Clearpoint Neuro Inc (CLPT) 2015 Q2 法說會逐字稿

Greetings and welcome to the MRI Interventions, Inc. second-quarter 2015 financial results conference call. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for today, Mr. Frank Grillo, Chief Executive Officer. Mr. Grillo, the floor is yours, sir.

Thank you. Good afternoon, everyone, and thank you for joining us for our 2015 Q2 earnings call. On behalf of the management team and employees of MRI Interventions, we appreciate your interest in our Company. And for those of you who are shareholders, thank you for your support. We are honored to be working for you and building this great Company, and we are proud of the care patients are receiving as result of the continued adoption of our products and technology.

With me for today's call is Hal Hurwitz, our CFO. As most of you know we transitioned the corporate functions from our Memphis, Tennessee, office to our Irvine, California, headquarters. As part of this transition, Hal joined us at the end of Q1 as VP of Finance and completed the planned transition to CFO in May.

To open this call, let me start by saying we are very pleased with the progress we are making. While our revenues came in a little light this quarter due to late shipments in a capital order that came in a few days after the end of Q2, we continue to see encouraging progress in marketplace adoption of our technology.

Let me turn the call over to Hal for a review of our first-quarter and six-month financial results, and then I will provide further context regarding our progress. Hal?

Thanks, Frank. Before we begin, however, I want to point out that the comments made on this call may include statements that are forward-looking within the meaning of securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends; the Company's plans, prospects, and strategies, both preliminary and projected; and management's expectations, beliefs, estimates, or projections regarding future results of operation. Actual results or trends could differ materially.

We undertake no obligation to revise forward-looking statements in light of new information or future events. For more information, please refer to the risk factors discussed in our Form 10-K for the year ended December 31, 2014, and the Form 10-Q for the quarter ended March 31, 2015 -- both of which have been filed with the SEC -- as well as the Form 10-Q for the quarter ended June 30, 2015, that we will be filing with the SEC in August 2015. All our filings can be obtained from the SEC or by visiting our website at www.mriinterventions.com.

Now let's cover the three-month period ended June 30, 2015. Revenues were $826,000 for the three months ended June 30, 2015, and $1.2 million for the same period in 2014, a decrease of $363,000 or 31%, attributable primarily to periodic fluctuations in sales of our ClearPoint system reusable products. ClearPoint reusable product sales for the three months ended June 30, 2015, where $93,000 compared to a $389,000 of such sales for the same period in 2014, representing a decrease of $296,000 or 76%. Sales of our receivable products, which consist primarily of computer hardware and software bearing sales prices that are appreciably higher than those for disposable products, historically have fluctuated from quarter to quarter.

ClearPoint disposable product sales for the three months ended June 30, 2015, were $654,000 compared with $760,000 for the same period in 2014, representing a decrease of $106,000 or 14%. This decrease was due primarily to adverse weather conditions on June 30, 2015, that prevented delivery of our products with an aggregate sales value of approximately $80,000 to customers who require FOB Destination delivery terms. Accordingly, we were precluded by US generally accepted accounting principles from recognizing revenue on these shipments in the quarter ended June 30, 2015.

Gross margin on product revenues was 51% for both three-month periods ended June 30, 2015, and 2014. Research and development costs were $427,000 for the three months ended June 30, 2015, compared to $898,000 for the same period last year, a decrease of $471,000 or 52%.

Approximately $181,000 of the decrease related to a reduction in spending on our ClearTrace development program, and $72,000 related to reductions in sponsored research. Commensurate with these decreases, materials and supplies decreased $87,000 and compensation decreased $27,000 during the three months ended June 30, 2015, as compared with the corresponding period in 2014.

Selling, general, and administrative expenses were $2.2 million for the three months ended June 30, 2015, compared with $1.9 million for the same period last year, an increase of $258,000 or 13%. The increase was primarily attributable to increases in compensation and related expenses resulting from growth in our commercial team.

In closing our Memphis, Tennessee, office in May 2015, we did not retain any of our seven Memphis-based employees, including three executives whose termination of employment triggered a modification in the terms of stock options previously granted to them. As a result of these modifications of option terms, as required by US GAAP, we revalued such options and recorded the related one-time restructuring cost of $493,000. During the three months ended June 30, 2015, we recorded a loss of $186,000 and during the three months ended June 30, 2014, a gain of $876,000 from changes in the fair value of derivative liabilities associated with certain warrants we issued in equity private placement transactions.

Now let's turn our attention to the six months ended June 30, 2015. Revenues were $1.8 million for the six months ended June 30, 2015, and $2 million for the same period in 2014, a decrease of $175,000 or 9%, attributable primarily to periodic fluctuations in sales of our ClearPoint system reusable products.

