|
Summary of Significant Accounting Policies
|
9 Months Ended | 12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Sep. 30, 2012
|
Dec. 31, 2011
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Significant Accounting Policies [Text Block] |
2.
Summary
of Significant Accounting Policies
Fair
Value Measurements
The
Company measures certain financial assets and liabilities
at fair value on a recurring basis. GAAP provides a fair
value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy
gives the highest priority to quoted prices in active
markets for identical assets and liabilities
(“Level 1”) and the lowest priority to
unobservable inputs (“Level 3”).
Carrying
amounts of the Company’s cash and cash equivalents,
accounts receivable and accounts payable and accrued
liabilities approximate their fair values due to their
short maturities.
The
table below reflects the carrying values and the
estimated fair values of the Company’s outstanding
notes payable at September 30, 2012:
The
difference between the carrying value of the related
party BSC convertible notes payable, which is equal to
the face value due to troubled debt restructuring
accounting (see Note 6), and the estimated fair value is
attributable to the fact that no interest is charged per
the terms of the convertible notes payable, which is
below market. The difference between the
carrying value and the fair value of the junior secured
notes payable relates to an unamortized debt
discount. This discount resulted from the
relative fair value assigned to the junior secured notes
payable at the time of issuance, as the notes were issued
in connection with a unit offering, with the units
consisting of a note payable and shares of the
Company’s common stock.
See
Note 6 for fair value information related to the
Company’s derivative liability.
Inventory
Inventory
is carried at the lower of cost (first-in, first-out
(“FIFO”) method) or net realizable value. All
items included in inventory relate to the Company’s
ClearPoint system. Software license inventory that is not
expected to be utilized within the next twelve months is
classified as a non-current asset. The Company
periodically reviews its inventory for obsolete items and
provides a reserve upon identification of potential
obsolete items.
Revenue
Recognition
The
Company’s revenues arise from: (1) sales of
ClearPoint system reusable components, including
associated installation services; (2) sales of ClearPoint
disposable products; and (3) license and development
arrangements. The Company recognizes revenue, in
accordance with Accounting Standards Codification
(“ASC”) 605-10-S99, Revenue Recognition, when
persuasive evidence of an arrangement exists, the fee is
fixed or determinable, collection of the fee is probable
and risk of loss has transferred to the customer. For all
product sales, the Company requires either a purchase
agreement or a purchase order as evidence of an
arrangement.
(1)
Sales
of ClearPoint system reusable components - When
selling directly to end customers, revenues related to
sales of ClearPoint system reusable components are
recognized upon installation of the system and the
completion of training of at least one of the
customer’s physicians, which typically occurs
concurrently with the system installation. When selling
to a distributor, revenues related to sales of ClearPoint
system reusable components are recognized at the time
risk of loss passes. ClearPoint system reusable
components include software. This software is incidental
to the utility of the ClearPoint system as a whole, and
as such, the provisions of ASC 985-605, Software Revenue
Recognition, are not applicable. ClearPoint system
reusable component sales were approximately $118,000 and
$435,000 during the nine months ended September 30, 2012
and 2011, respectively.
(2)
Sales
of ClearPoint disposable products - Revenues
from the sale of ClearPoint disposable products utilized
in procedures performed using the ClearPoint system are
recognized at the time risk of loss passes, which is
generally at shipping point or delivery to the
customer’s location, based on the specific terms
with that customer.
(3)
License
and development arrangements - The Company
analyzes revenue recognition on an agreement by agreement
basis as discussed below.
This
agreement requires the achievement of specified
milestones in the development of an MRI-safe implantable
lead by December 31, 2012. If the milestones are not
achieved by that date and this failure is not the result
of BSC Neuro’s failure to reasonably cooperate with
the Company in pursuing the milestones, the Company will
be required to repay BSC Neuro certain amounts, including
any development expenses and milestone payments
previously made to the Company under this agreement and
any patent prosecution costs incurred by BSC Neuro with
respect to the intellectual property licensed under this
agreement. The existence of this provision indicates the
sales price is not fixed or determinable and all monies
which have been or will be received prior to December 31,
2012 have and will be deferred until such time. If the
repayment obligations are not triggered as of December
31, 2012, the related party deferred revenue related to
this agreement will be recognized over the estimated
period of continuing involvement. If the repayment
obligations are triggered as of December 31, 2012, the
related party deferred revenue related to this contract
will be repaid to BSC Neuro.
