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Convertible Notes Payable
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Sep. 30, 2012
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Dec. 31, 2011
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| Debt Disclosure [Text Block] |
7.
Convertible
Notes Payable
2010
Unsecured Convertible Notes Payable
In
March 2010, the Company issued 10% senior unsecured
convertible notes (the “March 2010 Notes”) in
the aggregate principal amount of $4,071,000. The
original terms of the March 2010 Notes provided for a
mandatory conversion feature upon the closing of an
initial public offering of the Company’s common
stock that would automatically convert the outstanding
principal amount of the notes into shares of the
Company’s common stock at the lesser of $8.00 per
share or 80% of the public offering price, subject to a
minimum $4.00 per share conversion price. In addition,
the original terms of the March 2010 notes permitted note
holders to convert the outstanding principal into shares
of the Company’s common stock at any time, based on
a conversion price of $8.00 per share, subject to certain
adjustments. The March 2010 Notes were scheduled to
mature in March 2012. All accrued interest was to be paid
in cash upon the earlier of maturity or conversion. In
late 2011 and early 2012, all of the March 2010 Notes
were amended to provide for automatic conversion of the
outstanding principal and accrued interest into shares of
the Company’s common stock on the effective date of
a Form 10 filed by the Company with the SEC under the
Exchange Act, based on a conversion price of $1.00 per
share. Upon the effectiveness of the Company’s Form
10 on February 27, 2012, all of the March 2010 Notes,
representing an aggregate of $4,868,017 in principal and
accrued interest, were converted into 4,868,041 shares of
the Company’s common stock. In
conjunction with the conversion of the March 2010 Notes,
the Company applied the guidance in ASC 470-20 and
charged to interest expense the associated unamortized
discount of $13,500 and the unamortized deferred offering
costs of $13,883.
2011
Unit Offering Notes
In
October 2011, the Company initiated a private placement
of securities in which the Company offered units, each
unit consisting of a 10% junior secured convertible note
(“2011 Unit Offering Note”) in the principal
amount of $100,000 and a warrant to purchase 50,000
shares of the Company’s common stock. The 2011 Unit
Offering Notes were scheduled to mature three years from
the date of issuance and accrued interest at 10% per
year. Per the terms of the 2011 Unit Offering Notes, all
principal and accrued interest automatically converted
into shares of the Company’s common stock based on
a conversion price of $0.60 per share on the effective
date of the Company’s Form 10, which was February
27, 2012. The warrants were fully vested upon issuance,
have a term of five years, and have an exercise price of
$0.75 per share. Upon completion of the unit offering in
February 2012, the Company had sold 54.305 units
resulting in the issuance of convertible notes in the
aggregate principal amount of $5,430,500 and warrants to
purchase 2,715,250 shares of common stock under the terms
described above. Of the 54.305 units sold, 38.055 units
were sold after December 31, 2011. The Company’s
placement agent for the unit offering, and its
sub-placement agents, received an aggregate cash fee
equal to 10% of the gross proceeds from the offering, as
well as warrants to purchase an aggregate of 941,288
shares of the Company’s common stock, which
represented 8% of the aggregate number of shares of
common stock issuable upon conversion of the 2011 Unit
Offering Notes and exercise of the warrants sold in the
unit offering, at the time of issuance. The
warrants issued to the placement agent and its
sub-placement agents have an exercise price of $0.60 per
share. The fair value of these warrants of
$237,299 was calculated using the Black-Scholes pricing
model assuming a dividend yield of 0%, an expected
volatility of 48%, a risk free interest rate of 0.89% and
an expected life of five years. The $237,299
was recorded as a deferred offering cost to be amortized
to interest expense using the effective interest method
over the term of the 2011 Unit Offering Notes.
