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Note 2 - Summary of Significant Accounting Policies
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Sep. 30, 2012
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| Significant Accounting Policies [Text Block] |
2.
Summary
of Significant Accounting Policies
Fair
Value Measurements
The
Company measures 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 to quoted prices in active markets for identical
assets and liabilities (“Level 1”) and the lowest
priority to unobservable inputs (“Level
3”).
Carrying
amounts of the Company’s cash and cash equivalents,
accounts receivable and 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 of the Company’s outstanding notes payable
at September 30, 2012:
The
difference between the carrying value of the related party
BSC convertible notes payable, which is equal to the face
value due to troubled debt restructuring accounting (see Note
6), and the estimated fair value is attributable to the fact
that no interest is charged per the terms of the convertible
notes payable, which is below market. The
difference between the carrying value and the fair value of
the junior secured notes payable relates to an unamortized
debt discount. This discount resulted from the
relative fair value assigned to the junior secured notes
payable at the time of issuance, as the notes were issued in
connection with a unit offering, with the units consisting of
a note payable and shares of the Company’s common
stock.
See
Note 6 for fair value information related to the
Company’s derivative liability.
Inventory
Inventory
is carried at the lower of cost (first-in, first-out
(“FIFO”) method) or net realizable value. All
items included in inventory relate 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.
Revenue
Recognition
The
Company’s revenues arise from: (1) sales of ClearPoint
system reusable components, including associated installation
services; (2) sales of ClearPoint disposable products; and
(3) license and development arrangements. The Company
recognizes revenue, in accordance with Accounting Standards
Codification (“ASC”) 605-10-S99, Revenue
Recognition, when persuasive evidence of an arrangement
exists, the fee is fixed or determinable, collection of the
fee is probable and risk of loss has transferred to the
customer. For all product sales, the Company requires either
a purchase agreement or a purchase order as evidence of an
arrangement.
(1)
Sales of
ClearPoint system reusable components - When selling
directly to end customers, revenues related to sales of
ClearPoint system reusable components are recognized upon
installation of the system and the completion of training of
at least one of the customer’s physicians, which
typically occurs concurrently with the system installation.
When selling to a distributor, revenues related to sales of
ClearPoint system reusable components are recognized at the
time risk of loss passes. ClearPoint system reusable
components include software. This software is incidental to
the utility of the ClearPoint system as a whole, and as such,
the provisions of ASC 985-605, Software Revenue Recognition,
are not applicable. ClearPoint system reusable component
sales were approximately $118,000 and $435,000 during the
nine months ended September 30, 2012 and 2011,
respectively.
(2)
Sales of
ClearPoint disposable products - Revenues
from the sale of ClearPoint disposable products utilized in
procedures performed using the ClearPoint system are
recognized at the time risk of loss passes, which is
generally at shipping point or delivery to the
customer’s location, based on the specific terms with
that customer.
(3)
License and
development arrangements - The Company analyzes
revenue recognition on an agreement by agreement basis as
discussed below.
This
agreement requires the achievement of specified milestones in
the development of an MRI-safe implantable lead by December
31, 2012. If the milestones are not achieved by that date and
this failure is not the result of BSC Neuro’s failure
to reasonably cooperate with the Company in pursuing the
milestones, the Company will be required to repay BSC Neuro
certain amounts, including any development expenses and
milestone payments previously made to the Company under this
agreement and any patent prosecution costs incurred by BSC
Neuro with respect to the intellectual property licensed
under this agreement. The existence of this provision
indicates the sales price is not fixed or determinable and
all monies which have been or will be received prior to
December 31, 2012 have and will be deferred until such time.
If the repayment obligations are not triggered as of December
31, 2012, the related party deferred revenue related to this
agreement will be recognized over the estimated period of
continuing involvement. If the repayment obligations are
triggered as of December 31, 2012, the related party deferred
revenue related to this contract will be repaid to BSC
Neuro.
The
agreement includes research and development service
performance requirements. The Company has recorded deferred
research and development services revenue along with the
related costs (charged to expense) on a gross basis since the
Company is obligated and bears all credit risk with respect
to the cost of providing the services.
Future
product royalty income related to the agreement will be
recognized as the related products are sold and amounts are
due to the Company.
The
Company defers recognition of non-refundable upfront license
fees if there are continuing performance obligations without
which the technology, know-how, rights, products or services
conveyed in conjunction with the non-refundable fees have no
utility to the licensee that could be considered separate and
independent of the Company’s performance under other
elements of the arrangement. Since the Company has continuing
involvement through research and development services that is
required because the Company’s know-how and expertise
related to the technology are proprietary to the Company,
such upfront fees are deferred and recognized over the
estimated period of continuing involvement on a straight-line
basis.
Amounts
to be received related to substantive, performance-based
milestones in research and development arrangements will be
recognized upon receipt. Future product royalty income
related to the agreement will be recognized as the related
products are sold and amounts are due to the Company.
Net
Loss Per Share
The
Company calculates net loss per share in accordance with ASC
260, Earnings per Share. Basic earnings per share
(“EPS”) is calculated by dividing the net income
or loss attributable to common stockholders by the
weighted average number of common shares outstanding for the
period, without consideration for common stock equivalents.
