Clearpoint Neuro Inc (CLPT) 2016 Q2 法說會逐字稿

Greetings and welcome to MRI Interventions, Incorporated, 2016 second-quarter and six-month financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Frank Grillo, CEO. Please go ahead.

All right. Thank you, moderator. Good afternoon, everyone. Thank you for joining us for our Q2 2016 earnings call. With me for today's call is Hal Hurwitz, our CFO.

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.

For Q2 2016, we have good news about procedure growth, disposable revenue growth, continued improvements in our balance sheet and use of cash, and pipeline building for the rest of the year. The adoption of our technology continues, and we're pleased with our position and progress in the market and our momentum going into Q3 and the back half of the year. We're honored to be working for you in building this great Company, and we're proud of the care patients are receiving as a result of the continued adoption of our products and technology.

With that, let me turn the call over to Hal for a review of our Q2 2016 financial results, and then I will provide further context regarding our progress in the marketplace. Hal?

Thank you, Frank. Before we begin 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 operations. 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 our annual report on Form 10-K for the year ended December 31, 2015, which has been filed with the SEC, as well as our quarterly report on Form 10-Q for the quarter and six months ended June 30, 2016, that we filed with the SEC today. All our filings can be obtained from the SEC or by visiting our website at www.MRIInterventions.com.

Now for our results in the 2016 second quarter. Revenues were $1.1 million for the quarter ended June 30, 2016, and $826,000 for the same period in 2015, an increase of $278,000 or 34%, attributable to increases in our ClearPoint System disposable products.

ClearPoint disposable product sales for the quarter ended June 30, 2016, were $1 million compared with $678,000 for the same period in 2015, representing an increase of $350,000 or 52%. This increase was due primarily to a greater number of procedures performed during the quarter using the ClearPoint System within a larger installed base for ClearPoint in this quarter relative to the same period in 2015.

ClearPoint reusable product sales for the quarter ended June 30, 2016, were $39,000 compared with $93,000 for the same period in 2015. 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 sometimes significantly from quarter to quarter.

Gross margin on product revenues was 51% for the quarter ended June 30, 2016, compared to 49% for the same period in 2015. The increase in gross margin was due primarily to a favorable product mix toward disposable product sales during the 2016 second quarter relative to the same period in 2015, as disposable products bear a higher margin relative to reusable products, and to a decrease in the provision for inventory obsolescence during the 2016 second quarter relative to the same period in 2015. These factors were partially offset by increases during the 2016 second quarter relative to the same period in 2015 in product scrap levels and in the allocation of indirect costs amounting to $112,000 to manufacturing in connection with our transition from a focus on research and development to commercial activities.

Research and development costs were $750,000 for the quarter ended June 30, 2016, compared to $427,000 for the same period in 2015, an increase of $323,000 or 76%. The increase was due primarily to increases in the 2016 second quarter relative to the same period in 2015 in: A, software development costs of $104,000 incurred in connection with our development of the next generation of the ClearPoint operating system; B, compensation of $86,000 related primarily to an increase in headcount in January 2016; C, regulatory fees of $35,000; and D, product development costs other than software of $33,000.

Selling, general and administrative expenses were $1.9 million for the quarter ended June 30, 2016, as compared with $2.2 million for the same period in 2015, a decrease of $299,000 or 14%. This decrease was attributable primarily to decreases during the 2016 second quarter relative to the same period in 2015 in: A, personnel costs, including share-based compensation and travel costs, of $197,000; B, the allocation of costs amounting to $51,000 to manufacturing; C, occupancy costs of $25,000; and D, medical device excise taxes which were suspended by federal legislation for a two-year period beginning January 1, 2016, of $14,000.

These fluctuations were partially offset by increases in: one, professional fees of $44,000; and, two, public company and investor relations expenses of $37,000.

During 2015, we incurred restructuring charges in connection with the consolidation of all our major business functions into our Irvine, California, headquarters. In connection with this consolidation we closed our Memphis, Tennessee, office and did not retain any of our Memphis-based employees.