Utilizing
guidance in ASC 470-20, the Company initially allocated
the proceeds from the sale of the units on a relative
fair value basis between the convertible notes and the
warrants issued. Using the relative fair value of the
notes, an effective conversion price was determined which
resulted in a beneficial conversion feature
(“BCF”). The fair value of the warrants was
calculated using the Black-Scholes pricing model assuming
a dividend yield of 0%, an expected volatility of 49%, a
risk free interest rate of 0.93% and an expected life of
five years. The relative fair value of the warrants
issued and the intrinsic value of the BCF, which were
$383,204 each for the units issued in 2012, were recorded
as increases to additional paid-in capital and a discount
to the carrying value of the 2011 Unit Offering Notes.
Management estimated the fair value of the
Company’s common stock to be $0.60 per share at the
time the 2011 Unit Offering Notes were issued, and
management believed the 10% stated interest rate
approximated the market interest rate. The effective
conversion price of the conversion feature under the 2011
Unit Offering Notes was $0.54 per share. Upon the
effectiveness of the Company’s Form 10 on February
27, 2012, all of the 2011 Unit Offering Notes,
representing an aggregate of $5,491,929 in principal and
accrued interest, were converted into 9,153,248 shares of
the Company’s common stock. In
conjunction with the conversion of the 2011 Unit Offering
Notes, the Company applied the guidance in ASC 470-20 and
charged the related aggregate unamortized debt discount
of $1,063,018 and unamortized deferred offering costs of
$785,239 to interest expense.
2011
Junior Secured Convertible Note Payable and Strategic
Agreement
In
April 2011, the Company issued a $2,000,000 subordinated
secured convertible note (“April 2011 Note”)
to a medical device co-development partner
(“Strategic Partner”). The April 2011 Note
matures in April 2016, unless earlier converted, and it
accrues interest at the rate of 10% per year. Interest is
payable at maturity if the note is not converted. The
April 2011 Note is secured by a security interest in the
assets of the Company, which security interest is junior
and subordinate to the security interest that secures the
BSC Notes (see Note 6). In the event the Company closes a
qualified financing, which is defined as an equity
financing in which the Company issues shares of its
preferred stock and receives at least $10,000,000 in net
proceeds, the principal and accrued interest of the April
2011 Note will automatically convert into shares of the
preferred stock that are issued in the
qualified financing if the number of shares to be issued
upon conversion represents at least 10% of the
Company’s outstanding shares of stock on a fully
diluted basis. If the number of shares that would be
issued upon conversion represents less than 10% of the
Company’s outstanding shares of stock on a fully
diluted basis, the conversion will be at the Strategic
Partner’s election. Under the original terms, the
Strategic Partner had the right to accelerate the
maturity date of the April 2011 Note if the Company did
not consummate a qualified financing within 180 days
following the issue date of the note. The terms of the
April 2011 Note were amended in September 2011 to extend
the period within which to complete a qualified financing
from 180 days to 360 days (April 2012) and to
establish a maximum conversion price of $0.60 per share
(again, only in connection with the closing of a
qualified financing). The April 2011 Note was further
amended in February 2012 to remove the acceleration
provision mentioned above related to the consummation of
a qualified financing and to provide the Strategic
Partner the option to convert the April 2011 Note into
shares of the Company’s common stock at a
conversion price of $0.60 per share at any time on or
before February 23, 2013, regardless of whether there is
a qualified financing within that period of time.
Concurrent
with the issuance of the April 2011 Note, the Company and
the Strategic Partner entered into a Co-Development and
Distribution Agreement pursuant to which the Company
appointed the Strategic Partner as the exclusive
distributor of the Company’s ClearPoint system
products in the MRI-guided neurological drug delivery
field and as a non-exclusive distributor of the
Company’s ClearPoint system products for other
MRI-guided neurological applications. In connection with
the Co-Development and Distribution Agreement, the
Company is obligated to perform a limited amount of
training and support functions. In addition, under the
Co-Development and Distribution Agreement, the Company
licensed certain ClearPoint system technology to the
Strategic Partner, and the Company and the Strategic
Partner will work together to potentially integrate the
Company’s ClearPoint product line into the
Strategic Partner’s interventional MRI product
line, particularly for an MRI-guided neurological drug
delivery application.