The
agreement includes research and development service
performance requirements. The Company has recorded
deferred research and development services revenue along
with the related costs (charged to expense) on a gross
basis since the Company is obligated and bears all credit
risk with respect to the cost of providing the
services.
Future
product royalty income related to the agreement will be
recognized as the related products are sold and amounts
are due to the Company.
The
Company defers recognition of non-refundable upfront
license fees if there are continuing performance
obligations without which the technology, know-how,
rights, products or services conveyed in conjunction with
the non-refundable fees have no utility to the licensee
that could be considered separate and independent of the
Company’s performance under other elements of the
arrangement. Since the Company has continuing involvement
through research and development services that is
required because the Company’s know-how and
expertise related to the technology are proprietary to
the Company, such upfront fees are deferred and
recognized over the estimated period of continuing
involvement on a straight-line basis.
Amounts
to be received related to substantive, performance-based
milestones in research and development arrangements will
be recognized upon receipt. Future product royalty income
related to the agreement will be recognized as the
related products are sold and amounts are due to the
Company.
Net
Loss Per Share
The
Company calculates net loss per share in accordance with
ASC 260, Earnings per Share. Basic earnings per share
(“EPS”) is calculated by dividing the net
income or loss attributable to
common stockholders by the weighted average
number of common shares outstanding for the period,
without consideration for common stock equivalents.
Diluted EPS is computed by dividing the net income or
loss attributable to common stockholders by the weighted
average number of common shares outstanding for the
period plus the weighted average number of dilutive
common stock equivalents outstanding for the period
determined using the treasury stock method. For all
periods presented, diluted net loss per share is the same
as basic net loss per share. The following table sets
forth potential shares of common stock that are not
included in the calculation of diluted net
loss per share because to do so would be anti-dilutive as
of the end of each period presented:
Share-Based
Compensation
The
Company accounts for compensation for all arrangements
under which employees and others receive shares of stock
or other equity instruments (including options and
warrants) in accordance with ASC 718, Compensation
– Stock Compensation. Under ASC 718, the fair value
of each award is estimated and amortized as compensation
expense over the requisite service period. The fair value
of the Company’s share-based options and warrants
is estimated on the grant date using the Black-Scholes
valuation model. This valuation model requires the input
of highly subjective assumptions, including the expected
stock volatility, estimated option term and risk-free
interest rate during the expected term. To estimate the
expected term, the Company utilizes the
“simplified” method for “plain
vanilla” options as discussed within the
SEC’s Staff Accounting Bulletin 107 (“SAB
107”). The Company believes that all factors listed
within SAB 107 as pre-requisites for utilizing the
simplified method are true for the Company and for the
Company’s share-based compensation arrangements.
The Company intends to utilize the simplified method for
the foreseeable future until more detailed information
about exercise behavior becomes available.
The
Company utilizes risk-free interest rates based on a
zero-coupon U.S. treasury instrument, the term of which
is consistent with the expected term of the stock
options. The Company has not paid and does not anticipate
paying cash dividends on its shares of common stock;
therefore, the expected dividend yield is assumed to be
zero.
Fair
Value Determination of Privately-Held Equity
Securities
Determining
the fair value of privately held stock requires making
complex and subjective judgments. Prior to the time the
Company’s common stock was publicly traded, the
Company used the income approach, the market approach,
and the probability weighted expected return method to
estimate the value of the enterprise for the dates on
which securities were issued/granted and outstanding. The
income approach was based on estimated future cash flows
that utilized the Company’s forecasts of revenue
and costs. The assumptions underlying the revenue and
cost estimates were consistent with the Company’s
business plan. The market approach was based on recent
sales of the Company’s common stock in privately
negotiated transactions between stockholders, the once
anticipated initial public offering (“IPO”)
price of the Company’s common stock, or conversion
terms negotiated with holders of convertible securities
issued by the Company. When the Company began the process
of preparing for its IPO, it began to utilize the
probability weighted expected return method, which was
based on identifying the most likely liquidity events for
the Company, the probability of each occurring, and the
equity values for each after applying different
percentages to the likelihood of the different values
assigned to each anticipated outcome of those events.
Once the Company’s planned IPO was withdrawn in the
third quarter of 2010, the Company reverted to using the
income and market approaches previously discussed. The
assumptions used in each of the different valuation
methods take into account certain discounts such as
selecting the appropriate discount rate and control and
lack of marketability discounts. The discount rates used
in these valuations ranged from 22% to 35%. The discounts
for lack of marketability ranged from 15% to 35% and the
discount for lack of control ranged from 20% to 30%. If
different discount rates or lack of marketability and
control discounts had been used, the valuations would
have been different. The enterprise value under each
valuation method was allocated to preferred and common
shares taking into account the enterprise value available
to all stockholders and allocating that value among the
various classes of stock based on the rights, privileges,
and preferences of the respective classes in order to
provide an estimate of the fair value of a share of the
Company’s common stock. There is inherent
uncertainty in these estimates.
