Stockholders' Equity

3 Months Ended

Jun. 28, 2013

Stockholders' Equity

Note 6.  Stockholders’ Equity

Warrants

At March 31, 2013 and June 28, 2013, the Company had the following warrants outstanding and exercisable:

	Shares (000’s)		Exercise Price
2010 Warrants		267	$   1.376
PFG Warrants		995	$   0.500
PFG Warrants		200	$   1.000
Total		1,462

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 subject to adjustment, based on a formula in the warrant agreements, if Common Stock is issued in the future below $1.404.  Future adjustments cannot reduce the exercise price below $1.17.  Given the issuance of the PFG Warrants in February 2013, a price reset was triggered to the 2010 Warrants and the new exercise price became $1.376.  As a result of the exercise price reset feature, the fair values of the warrants are recorded as a liability with changes in values flowing through the Consolidated Statements of Operations.

As described in Note 5, during February 2013, the Company issued warrants to PFG to purchase 1,195,000 shares of the Company’s Class A Common Stock.  The PFG warrants are exercisable over a five year period with 995,000 shares at strike price of $0.50 per share and another 200,000 shares with a strike price of $1.00 per share.  The PFG warrant agreement contains a provision allowing the warrant to be put back to the Company under certain circumstances.  Given this feature, the fair values of the warrants are recorded as a liability with changes in values flowing through the Consolidated Statements of Operations.

For the three months ended June 28, 2013, the Company recorded expense of $196,000 for the change in fair value of the warrant liability.  For the three months ended June 29, 2012, the Company recorded income of $17,000.  The fair value of the warrant liability outstanding was approximately $488,000 and $292,000 as of June 28, 2013 and March 31, 2013, respectively.

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

	June 28, 2013				June 29, 2012
	PFG Warrants		2010 Warrants		2010 Warrants
Contractual term in years	4.6		2.4		3.4
Volatility	68.9	%	71.4	%	66.1	%
Expected dividend	--		--		--
Risk-free interest rate	1.3	%	0.5	%	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.

When a warrant may have different share exercise assumptions such as those issued in February 2013 to PFG and affiliates, the Company weighs various values based on the estimated probability of each outcome as of the valuation date.

The following chart represents the activity in the Company’s Level 3 warrants during the three months ended June 28, 2013 and the year ended March 31, 2013.

	Three months Ended June 28, 2013		Year Ended March 31, 2012
Level 3 Warrants, beginning of period	$	292,000	$	26,000
Addition – PFG Warrants, initial fair value		--		434,000
Change in fair value of warrant liability		196,000		(168,000	)
Level 3 Warrants, end of period	$	488,000	$	292,000

MEDC Put Option

In May 2010, the Company entered into a debt conversion agreement with the MEDC whereby the MEDC converted the accrued and unpaid interest as of November 30, 2009 totaling $562,336 into 1,041,363 unregistered shares of our Class A Common Stock at a price per share of $0.54 (market value of the stock on the day of conversion).  In addition, the Company granted MEDC a put option to sell back the shares received pursuant to the debt conversion agreement in the event of a trigger event as defined in the debt conversion agreement.  Given the conditions under which the put may be exercised are in the control of the Company, a liability for the fair value has not been recorded.