ClearPoint Neuro, Inc. (CLPT) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the MRI Interventions Incorporated First Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Frank Grillo, CEO for MRI Interventions Incorporated. You may begin.

Thank you, Danielle. Good afternoon, everyone, and thank you for joining us for our 2015 Q1 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’re honored to be working for you in building this great Company and we’re proud of the care patients are now receiving as a result of the continued adoption of our products and technology. With me for today’s call is Harold Hurwitz, our Vice President of Finance and soon to be CFO; and also David Carlson, our outgoing CFO. As most of you know, we’re transitioning the corporate functions from our Memphis, Tennessee office to our Irvine, California Headquarters. As part of this transition, David has decided to stay in Memphis and Hal has been brought on board to serve as our new CFO. I appreciate the work, devotion and six years of service David has provided to MRI Interventions. David will be finalizing the transition to Hal for the CFO role over the next few weeks. Also as you may know, Kim Jenkins, my predecessor as CEO has transitioned from executive chairman to non-executive chairman of the Company. No longer an employee of the Company, we’re pleased that Kim will continue as Chairman of the Board and will be able to provide us his advice and insight. We certainly appreciate the many years Kim has devoted to building the Company. I should also mention, we appreciate the years of hard work and service provided by Oscar Thomas, our VP of Business Affairs as well as the other employees in the Memphis office. Unfortunately none of these employees are able to join us in our [indiscernible], but we do appreciate the time and effort they put into the Company. It’s been only eight weeks since our last call and I’m very pleased with the progress we’re making. Let me turn the call over to Hal, for a review of our first quarter financial results and then I’ll provide further context regarding our progress. Hal?

Thanks, Frank. I echo Frank’s comments regarding our colleagues in Memphis who have laid a great foundation. Now I’m very excited to be here to continue the good work. Before we begin, however, I want to point out that the comments made on this call may include statements that are forward-looking with 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, estimated or projections regarding future results of operation. Actual trends or results 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, which has been filed with the SEC, as well as the Form 10-Q for the quarter ended March 31, 2015 that we will be filing with the SEC in May 2015. All our filings can be obtained from the SEC or by visiting our Web site at www.mriinterventions.com. With that, now let me transition to a summary of our financial results. Total revenues for the three months ended March 31, 2015 were $1.01 million, representing an increase of $188,000 or 23% from total revenues of $823,000 in the corresponding quarter of 2014. Of this $1.01 million total, sales of disposable products related to our ClearPoint system amounted to a Company high $840,000 in the first quarter of 2015, an increase of 49% from disposable product sales of $565,000 in the 2014 period. This increase reflects customer purchases of disposable products for a higher number of performed and anticipated procedures in 2015 relative to 2014. Sales of ClearPoint-related reusable products amounted to $137,000 in the first quarter of 2015, an increase of $45,000, or 49%, from reusable product revenues of $92,000 in the first quarter of 2014. Other service revenues, most related to ClearPoint system service agreements and installation services were $34,000 for the three months ended March 31, 2015, and approximately $10,000 for the same period last year. During the three months ended March 31, 2014, we recognized development service revenues of $99,000 reflecting the completion of a contract development project. No such revenues are recognized during the first quarter of 2015, and we do not expect development service revenues to be a meaningful ongoing revenue source. Cost of product revenues was $386,000 for the three months ended March 31, 2015 representing a gross margin on product revenues of 60% compared to $351,000 for the same period last year, representing a gross margin of 51%. This improvement in gross margin reflects the