Since
May 21, 2012, the Company’s common stock has been
traded in the over-the-counter market and has been quoted
on the OTC Bulletin Board under the symbol
MRIC. Prior to the time the Company’s
stock was publicly traded, the fair value of the
Company’s common stock, as well as the common stock
underlying options and warrants, granted as compensation,
or issued in connection with the settlement of
liabilities (“stock based transactions”),
were estimated by management, with input from a
third-party valuation specialist from time to time. The
Company intends to include the prices of public trading
of its common stock as a key input going forward in
determining fair value for stock based
transactions.
New
Accounting Pronouncements
In
June 2011, the Financial Accounting Standards Board
(“FASB”) issued new accounting guidance
related to the presentation of comprehensive income that
increases comparability between GAAP and International
Financial Reporting Standards (“IFRS”). This
guidance requires companies to present the components of
net income and other comprehensive income either as one
continuous statement or as two consecutive statements,
eliminating the option to present components of other
comprehensive income as part of the statement of changes
in stockholders’ equity. Public entities are
required to apply this guidance for fiscal years and
interim periods within those years, beginning after
December 15, 2011. The Company adopted this guidance
during the nine months ended September 30, 2012, and the
adoption of this guidance had no impact on the
Company’s results of operations or financial
position and is not expected to have an impact on the
Company’s future results of operations or financial
position.
In
May 2011, the FASB issued guidance to provide a
consistent definition of fair value and ensure that the
fair value measurement and disclosure requirements are
similar between GAAP and International Financial
Reporting Standards. This update changes certain fair
value measurement principles and enhances the disclosure
requirements particularly for Level 3 fair value
measurements. This guidance was effective for annual
periods beginning after December 15, 2011 (the 2012
fiscal year) and should be applied prospectively. As this
guidance was only disclosure related, it did not have any
effect on the carrying value of the assets or liabilities
on the balance sheet as of September 30, 2012.
|
2.
Summary of Significant Accounting Policies
Basis
of Presentation and Use of Estimates
The
preparation of financial statements in conformity with
accounting principles generally accepted in the United
States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations
of Credit Risk and Other Risks and Uncertainties
Financial
instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily
of cash and cash equivalents and accounts receivable. The
Company holds its cash and cash equivalents on deposit with
financial institutions in the United States insured by the
Federal Deposit Insurance Corporation (“FDIC”).
At December 31, 2011 no amounts on deposit were in
excess of FDIC limits.
The
Company is subject to risks common to emerging companies in
the medical device industry including, but not limited to:
new technological innovations, dependence on key personnel,
dependence on key suppliers, changes in general economic
conditions and interest rates, protection of proprietary
technology, compliance with changing government regulations
and taxes, uncertainty of widespread market acceptance of
products, access to credit for capital purchases by
customers, product liability and the need to obtain
additional financing. The Company’s products include
components subject to rapid technological change. Certain
components used in manufacturing have relatively few
alternative sources of supply and establishing additional
or replacement suppliers for such components cannot be
accomplished quickly. The inability of any of these
suppliers to fulfill the Company’s supply
requirements may negatively impact future operating
results. While the Company has ongoing programs to minimize
the adverse effect of such uncertainty and considers
technological change in estimating the net realizable value
of its inventory, uncertainty continues to exist.
Receivables
at December 31, 2011 and all product revenues for 2011
relate to sales to a limited number of hospital customers
located in the United States (“U.S.”) and to
one distributor outside of the U.S. Sales to five of these
hospital customers each represented between 12% and 17% of
total product sales. Product revenues for 2010 all related
to sales to two U.S. hospitals. The Company may perform
credit evaluations of its customers’ financial
condition and, generally, requires no collateral from its
customers. The Company will provide an allowance for
doubtful accounts when collections become doubtful, but the
Company has not experienced any credit losses to
date.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid investments
with an original maturity of three months or less.