Relying
upon guidance in ASC 605-25 Revenue Recognition Multiple
Element Arrangements, the Company analyzed whether the
deliverables of the arrangement with the Strategic
Partner represented separate units of accounting.
Application of these standards requires subjective
determinations and requires management to make judgments
about the value of the individual elements and whether
delivered elements are separable from the other aspects
of the contractual relationship. The Company determined
that the April 2011 Note was the only element of the
arrangement that had standalone value to the Strategic
Partner separate from the other elements; thus, the
Company accounted for the arrangement in two units of
accounting. The distribution, license, service and
support elements of the arrangement did not have value to
the Strategic Partner on an individual basis, but
together these elements did have value to the Strategic
Partner and, therefore, represent a unit of accounting.
The Company applied the relative selling price method to
determine the value to associate with each unit of
accounting. This method establishes a hierarchy of
factors to consider when determining relative selling
price: (1) vendor-specific objective evidence, (2)
third-party evidence of selling price, or lastly, (3)
management’s best estimate of the selling price.
Because of the unique nature of the rights conveyed,
there was no vendor-specific objective evidence or
third-party evidence of relative selling price.
Therefore, the Company was required to use its best
estimate of the relative selling price of the
deliverables comprising each unit of accounting. The
Company determined the relative selling price of the unit
of accounting associated with the distribution, license,
service and support elements to be zero, as the Company
would have conveyed these rights and assumed these
obligations in exchange for the potential benefits from
leveraging the distribution resources of the Strategic
Partner (i.e. sales to the Strategic Partner are expected
to yield similar net profits to those the Company
generates on its direct customer sales). The other unit
of accounting is comprised of the April 2011 Note with
its junior security interest. Upon the issuance of the
note, the note’s conversion feature did not require
any accounting adjustment since it was a contingent
feature subject to the completion of a qualified
financing, which is not considered to be within the
Company’s control. Therefore, the full $2,000,000
in cash proceeds was recorded as a liability related to
the April 2011 Note. The Company determined that the
February 2012 amendment to the April 2011 Note, which
provided the optional conversion feature, represented
conventional convertible debt and did not require any
additional accounting treatment.
Summary
of Convertible Notes Payable
The
table below summarizes convertible notes payable by
liability classification:
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7.
2010 Senior Unsecured Convertible Notes Payable
In
March 2010, the Company issued 10% senior unsecured
convertible notes (the “March 2010 Notes”) in
the aggregate principal amount of $4,071,000. The original
terms of the March 2010 Notes provide a mandatory
conversion feature upon the closing of an initial public
offering of the Company’s common stock that
automatically converts the outstanding principal amount of
the notes into shares of the Company’s common stock
at the lesser of $8.00 per share or 80% of the public
offering price, subject to a minimum $4.00 per share
conversion price. In addition, the original terms of the
March 2010 notes permit note holders to convert the
outstanding principal into shares of the Company’s
common stock at any time, based on a conversion price of
$8.00 per share, subject to certain adjustments. The March
2010 Notes mature in March 2012, unless earlier converted,
and accrue interest at the rate of 10% per annum. All
accrued interest was to be paid in cash upon the earlier of
maturity or conversion. In late 2011 and early 2012, all of
the March 2010 Notes were amended to provide for automatic
conversion of the outstanding principal and accrued
interest into shares of the Company’s common stock on
the effective date of a Form 10 registration statement
filed with the SEC under the Exchange Act, based on a
conversion price of $1.00 per share. The Company filed a
Form 10 registration statement with the SEC in December
2011, and the Company expects that its Form 10 registration
statement will be effective on February 27, 2012. At
that time, the March 2010 Notes will convert into shares of
the Company’s common stock.