ClearPoint reusable product sales for the six months ended June 30, 2015, were $262,000 compared with $481,000 for the same period in 2014, representing a decrease of $219,000 or 46%. As I previously mentioned, sales of our reusable products consist primarily of computer hardware and software, bearing sales prices that are appreciably higher than those for disposable products and have historically fluctuated from period to period.

ClearPoint disposable product sales for the six months ended June 30, 2015, were $1.4 million compared with $1.2 million for the same period in 2014, representing an increase of $192,000 or 15%. This increase is due primarily to the use of ClearPoint disposable products in a greater number of procedures during the six months ended June 30, 2015, relative to the same period in 2014.

Gross margin on product revenues for the six months ended June 30, 2015, was 57% compared to gross margin of 51% for the corresponding period in 2014. The improvement in gross margin is primarily attributable to a more favorable product mix in the 2015 period relative to the same period in 2014.

Research and development costs were $954,000 for the six months ended June 30, 2015, compared to $1.7 million for the same period in 2014, a decrease of $762,000 or 44%. Approximately $361,000 of the decrease related to a reduction in spending on our ClearTrace development program, and $139,000 related to reductions in sponsored research. Commensurate with these decreases, materials and supplies decreased $79,000 and compensation decreased $20,000 during the six months ended June 30, 2015, as compared to the same period in 2014.

Selling, general, and administrative expenses were $4.5 million for the six months ended June 30, 2015, compared with $3.7 million for the same period last year, an increase of $746,000 or 20%. The increase was primarily attributable to an increase during the six months ended June 30, 2015, in cash compensation costs of approximately $390,000, a portion of which was associated with overlapping executives' terms of employment so as to provide for a coordinated transition of duties during the period in which we, as previously discussed, consolidated our business functions into our Irvine, California, headquarters and closed our executive offices in Memphis, Tennessee. Also contributing to the increase was an increase in share-based compensation of $284,000.

In connection with the consolidation of our offices and the termination of our Memphis-based employees and executives, restructuring charges of $1.3 million, including $493,000 in non-cash charges related to the modification of option terms I mentioned earlier, were recorded during the six months ended June 30, 2015. During the six months ended June 30, 2015, we recorded a loss of $969,000. And during the six months ended June 30, 2014 we recorded a gain of $1.4 million -- in each case resulting from changes in the fair value of derivative liabilities associated with certain warrants we issued in the equity private placement transactions.

With that, I will now turn the call back to Frank.

All right. Thank you, Hal. Good summary of the numbers there.

So as I stated earlier, we are pleased with the progress we are making to position our Company for future growth. Revenue came in at $826,000 in the second quarter here, which was a little lower than anticipated. We had some shipping delays due to storms in the Midwest at the very end of the quarter, as well as a capital sale that we expected in Q2 but actually landed in the first couple of days of Q3. Taking these into account, we would have been over $1 million again this quarter and higher than Q1 of this year.

Disposable sales are down somewhat compared to Q2, although I would assign this more to stocking levels and the late shipments I mentioned than any long-term change in the use of our product. We had one capital sale in the first quarter and two additional new accounts sign up to evaluate ClearPoint. Including these newest accounts, we now have 39 US accounts with ClearPoint. This number is net of four sites of the where we ended the evaluations that were exceeding 90 days without a capital purchase. And in particular, I do have the goal of ensuring that our sites are active and using our technology. Regardless, strong interest from additional new customers continues, and we expect Q3 to be a stronger quarter for us in terms of evaluations, capital sales, and growth in our overall revenue.

All right. Let me update you on procedure progress, which -- procedures continued to go very well this quarter. Our mix is about two-thirds DBS, and with a quarter of our procedures now for laser ablation, with biopsy and drug delivery taking up the rest of the numbers.

This is the highest proportion of laser ablation procedures we have seen. Our value proposition in laser is strong, based upon the accuracy and real-time visualization of the placement of the laser fiber that is possible with our ClearPoint system. In addition, by enabling the entire procedure to be done in the MRI suite, which therefore eliminates transporting a patient through the hospital hallways from the operating room to the MRI suite with an open hole in his or her head, we believe ClearPoint is the ideal navigation system for laser ablation.

In DBS our procedures are going very smoothly, and word is getting out about this technique. A great article was released in the press in Northern New Jersey regarding the use of ClearPoint for electrode placement for DBS. The article describes the patient's remarkable experience and beginning of his lifestyle. We believe that without ClearPoint, the procedure might've been too traumatic for this patient -- while with it, he was able to undergo the procedure and receive the benefits of DBS. Dr. Azmi and Dr. Gupta, who are featured in the article, are great champions for our technology and the improved patient experience it enables. This is the type of story we hear repeatedly, and it clearly shows the value of ClearPoint.

