Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
 12 Months Ended
Dec. 31, 2017
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, MRI Interventions (Canada) Inc. All significant inter-company accounts and transactions have been eliminated.
Basis of Presentation and Use of Estimates

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, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reverse Stock Split

Reverse Stock Split

As discussed in Note 6, on July 21, 2016, the Company’s Board of Directors approved a 1-for-40 reverse stock split of its issued common stock, which was effectuated on July 26, 2016. All disclosures of common shares and per share data in the accompanying consolidated financial statements and related notes have been adjusted retroactively to reflect the reverse stock split for all periods presented.
Cash and Cash Equivalents

Cash and Cash Equivalents

 

Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Derivative Liabilities

Derivative Liabilities

 

Derivative liabilities represent the fair value of conversion features of certain notes and of certain warrants to purchase common stock (see Note 7). These derivative liabilities are calculated utilizing the Monte Carlo simulation valuation method. Changes in the fair values of these warrants are recognized as other income or expense in the related consolidated statements of operations.
Fair Value Measurements

Fair Value Measurements

 

The Company measures and records 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, referred to as Level 1, to quoted prices in active markets for identical assets and liabilities. The next priority, referred to as Level 2, is given to quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active; that is, markets in which there are few transactions for the asset or liability, or inputs other than quoted prices that are observable for the asset or liability. The lowest priority, referred to as Level 3, is given to unobservable inputs. The table below reflects the level of the inputs used in the Company’s fair value calculations:

 

    Quoted
Prices in
Active
Markets
(Level 1) 		  Significant
Observable
Inputs (Level 2) 		 

Significant

Unobservable
Inputs (Level 3) 

  

Total Fair 

Value
                 
December 31, 2017                                
Derivative liabilities - warrants   $ -     $ -     $ 79,286     $ 79,286  
Derivative liabilities – debt conversion feature   $ -     $ -     $ 16,500     $ 16,500  
                                 
December 31, 2016                                
Derivative liabilities - warrants   $ -     $ -     $ 91,173     $ 91,173  
Derivative liabilities – debt conversion feature   $ -     $ -     $ 40,000     $ 40,000  

 

Inputs used in the Company’s Level 3 calculation of fair value include the assumed dividend rate on the Company’s common stock, risk-free interest rates stock price volatility and the likelihood of a future equity financing transaction, all of which are further discussed in Note 7.

 

Carrying amounts of the Company’s cash and cash equivalents, accounts receivable, 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, based on Level 3 inputs, of the Company’s outstanding notes payable, including the related accrued interest, at December 31, 2017 and 2016:

 

        Estimated
    Carrying Value   Fair Value
December 31, 2017                
Senior secured note payable, including accrued interest   $ 2,028,111     $ 2,028,111  
2014 junior secured notes payable, including accrued interest   $ 1,942,195     $ 2,042,625  
2010 junior secured notes payable, including accrued interest   $ 1,796,042     $ 3,752,500  
                 
December 31, 2016                
Senior secured note payable, including accrued interest   $ 2,028,111     $ 2,028,111  
2014 junior secured notes payable, including accrued interest   $ 1,861,851     $ 2,042,625  
2010 junior secured notes payable, including accrued interest   $ 1,345,028     $ 2,789,257  
Inventory

Inventory

 

Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly 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.
Property and Equipment

Property and Equipment

 

Property and equipment, including ClearPoint capital equipment on loan to customers for evaluation purposes, 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 term of the related lease.
Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

 

The Company periodically 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, 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 were to exceed 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 for the years ended December 31, 2017 or 2016.
Revenue Recognition

Revenue Recognition

 

The Company’s revenues are comprised of: (1) product revenues resulting from the sale of functional neurological products, and drug delivery and biologic products; (2) product revenues resulting from the sale of ClearPoint capital equipment; and (3) revenues resulting from the rental, service, installation, training and shipping related to ClearPoint capital equipment. The Company recognizes revenue when persuasive evidence of an arrangement exists, the selling price or fee is fixed or determinable, collection is reasonably assured, and, for product revenues, 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. The Company analyzes revenue recognition on an individual agreement basis. The Company determines if the deliverables under the arrangement represent separate units of accounting as defined by GAAP. Application of GAAP regarding multiple-element arrangements requires the Company to make subjective judgments about the values of the individual elements and whether delivered elements are separable from the other aspects of the contractual relationship.

 

·        Sales of functional neurology products, and biologics and drug delivery systems products: Revenues from the sale of functional neurology products (consisting of disposable products sold commercially and related to cases utilizing our ClearPoint system), and biologics and drug delivery systems (consisting primarily of disposable products related to customer-sponsored clinical trials utilizing our ClearPoint system), are recognized at the time risk of loss passes to the customer, which is generally upon delivery to the customer’s location.

 

·        Sales of capital equipment: The predominance of capital equipment sales (consisting of integrated computer hardware and software that are integral components of the Company’s ClearPoint system) are preceded by customer evaluation periods of generally 90 days. During these evaluation periods, installation of, and training of customer personnel on, the systems have been completed and the systems have been in operation. Accordingly, capital equipment sales following such evaluation periods are recognized upon receipt of an executed purchase agreement or purchase order that provide for risk of loss to pass to the customer. Sales of capital equipment not having been preceded by an evaluation period are recognized on an individual agreement basis as described above.