The
Company applied the guidance in ASC 815-40,
“Derivatives and Hedging Contracts in an
Entity’s Own Equity,” in determining that the
conversion features of the March 2010 Notes did not require
derivative liability accounting treatment. The Company
relied upon guidance in ASC 470-20, “Debt with
Conversion and Other Options,” in determining that
the non-mandatory conversion feature represented a
beneficial conversion feature (“BCF”) that
should be recorded as equity based on its intrinsic value.
Upon the issuance of the March 2010 Notes, the intrinsic
value of the BCF was $834,555, which represented the
difference between the estimated fair value at the date of
issuance of $9.64 per common share and the conversion price
of $8.00 per share multiplied by the number of conversion
shares. This BCF was recorded as debt discount, which is
being amortized to interest expense using the effective
interest method over the term of the March 2010
Notes.
The
Company incurred approximately $293,000 of costs related to
the issuance of the March 2010 Notes, comprised of
placement agent commissions and legal fees. In addition,
warrants with a five year term were issued to the placement
agent exercisable for 25,444 shares of the Company’s
common stock at a price equal to the lesser of $8.00 per
share or 80% of the public offering price in the
Company’s initial public offering, subject to a
minimum $4.00 per share conversion price. The estimated
fair value of the placement agent warrants at the date of
issuance was $120,218 (Note 8). The total costs incurred in
connection with the issuance of the March 2010 Notes of
approximately $413,000 were capitalized as deferred
financing costs and are being amortized using the effective
interest method over the term of the March 2010 Notes. The
unamortized balance at December 31, 2011 was
$44,579.
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Junior Secured Notes Payable [Member]
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| Debt Disclosure [Text Block] |
8.
Unit Offerings
2010
Junior Secured Notes
In
November 2010, the Company issued an aggregate of
10,714,286 units and received proceeds of $3,000,000. The
units were sold to existing stockholders of the Company and
existing holders of other Company securities. Each unit
consisted of a junior secured note, and one share of the
Company’s common stock. The Company issued 10,714,286
shares of common stock and junior secured notes in the
aggregate principal amount of $3,000,000. The notes mature
in November 2020 and accrue interest at the rate of
3.5% per annum. The notes are secured by a security
interest in the assets of the Company, which security
interest is junior and subordinate to the security
interests that secure the BSC Notes, as well as the April
2011 and the 2011 Unit Offering Notes. All outstanding
principal and interest on the notes will be due and payable
in a single payment upon maturity.
Under
guidance in ASC 470, the Company allocated the $3,000,000
in proceeds from the sale of the units between the junior
secured notes and the shares of common stock issued based
on their relative fair values with $2,775,300 being
recorded as equity. The junior secured notes were recorded
at the principal amount of $3,000,000 less a discount of
$2,775,300. This discount is being amortized to interest
expense over the 10 year term of the notes using the
effective interest method. The fair value of the notes was
estimated based on an assumed market interest rate for
notes of similar terms and risk. The fair value of the
Company’s common stock was estimated by management
using a market approach, with input from a third-party
valuation specialist.
Four
officers of the Company purchased an aggregate of 882,726
units in the offering for $247,164. In addition, three
non-employee directors of the Company also purchased an
aggregate of 567,203 units for $158,816 in the
offering.
Five
other non-employee directors had advanced a total of
$190,000 to the Company in anticipation of the
offering. However, due to the investment allocations
for the offering, these five non-employee directors were
not able to purchase units. All funds advanced to the
Company by the five non-employee directors were returned,
without interest, $90,000 of which was returned prior to
December 31, 2010 and $100,000 of which was returned
in January 2011. This $100,000 is included in other
accrued liabilities at December 31, 2010.