The termination of certain of these employees triggered a modification in the terms of stock options previously granted to them. As a result of these modifications of stock option terms, we revalued such options and recorded related one-time noncash restructuring costs of $493,000, constituting nearly all of the restructuring charges incurred during the quarter ended June 30, 2015.

Resulting from the items we have just discussed, our operating loss for the quarter ended June 30, 2016, was $2.1 million as compared with $2.7 million for the same period in 2015, an improvement of $627,000 or 23%.

Now I will briefly address some nonoperating items that also appear in our statement of operations. During the quarter ended June 30, 2016, we recorded a gain of $264,000, and during the quarter ended June 30, 2015, we recorded a loss of $186,000, resulting from additions to and changes in the fair value of the Company's derivative liabilities. For the 2016 second quarter, such derivative liabilities related to: A, the issuance of warrants in connection with 2012 and 2013 private placement transactions; and B, the amendment in June 2016 of certain notes to add contingent conversion terms and potential down-round pricing protection of warrants issued in connection with such notes. For the 2015 second quarter, derivative liabilities were limited to the issuance of the warrants in connection with the 2012 and 2013 private placement transactions.

In April 2016, we entered into a securities purchase agreement with Brainlab AG, under which a note payable to Brainlab in the principal amount of $4.3 million was restructured. Among other items, we, one, entered into a patent and technology license agreement with Brainlab for software relating to the company -- to our SmartFrame device, in consideration for the cancellation of $1 million of the principal amount of the Brainlab note. And, two, we issued to Brainlab, in consideration for the cancellation of approximately $1.3 million of the principal amount of the Brainlab note, equity units consisting of shares of our common stock and warrants to purchase shares of our common stock.

As a result of the foregoing, we recorded a gain of $941,000 in the second quarter of 2016, representing the difference between: A, the aggregate fair value of the license agreement, which had no cost basis on our consolidated balance sheet, and the equity units; and B, the aggregate principal amount of the Brainlab note canceled as consideration.

On June 30, 2016, we entered into amendments with Brainlab with respect to that Brainlab note and with two holders of the 2014 secured notes. Pursuant to the amendments, the parties agree that in the event we close a qualified public offering of $2 million of the principal balance -- well, if we close that public offering: one, $2 million of the principal balance of those notes plus all unpaid accrued interest on that amount will automatically convert into the security offered in the qualified public offering; and two, the exercise price for 46,207 shares of common stock underlying warrants issued in connection with those notes will be reduced as provided in the amendment.

Based on the provisions of the amendments, on June 30, 2016, we recorded a debt restructuring loss of a noncash amount of $820,000 resulting from the restructuring of the Brainlab note and those 2014 secured notes. Accordingly, after considering both the operating and nonoperating items, net loss for the quarter ended June 30, 2016, was $1.8 million as compared to $3.1 million for the same period in 2015, an improvement of $1.3 million or 42%.

Now let's go over the financial results for the first six months of 2016. Revenues were $2.5 million for the six months ended June 30, 2016, and $1.8 million for the same period in 2015, an increase of $662,000 or 36%, attributable primarily to increases in our ClearPoint System disposable products. ClearPoint disposable product sales for the six months ended June 30, 2016, were $2.1 million compared with $1.5 million for the same period in 2015, representing an increase of $614,000 or 40%. This increase was due primarily to a greater number of procedures performed using our ClearPoint System within a larger installed base for ClearPoint in the six months ended June 30, 2016, relative to the same period in 2015.

ClearPoint reusable product sales for the six months ended June 30, 2016, were $301,000 compared with $230,000 of such sales for the same period in 2015, representing an increase of $71,000 or 31%. As previously mentioned, sales of our reusable products, which consist primarily of computer hardware and software, bear sales prices that are appreciably higher than those for disposable products, and they may vary sometimes significantly from quarter to quarter.