efficiencies derived from higher production volumes and a favorable product mix. Research and development costs were $528,000 for the three months ended March 31, 2015, compared to $818,000 for the same period last year, reflecting a decrease of $290,000 or 35%. Approximately $181,000 of the decrease related to a reduction in spending on our ClearTrace development program, about which Frank will comment later in this conference call. Reductions in sponsored research of $67,000 and in consulting expense of $31,000 also contribute at to the overall decrease. Selling, general and administrative expenses were $2.3 million for the three months ended March 31, 2015 compared with $1.8 million for the same period last year, an increase of $488,000 or 27%. Of this increase, $100,000 relates to the compensation expense associated with having a full-time executive chairman in addition to a chief executive officer in the first quarter of 2015. In addition, $98,000 of the increase relates to hiring expenses incurred in 2015. Both of these non-recurring items were associated with the previously announced consolidation of all of our major business functions into our Irvine, California facility, which included providing a smooth transition from our Memphis-based executive team to the team now based in Irvine. Also contributing to the SG&A increase were marketing expenses that were $67,000 higher in 2015, relative to 2014. With the upcoming closure of our Memphis office on May 2015, none of our Memphis-based employees will be retained. Our chairman became a non-executive on April 1, 2015, and the remaining Memphis-based employees including two executives will separate from the Company in the 2015 second quarter. In connection with these changes, we recorded a restructuring charge of $753,000 in the first quarter of 2015, $718,000 of which relates to severance and other compensation for the impacted employees. The majority of the restructuring charge is expected to be paid during the second quarter of 2015. During the three months ended to March 31, 2014, we recorded a gain of $4.3 million related to the sale of certain intellectual property to Boston Scientific. The purchase price was satisfied through the cancellation of a related party convertible note payable we previously issued to Boston Scientific in the aggregate principal amount of $4.3 million. We recorded a gain equal to the purchase price, as the assets sold had no cost basis on our balance sheet, in conformity with generally accepted accounting principles. In connection with warrants, we issued in private placement equity transactions; we recorded a loss of $783,000 during the three months ended March 31, 2015 and a gain of $484,000 during the corresponding period in 2014, in each case resulting from changes in the fair value of our derivatives liabilities associated with those outstanding warrants. Net other income was $83,000 and $103,000 for the three months ended March 31, 2015 and 2014, respectively. Most of the other income for the 2015 period related to grants received to fund research, and the majority of other income for the 2014 period related to negotiated reductions in amounts payable to service providers. Net interest expense for the three months ended March 31, 2015 was $300,000 compared with $149,000 for the same period in 2014. The increase relates mostly to interest on notes payable we issued in our March 2014 private placement of debt, as well as to the amortization of the related debt discount and deferred financing costs associated with that transaction. As a result of the foregoing, we incurred a net loss for the three months ended March 31, 2015 of $3.9 million, and we realized that net income of $2.6 million for the corresponding in 2014. At March 31, 2015 we had cash and cash equivalents of $6.4 million, which reflects a decrease of $2.8 million for the quarter, due primarily to the cash items embedded in the results of operations I’ve just discussed. While this decrease is in line with our 2015 business plan, it is important to note that our plan also calls for the reduction in our operational burn rate to anticipated increases in revenues and decreases in selected operating costs. The accomplishment of these business plan goals is subject to risks, including those described in the Risk Factor section of the form 10-K we filed with the Securities and Exchange Commission in March 2015 and in the form 10-Q we will be filing with the SEC in May 2015. With that, let me turn it back to Frank.