Fair
Value Measurements
The
Company measures certain financial assets and liabilities
at fair value on a recurring basis, including its
derivative liability. Generally accepted accounting
principles for fair value measurement provide a fair value
hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives
the highest priority to quoted prices in active markets for
identical assets and liabilities (“Level 1”)
and the lowest priority to unobservable inputs
(“Level 3”). The Company measures the fair
value of its derivative liability (see Note 6) on a
recurring basis using Level 3 inputs. The fair value of the
Company’s derivative liability was $0 at
December 31, 2011 and 2010.
Carrying
amounts of the Company’s cash and cash equivalents,
accounts receivable and accounts payable and accrued
liabilities approximate their fair values due to their
short maturities.
The
fair values of the Company’s notes payable differ
from their carrying values primarily as the result of
certain unamortized debt discounts that have been recorded
as it relates to those debt instruments as well as a less
than market contract interest rate associated with the 2010
junior secured notes payable issued by the Company in 2010.
The fair values of all outstanding notes payable other than
the 2010 junior secured notes payable were determined to be
equal to the face value of the notes payable as the
contractual interest rate approximated the market interest
rate. Since the contractual interest rate on the 2011
junior secured notes payable is 3.5% per year, the
Company determined the fair value of these notes by
discounting the face value utilizing an estimated market
interest rate of 10%. The carrying values and estimated
fair values of notes payable are as follows at
December 31, 2011:
Inventory
Inventory
is carried at the lower of cost (first-in, first-out
(“FIFO”) method) or net realizable value. All
items included in inventory relate to the Company’s
ClearPoint system. The Company periodically reviews its
inventory for obsolete items and provides a reserve upon
identification of potential obsolete items.
Property
and Equipment
Property
and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives,
principally five to seven years. Leasehold improvements are
depreciated on a straight-line basis over the lesser of
their estimated useful lives or the life of the related
lease.
Licenses
Licenses
are recorded at cost and are amortized using the
straight-line method over their estimated useful lives. The
carrying value of licenses at December 31, 2011 and
2010 was $27,000 and $45,000, respectively, net of
accumulated amortization of $63,000 and $45,000 at those
respective dates. Future amortization under licenses is
expected to be approximately $18,000 annually through June
2013. One of the licenses contains a requirement to pay the
licensor an additional $40,000 upon the issuance of a
certain patent. The license arrangements also require
certain minimum royalty payments to the licensor (see Note
12).
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of its long-lived
assets (finite-lived intangible assets and property and
equipment) whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be
fully recoverable. When this occurs, the expected
undiscounted future cash flows are compared to the net book
value of the related assets. If the net book value of the
related assets exceeds the undiscounted expected future
cash flows of the assets, the carrying amount would be
reduced to the present value of the expected future cash
flows and an impairment loss would be recognized. The
Company has not recorded any impairment losses to
date.
Revenue
Recognition
The
Company’s revenues arise from: (1) the sale of
ClearPoint system reusable components, including associated
installation services; (2) sales of ClearPoint
disposable products; and (3) license and development
arrangements. The Company recognizes revenue, in accordance
with Accounting Standards Codification (“ASC”)
605-10-S99, Revenue
Recognition, when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, collection of the
fee is probable and risk of loss has transferred to the
customer. For all sales, the Company requires either a
purchase agreement or a purchase order as evidence of an
arrangement.
(1)
Sale of
ClearPoint system reusable components —
Revenues related to ClearPoint system sales are recognized
upon installation of the system and the completion of
training of at least one of the customer’s
physicians, which typically occurs concurrently with the
ClearPoint system installation. ClearPoint system reusable
components include software. This software is incidental to
the utility of the ClearPoint system as a whole, and as
such, the provisions of ASC 985-605, Software Revenue
Recognition, are not applicable.
(2)
Sales of
ClearPoint disposable products— Revenues from
the sale of ClearPoint disposable products utilized in
procedures performed using the ClearPoint system, which
occurs after the system installation is completed for a
given customer, are recognized at the time risk of loss
passes, which is generally at shipping point or delivery to
the customer’s location, based on the specific terms
with that customer.
(3)
License
and development arrangements— The Company
analyzes revenue recognition on an agreement by agreement
basis as discussed below.
The
Company defers recognition of non-refundable upfront
license fees if there are continuing performance
obligations without which the technology, know-how, rights,
products or services conveyed in conjunction with the
non-refundable fees have no utility to the licensee that
could be considered separate and independent of the
Company’s performance under other elements of the
arrangement. Since the Company has continuing involvement
through research and development services that is required
because the Company’s know-how and expertise related
to the technology are proprietary to the Company, such
upfront fees are deferred and recognized over the estimated
period of continuing involvement on a straight-line
basis.