In drug delivery we saw a very interesting paper published in the Journal of Neurosurgery this quarter by Dr. Russ Lonser, Chair of Neurological Surgery at Ohio State. In the paper Dr. Lonser analyzed the technique and accuracy of placing drug delivery catheters in three different patients. Encouragingly, the paper stated -- and I quote -- real-time iMRI-based targeting and monitoring of infusion cannula placement is a safe, effective, and accurate technique that should enable more selective perfusion of brain regions.

The key words here are selective perfusion -- that is a good description of delivering the right dose of drug to the right target in the brain. We view this paper as further validation of our value proposition in drug delivery; additional validation of our ability to reach sub-millimetric targets in the brain; and we are encouraged by the growing number of publications regarding use of our technology, quote, in drug delivery and in a variety of other procedures as well.

During this quarter we had one of our two biggest tradeshows of the year, the American Association of Neurological Surgeons. We supported several events at this meeting, the highlight of which was a luncheon we cosponsored with two other companies focused on the intraoperative guidance and laser ablation. Over 100 attendees heard lectures regarding the use of real-time MRI for a variety of neurological procedures.

This quarter, in Q3 in September, we will attend the Congress of Neurological Surgeons and cohost a similar session with Medtronic entitled The Emergence of Real-time Imaging in Neurosurgery: How MRI-guided Navigation and Laser Ablation Are Increasing Minimally-invasive Surgical Options. We are looking forward to reviewing our technology and value proposition at this session, and we expect an even stronger turnout.

To support our cases, we are expanding our commercial team by having added two clinical specialists in Q2 and another one coming on board next week. As I've stated before, our clinical specialists are in almost every case and are deeply knowledgeable in the use of our products. We will continue to add to the commercial team as our procedures grow and ensure each one of them has appropriate training.

On the cost side of the business, we've done a lot in the last two quarters. We have completed the consolidation of our Memphis facility into Irvine, California. This is a major focus for our cost reduction efforts. All of the charges and payments associated with the consolidation are now behind us, and I expect our net cash burn will be significantly reduced in the next quarter and continue to decline from there.

So in summary, we are pleased with the progress we made this quarter on focusing on our near-term opportunities and preparing the Company for future growth in the neurological surgery space. We saw several strong publications regarding our technology as well as several inspiring patient stories in the popular press.

We are rightsizing our cost profile. We've added a few key new members to our team. Customer interest continues to build, and the adoption of our products and technology continues.

We are changing how neurosurgery is done; where it is done; and, in some instances, what can be done. We are confident of the benefits our technology brings to patient care. We are committed to bringing these benefits to more and more hospitals, surgeons, and patients. And the marketplace is responding with growing interest in the use of our products. With that, I would like to open the call for any questions. Thank you.

(Operator Instructions) Tracy Marshbanks, First Analysis.

Good afternoon, guys, and thanks for taking the questions. First question is really more on the business side, particularly on sales and marketing. Obviously it's in general a tough market, and you have new technology.

If you look at where you've come from, what you are in the process of building, where do you see your key gaps to be addressed going forward in both the capital and the disposable sales? Is it clinical data? Is it economic data? Where do you see something that would help you, or a couple of things that would help you materially?

Tracy, that's a good question. Certainly in clinical and economic data, we can always use more. However, there's a fair amount of clinical data in clinical papers on our technology out there now.

As a navigation system, what people really look for is our ability to accurately hit a target. And that data is fairly well published at this point.

If I look at where we are -- you know, we are a small company pushing into a new procedural area. So I think it is really just getting past -- really, just crossing the chasm of adoption here. I always think about -- adoption really starts to accelerate when you hit that 10% market share kind of place. That's where you start to see the real hockey stick in the curve.

I would say now we are not yet at that 10%, but we are getting close. The buzz, the talk about our technology when I go to the tradeshows, the understanding of it by a variety of surgeons is very solid. And I think we've done a good job of marketing to the surgeons.

I think the next challenge for us is probably reaching out to the neurologists. They are the referring physician for these procedures, and we've not really targeted them for education and understanding of our technology and the patient benefits that it enables. So if I were to look at one distinct area, I think that would be one distinct area we need to do more work in.

It is a new procedure area. So continuing to educate accounts on use of the MRI, allocating time from the MRI suite continues to be a challenge in certain accounts. Those areas, I believe, we will overcome over time. But we do just need the time to get there.

Okay. And I think a fairly directly related question to some of the items you hit on: assess your opportunity to increase utilization at the sites you are already at. In some sense you've already got them to the point of buying a system and doing a procedure, so ramping up utilization is a bit different battle. And you don't need to worry about your 10% market share; you need to worry about that individual site.

And it seems like it's still relatively low utilization. So could you talk about what might be an appropriate level of utilization, and how you get the patients in? Your urologist focus could be one of those, obviously.