Gross margin on product revenues was 50% for the six months ended June 30, 2016, compared to 55% for the same period in 2015. The decrease in gross margin was due primarily to: A, an unfavorable product mix related to reusable product sales; and B, the allocation of indirect costs amounting to $240,000 to manufacturing during the six months ended June 30, 2016, in connection with our transition from a focus on research and development to commercial activities.

Research and development costs were $1.4 million for the six months ended June 30, 2016, compared to $954,000 for the same period in 2015, an increase of $453,000 or 47%. The increase was due primarily to increases during the six months ended June 30, 2016, relative to the same period in 2015 in: A, software development costs of $168,000 incurred in connection with the Company's development of the next generation of the ClearPoint operating system; B, personnel costs related primarily to the additional headcount and related search commissions of $121,000; C, regulatory fees of $54,000; D, license fees of $52,000; and other product development costs other than software of $52,000. Partially offsetting these increases was an allocation of a departmental cost to manufacturing during the six months ended June 30, 2016, amounting to $77,000.

Selling, general, and administrative expenses were $3.9 million for the six months ended June 30, 2016, as compared with $4.5 million for the same period in 2015, a decrease of $614,000 or 14%. This decrease was attributable primarily to decreases in: A, personnel costs, including share-based compensation and travel, of $484,000; B, an allocation of departmental cost to manufacturing during the six months ended June 30, 2016, amounting to $87,000; C, occupancy costs of $33,000; and D, medical device excise taxes suspended by the federal legislation of $30,000. These fluctuations were partially offset by increases during the six months ended June 30, 2016, relative to the same period in 2015 in: one, public company costs of $105,000; and two, professional fees of $45,000.

In connection with the aforementioned consolidation in 2015 of all major business functions into our Irvine, California, headquarters and the closure of our Memphis, Tennessee, office, we incurred expense of $1.3 million primarily related to termination costs and the modification of option terms during the six months ended June 30, 2015. As a result of these items we have discussed so far, our operating loss for the six months ended June 30, 2016, was $4.0 million as compared with $5.6 million for the same period in 2015, an improvement of $1.6 million or 29%.

Now for a brief description of the nonoperating items that appear in our statement of operations. During the six months ended June 30, 2016, we recorded a gain of $424,000 and during the six months ended June 30, 2015, we recorded a loss of $969,000, resulting from additions to and changes in the fair value of our derivative liabilities, the composition of which I mentioned earlier. The other nonoperating items consisted of the previously mentioned $941,000 noncash gain we realized in April 2016 from the restructuring of the note payable to Brainlab that was previously described, and the noncash $820,000 loss from amending the Brainlab note and two of the 2014 junior secured notes.

Accordingly, net loss for the six months ended June 30, 2016, was $3.7 million as compared with $7 million for the same period in 2015, an improvement of $3.3 million or 47%.

Finally, a few comments regarding cash. We had a good cash quarter in the second quarter of 2016. We ended the quarter with cash balances of approximately $2 million, which represents a quarterly burn for the second quarter of 2016 of a little better than $1.6 million. And that $1.6 million, almost $1.7 million, does include Brainlab interest that we repaid as a consequence of the restructuring of the Brainlab note of $740,000.

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

All right. Thanks, Hal. Okay, I'd like to hit some of our highlights for the quarter. To begin with, we achieved a record quarterly number of procedures, with 125 patients benefiting from the Company's ClearPoint technology, a 44% increase in procedures over Q2 2015. This is the clearest evidence of strong adoption and enthusiasm for our technology.

As Hal mentioned, revenues were $1.1 million for the three months ended June 30, 2016, and $826,000 for the same period in 2015, an increase of 34%. Disposable revenue, like procedures, is a key indicator for us; and disposable revenue grew 52% as compared to the same period in 2015.

We restructured the note agreement with Brainlab, resulting in a reduction of debt and accrued interest of over $3 million. I believe we've discussed this on prior calls, and it was great to have this concluded and finalized early in the quarter.