Amounts
to be received related to substantive, performance-based
milestones in research and development arrangements are
recognized upon receipt in accordance with the
Company’s revenue recognition policy. Future product
royalty income related to the agreement will be recognized
as the related products are sold and amounts are due to the
Company.
Research
and Development Costs
Costs
related to research, design and development of products are
charged to research and development expense as incurred.
These costs include direct salary costs for research and
development personnel, costs for materials used in research
and development activities and costs for outside
services.
Costs
of Withdrawn IPO
In
December 2009, the Company filed a registration statement
with the SEC relating to the initial public offering
(“IPO”) of shares of the Company’s common
stock. In September 2010 the Company made the decision to
withdraw its registration statement and to cancel the
planned IPO. Costs which had been deferred during 2009
totaling $366,503 and costs incurred during 2010 related to
the IPO effort are recorded as costs of withdrawn IPO in
the statement of operations for the year ended
December 31, 2010.
Other
Income (Expense)
During
2010 the Company recorded other income related to grants
received under the Qualifying Therapeutic Discovery Project
program administered under section 48D of the Internal
Revenue Code. Included in net other income for the year
ended December 31, 2010 is other income related to the
grants of $415,615, which is net of expenses paid to a
service firm that assisted the Company in completing the
grant applications.
Income
Taxes
The
Company accounts for income taxes under ASC 740, Income
Taxes. Deferred income tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and
their respective income tax bases. Such assets and
liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. The effect of a change in tax rates is recognized
in the period that includes the enactment date.
Due
to uncertainty surrounding realization of the deferred
income tax assets in future periods, the Company has
recorded a 100% valuation allowance against its net
deferred tax assets. If it is determined in the future that
it is more likely than not that any deferred income tax
assets are realizable, the valuation allowance will be
reduced.
Net
Loss Per Share
The
Company calculated net loss per share in accordance with
ASC 260, Earnings per Share. Basic earnings per share
(“EPS”) is calculated by dividing the net
income or loss attributable to common stockholders by the
weighted average number of common shares outstanding for
the period, without consideration for common stock
equivalents. Diluted EPS is computed by dividing the net
income or loss attributable to common stockholders by the
weighted average number of common shares outstanding for
the period plus the weighted average number of dilutive
common stock equivalents outstanding for the period
determined using the treasury stock method. For all periods
presented, diluted net loss per share is the same as basic
net loss per share. The following table sets forth
potential shares of common stock that are not included in
the calculation of diluted net loss per share because to do
so would be anti-dilutive as of the end of each period
presented:
The
table above excludes the potential impact of convertible
notes payable issued by the Company in 2011 (see Notes 7,
8, and 9) that have conversion features which are
contingent upon the occurrence of a future event. In
addition, the conversion ratios related to the convertible
preferred shares and convertible notes reflected in the
table above will be different upon the effectiveness of the
Company’s Form 10 registration statement (see Notes 7
and 9).
Share-Based
Compensation
The
Company accounts for compensation for all arrangements
under which employees and others receive shares of stock or
other equity instruments (including options and warrants)
in accordance with ASC Topic 718 “Compensation
– Stock Compensation.”. Under ASC Topic 718,
the fair value of each award is estimated and amortized as
compensation expense over the requisite service period. The
fair value of the Company’s share-based options and
warrants is estimated on the grant date using the
Black-Scholes valuation model. This valuation model
requires the input of highly subjective assumptions,
including the estimated stock price volatility, estimated
option term and risk free interest rate during the expected
term. To estimate the expected term, the Company utilizes
the “simplified” method for “plain
vanilla” options as discussed within the Securities
and Exchange Commission’s Staff Accounting Bulletin
107, or SAB 107. The Company believes that all factors
listed within SAB 107 as pre-requisites for utilizing the
simplified method are true for the Company and for the
Company’s share-based compensation arrangements. As
the Company has been operating as a private company, it was
unable to use actual price volatility and option life data
as input assumptions within its Black-Scholes valuation
model. Prior to October 2009, the Company used expected
volatilities based on the historical volatility of the
industry sector in which the Company operates, in
accordance with the guidance set forth in ASC Topic 718.
Beginning in October 2009, the Company based its estimate
of expected volatility on the average of historical
volatilities of publicly traded companies it deemed similar
because the Company lacks its own relevant historical
volatility data. The Company will consistently apply this
methodology until a sufficient amount of historical
information regarding the volatility of the Company’s
own share price becomes available. The Company utilizes
risk-free interest rates based on a zero-coupon U.S.
treasury instrument, the term of which is consistent with
the expected term of the stock options. The Company has not
paid and does not anticipate paying cash dividends on its
shares of common stock; therefore, the expected dividend
yield is assumed to be zero.