 

·        Rental, service and other revenues: Revenues from rental of ClearPoint capital equipment are recognized over the term of the rental agreement, which is less than one year. Revenues from service of ClearPoint capital equipment previously sold to customers are based on agreements with terms ranging from one to three years. Typically, the Company bills and collects service fees at the inception of the agreement and recognizes revenue ratably over the term of the related service agreement. Other revenues consist primarily of installation, training and shipping fees in connection with sales of ClearPoint capital equipment and is recognized as the related services are performed.
Product Warranties

Product Warranties 

The Company’s standard policy is to warrant ClearPoint system capital equipment against defects in material or workmanship for one year following installation. The Company periodically reviews its estimate of costs to service warranty obligations based primarily on historical experience, which has been nominal. Such estimates are included in accrued liabilities in the accompanying consolidated balance sheets, and changes in such estimates are recorded as costs of product revenues in the accompanying consolidated statements of operations.
Research and Development Costs

Research and Development Costs

 

Costs related to research, design and development of products are charged to research and development expense as incurred.
Income Taxes

Income Taxes

 

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated 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 or loss 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. The Company provides a valuation allowance against net deferred income tax assets unless, based upon available evidence, it is more likely than not the deferred income tax assets will be realized. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties related to uncertain tax positions.
Net Loss Per Share

Net Loss Per Share

 

The Company computes net loss per share using the weighted-average number of common shares outstanding during the period. Basic and diluted net loss per share are the same because the conversion, exercise or issuance of all potential common stock equivalents, which comprise the entire amount of the Company’s outstanding common stock options and warrants as described in Note 6, would be anti-dilutive.
Share-Based Compensation

Share-Based Compensation

 

The Company accounts for compensation for all arrangements under which employees, directors and others receive shares of stock or other equity instruments (including options and warrants) based on fair value. The fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period. The fair values of the Company’s share-based awards are estimated on the grant dates using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected stock volatility, estimated award terms and risk-free interest rates for the expected terms. To estimate the expected terms, the Company utilizes the “simplified” method for “plain vanilla” options discussed in the Staff Accounting Bulletin 107 (“SAB 107”) issued by the Securities and Exchange Commission (the “SEC”). The Company believes that all factors listed within SAB 107 as pre-requisites for utilizing the simplified method apply to the Company and its 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 based its estimate of expected volatility on the average of: (i) historical volatilities of publicly traded companies it deemed similar to the Company; and (ii) the Company’s historical volatility, which is limited, and will consistently apply this methodology until its own sufficient relevant historical data is exists. The Company utilizes risk-free interest rates based on zero-coupon U.S. treasury instruments, the terms of which are consistent with the expected terms of the equity awards. 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 Share-Based Transactions

Fair Value Determination of Share-Based Transactions

 

The Company’s common stock is traded in the over-the-counter market and is quoted on the OTCQB Marketplace and the OTC Bulletin Board under the symbol “MRIC.” Quoted closing stock prices are used as a key input in determining the fair value for share-based transactions.
Concentration Risks and Other Risks and Uncertainties

Concentration Risks 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 U.S. insured by the Federal Deposit Insurance Corporation. At December 31, 2017, the Company had approximately $103,559 in bank balances that were in excess of the insured limits.

 

For the year ended December 31, 2017, sales to no customers represented in excess of 10% of the Company’s product revenues. For the year ended December 31, 2016, sales to one customer represented 10% of the Company’s product revenues.

 

Information with respect to accounts receivable from those customers who comprised more than 10% of accounts receivable at December 31, 2017 and 2016 is as follows:

 

    December 31,
    2017   2016
Customer – 1     10%     20%
Customer – 2     -     13%
Customer – 3     -     10%

 

Prior to granting credit, the Company performs credit evaluations of its customers’ financial condition, and generally does not require collateral from its customers. The Company will provide an allowance for doubtful accounts when collections become doubtful. The allowance for doubtful accounts at December 31, 2017 and 2016 was $29,000 and $25,000, respectively.

 

The Company is subject to risks common to emerging companies in the medical device industry, including, but not limited to: new technological innovations; acceptance and competitiveness of its products; 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; uncertainty of widespread market acceptance of products; access to credit for capital purchases by customers; and product liability claims. 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.

 
Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-14 as an amendment to ASU 2014-09, “Revenue from Contracts with Customers,” which created a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard, and ASUs 2016-10, 2016-12, 2016-20 and 2017-13 discussed below, are effective for the Company beginning in 2018.

 

· In April 2016, the FASB issued ASU 2016-10, “Revenues from Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarified guidance related to identifying performance obligations and licensing implementation guidance contained in ASC Topic 606 as promulgated by ASU 2015-14 discussed above.

 

· In May 2016, the FASB issued ASU 2016-12, “Revenues from Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which address narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.

 

· In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts With Customers,” which provided for minor corrections and minor improvements to previously issued Topic 606 guidance.