Sure, sure. The neurologist focus is definitely one of those.

One thing I would point out is that the laser ablation opportunity really -- particularly for ablation of the hippocampus, which is frequently the site of epileptic seizures, the initiation of those seizures -- that is a very interesting opportunity for us, where our value proposition the strong. And very often it's the same surgeon or a very close partner of the surgeon who bought into our technology for DBS. So that is a great application for where we can increase utilization, and that is happening as we speak.

Ablation for tumors is also an interesting opportunity. And virtually any site that is doing the stereotactic work for DBS will also have neurologic oncology surgeons on staff. That is a different doctor, though. So for us that's a great opportunity for utilization, although it's probably the next ring out from the bull's-eye.

In terms of -- you know, what does a good site look like? We have a couple sites that are well north of 10 procedures a quarter now, and that's where we would like to see everybody get to. Part of the effort of playing up cleaning up some of the old -- what I would refer to as stalled sites, by removing some of the equipment, is to make sure that the utilization numbers you guys do, just through calculations of procedures per site, are accurate and reflective of the business.

We still have a couple sites out there that I'm looking at to -- they seem very interested but have not yet started doing cases. So we're always going to be a little lagging on what we just sold versus what comes through in the utilization, because it takes a little while to ramp up a site. So I think there's a lot of opportunity for us.

I would also say even within what is probably our core procedure area of DBS, more docs are finding that as word gets out about the procedure, more and more patients request it. So within DBS there is a great opportunity. Laser ablation for treatment of epileptic seizures is a great opportunity. And then the next one out is that laser for tumors. Drug delivery and biopsy also represent upside to us, but they are probably smaller overall.

Could we turn just quickly to the system side? Then I had some more financial statement questions.

But I heard you talk about having two more evaluations signed up. How many systems are currently sitting under evaluation? And how do you assess your pipeline even further out than evaluation sites, if you look at that?

Yes. It's a good question; unfortunately, I don't have that number right in front of me, Tracy. And I'd be glad to get that out to you some other time.

In terms of our pipeline, our pipeline begins with evaluation sites. And we have several that are in discussions right now for this quarter, and I'm feeling pretty good about those. And the sales cycle here typically starts with an evaluation, few initial cases, roll into a capital purchase.

We're not as batting 100% on those. I don't know that I would never expect about 100% on those, but I do feel like our batting percentage is definitely coming up. So the pipeline continues to grow.

Okay. Final area -- if I look -- this is going to be a combined cash, cash burn, and balance sheet question. If I look at your first-half burn, obviously it was fairly healthy relative to cash on the balance sheet. You talked about it coming down. Can you be a little more quantitative?

And also, you have some notes payable now up in current. If you take a look just on the liability side of the balance sheet, sort of walk me through what the plan might be?

Sure. The cash burn has been high the last two quarters because of the restructuring. We've had a couple other charges in there.

You do have to look at the cash statements versus the GAAP statements to really get a feel for where it's at. I really do feel like our cash burn will come way down this quarter. It's hard for me to give you a number, because it's very dependent on our revenue number. And I'm not prepared yet to give revenue guidance, because we are still a little bit volatile on that side. But I do see that coming down a great deal.

We do have a notes payable coming up second quarter of next year. And so we're beginning discussions with the holder of that note to reestablish where we go with it. And I'm confident we will be able to make some progress there. So those are kind of the things we're thinking about right now.

Okay. Thanks very much for taking the questions. Appreciate it.

Raymond Pirrello, Pendulum Capital Markets.

A quick question on the target sites. So you have 39 current sites now. What is the target market in the US? And then what other areas are you looking at in terms of going into -- overseas?

Some great questions there. So of the sites available in the United States, our targets are typically academic medical centers and very large community hospitals that currently do stereotactic neurosurgery. We estimate there is 400 to 600 of those in the United States, so I would say that's kind of the universe of targets for us. And most of those, if not all of them, have a functional neurosurgeon -- that's a neurosurgeon who specializes in movement disorders -- on staff.

So that might bring the number down a little bit to, say, 80% of those. So those are our really in the bull's-eye targets.

Now, as we expand into areas like laser ablation for tumor, or biopsy, or drug delivery, that can probably open that number up a little bit more. You still want to be working with someone who's done stereotactic guidance to have the experience that's appropriate for MRI ClearPoint guidance.

As far as international, it's interesting you ask that question. We've had some very strong inquiries this quarter from a couple hospitals in Europe, one of which in particular is very interested in becoming the leading site in drug delivery in Europe. And we are hoping to comment on that on the next call, but it's probably premature to go into it in more depth.

For Europe -- you know, my attitude towards Europe so far has been that Europe tends to be -- you know, a medical device business in Europe tends to be an investment before it is a profitable business. We are conscious of our cash situation and managing our cash flows. So we are not leaping into Europe with the investment required and kind of relying on a strong pull from interested parties, which we've had a couple this quarter -- one of which I do think will finally pull us over.

