3. Debt

Convertible Debt

On various dates from October 2012 through March 2013 the Company entered into 2% Secured Convertible Promissory Note agreements (the “Prior Notes”) with certain of its investors and management. Pursuant to the Prior Notes, the Company sold an aggregate of $2,433,333 in principal and issued 833,333 warrants (the “Prior Note Warrants”) to purchase shares of the Company’s common stock. The Prior Notes were payable in full 54 months from date of issuance, if and to the extent they were not sooner paid or converted. The Prior Notes accrued simple interest at two percent (2%) per annum. The Prior Notes were 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 Prior Notes were 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. Of the total amount of the Prior Notes, $2,100,000 were convertible at $3.00, while $333,333 were convertible at $2.50. The Prior Notes could have been prepaid at any time at the option of the Company.

The Prior Note Warrants were 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 Prior Note Warrants was determined using the Black Scholes model with the following assumptions: risk free rate 0.48% - 0.63%, dividend yield 0.0%, expected life of 4 years, and volatility 40.4% - 44.9%. The proceeds of the Prior Notes were discounted for the fair value of the Prior Note Warrants ($1,199,517) which was recorded as additional paid-in capital. The warrant discount was being amortized over the life of the Prior 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 Prior Notes was $1,233,815 of which $1,143,961 was allocated to a beneficial conversion feature (“BCF”). A BCF was 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, was below the fair value of the common stock at the date of issuance of the convertible instruments. The BCF was being amortized to interest expense over the life of the Prior 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 Prior Notes for the year ended December 31, 2012. The Company agreed to pay the holders’ legal fees in conjunction with the Prior Notes.

For the six months ended June 30, 2013, amortization of the BCF was $23,660. At closing of the Amended Securities Purchase Agreement (as defined later in Note 5), the unamortized warrant discount and BCF of $2,314,084 were written off to Additional Paid in Capital as of May 8, 2013.

On April 4 and May 8, 2013 the Company entered into Amended Securities Purchase Agreements with certain of its investors and management for 2% Secured Convertible Promissory Notes (“Notes”). Pursuant to the Notes, the Company sold an aggregate of $5,633,333 in principal and issued 3,536,458 warrants (the “Note Warrants”) to purchase shares of the Company’s common stock. This consists of $3,225,000 of additional Notes (of which $333,333 was raised from the April 4 transaction) and $2,433,333 in Prior Notes entered into during 2012 and during the first quarter of 2013 and amended under this agreement. 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 initially convertible into common stock of the Company at $1.60 per share plus additional shares for any unpaid interest by the holders at any time prior to maturity. If the cash balance of the Company and its subsidiaries is less than $1,000,000 during the term of the Notes, the conversion rate will become $1.00 (On May 8, 2013, the $2,433,333 of Prior Notes theretofore issued were converted under these terms).

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 to the Hercules Loan and Security Agreement (“Hercules Loan) and the Massachusetts Development Financing Agency (“MDFA”) note payable. The Notes can be prepaid at any time at the option of the Company.

The 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 proceeds of the Notes have been discounted for the fair value of the Note Warrants ($1,027,770) which was recorded as a warrant liability. The warrant discount is being amortized over the life of the Notes using the effective interest method. 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 .55%, dividend yield 0.0%, expected life of 3.4-4 years, and volatility 82.5%.

The Company evaluated the conversion feature of the Notes and determined that it met the conditions for bifurcation into a separate derivative liability (the “conversion feature”). The Company estimated the fair market value of the derivative liability to be $1,028,517 at inception, which was recorded as a liability and a discount to the Notes. The conversion feature discount is being amortized over the life of the Notes using the effective interest method. The fair value of the conversion feature was determined using the Black Scholes model with the following assumptions: risk free rate 0.55%, dividend yield 0.0%, expected life of 3.94-4.5 years, and volatility 82.5%.

As of June 30, 2013 the Company had accrued interest on the Notes of $31,343. Additionally, the Company paid direct financing costs, which were recorded as deferred financing costs of $18,674 which will be amortized to interest expense over the term of the related debt.