Brainlab is now a customer, a licensee, a debtholder, and a shareholder. Our relationship with Brainlab continues to be very collaborative, and I'm glad to see this strengthening of the balance sheet.

As Hal just mentioned, we reduced operating cash burn this quarter to about $1.6 million, and that included a payment of $740,000 in accrued interest to Brainlab. In Q2 of 2015, we used nearly $3 million in cash as we completed our restructuring efforts. So, this is about a 47% decrease in the use of our cash even with the large payment to Brainlab.

Now, there were a lot of puts and takes in the quarter in terms of cash flow, including a great job by our finance people managing down our receivables and our days sales outstanding receivables. We expect to continue to manage expenses tightly and, as we continue to grow revenue, we expect to see cash use continue to decline each quarter.

A real highlight for us this quarter was that in June we saw the first release of initial drug delivery data by Voyager Therapeutics at the 20th International Congress of Parkinson's Disease and Movement Disorders -- that's ICPDMD for short -- in Berlin, Germany. The initial set of interim surgical data from their Phase 1b dose-escalation study included 10 patients, and it continues to demonstrate the continued safety of Voyager AADC01, their lead candidate.

In addition, the data show that the utilization of our ClearPoint System allowed: precise targeting and placement of the SmartFlow cannula -- that's our cannula used to deliver and infuse the drug; real-time visualization of the delivery of the drug; administration of higher infusion volumes to and confirmation of greater coverage of the putamen, which is the brain region that is being targeted with Voyager's drug. The lead candidate drug of Voyager continues to demonstrate safety with increasing coverage of targeted regions of the brain, an important finding.

In general, this study showed the benefits of MRI-guided convection-enhanced delivery and especially the value of seeing the drug infused into tissue under real-time MRI guidance, exactly the capability that the ClearPoint System provides.

Along the lines of drug delivery, we also saw a publication in the Journal of Neurosurgery entitled "Deep brain stimulator implantation in a diagnostic MRI suite: infection history over a 10-year period." This was a DBS study that was published right at the end of Q1, and we were able to get out and market this and discuss it with our surgeons. The paper reported data gathered over a 10-year period at UCSF Medical Center and showed zero DBS electrode infections when utilizing the ClearPoint neuro-navigation system in an MRI suite.

In addition, we saw publication of an article in the Expert Review of Neurotherapeutics journal entitled "Interventional MRI guided catheter placement and real-time drug delivery to the central nervous system," by Han et al. This article discusses the local delivery of therapeutic agents into the central nervous system and brain.

An in-depth review of the procedural workflow is presented and several key aspects are highlighted. Importantly, it identifies key advantages of the ClearPoint System, including the visualization of infusion and the ability to adjust cannula position or placement of additional catheters during the procedure, which helps ensure optimal delivery and coverage of target sites. This is very similar in terms of what it describes to the methods being used by Voyager in their trials.

We did two large trade shows in Q2. In May we had the American Association of Neurosurgeons, and in June we had the American Society of Stereotactic and Functional Neurosurgeons Meeting in Chicago. Both of these are strong meetings for us.

The AANS is the largest neurosurgery tradeshow each year, and the exhibit whole is heavily trafficked by thousands of neurosurgeons, neurologists, and their staffs.

The second meeting, the Association of the American Society of Stereotactic and Functional Neurosurgery, the ASSFN meeting, is a much more focused meeting and targets the functional neurosurgery community, which is our core customer base at this time. At this meeting we had the opportunity to host a symposium for more than 160 attendees highlighting the use of the ClearPoint System in laser ablation and deep brain stimulation procedures. This was a great opportunity to be in front of a large group of our current and potential customers and for them to see the ClearPoint technology used in several different procedures, as described by the presenters, including DBS electrode placement, drug delivery, and laser ablation of tumors.