So I'm excited about that. We've also had some inquiries from Asia as well, also an area where I consider it to be an investment before it's a profitable business. And we will evaluate those in the same way.

In terms of the 400-plus sites in the US, what is your goal as a company to achieve on a year-over-year basis of those sites, especially this year and next year? Where do you think you can get to with that sales force? What are the goals of the sales force, I guess?

You are kind of stepping into the realm of asking for some specific guidance which we are just not prepared to do right now. So do I think we can double our installed base within the next two years? Absolutely. I can go out on a limb and say that.

But getting more specific and granular than that -- I'm just not comfortable doing that quite yet as we manage the volatility of the business. The business -- the interest and the buzz around our technology continues to grow. And I feel like we are on the cusp of crossing this of adoption chasm, but we are not there quite yet. So I'm going to hold off on more specifics there.

Okay. Thank you.

Mark Abrams, Investor.

I have a couple of questions that Ray started on, actually. Where do you see -- where do you need to be in revenues before you can get to breakeven?

You know, that's also one that jumps into guidance. And let me give you some perspective there. I have been very conscious of the fixed cost profile of the Company, and we have taken a lot of steps in the last two quarters to manage down our fixed costs.

Then we have variable costs, which are mostly tied to production of product and sales force compensation. As I look at things, I would say a typical medical device company similar to ours, with a disposable product in the 70% range and heavy clinical support, can get to breakeven in the $20 million to $30 million revenue range.

I believe that we've done a good enough job to manage down our fixed costs that we can hit that breakeven before that, at a lower level than that. I don't have a specific number modeled out, but I feel like we've got production capacity to ramp up without a lot of additional cost. I've got a clinical and sales team that can ramp up significantly, where only on occasion would I have to add folks to that group, mostly on the clinical support side. And so that would increase fixed costs a little bit at a time.

But I think we can leverage quite a bit out of where we are right now. And we've reduced our fixed costs a lot in the last couple quarters. So I think we are well positioned to get there.

If you partnered up with a large medical device company that had better insight into some of these hospitals or had better structures into penetrating these hospitals, is that something that would possibly put you in a better position?

Well, a couple of things there. First of all, I don't want to partner with somebody who is a capital equipment sales force. They tend not to support procedures, and we are really a procedure company.

So when you start thinking about what are often referred to as the big iron companies out there that are selling imaging equipment, I'm not sure that's actually a great approach. I don't know that they support procedures as well.

Now, if you look at other procedure-based companies, I actually think that is a possibility for us at some point. But I'll be the first to admit, we are probably going to have to get a little bit bigger before they become interested in that partnership as well.

And I'll tell you, as I look at our commercial team, our commercial team -- you used the word, you know, a company that has a better commercial team. Our commercial team is getting really good, particularly the folks who are in procedures every day. And very proud of the work they've done the last couple quarters and expect that that's really going to bear fruit for us in the next few quarters and next few years.

So to answer your question, yes, I do think about those kind of partnerships. But I'm not sure the timing is quite there yet.

And the other thing -- you mentioned you are pretty happy with doing 10 procedures a quarter in an installation. That doesn't seem like a lot. Is it because people are scared to do them? What is the actual market? How many procedures actually could be done if people really accepted it?

Keep in mind, the procedures we are in are -- you know, you think about DBS placements, there's probably, I don't know, 5,000 or 6,000 of those in the United States each year. Probably double that when you add international.

Laser ablation is early in its adoption, although I'm very confident in the ramp there. Biopsies and drug delivery -- biopsies for use of our technology, the biopsies that are applicable is not huge. Drug delivery, of course, is the wild card; and we've talked about that many times. It could be huge, but probably not in the next year or two.

So you have to keep in mind that we are dealing with brain surgery, and the types of brain surgery that are not huge procedure numbers, but are pretty decent and high revenue per procedure and very well reimbursed. So if I think about a site doing -- every site doing 10 a quarter, there would be a range. We would have some doing five; we would have some doing 15 or 20. We have a couple in that range right now.

And I think it's a very good goal. We're always going to -- you know, as we build sites, the utilization will always lag a little bit due to brand-new sites. It takes a site a little while to ramp up once they get going. So there's a lot of dynamics to those utilization numbers. And as I said, I also want to clean up a few older sites that were just stalled and never got off the ground in the first place.

So if you do an average of 40 sites or 40 procedures per site, approximately, that's like 160 a year. Is that times the $7,000 number, or --?

Yes, our procedure numbers these days are in that range. It's interesting -- our procedure numbers -- our pricing is between $5,000 and $10,000 per procedure, depending on whether they use one or two of our kits. So as I go through it -- just throw some numbers out there -- if we got to 100 sites doing even 50 procedures a year, that would be 5,000 procedures times our ASP. You start to see some revenue numbers that build pretty rapidly.

