Debt

3 Months Ended

Mar. 31, 2013

Debt Disclosure [Abstract]

Debt

5. Debt

Convertible Debt -2012

In October and December 2012 the Company entered into 2% Secured Convertible Promissory Note agreements (the “Notes”) with certain of its investors and management. Pursuant to the Notes, the Company sold an aggregate of $1,433,332 in principal and 477,778 warrants (the “2012 Note Warrants”) to purchase shares of the Company’s common stock. The Notes are payable in full 54 months from date of issuance, if and to the extent they are not sooner paid or converted. The Notes accrue simple interest at two percent (2%) per annum. The Notes are guaranteed jointly and severally by the Company’s subsidiaries and secured by all of the assets of the Company and by a pledge of each subsidiary’s securities, subordinate only to the Massachusetts Development Financing Agency (“MDFA”) lien. The Notes are convertible into common stock of the Company at $3.00 per share plus additional shares for any unpaid interest by the holders at any time prior to maturity. The Notes can be prepaid at any time at the option of the Company.

The 2012 Note Warrants are exercisable at any time at an exercise price of $.01 per share and expire four (4) years from date of issuance. The fair value of the 2012 Note Warrants was determined using the Black Scholes model with the following assumptions: risk free rate 0.48 - 0.51%, dividend yield 0.0%, expected life of 4 years, and volatility 40.4-43.0%. The proceeds of the Notes have been discounted for the fair value of the 2012 Note Warrants ($715,590) which was recorded as additional paid-in capital. The warrant discount is being amortized over the life of the Notes using the effective interest method. For the year ended December 31, 2012, $2,862 of the warrant discount was amortized to interest expense. The total fair value allocated to the Notes was $717,743 of which $715,590 was allocated to a beneficial conversion feature (“BCF”). A BCF is recorded as a debt discount when the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair value of the common stock at the date of issuance of the convertible instruments. The BCF is being amortized to interest expense over the life of the Notes, using the effective interest method. Amortization of the BCF totaled $2,861 for the year ended December 31, 2012. Additionally, interest expense of $5,207 was accrued to the Notes for the year ended December 31, 2012. The Company agreed to pay the holders’ legal fees in conjunction with the Notes. These fees were recorded as an expense in period incurred.

For the three months ended March 31, 2013 amortization of the BCF was $9,306 and accrued interest on the Notes was $6,990. There was no amortization or interest expense on these Notes for the three months ending March 31, 2012.

Convertible Debt -2013

During the first quarter the Company entered into 2% Secured Convertible Promissory Note agreements (the “Notes”) with certain of its investors and management. Pursuant to the Notes, the Company sold an aggregate of $999,999 in principal and 355,555 warrants (the “2013 Note Warrants”) to purchase shares of the Company’s common stock. The Notes are payable in full 54 months from date of issuance, if and to the extent they are not paid sooner or converted. The Notes accrue simple interest at two percent (2%) per annum. The Notes are guaranteed jointly and severally by the Company’s subsidiaries and secured by all of the assets of the Company and by a pledge of each subsidiary’s securities, subordinate only to the Massachusetts Development Financing Agency (“MDFA”) lien. The Notes are convertible into common stock of the Company at $3.00 and $2.50 per share plus additional shares for any unpaid interest by the holders at any time prior to maturity. The Notes can be prepaid at any time at the option of the Company.

The 2013 Note Warrants are exercisable at any time at an exercise price of $.01 per share and expire four (4) years from date of issuance. The fair value of the 2013 Note Warrants was determined using the Black Scholes model with the following assumptions: risk free rate 0.59-63%, dividend yield 0.0%, expected life of 4 years, and volatility 42.7-44.9%. The proceeds of the Notes have been discounted for the fair value of the 2013 Note Warrants ($483,927) which was recorded as additional paid-in capital. The warrant discount is being amortized over the life of the Notes using the effective interest method. The total fair value allocated to the Notes was $516,072 of which $428,371 was allocated to a beneficial conversion feature (“BCF”). The BCF is being amortized to interest expense over the life of the Notes, using the effective interest method.

For the three months ended March 31, 2013 amortization of the BCF was $4,879 and accrued interest on the Notes was $2,776.

Note Payable

On October 13, 2011, the Company and its subsidiary, AMS Inc. entered into a series of agreements with MDFA related to financing for up to $2,000,000 loan for the purchase of equipment, including a Loan Agreement, a Note, a Security Agreement, a Guaranty and a Warrant. The actual principal amount will be based on equipment purchased during the first six months or such longer period as the lender permits. The loan bears interest at the rate of 6.25% per annum. The term of the loan is seven years and is repayable as follows: interest only for the first twelve months, and then constant payments of interest and principal during the following six year period. The loan is repayable in whole or part without penalty. The loan is secured by a security interest in substantially all of the assets of AMS excluding intellectual property. In connection with this loan, the Company has certain covenants that are required to be maintained that may or may not result in default. The Company, in conjunction with the financing, granted a warrant to MDFA for 59,524 shares of common stock of the Company at an exercise price of $2.10. The $80,357 fair value of the warrants was recorded as a warrant liability with a corresponding amount as a discount to the debt. The fair value of the warrant, which is required to be measured on a recurring basis, was determined using the Black Scholes model with the following assumptions: risk free rate 2.0%, dividend yield 0.0%, expected life of 10 years, and volatility 65%. Additionally, the Company paid the direct financing costs, which were recorded as deferred financing costs of $34,000.

As of March 29, 2012 AMS had borrowed the full amount available under the loan. Consistent with the terms of the loan, AMS began making principal payments effective October 1, 2012. As of March 31, 2013 $116,076 had been applied to the principal. Interest expense of $30,027 and $24,690 was paid for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, the Company was not considered to be in default.