2011
Junior Secured Convertible Notes
In
October 2011, the Company began a private placement of
securities in which the Company offerred units, with each
unit consisting of a 10% junior secured convertible note
(“2011 Unit Offering Note”) in the principal
amount of $100,000 and a warrant to purchase 50,000 shares
of the Company’s common stock. The 2011 Unit Offering
Notes mature three years from the date of issuance (October
through December 2014), unless earlier converted, and
accrue interest at 10% per year. The notes are secured
by a security interest in the assets of the Company, which
security interest is junior and subordinate to the security
interest that secures the BSC Notes (Note 6) and pari
passu with the security interest that secures the
April 2011 Note (Note 9). The 2011 Unit Offering Notes,
including the principal and all accrued interest, convert
automatically into shares of the Company’s common
stock on the effective date of a Form 10 registration
statement filed with the SEC under the Exchange Act, based
on a conversion price of $0.60 per share. In addition, a
note holder may elect at any time to convert the note into
shares of the Company’s common stock, based on a
conversion price of $0.60 per share. The warrants vest
immediately, have a term of five years, and have an
exercise price of $0.75 per share. At December 31,
2011, the Company had sold 16.25 units, resulting in the
issuance of convertible notes in the aggregate principal
amount of $1,625,000 and warrants to purchase 812,500
shares of common stock under the terms described above. The
offering period for the Company’s sale of units
extended beyond December 31, 2011. See Note 13 for
additional information regarding units sold after
December 31, 2011. The Company’s placement agent
for the unit offering receives a cash fee equal to 10% of
the gross proceeds, as well as a warrant to purchase that
number of shares of the Company’s common stock equal
to 8% of the number of shares of common stock issuable upon
conversion of the notes and exercise of the warrants issued
in the offering, at an exercise price of $0.60 per share.
At December 31, 2011 the Company had $66,500 included
in other accrued liabilities related to cash fees due to
the placement agent, and none of the placement agent
warrants had yet been issued as of December 31,
2011.
Utilizing
guidance in ASC 470, the Company allocated the $1,625,000
in proceeds from the sale of the units on a relative fair
value basis between the convertible notes and the warrants
issued. Using the relative fair value of the notes, an
effective conversion price was determined which resulted in
a BCF. The fair value of the warrants issued was calculated
using the Black-Scholes pricing model (see Note 10). The
relative fair value of the 812,500 warrants issued and the
intrinsic value of the BCF were each $163,633, and these
amounts were recorded as increases to additional paid-in
capital and a discount to the carrying value of the
convertible notes. The Company’s management estimated
the fair value of the Company’s common stock to be
$0.60 at the time the convertible notes were issued, and
the Company’s management believes the 10% stated
interest rate to be a market rate. The effective conversion
price of the conversion feature was $0.54 per common share.
The total discount of $327,266 is being amortized to
interest expense over the three year term of the notes
using the effective interest method. The unamortized
balance of the discount was $316,610 at December 31,
2011.
At
December 31, 2011, the Company had incurred
approximately $170,000 of costs related to the issuance of
the units, comprised of placement agent cash fees and
professional fees. These costs were capitalized as deferred
financing costs, and, along with the fair value of the
placement agent warrants once issued, will be amortized
using the effective interest method over the three year
term of the 2011 Unit Offering Notes.
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The 2011 Junior Secured Convertible Note Payable [Member]
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| Debt Disclosure [Text Block] |
9.