The total principal amounts outstanding at June 30, 2013 and December 31, 2012 were $5,658,331 and $1,433,332 respectively.

Notes Payable

Massachusetts Development Financing Agency (“MDFA”) Loan

On October 13, 2011, the Company and its subsidiary, AMS Corp. 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, which are being amortized over the term of the related debt.

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 a result of the debt financing in May 2013, the warrant issued in October 2011 became subject to adjustment in terms of exercise price and number of shares. The exercise price was adjusted to $1.35, which resulted in an increase in the number of shares of common stock of the Company exercisable in the warrant grant to MDFA to 92,472.

O n May 8, 2013, the Company and MDFA executed a “First Amendment to Term Note”. Per the amendment, the Company, prior to the maturity date of the Loan, must make a one-time lump sum principal payment of $500,000. Until such payment is made, the Company must accrue an additional 3% annual interest on the outstanding principal balance. This accrued interest is to be paid in addition to the lump sum. MDFA also executed a subordination agreement that makes this Note subordinate to the Hercules Note. MDFA was also granted an additional warrant to purchase 59,524 shares of common stock with an exercise price of $.10 with a term of 10 years. The $15,330 fair value of the warrant 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 of 1.81%, dividend yield of 0.0%, expected life of 10 years, and volatility of 66%.

As of June 30, 2013 $140,886 had been applied to the principal. Interest expense of $30,027 and $64,533 was paid for the three and six months ended June 30, 2013 respectively. Interest expense of $31,255 and $55,915 was paid for the three and six months ended June 30, 2012 respectively. As of June 30, 2013, the Company was not considered to be in default.

The total principal amounts outstanding at June 30, 2013 and December 31, 2012 were $1,813,246 and $ 1,954,133 respectively.

Hercules Technology Growth Capital (“Hercules”) Loan

On May 8, 2013 the Company’s subsidiary, AMS Corp., and Hercules Technology Growth Capital, Inc. (“Hercules”) entered into a Loan and Security Agreement, a Note, a Guaranty and a Warrant. The agreement provides for up to $3,000,000 with an initial loan amount of $2,000,000 upon closing. The debt is guaranteed jointly and severally by the Company’s subsidiaries and secured with a first lien by all of the assets of the Company and by a pledge of each subsidiary’s securities. 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 loan bears interest at a rate equal to current prime rate plus 12.75%. At closing the rate was 16.0% per annum (3.25% prime plus 12.75%). The interest rate is broken into two components; cash interest at the rate of 12.0% per annum and payment-in-kind (PIK) interest at 4.0% per annum. The term of the loan is 41 months and is repayable as follows: interest only for the first nine months, and then payments of cash interest and principal for the remaining term. The loan is repayable in whole or part without penalty. PIK interest is accrued over the term of the loan and paid at maturity.

The Company, in conjunction with the financing, granted a warrant to Hercules to purchase Series A Preferred Convertible Stock such that upon conversion of the same, Hercules will own 3.5% of the fully diluted shares on an ongoing basis. The warrant is exercisable for seven years from date of issuance at an exercise price of $.01 per share. At closing the estimated number of shares granted with the warrant was 431,393. The $845,922 fair value of the Series A Preferred Stock 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: estimated fair value of preferred stock of $1.97, risk free rate of 1.2%, dividend yield of 0.0%, expected life of 7 years, and volatility of 70.58%.

Additionally, the Company paid the direct financing costs, which were recorded as deferred financing costs of $107,920. The Company also paid finders fees in the form of cash and warrants to purchase commons stock of $190,270 which were recorded as deferred financing costs, which will be amortized to interest expense over the term of the related debt.

As of June 30, 2013, the Company was not considered to be in default.

The total principal amounts outstanding at June 30, 2013 and December 31, 2012 were $2,000,000 and $0 respectively.

The following is a summary of the maturities of debt outstanding on June 30, 2013:

Year		Debt Outstanding as of 12/31
2013	$	145,086
2014		909,404
2015		1,057,248
2016		1,007,977
2017		6,026,546
2018		325,316
Thereafter		0
Total	$	9,471,577