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Note 7 - Other Notes Payable
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Dec. 31, 2012
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| Debt Disclosure [Text Block] |
7.
Other
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 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 registration statement 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 FASB 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 on 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. 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 at $0.60 per
share. The fair value of these warrants of
$237,299 was calculated using the Black-Scholes pricing
model. 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. 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. 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 (see Note 11), 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 FASB 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 at December 31:
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 and the April 2011
Note. All outstanding principal and
interest on the notes will be due and payable in a single
payment upon maturity.
Under
guidance in FASB 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.
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