Right. That's $35 million.

Right, right -- on what is right now at very low volumes, on a material and labor basis, anyway, 70%-plus gross margin product. So you can imagine that that starts to get pretty lucrative.

Yes, that would be great. But you said -- I mean, how many -- I know you can't go out and give guidance or anything like that, but is that doable in five years?

Without going out on a limb SEC-wise, I absolutely think that's doable within that time frame.

Okay. Yes, because you could make some -- you should a lot of them money at those numbers. Okay.

Yes. And as I said earlier, I think -- I forget who had the call, whether it was Raymond or Tracy -- I think we would get to breakeven long before that point.

So right now, if you are doing an average of 40 procedures per hospital, that's $280,000. So why aren't your revenues up around $10 million now with 39 hospitals?

We do have a few sites that are at much lower volumes and are still what I would think of as dabblers, still getting used to the technology. And talking about goals, that is definitely in the realm of our goals.

We have a few sites that are up in that range. And we also have a few sites that are dabblers, and a lot of sites in between. So that's our task is to grow that utilization per account -- no question.

So one last question, and I'll let you go. Is some of the pushback the amount of money it costs to buy a unit? So could you possibly put units in and give them a good deal? It takes them five years to pay it out, or something like that, just to get the product on the move?

You know, I would say that our capital pricing is not our biggest hurdle. We are willing to do flexible deals like that. We've had one or two come forward to discuss that.

But in the realm of hospital capital equipment, our number is not that big. I would say it's more understanding that it's a brand-new way of doing a procedure that involves multiple departments in a hospital just takes a little bit of -- what's the right word? I guess for a sales rep, it's kind of a complex sales cycle, because you have to talk to a lot of different entities within a hospital.

And then once they get on board, the capital is not the biggest challenge for us. As I said earlier on the call, our pipeline starts with our evaluation program, where we do put the equipment in for free. Now what I am adamant about with our team is if we put it in for free, let's get it used. And if it's not going to be used, let's pull it out.

And I'll tell you, that's different than a lot of small hardware companies. If you go into hospitals and ask to go in their back hallways, you will see a lot of dead equipment out there. And I'm not eager to add ours to it.

No, no -- I think you are very smart as far as that goes. But I think it's very troubling, you know, as investors -- you guys have an unbelievably fantastic product. It's just for some reason it's taking forever to get it -- to get people to get on the bandwagon. It's just a fantastic product.

Yes, and -- appreciate your perspective and agree with you. I think it's an excellent product.

But I also like to point out to people it's not just a product. We are selling a new way of doing a procedure, and that just makes the sales cycle a little bit complex. The product works great. Our cases are going very well. I'm very happy about how our cases have been proceeding and progressing very nicely.

It's more the complexity of selling across multiple departments of a hospital and changing the paradigm of how these are done. That just takes a little time in the sales cycle.

And how about -- would better PR do anything for you?

Given the stage we are at right now, I feel like we've built very good awareness among neurosurgeons, and we're really starting to see them come on board. I think the next avenue to pursue is the neurologist, who tends to see the patient and makes the referral for surgery. And that's an audience I think we need to get better PR going.

As far as direct-to-patient, I think right now at our stage, and our share, and knowledge of neurologists of our technology, it's probably a little bit early. Now, when it happens for free like, this article we had in North New Jersey -- man, I love it, and I think it will help that side a lot. But if I'm going to choose where to spend the dollars on that kind of effort, it's probably on the neurologist is our next hit.

Okay. Thank you for all your time. I appreciate it.

Raymond Pirrello, Pendulum Capital Markets.

What would it take procedure-wise to get to become standard of care for these procedures?

Oh, boy. Well, we are not there yet, I'll be the first to admit. And I think that's unfortunate.

I would say that most people are going to say that when you are above 50%, you are at standard of care. In our market I think it would be lower than that. But the stereotactic procedure -- and, again, I have to caveat everything I say with: it depends on the procedure you are talking about.

Electrodes for DBS -- there's been 14 years of history of doing that placement stereotactically. So that's a hard area to displace the standard of care and take its place. We're working on it. I believe we will get there, but it's going to take some time.

If we get to standard of care it's a game changer for our Company.

Absolutely. And if I look at laser ablation, where that's early, there is not a history of doing that procedure. And I'll tell you, a lot of accounts are finding this start in the OR and then move to the MR to be very awkward. I think we have a much better shot at getting to standard of care there early and becoming -- you know, creating the standard rather than displacing a standard.

I guess that goes back to the original question I had earlier. How much exposure do you need hospital-wise to have the ability to get to standard of care? What's the reach?

