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Note 7 - Convertible Notes Payable
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Mar. 31, 2012
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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, Debt with
Conversion and Other Options, and charged to interest expense
the associated unamortized discount of $13,500 and the
unamortized deferred offering costs of $13,885.
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 they 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, Debt with Conversion and Other Options, 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 upon 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,
notwithstanding whether there is a closing of a qualified
financing.
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, 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.
The
table below summarizes convertible notes payable by liability
classification:
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