Overall, we are pleased with the quarterly procedure volume. May was slower than desired for procedures, as surgeons prepared for and attended the AANS meeting. This is similar to a trend we saw last year in May.

June came back very strong, and we set a new monthly record for procedures in June -- over 50 in that month -- and that momentum has carried into July and the third quarter as well. Capital sales were light this quarter, although we feel the pipeline for Q3 and Q4 is developing very nicely.

We've seen an uptick in drug delivery sales, especially with respect to our SmartFlow cannula, which is utilized for the injection and delivery of drugs into the brain. We are seeing more drug companies reach out to us to do testing on and with our devices, both in the preclinical and clinical phases. Clearly this is an exciting area of future growth for our Company.

So in summary, we are pleased with our progress. Q2 was a good quarter, even if capital was a little light. Cases are going well, and we're seeing more and more excitement around our technology through a variety of procedure types.

Our sales and clinical specialty teams are driving hard, and we appreciate the interest in our technology we are receiving from more and more potential customers.

To close my comments I'd like to highlight a recent story about a patient at one of our newer sites, Inova Health System in Washington, DC. A patient presented to the movement disorders team at Inova Health. After seeing the neurologist, it was clear the patient was a candidate for deep brain stimulation. However, the patient was very claustrophobic and nervous about the 4- to 6-hour traditional approach to the surgery and the attachment of the stereotactic head frame, which as I've noted on prior calls is actually screwed into the patient's head.

The patient agreed to try a mock surgery, where several steps of the traditional stereotactic approach were simulated. This confirmed his inability to tolerate the traditional procedure approach.

As an alternative, the functional neurosurgeon at Inova, Dr. Mahesh Shenai, offered the patient the opportunity to have the DBS electrodes implanted with the use of the ClearPoint System under general anesthesia. The patient decided to move forward, and the procedure was successful.

In a video taken after the procedure, the patient is seen walking straight down a hallway for the first time in quite a while, and the movement disorders, neurologist states: This technology will open up deep brain stimulation to a large group of patients who otherwise would just not do it because of the awake procedure part.

This type of patient outcome is inspiring and reminds us of why we do what we do every day. With that, I would like to turn it back to the moderator for any questions. Thank you.

(Operator Instructions) Joseph Dedona, Alexander Capital.

Hi, Frank.

Hi there, Joe; thanks for calling in.

Hi. I've got a question. Are we still targeting next year sometime for breakeven?

You know, it's always a question -- I'm frequently asked that question; it's a hard question to answer because it really relates to guidance, which we're still hesitant to give, given the early-stage nature of our business. The end of 2017, first half of 2018, that is certainly our target for getting to a cash breakeven-type operating performance. Probably not a GAAP breakeven performance at that point, but that's in the range of where we're targeting.

Okay, thank you.

Mark Abrams, private investor.

Hi, Frank. Good quarter, but I have two questions. Number one, by having the reverse split of 40-to-1, it makes a very small float of the stock now, so there's wild swings in small amounts of shares. My question is why did we do 40-for-1?

Mark, it's a good question. In terms of the reverse split, what we found with the stock is once a stock was much below $1 I think more and more people become limited in their ability to trade the stock. Many of the brokers out there now will not even accept $1 stocks or stocks trading for less than $1, and even a few are demanding -- will not accept stocks less than $5. So we've made a decision to do a reverse split on the stock, change the stock price, and open up the number of investors that can take a look at the stock at least in terms of the price that it was at.

1-for-40 is probably not a magic number; 1-for-30, 1-for-20, all of those would have gotten us well above $1. But we felt like: Look, let's do this once and not have to go back and do it again.

I understand that over the last few weeks it has been bouncing around a bit. Today, I actually -- one thing I have been encouraged, though, is in terms of dollar volume per day it is trading much higher volume. Obviously not in terms of shares but in terms of dollar volume.

So I think that's encouraging. That's a good start, and I think we'll see it find a natural range over the next few weeks.