Fair
Value Determination of Privately-Held Equity
Securities
The
fair values of the common stock, as well as the common
stock underlying options and warrants, granted as
compensation, or issued in connection with the settlement
of liabilities, were estimated by management, with input
from a third-party valuation specialist.
Determining
the fair value of stock requires making complex and
subjective judgments. The Company has used the income
approach, the market approach, and the probability weighted
expected return method to estimate the value of the
enterprise for the dates on which securities are
issued/granted and outstanding. The income approach was
based on estimated future cash flows that utilized the
Company’s forecasts of revenue and costs. The
assumptions underlying the revenue and cost estimates were
consistent with the Company’s business plan. The
market approach was based on recent sales of the
Company’s common stock in privately negotiated
transactions between stockholders or the once anticipated
IPO price of the Company’s common stock. Once the
Company began the process of preparing for its IPO, the
Company began to utilize the probability weighted expected
return method, which was based on identifying the most
likely liquidity events for the Company, the probability of
each occurring, and the equity values for each after
applying different percentages to the likelihood of the
different values assigned to each anticipated outcome of
those events. Once the Company’s planned IPO was
withdrawn in the third quarter of 2010, the Company
thereafter used the income and market approaches previously
discussed. The assumptions used in each of the different
valuation methods take into account certain discounts such
as selecting the appropriate discount rate and control and
lack of marketability discounts. The discount rates used in
these valuations ranged from 22% to 35%. The discounts for
lack of marketability ranged from 15% to 35% and the
discount for lack of control ranged from 20% to 30%. If
different discount rates or lack of marketability and
control discounts had been used, the valuations would have
been different. The enterprise value under each valuation
method was allocated to preferred and common shares taking
into account the enterprise value available to all
stockholders and allocating that value among the various
classes of stock based on the rights, privileges, and
preferences of the respective classes in order to provide
an estimate of the fair value of a share of the
Company’s common stock. There is inherent uncertainty
in these estimates.
Derivative
Financial Instruments
The
Company accounts for derivative instruments in accordance
with ASC Topic 815, which establishes accounting and
reporting standards for derivative instruments and hedging
activities, including certain derivative instruments
embedded in other financial instruments or contracts and
requires recording of all derivatives on the balance sheet
at their fair values (Note 6). Changes in the fair values
of derivatives are recorded each period as gains or losses
in the statement of operations unless the derivatives
qualify for hedge accounting. At December 31, 2011 and
2010, the Company did not have any derivative instruments
that were designated as hedges.
New
Accounting Pronouncements
In
April 2010, the Financial Accounting Standards Board, or
FASB, issued Accounting Standards Update No. 2010-17
(“ASU 2010-17”) which provided guidance on
defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue
recognition for research or development transactions. ASU
2010-17 is effective prospectively for milestones achieved
in fiscal years and interim periods within those years
beginning on or after June 15, 2010. The adoption of
this standard on January 1, 2011 did not have any
impact on the Company’s financial statements.
In
May 2011, the FASB, issued additional guidance on fair
value measurements. The updated guidance provides a
consistent definition of fair value and aligns the fair
value measurement and disclosure requirements between U.S.
GAAP and International Financial Reporting Standards, or
IFRS, amends certain guidance primarily related to fair
value measurements for financial instruments, and enhances
disclosure requirements particularly for Level 3 fair value
measurements. The guidance is effective prospectively for
fiscal years beginning after December 15, 2011 and
interim periods within those years. Early adoption is
permitted. The Company does not expect the adoption of this
guidance will have a material impact on its financial
statements.
In
June 2011, the FASB issued new accounting guidance related
to the presentation of comprehensive income that increases
comparability between U.S. GAAP and IFRS. This guidance
will require companies to present the components of net
income and other comprehensive income either as one
continuous statement or as two consecutive statements,
eliminating the option to present components of other
comprehensive income as part of the statement of changes in
stockholders’ equity. Public entities are required to
apply this guidance for fiscal years and interim periods
within those years, beginning after December 15, 2011.
Nonpublic entities should begin applying these requirements
for fiscal years ending after December 15, 2012, and
interim and annual periods thereafter. The Company does not
believe the adoption of this guidance will have a material
impact on its results of operations or financial
position.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||