 

· In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842),” which added and deleted paragraphs pursuant to SEC Staff Announcements and SEC Observer Comments.

· In November 2017, the FASB issued ASU 2017-14, “Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606),” which amends SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403, which bring existing guidance into conformity with Topic 606

 

The Company has assessed the potential impact of the provisions ASU 2015-14 and the subsequently issued related ASUs discussed above (collectively, “Topic 606”) on its consolidated financial statements. In its assessment, the Company has considered such factors as the following:

 

· Economic factors:

 

o The Company’s revenues are comprised of the product and service lines described below. With respect to each of these product and service lines:

 

§ The Company’s customers are predominantly large, well-known hospitals. Accounts receivable are due in a range of 30-60 days from the date of product delivery. The Company establishes an allowance for doubtful accounts, which historically has not been material.

 

§ Due to the short-term nature of the Company’s performance obligations, the Company has no remaining post-transaction performance obligations.

 

o Based on the foregoing, the Company has concluded that the nature, amount and certainty of revenue recognition for each of the product and service lines described below are not affected by economic factors.

 

· Sales of functional neurology products, and biologics and drug delivery systems products: Revenues are recognized generally upon delivery to the customer’s location, consistent with the Topic 606 criterion related to the point in time at which the customer obtains control of the product.

 

· Sales of capital equipment: As discussed above, under the heading “Revenue Recognition,” the predominance of capital equipment sales is preceded by customer evaluation periods of generally 90 days. During these evaluation periods, installation of, and training of customer personnel on, the systems have been completed (recognition of revenue from such installation and training is discussed below) and the systems have been in operation. Accordingly, capital equipment sales following such evaluation periods are recognized upon receipt of an executed purchase agreement or purchase order that provide for risk of loss to pass to the customer. Sales of capital equipment not having been preceded by an evaluation period are generally recognized upon delivery to the customer’s location, consistent with the Topic 606 criterion related to the point in time at which the customer obtains control of the product.

 

· Rental, service and other revenues:

 

o Revenues from rental of capital equipment are recognized over the term of the rental agreement, which is less than one year, and which is consistent with the Topic 606 criterion of recognizing revenue for such contracts on a straight-line basis.

 

o Revenues from service of capital equipment previously sold to customers are based on agreements with terms ranging from one to three years. The Company’s performance obligations with respect to such service agreements consists predominantly of being available to service the equipment and the Company’s historical cost of performing service on capital equipment has been nominal. Typically, the Company bills and collects service fees at the inception of the agreement and recognizes revenue ratably over the term of the related service agreement, which the Company believes is consistent with the Topic 606 criterion of recognizing revenue for such contracts on a straight-line basis.

 

o Other revenues consist primarily of installation, training and shipping fees in connection with sales of capital equipment. Such fees are recognized as revenue at the point in time at which the related sale of the capital equipment is recognized, as discussed above, which the Company has concluded is consistent with the Topic 606 criterion related to the satisfaction of performance obligations.

 

Based on the foregoing assessment, the Company concluded that adoption of Topic 606 will not have a material effect on its consolidated financial statements. The Company adopted the provisions of Topic 606 on January 1, 2018 under the modified retrospective method permitted by such provisions.

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” which created a new Topic, ASC Topic 842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments, that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This standard is effective for the Company beginning in 2019, and early application is permitted. The Company currently has two leases for manufacturing and office space that would be subject to the provisions of ASU 2016-02. The Company believes that adoption of ASC Topic 842 (as amended by ASC 2017-13 described above) will result in the establishment on the Company’s consolidated balance sheet of an asset and liability for each such lease, but that neither such assets and liabilities nor the resulting lease expense recognition will have a material effect on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. The standard is effective for the Company beginning in 2018, and early adoption is permitted. The Company believes that adoption of ASU 2016-15 will not have a material effect on its consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies and reduces both (i) diversity in practice and (ii) cost and complexity when a company changes the terms or conditions of a share-based payment award. The standard is effective for the Company beginning in 2018, and early adoption is permitted. The Company believes that adoption of ASU 2017-09 will not have a material effect on its consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” which, among other items, changes the classification of certain equity-linked financial instruments (or embedded features) with down round features. The standard is effective for the Company beginning in 2019, and early adoption is permitted. Because the terms of the Company’s currently existing derivative liabilities described in Note 7, all of which the Company believes are included in the scope of the standard, will have expired prior to the standard’s effective date, the Company believes that adoption of the standard on its effective date will not have a material effect on the Company’s consolidated financial statements.
2016 Fourth Quarter Adjustment

2016 Fourth Quarter Adjustment

 

In August 2016, the Company elected to suspend its efforts to sell equity units through a public offering then underway, and instead commenced a private placement of equity units through the 2016 PIPE (see Note 6). Upon suspension of its public offering efforts, the Company capitalized certain related legal and other costs, amounting to $459,000, in anticipation of resuming public offering efforts within an estimated six-month time frame. In December 2016, the Company determined that a future public offering it might consider was not likely to be commenced within this six-month time frame, and accordingly, in the fourth quarter of 2016, the Company recorded a charge of $459,000 to general and administrative expense.