And my question, too, is in order to get the kind of traction you need to talk about breakeven, anything like that, have you had any possibilities of doing any kind of partnerships or licensing agreements? Because even though you are growing, it's just not enough to get where you really need to be, because you're going to be running out of cash again.

We talk to other companies all the time. And in terms of, like, press release type strategic agreements, what we're doing right now is we work very closely with a number of other companies already. We work very closely with both Monteris and Medtronic on laser ablation; we work closely with the Medtronic teams on DBS; we work very closely with -- I think we're up to six, seven different drug companies now on drug delivery. So we actually work closely with a large number of companies.

And at some point, one of those might turn into a more significant partnership -- although that's probably not on the horizon this quarter. So I'm actually pleased with the way we are working with other companies in the field of neurosurgery, and I think you do need to look at it as -- we work with a lot of different companies and a lot of different technologies already, and our growth is very -- what's the right word? -- very symbiotic: as one grows, the other grows. So we all help each other out that way.

Yes, because what I'm saying is, you could have one of the best technologies out there, but there's just not enough people that know about it and it just doesn't seem to be going in the kind of direction you really need to go for the traction it needs.

Well --

Because of what I said: you have a perfect product, but -- you can even deliver drugs for Parkinson's, which could be a game-changer completely. And with things like that, with the product you have, which is so good, why aren't people just jumping at it saying: Wow, if I had this product in my company -- like if I was Medtronic or if I was Johnson & Johnson or any of these companies. Why can't they say: Why can't I do something with these people and really make this thing a fabulous Company?

It's interesting the example you brought up in drug delivery. We are working with four or five different companies now on utilizing our products for the delivery of drugs to treat Parkinson's disease. However, if there is one industry that is more regulated than the medical device industry, it might be the pharmaceutical industry; so these things take time to develop.

I really feel like we have this great growing business in procedures now and this great upside in drug delivery, and we're continuing to pursue as many partnerships and relationships as we can in that field. And I do think we'll see that pay off over time.

In the meantime, we're building a business here and now on procedures that are available to us right now and that we can continue to drive our growth with.

One last question. Have you identified the actual market for your product out there as far as procedures go?

Well, on our investor presentation on our website we do give an outline of the procedure size that we believe is the potential procedure size for our products, based on the markets we know of today. So that adds up to 50,000 to 55,000 potential procedures in the United States.

You keyed in on a key area. The drug delivery side of things could change our market potential significantly if one of those drugs gets approved. I think we could see some really encouraging procedure and potential market sizes on the drug delivery side.

But again, developing drugs that are injected directly into the brain does take some time. And we are partnering with as many people as we can to develop those markets and products.

Thank you very much.

Bruce Conway, private investor.

Hi, Frank. I think I got on the call that you had a record number of procedures for June, and that that's continuing in July. Can you tell me if you added any new sites and what the projections are for site additions for the rest of the year?

Sure. We had a record number of procedures for Q2 in 125; and June was also a record for monthly procedures for us with I think it was around 53 in June. And I will say that I won't typically give out monthly procedure numbers, but I did find June very encouraging.

Momentum has continued on procedures. Procedures feel like they are looking very good this quarter.

And then in terms of sites we did not add new sites in Q2, but we did see a nice build in our pipeline for capital sales that we're working very hard on to close for the second half of the year, as well as a good handful of new evaluation sites, new accounts as well. So Q2 was light on capital and new sites, but the back half of the year looks pretty good.

Thank you, Frank.

Alan Eisenman, private investor.

My question has been answered. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Frank Grillo for closing remarks.

All right. Thank you, moderator; thank you, I guess, Gary. Just to close briefly, we appreciate the interest of our investors and hope that you sense our excitement about the progress of our Company. 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, and we are committed to bringing these benefits to more and more hospitals, surgeons, and patients. And the marketplace is responding with growing interest and use of our products.

Thank you again for joining us, and we'll talk with you next quarter. Bye-bye.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.