You said the laser ablation was about 6,000 procedures if we went and picked out the procedures. So how many hospitals do we need to get into to actually have the ability to become, based on the amount of procedures you can do in those facilities, standard of care? That would be part of the goal, I guess, of hospitals as well, if you can get to that same level?

Yes, I agree. It would be that goal. Like most procedure areas this is probably a 70%/30% market. So if you can get into the top 30% or 40% of those accounts and really get going in those, which -- and those, of course, are our primary targets -- I think you have a great shot at it.

All right, guys. Thanks so much.

Rodney Baber, Halen Capital.

Thanks for the update. I've got several things -- I'll try not to ask all the questions I'd like to right now, but with 5,000 to 6,000 DBS procedures that are done in the 400 to 600 hospitals with stereotactic capabilities, right? That still seems and is, I think, probably a very low number.

And that has to do with the fact that a lot of people don't want to have to be kept awake and go through that. So is part of the issue here that the growth of that has been so slow that it has not given you something to move into that's got a healthy growth rate, because the major product out there is just really not doing as well as it should?

Let me give a little bit of perspective there. DBS is a great technology. The surgery itself -- if it's done stereotactically, and the patient is awake, is a scary surgery. And if you go on to YouTube and type in placement of a head frame prior to neurosurgery, you will see some videos that will, frankly, freak you out.

With our technology, you don't have to go through those steps. Now even Medtronic, the major manufacturer -- currently the monopolist manufacturer in the United States for DBS -- will say that two-thirds of patients who are eligible for that surgery don't do it, because they are concerned about the surgery itself. Not the outcomes, but the actual surgery.

So I believe that we can definitely help grow that market. If I look at laser, that's a market that -- you know, it's early in that therapy. It's only in the last couple years people have started doing that therapy particularly for epilepsy. But the early data is very good. It's very encouraging, but it's still early. The ramp rate there, however, is quite rapid off a much smaller base.

So if I look at those two areas in particular, I feel like we can help grow the DBS market. We continue to do some training and collaborative marketing efforts with Medtronic in that space. We see St. Jude coming into that space shortly. They do have a US clearance now for product and expect to see them on the market by the end of the year. And we're building in laser as well, working with both of the laser ablation companies -- Medtronic and Monteris -- for use of our technology as a choice of navigation for the doctor. So those markets add a lot of promise for them, particularly with our kind of navigation.

So the basic DBS core business -- what would you say the growth rate has been there? And are you actually taking market share at this point? I know the numbers are small, or much smaller, but are you gaining market share on the DBS guys?

I think Medtronic posts high single-digit growth in the DBS market in the US these days. So 8%, 9%, 10%. And are we taking market share? Yes, we definitely are taking market share there, but let's face it, we are pretty small to begin with.

Got you. Let me ask you this question -- long-term thought process: forgetting the issues with marketing and sales and all of that, getting people to sign up, what have been the external things that have caused this industry to have problems? For example, hospitals not having enough money, not being willing to spend on something like this? Boards on these hospitals that don't really get it, don't want to take on anything new?

Just these other things -- like regulatory issues. How often are you running into regulatory issues where some state says you can't put this thing in because it doesn't meet the guidelines we have for these style procedures? Give us kind of a 20,000-foot view on all that. Is that improving any? Are you seeing people saying they just have to bring this on now because of what it delivers? Give us a state of the union on that.

Sure. So to start with, as I said earlier, I don't think our capital pricing and getting in front of a hospital CFO, CEO, or Board is really our biggest challenge.

I think our biggest challenge is the complexity of how many decision-makers there are in the sales process. So everything starts with the neurosurgeon. Typically, the neurosurgeon is a big fan of what we want to do.

Then it has to go to radiology, because they control the MRI. Nursing will get involved. Staffing, infection control, hospital administration -- so there's just a lot of different touch points for our sales reps. And they are getting better and better at learning how to navigate that complexity. That's what slows down the sales cycle. But it's also -- when you get it done, you've now got buy-in from across the organization, and it sticks.

You know, I don't think this a lot of regulatory issues. We have had one or two sites that said they are not sure about whether they are ready to do procedures in the MR. And then we are seeing the growth of intraoperative MRIs. And very often, the way hospitals are approaching that, they are intentionally taking a diagnostic MRI and positioning it next to -- if not connected to -- an operating room, so they can shuttle the patient back and forth between the two rooms through some sliding doors. That is a fantastic environment for us. It's exactly what we are eager to see more of. And we are hearing more and more hospitals do that.

My final point is: you say -- is anybody just standing up saying, we have to have this? That's really the strongest -- the strongest pull for our technology right now I would say is in children's hospitals. They are very conscious of the patient experience. They think a lot about ensuring they don't traumatize the patient from the surgery itself.