Thank you, Hal. As I stated earlier, we are pleased with the progress we are making. Revenue came in over $1 million in the first quarter and we had our best disposable sales ever reflecting the continued growth in procedures. As Hal mentioned, disposable sales were up 49% over Q1 2014 and up 19% sequentially over Q4 2014. This is a key metric for our business and we are pleased to see the procedure growth we are experiencing reflected in the revenue number. We had one capital sale in the first quarter and we also had four additional new accounts sign up to evaluate ClearPoint since the year-end. These evaluations are at the beginning of the sales process and this number of new accounts shows the growing interest in our technology. Including these newest accounts we now have 41 accounts with ClearPoint. That aggregate number reflects two sites where we ended the evaluations without a capital purchase. Clinical and administrative support at those two sites was not as strong as what we wanted, so we felt it didn't make sense to keep ClearPoint Systems at the sites. We are focusing on accounts with the potential for greater productivity and expect to continue to grow our installed base. We continue to have strong interest in our procedures as shown by the growth in the revenue for disposables. The expansion of our focus to the three-legged stool of electrode placements for DBS, laser fiber placement for laser ablation, and tumor biopsy continues to bring results. We recently had a couple of new accounts begin laser ablation with ClearPoint and the procedures went well. At another account in a recent laser procedure which I personally observed, the surgeon utilized ClearPoint to plant two distinct ablation trajectories. He was able to do successfully both -- to successfully do both trajectories without moving either the patient or our SmartFrame device and the entire procedure was done in the MRI. If he had tried this procedure without ClearPoint, he would have shuttled the patient back and forth between the operating room and the MRI two-fold times, all while the patient is under general anesthesia. This is a great example of the power of our technology not just in DBS, but also in laser ablation. In the first quarter, we saw particular interest from children's hospitals around the country. Two of our new evaluation sites are children's hospitals and others have expressed interest. Recently, another surgical -- neurological surgical team at Cincinnati Children's Hospital performed the first stereotactic laser ablation of the hippocampus procedure entirely in the MRI suite on a pediatric patient utilizing our ClearPoint system. This is the first procedure of this type in the State of Ohio. We understand the procedure went well, the patient is doing well, and we are pleased to work with Cincinnati Children's team in providing great care to the patients. Our conversations with potential accounts now often include discussions regarding two or more of these procedure types. This helps the capital side of our business as a counselor [ph] learning the multi dimensionality of our ClearPoint system. As a result, more accounts are more interested in ClearPoint. Overall, interest from the neurosurgery community continues to grow and we are encouraged by the discussions we are having that include DBS and more. Our peer-to-peer marketing efforts are going well and we are fielding more and more requests to provide information to speakers at a variety of medical conferences and lectures. We supported several events in the first quarter were it totaled over a hundred clinicians who had one or more of our current users speak about the benefits they are experiencing from the use of ClearPoint. At one event, we supported in February, surgeons have the opportunity to listen to lectures on the first day of the course and participate in a hands-on lab session the next day. Several technologies were featured at this course and the ClearPoint stations were very popular and well attended. As I’ve said, interest in our technology continues to grow. To ensure our field people are well prepared to support ClearPoint cases; in Q1 we conducted multiple training events to enhance the clinical and technical knowledge of our sales people and our clinical support people. In particular, training of all stuff on the laser procedures and our three-legged stool approach for ClearPoint, including DBS, laser ablation, and biopsy has been productive. All of our reps and clinical support people are now well versed in all of our primary procedures and we will continue to invest in additional training to ensure they are viewed as experts by their customers. On the cost side, as I've said many times before, we are focusing on building the commercial business at hand. This includes not only growing our revenue, but also reducing and focusing our cost as an organization. A major part of this cost management is the consolidation of Memphis roles into Irvine, which we announced a few weeks ago. This consolidation is well underway and we are on track to close the Memphis office in mid-May as we planned. With this consolidation come certain one-time expenses. These one-time expenses are due to severance in retention payments, as well as the cost of exiting the office space. We’ve taken a charge against earnings in Q1 and most of the cash payments will occur in Q2. By Q3, we anticipate a noticeably lower net cash burn rate than we’ve had. As part of this transition to Irvine, and as I said earlier in the call, how Hurwitz has joined as VP of Finance, in Irvine and will become the CFO immediately following the filing of our first quarter 10-Q, which will occur in early May. We have also expanded our Irvine-based marketing team and continue to build out the Irvine office as our headquarters location. All of these efforts to reduce costs are done with an eye on our current focus. Are we spending our dollars in a way that supports the commercialization of ClearPoint, if not, cut it. If so, grow it or at least maintain it. We're pleased with the renewed focus and the progress we are making. The interest in our technology for a highly accurate delivery of drugs under real-time MRI guidance continues to be strong. We have received inquiries regarding at least three more drug trials interested in utilizing ClearPoint to ensure the drug rechoose the intended target. These discussions are early, and none have been formalized, but they’re evidence of the big interest in our technology for local drug delivery. Also as I mentioned a few weeks ago, we are continuing to evaluate our plans and options for the best path forward related to the commercialization of ClearTrace. We continue to be excited about this technology and the potential it brings. We are reviewing several options here, but no final conclusion at this time. As our options fully develop, we will be sure to communicate them to our shareholders. So in summary, we are pleased with the quarter. We had an all-time high in disposable product sales. We added several promising new accounts. We made significant progress on the consolidation into Irvine. We’ve continued strong interest from potential drug delivery partners who have taken several steps to dramatically lower the net operating burn. On top of all this, we are feeling more momentum in the business than ever. Interest is high and we continue to make progress. Adoption of our technology continues to grow and as it grows, momentum for it builds. We are changing our neurosurgery as done, where it is done and in some instances what can be done. This has not happened overnight, it is brain surgery after all. Yet we are confident of the value our technology brings to patient care, we are committed to bringing this value to more and more hospitals, surgeons, and patients and the marketplace is responding with growing interest and growing use of our products. With that, I’d like to open the call for questions. Danielle?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Tracy Marshbanks from First Analysis. Please go ahead.

