Quarterly report pursuant to Section 13 or 15(d)

Basis of Presentation and Summary of Significant Accounting Policies (Policies)

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Basis of Presentation and Summary of Significant Accounting Policies (Policies)
6 Months Ended
Jun. 30, 2018
Accounting Policies [Abstract]  
Basis of Presentation and Use of Estimates

Basis of Presentation and Use of Estimates

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with the Company’s December 31, 2017 audited consolidated financial statements, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth therein. These condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) Securities and Exchange Commission (“SEC”) rules for interim financial information, and, therefore, omit certain information and footnote disclosures necessary to present such statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. These condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on March 21, 2018 (the “2017 Form 10-K”). The accompanying unaudited condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by GAAP for a complete set of financial statements. The results of operations for the three and six months ended June 30, 2018 may not be indicative of the results to be expected for the entire year or any future periods. 

Derivative Liabilities

Derivative Liabilities

 

Derivative liabilities represent the fair value of a conversion feature of a note payable 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 condensed 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
 
                           
June 30, 2018                          
Derivative liabilities - warrants   $ -   $ -   $ 8,795   $ 8,795  
Derivative liabilities – debt conversion feature   $ -   $ -   $ 13,500   $ 13,500  
December 31, 2017                          
Derivative liabilities - warrants   $ -   $ -   $ 79,286   $ 79,286  
Derivative liabilities – debt conversion feature   $ -   $ -   $ 16,500   $ 16,500  

 

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 June 30, 2018 and December 31, 2017:

 

    Carrying Values   Estimated
Fair Values
 
June 30, 2018              
Senior secured note payable, including accrued interest   $  2,027,806   $  2,027,806  
2014 junior secured notes payable, including accrued interest   $  1,982,367   $  2,042,625  
2010 junior secured notes payable, including accrued interest   $  2,081,228   $  3,805,000  
               
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  
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 related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying condensed consolidated balance sheets. All other software license inventory 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 / Recently Adopted Accounting Pronouncement

Revenue Recognition / Recently Adopted Accounting Pronouncement 

 

Effective January 1, 2018, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which, with subsequent amendments thereto, created a new Topic 606 within the Accounting Standards Codification (“ASC”). Topic 606 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. Prior to adoption, the Company assessed the impact of Topic 606 and determined that adoption would not have a material effect on its consolidated financial statements. The Company adopted Topic 606 in conformity with its provisions on January 1, 2018 under the modified retrospective method. 

 

The Company’s revenues are comprised primarily 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; (3) revenues resulting from the rental, service, installation, training and shipping related to ClearPoint capital equipment; and (4) clinical case support revenues in connection with customer-sponsored clinical trials. The Company recognizes revenue when control of the Company’s products and services is transferred to its customers in an amount that reflects the consideration the Company expects to receive from its customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once it has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when it determines there are no uncertainties regarding payment terms or transfer of control. 

 

Lines of Business; Timing of Revenue Recognition 

 

  Functional neurology product, and biologics and drug delivery systems product sales: Revenues from the sale of functional neurology products (consisting of disposable products sold commercially and related to cases utilizing the Company’s ClearPoint system), and biologics and drug delivery systems (consisting primarily of disposable products related to customer-sponsored clinical trials utilizing the ClearPoint system), are generally based on customer purchase orders, the predominance of which require delivery within one week of the order having been placed, and are recognized at the point in time of delivery to the customer, which is the point at which legal title, and risks and rewards of ownership, along with physical possession, transfer to the customer.

  

  Capital equipment sales

 

  o Capital equipment sales preceded by evaluation periods: 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, revenue from capital equipment sales following such evaluation periods is recognized at the point in time the Company is in receipt of an executed purchase agreement or purchase order.

 

  o Capital equipment sales not preceded by evaluation periods: Revenue from sales of capital equipment not having been preceded by an evaluation period is recognized at the point in time that the equipment has been delivered to the customer.

