Revenue Recognition The Companys revenues are comprised primarily of: (1) product revenues resulting from the sale of functional neurosurgical products, and drug delivery and biologic products; (2) product revenues resulting from the sale of ClearPoint capital equipment; (3) functional neurosurgery and related service revenues resulting from the performance of product line commercialization planning and execution for a third party; (4) clinical case support revenues in connection with customer-sponsored clinical trials; and (5) revenues resulting from the rental, service, installation, training and shipping related to ClearPoint capital equipment. The Company recognizes revenue when control of the Companys 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 neurosurgery product, and biologics and drug delivery systems product sales : Revenues from the sale of functional neurosurgery products (consisting of disposable products sold commercially and related to cases utilizing the Companys 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 generally recognized at the point at which legal title, and risks and rewards of ownership, along with physical possession, transfer to the customer. ? Capital equipment sales ? 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 Companys 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. ? 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 Companys 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. ? Functional neurosurgery and related services: Revenues from functional neurosurgery and related services are recognized over the period of time such services are rendered. ? Biologics and drug delivery services: ? 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 customers outsourced clinical support services coordinator. ? Outsourced technical clinical support of cases performed pursuant to customer-sponsored clinical trials: The Company recognizes revenue at the point in time a clinical trial case is performed based on the allocated per-case transaction price. ? Other related services: The Company recognizes revenue for such services at the point in time that the performance obligation has been satisfied. ? Capital equipment-related services ? 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. ? Installation, training and shipping: Consistent with the Companys 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. 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 Companys invoices. The Company provides a one-year warranty on its functional neurosurgery products, biologics and drug delivery systems products, and capital equipment products that are not otherwise covered by a third-party manufacturers warranty. The Companys contracts with customers do not provide for a right of return other than for product defects. See Note 3 for additional information regarding revenue recognition.