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of common shares outstanding for the period plus the
weighted average number of dilutive common stock equivalents
outstanding for the period determined using the treasury
stock method. For all periods presented, diluted net loss per
share is the same as basic net loss per share. The following
table sets forth potential shares of common stock that are
not included in the calculation of diluted net
loss per share because to do so would be anti-dilutive as of
the end of each period presented:
Share-Based
Compensation
The
Company accounts for compensation for all arrangements under
which employees and others receive shares of stock or other
equity instruments (including options and warrants) in
accordance with ASC 718, Compensation – Stock
Compensation. Under ASC 718, the fair value of each award is
estimated and amortized as compensation expense over the
requisite service period. The fair value of the
Company’s share-based options and warrants is estimated
on the grant date using the Black-Scholes valuation model.
This valuation model requires the input of highly subjective
assumptions, including the expected stock volatility,
estimated option term and risk-free interest rate during the
expected term. To estimate the expected term, the Company
utilizes the “simplified” method for “plain
vanilla” options as discussed within the SEC’s
Staff Accounting Bulletin 107 (“SAB 107”). The
Company believes that all factors listed within SAB 107 as
pre-requisites for utilizing the simplified method are true
for the Company and for the Company’s 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 utilizes risk-free interest rates based on a
zero-coupon U.S. treasury instrument, the term of which is
consistent with the expected term of the stock options. 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 Privately-Held Equity
Securities
Determining
the fair value of privately held stock requires making
complex and subjective judgments. Prior to the time the
Company’s common stock was publicly traded, the Company
used the income approach, the market approach, and the
probability weighted expected return method to estimate the
value of the enterprise for the dates on which securities
were issued/granted and outstanding. The income approach was
based on estimated future cash flows that utilized the
Company’s forecasts of revenue and costs. The
assumptions underlying the revenue and cost estimates were
consistent with the Company’s business plan. The market
approach was based on recent sales of the Company’s
common stock in privately negotiated transactions between
stockholders, the once anticipated initial public offering
(“IPO”) price of the Company’s common
stock, or conversion terms negotiated with holders of
convertible securities issued by the Company. When the
Company began the process of preparing for its IPO, it began
to utilize the probability weighted expected return method,
which was based on identifying the most likely liquidity
events for the Company, the probability of each occurring,
and the equity values for each after applying different
percentages to the likelihood of the different values
assigned to each anticipated outcome of those events. Once
the Company’s planned IPO was withdrawn in the third
quarter of 2010, the Company reverted to using the income and
market approaches previously discussed. The assumptions used
in each of the different valuation methods take into account
certain discounts such as selecting the appropriate discount
rate and control and lack of marketability discounts. The
discount rates used in these valuations ranged from 22% to
35%. The discounts for lack of marketability ranged from 15%
to 35% and the discount for lack of control ranged from 20%
to 30%. If different discount rates or lack of marketability
and control discounts had been used, the valuations would
have been different. The enterprise value under each
valuation method was allocated to preferred and common shares
taking into account the enterprise value available to all
stockholders and allocating that value among the various
classes of stock based on the rights, privileges, and
preferences of the respective classes in order to provide an
estimate of the fair value of a share of the Company’s
common stock. There is inherent uncertainty in these
estimates.
Since
May 21, 2012, the Company’s common stock has been
traded in the over-the-counter market and has been quoted on
the OTC Bulletin Board under the symbol
MRIC. Prior to the time the Company’s stock
was publicly traded, the fair value of the Company’s
common stock, as well as the common stock underlying options
and warrants, granted as compensation, or issued in
connection with the settlement of liabilities (“stock
based transactions”), were estimated by management,
with input from a third-party valuation specialist from time
to time. The Company intends to include the prices of public
trading of its common stock as a key input going forward in
determining fair value for stock based transactions.
New
Accounting Pronouncements
In
June 2011, the Financial Accounting Standards Board
(“FASB”) issued new accounting guidance related
to the presentation of comprehensive income that increases
comparability between GAAP and International Financial
Reporting Standards (“IFRS”). This guidance
requires companies to present the components of net income
and other comprehensive income either as one continuous
statement or as two consecutive statements, eliminating the
option to present components of other comprehensive income as
part of the statement of changes in stockholders’
equity. Public entities are required to apply this guidance
for fiscal years and interim periods within those years,
beginning after December 15, 2011. The Company adopted this
guidance during the nine months ended September 30, 2012, and
the adoption of this guidance had no impact on the
Company’s results of operations or financial position
and is not expected to have an impact on the Company’s
future results of operations or financial position.
In
May 2011, the FASB issued guidance to provide a consistent
definition of fair value and ensure that the fair value
measurement and disclosure requirements are similar between
GAAP and International Financial Reporting Standards. This
update changes certain fair value measurement principles and
enhances the disclosure requirements particularly for Level 3
fair value measurements. This guidance was effective for
annual periods beginning after December 15, 2011 (the 2012
fiscal year) and should be applied prospectively. As this
guidance was only disclosure related, it did not have any
effect on the carrying value of the assets or liabilities on
the balance sheet as of September 30, 2012.
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