2011 Junior Secured Convertible Note Payable and Strategic
Agreement
In
April 2011, the Company issued a $2,000,000 subordinated
secured convertible note (“April 2011 Note”) to
a medical device co-development partner (“Strategic
Partner”). The April 2011 Note matures in April 2016,
unless earlier converted, and it accrues interest at the
rate of 10% per year. Interest is payable at maturity
if the note is not converted. The April 2011 Note is
secured by a security interest in the assets of the
Company, which security interest is junior and subordinate
to the security interest that secures the BSC Notes (Note
6) and pari
passu with security interest that secures the 2011
Unit Offering Notes (Note 8). In the event the Company
closes a qualified financing, which is defined as an equity
financing in which the Company issues shares of its
preferred stock and receives at least $10,000,000 in net
proceeds, the principal and accrued interest of the April
2011 Note will automatically convert into shares of
preferred stock that are issued in the qualified financing
if the number of shares to be issued upon conversion
represents at least 10% of the Company’s outstanding
shares of stock on a fully diluted basis. If the number of
shares that would be issued upon conversion represents less
than 10% of the Company’s outstanding shares of stock
on a fully diluted basis, the conversion will be at the
Strategic Partner’s election. Under the original
terms, the Strategic Partner had the right to accelerate
the maturity date of the April 2011 Note if the Company did
not consummate a qualified financing within 180 days
following the issue date of the note. The terms of the
April 2011 Note were amended in September 2011 to extend
the period within which to complete a qualified financing
from 180 days to 360 days (April 2012). In addition, in
September 2011, the terms of the April 2011 Note were
amended to establish a maximum conversion price of $0.60
per share. Accordingly, the conversion price under the
April 2011 Note will be the lesser of the price paid by
investors in a qualified financing or $0.60 per share
(again, contingent upon the completion of a qualified
preferred stock financing). A further amendment to the
April 2011 Note was executed in February 2012 that removed
the acceleration provision mentioned above related to not
consummating a qualified financing and that provides the
Strategic Partner the option to convert principal and
accrued interest into shares of the Company’s common
stock at a conversion price of $0.60 per share at any time
on or before February 24, 2013.
Concurrent
with the issuance of the April 2011 Note, the Company and
the Strategic Partner entered into a Co-Development and
Distribution Agreement pursuant to which the Company
appointed the Strategic Partner as the exclusive
distributor of the Company’s ClearPoint system
products in the neurological drug delivery field and as a
non-exclusive distributor of the Company’s ClearPoint
system products for other neurological applications. In
connection with the Co-Development and Distribution
Agreement, the Company is obligated to perform a limited
amount of training and support functions. In addition,
under the Co-Development and Distribution Agreement, the
Company
licensed certain ClearPoint system technology to the
Strategic Partner and will work together to potentially
integrate the Company’s ClearPoint product line into
the Strategic Partner’s interventional MRI product
line, particularly for a neurological drug delivery
application.
Relying
upon guidance in ASC 605-25, the Company analyzed whether
the deliverables of the arrangement with the Strategic
Partner represented separate units of accounting.
Application of these standards requires subjective
determinations and requires management to make judgments
about the value of the individual elements and whether
delivered elements are separable from the other aspects of
the contractual relationship. The Company determined that
the April 2011 Note was the only element of the arrangement
that had standalone value to the Strategic Partner separate
from the other elements; thus, the Company accounted for
the arrangement in two units of accounting. The
distribution, license, service, and support elements of the
arrangement did not have value to the Strategic Partner on
an individual basis, but together these elements did have
value to the Strategic Partner and, therefore, represent a
unit of accounting. The Company applied the relative
selling price method to determine the value to associate
with each unit of accounting. This method establishes a
hierarchy of factors to consider when determining relative
selling price: (1) vendor specific objective evidence,
(2) third-party evidence of selling price, or lastly,
(3) management’s best estimate of the selling
price. Because of the unique nature of the rights conveyed,
there was no vendor specific objective evidence or third
party evidence of relative selling price. Therefore, the
Company was required to use its best estimate of the
relative selling price of the deliverables comprising each
unit of accounting. The Company determined the relative
selling price of the unit of accounting associated with the
distribution, license, service, and support elements to be
zero, as the Company would have conveyed these rights and
assumed these obligations in exchange for the potential
benefits from leveraging the distribution resources of the
Strategic Partner (i.e. sales to the Strategic Partner are
expected to yield similar net profits to those the Company
generates on its direct customer sales). The other unit of
accounting is comprised of the April 2011 Note with its
junior security interest. The conversion feature associated
with the note was not accorded any accounting treatment
since this a contingent feature completely subject to the
completion of a qualified financing, which is not
considered to be within the Company’s control.
Therefore, the full $2,000,000 in cash proceeds has been
recorded as a liability related to the April 2011
Note.
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