Frankly, they tend to be fairly well-funded, which is an added benefit. But for those patients, when you start talking about awake neurosurgery, that's a nonstarter in a pediatric environment. So we've seen some very nice pull from that environment, both for -- you know, the primary application there tends to be dystonia, which is a relatively small surgical market, but one where our guiding proposition really stands out clearly.

In the regulatory side of this thing -- how would you rate what's going on there? How would you talk about that?

Well, I'm not really sure what your question is there, Rodney. We've got regulatory approval for placement of electrodes. So I think things are fine there right now.

Maybe on the state level? In other words, do you have places that maybe haven't even approved this kind of process yet -- that they are slow to come around to it? Or is that not an issue? Is that what you're saying -- it's not really an issue to get this stuff approved?

For the most part that's not been a challenge for us. We had one or two sites where state regulators said the airflow in the MRI suite wasn't enough, things like that. But we're conscious of it. But I would not say that's a direct hurdle to our business for the most part.

Got you. Thank you.

All right. Thanks for the questions, Rodney.

(Operator Instructions) At this time we have no further questions. I will -- actually, I apologize. It looks like we do have a question that comes from Jeb Terry of Aberdeen Investment Management.

Your comment about children's hospitals and how that's a great value proposition -- can you help us understand how large that opportunity might be? How many children's hospitals are there now working with you? Can we think of that as low-hanging fruit? Or is it something that's kind of in the mix but progressing nicely?

Probably somewhere in between. It is progressing nicely, and we've had some particularly good stories -- patient stories -- lately for use of our technology with dystonia and also with epilepsy for ablation.

So in terms of the number of children's hospitals, I think there is between 100 and 150 in the United States that specialize in neurosurgical pediatrics. I don't know off the top of my head if all of them have functional neurosurgical programs.

So it's just that we've got more and more inquiries from some of the more impressive children's hospitals. We're in Boston Children's, Cincinnati, Texas Children's -- some of the biggest institutions out there. Benioff here in San Francisco. So it continues to grow in interest. And because of the strength of our value proposition, I really feel like we will be able to make some nice progress there.

And one of Rodney's comments raised a question. Are there any issues with getting regional MAC approval? Or are people getting pretty well straightforward reimbursement for procedures?

You know, the reimbursement codes for virtually all of the procedures in which we are involved are fairly standard and in existence. They don't need special codes for the use of our technology. It's mostly DRG-based, and they just pay for whatever technology they choose to use out of the DRG. So I've not heard of a lot of pushback on reimbursement. That is just not even something I've heard about this quarter.

And you mentioned that the last several months you have had some adjustments in your sales and marketing team, and you now feel that they're -- I think you used the term pretty good in responding relative to partnering with a larger company. Can you give us kind of a, as Rodney said, state of the nation on sales and marketing -- because there's been obviously a big shift over the last six months -- and what the next six months might look like?

Yes. So over the last couple quarters we've continued to build a commercial team. We have five or six folks on the sales side, and I think we are up to 8 or so on the clinical support side.

The clinical support side is likely to grow faster just with procedure growth. We still support our cases with a clinical specialist, and the sales rep is more to get new accounts up and going and started and get through the purchasing process. The team has really developed a lot in the last six months. There's a lot to learn about utilizing MRIs for these procedures, and that clinical support team in particular has gotten very strong. And as we move into new procedure areas in laser biopsy, drug delivery, they've really now got the base so that they can do that pretty well.

We've brought a couple new people on to that team in the last quarter or two and continue to grow it. I think as you know, we've replaced both our marketing people in the last year. I don't want to throw the prior folks under the bus -- a lot of that was geography-driven, so that we've now got them out here in Irvine California. Integrate very well with the sales team and, from my perspective, really working well as a team commercializing the product with a headquarters focus here in Irvine and a sales focus, obviously, all over the country.

So looking to support them and train them better and better. We're meeting with them every quarter now on a quarterly basis, which we were not doing before. And leadership is stepping up as well. So I'm feeling pretty good about that team right now and eager to expand it as we grow.

Okay. And what's the total headcount now for the Company?

For the Company I think it's around 33 or 34.

Probably around 35.

Okay. 35 including a couple part-timers.

Okay. Perfect. Thanks very much. Look forward to the back half of the year.

All right. Thanks, Jeb.

We have no further questions. We will go ahead and conclude today's conference call, hand the call back over to management for their closing remarks. Gentlemen?

Thank you, Mike. We appreciate everyone joining us this afternoon. We are looking forward to the next couple of quarters and the adoption of our technology, and feeling very good about the work we've done over the last two quarters to prepare for our future. Thanks again, and we will join you next quarter.

And we thank you, sir, and to the rest of the management team for your time today. The conference call has now concluded. At this time you may disconnect your lines. Thank you and have a great day, everyone.