted at the homeland security market.  Revenues under the development contract were approximately $1.3 million during the year ended March 31, 2012 and approximately $500,000 during the year ended March 31, 2011.

Universal Shelf Registration Statement on Form S-3

On December 23, 2010, the Company filed a universal shelf registration statement on Form S-3 with the SEC (File No. 333-17390 and such registration statement, the Registration Statement).   The Registration Statement was declared effective by the SEC on January 5, 2011, which in turn allowed the Company to sell up to $7.0 million of various securities

On January 6, 2011, the Company entered into an underwriting agreement (the January Underwriting Agreement) with B. Riley & Co., LLC, (the Underwriter) as sole underwriter for the offer and sale in a firm commitment underwritten public offering of 2,702,703 shares of the Company’s Class A Common Stock, par value $0.001 per share at a price to the public of $1.48 per share ($1.391 per share, net of underwriting discounts) (the January Offering). Pursuant to the January Underwriting Agreement, the Company also (i) granted to the Underwriter a 30-day option to purchase up to an additional 405,405 shares of Common Stock to cover over-allotments, if any, at the same price and (ii) agreed to reimburse the Underwriter for certain of its out-of-pocket expenses. The January Underwriting Agreement also contained customary (i) representations, warranties, and agreements by the Company, (ii) conditions to closing, and (iii) indemnification provisions of the Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended (the Security Act).

The January Offering was made pursuant to a prospectus supplement dated January 6, 2011, an additional prospectus supplement dated January 11, 2011 and an accompanying prospectus dated December 23, 2010 pursuant to the Registration Statement.

On January 10, 2011, the Underwriter gave notice to the Company that it was exercising its over-allotment option to purchase an additional 405,405 shares of the Company’s Common Stock.

The net proceeds to the Company from the January Offering, completed in the fourth quarter of fiscal 2011, after underwriting discounts and transaction expenses, were approximately $4,154,000. The Company has used the net proceeds of the January Offering for general corporate purposes including, but not limited to, reducing its outstanding indebtedness, increasing its working capital and expanding its products.

On February 25, 2011, the Company entered into an underwriting agreement (the February Underwriting Agreement) with the Underwriter as sole underwriter for the offer and sale in a firm commitment underwritten public offering of 1,200,000 shares of the Company’s Class A Common Stock at a price to the public of $1.97 per share ($1.8518 per share, net of underwriting discounts) (the February Offering). Pursuant to the February Underwriting Agreement, the Company also agreed to reimburse the Underwriter for certain of its out-of-pocket expenses. The February Underwriting Agreement also contained customary (i) representations, warranties, and agreements by the Company, (ii) conditions to closing, and (iii) indemnification provisions of the Company and the Underwriter, including for liabilities under the Securities Act of 1933, as amended.  The February Offering was made pursuant to a prospectus supplement dated February 25, 2011 and an accompanying prospectus dated December 23, 2010 pursuant to the Registration Statement.

The February Offering was expected to close on or about March 8, 2011, or such earlier date as the Underwriter and the Company agreed to, subject to the satisfaction of customary closing conditions including, but not limited to, NYSE Amex approval of the Company’s additional listing application to list the Common Stock issued accordance with the February Underwriting Agreement on NYSE Amex (the February Additional Listing Application).  On March 1, 2011, NYSE Amex approved the February Additional Listing Application and the February Offering closed on March 2, 2011, when the Company and Underwriter satisfied the remaining closing conditions.

The net proceeds to the Company from the February Offering, completed in the fourth quarter of fiscal 2011, after underwriting discounts and transaction expenses, were approximately $2,135,000. The Company has used the net proceeds of the Offering for general corporate purposes including, but not limited to, (i) working capital needed to support the rapid growth of the Company’s HSOR products in foreign markets, (ii) accelerated development and marketing of Terahertz applications, (iii) capital expenditures needed to further automate the Company’s manufacturing processes, and increase the Company’s productivity.

Deregistration of Registration Statement

On March 22, 2011, the Company filed a post-effective amendment on Form S-3 (the Post-Effective Amendment) to deregister the remaining securities under our Registration Statement.  On March 28, 2011, the Post-Effective Amendment was declared effective by the SEC.