 

For both types of capital equipment sales described above, the Company’s determination of the point in time at which to recognize revenue represents that point at which the customer has legal title, physical possession, and the risks and rewards of ownership, and the Company has a present right to payment. 

 

  Capital equipment-related services

 

  o Rental and equipment service: Revenue from rental of ClearPoint capital equipment is recognized ratably on a monthly basis over the term of the rental agreement, which is less than one year. Revenue from service of ClearPoint capital equipment previously sold to customers is based on agreements with terms ranging from one to three years and revenue is recognized ratably on a monthly basis over the term of the service agreement. A time-elapsed output method is used for rental and service revenues because the Company transfers control evenly by providing a stand-ready service.

 

  o Installation, training and shipping: Consistent with the Company’s recognition of revenue for capital equipment sales as described above, fees for installation, training and shipping fees in connection with sales of capital equipment that have been preceded by customer evaluation periods are recognized as revenue at the point in time the Company is in receipt of an executed purchase order for the equipment. Installation, training and shipping fees related to capital equipment sales not having been preceded by an evaluation period are recognized as revenue at the point in time that the related services are performed.

 

  Biologics and drug delivery services:

  

  o Outsourced recruitment and/or designation of a clinical services liaison between Company and its customer: The Company recognizes revenue at the point in time that the liaison is either recruited or designated, which is the point at which the customer is able to direct, and obtain benefit from, use of the liaison. The Company made this determination based on the decision made by the customer to outsource this function to the Company, rather than to incur its own recruiting costs. Upon such recruitment or designation, the liaison becomes the customer’s outsourced clinical support services coordinator.

  

  o Outsourced technical clinical support of cases performed pursuant to customer-sponsored clinical trials: The Company recognizes revenue at the point in time each clinical trial case is performed based on the allocated per-case transaction price.

  

  o Other related services: The Company recognizes revenue for such services at the point in time that the performance obligation has been satisfied.

  

The Company operates in one industry segment, and substantially all its sales are to U.S.-based customers.

 

Payment terms under contracts with customers generally are in a range of 30-60 days after the customers’ receipt of the Company’s invoices. 

 

The Company provides a one-year warranty on its functional neurology products, biologics and drug delivery systems products, and capital equipment products that are not otherwise covered by a third-party manufacturer’s warranty. The Company’s contracts with customers do not provide for a right of return other than for product defects. 

 

Other Judgments and Estimates – Transaction price 

 

Substantially all the Company’s contracts with customers are based on customer-issued purchase orders for distinct products or services. For these contracts, the transaction price is determined upon establishment of the contract that contains the final terms of the sale. 

 

One of the Company’s contracts bundles performance obligations that include biologics and drug delivery system products, capital equipment products and clinical support services, for which the Company estimates the transaction price by allocating among the performance obligations reductions to revenue for discounts given on certain elements with the bundle. 

 

See Note 3 for additional information regarding revenue recognition.

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.

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 June 30, 2018, the Company had $150,487 in bank balances that were in excess of the insured limits.

 

Information with respect to customers that accounted for sales in excess of 10% of total sales in the three-month periods ended June 30, 2018 and 2017 is as follows:

 

  Three Months Ended June 30,
  2018   2017
Customer – 1 10%   11%
Customer – 2 10%   -

 

No customers accounted for sales in excess of 10% of total sales in either of the six-month periods ended June 30, 2018 and 2017.

 

Information with respect to accounts receivable from those customers who comprised more than 10% of accounts receivable at June 30, 2018 and December 31, 2017 is as follows:

 

  June 30, 2018   December 31, 2017
Customer – 1 18%   10%
Customer – 2 14%   -

 

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 June 30, 2018 and December 31, 2017 was $24,000 and $29,000, 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 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), 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 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.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718),” which expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The standard is effective for the Company beginning in 2019, and early adoption is permitted. The Company believes that adoption of the standard will not have a material effect on the Company’s consolidated financial statements.