Yes, good afternoon and thanks for taking the questions and good luck to all [indiscernible] company aren’t leaving. So I got several questions. First, it's pretty exciting that you have advanced with a 100 clinicians. Question on -- two questions on that. One, what is the feedback response? Any particular feedback and response that they face and maybe converting to your technology, and what type of system and process do you have sort of running behind the scenes to make sure you try to convert as many as possible to customers in the follow-up?

Sure. Tracy thanks for the question and good to hear from you. Regarding what is the feedback, so first of all, the feedback particularly when we’re in front of functional neurosurgeons who do most of the procedures we're talking about is all -- I can’t, I guess I can’t say always, but generally very strong. They get it. When you talk to a neurosurgeon about doing surgery with direct visualization in the MRI they understand it immediately. These are surgeons who are familiar with MRI visualization and really like the idea of being able to do an actual procedure without kind of visualization and guidance real-time. As far us a follow-up, at most of these courses, I can’t say every single one, but most of these courses our folks are present in the course. So for instance, the course I refer to in February, a couple of our clinical specialists were actually in the lab sessions manning the stations and they’re with our technology talking to the surgeons, talking to the clinicians. And so of course, afterwards we all get together and talk about who were the folks at the course who show the most interest and immediately we direct our sales reps in that direction. So it's actually a pretty seamless process given we typically have our commercial folks at many of these courses. There is a few that are continuing medical education type. Courses where they don't like to have sales reps in the audience, but even then very often we will have a clinical specialist there to do product overviews. So it's pretty seamless.

Okay. And maybe turning to the one capital sale and the four placements, just maybe take us through when initial contact was made with those? And it sounds like the evaluation process is both the side evaluating your technology, as well as you evaluating the site. But take me through some timelines and key milestones and points that you look at under that program?

Sure. Sure. So, the evaluation process is a good process and we’ve been pleased with the way the program has come together over the last couple of quarters. So if you think about our sales process it virtually always starts with a neurosurgeon. So neurosurgeon drives the interest and becomes our champion at the account. So from that we start with the neurosurgeon very often at a course, at a trade show, that kind of interest is developed. And from there our sales reps work with the surgeon to identify who else in the account is part of the decision making process. That is where it can get a little complex. We are not just dropping in a new widget into an account; we’re changing the workflow and working with the account to develop a new offering. So from there the reps often have to work with radiology, they work with administration, they work with all our staffing et cetera. So there is a lot of touch points involved, and that often culminates in evaluation agreement that the account signs with us. That evaluation agreement includes a quote for the capital equipment and we ask them to make a decision within 90 days. What I look for when we do the devolves [ph] is that a surgeon who a: has the volume of patients and b: is looking to continue to build their volume and perhaps even differentiate themselves from their -- in their community to be doing this kind of work. So within 90 days of getting our system installed and integrated into their MRI, we look for procedures. So even account has our system and he is doing several procedures in the first 90 days and sometimes we will extend that. Very often we can predict that will turn into a capital sale. Where it gets tricky is where it takes on a longer time to get going on the procedure front and that’s something we monitored very closely. But once they get going, it turns into a good account.

Okay. Maybe a little bit more on the nuts and bolts in financial side. You refer to noticeably lower net burn. Just wondering as you go through the restructuring and consolidation, if you can give us a little guidance on the expense side, what do you think you’re saving once you exit the transition period on a run rate basis?

So we are not currently giving guidance, Tracy. So I can’t give you an exact number. But if I look at where we are, we’ve got the Memphis consolidation with a couple of executive roles transitioning out of the Company. We’ve got some further consolidation including; for instance, we had a small engineering office in Baltimore that we’re also eliminating. And we're also focused on pretty much all the other variable costs that we can identify for expense reduction. So I do see it being a significant reduction in the net burn. You'll particularly see it coming out of the SG&A line. And so by Q3, I think the P&L will look very different.

Okay. And you called out some specifically on the as far as the chair side, but are there some more in addition to that, that we will start see in 3Q?

Correct.

Okay. On the kits in procedures do you actually have a -- what type of visibility do you have on procedures and relative to kits shipped, do you know the exact procedures or do you know what you're shipping and how do you keep, sort of line of sight on what might be in the supply chain or on the shelf someplace?

Sure. Yes, we have relatively good insight into procedures, not perfect. And we're actually working on some software for our sale reps to start inputting into to give us better insight there. And then of course we watch the kit sales very closely as you can imagine at our sites. We are careful about stuffing the shelves at the end of the quarter. We don't like to do that. Some of our larger accounts do stock products of course, I'd say, just to have safety stock there and some other accounts that are still lower volume in the early stage of their ramp are pretty much on a just-in-time basis. So we are cautious about stuffing the shelf at the end of the quarter. We don't like to do that. So I think the revenue line of kits is a good reflection of the growth overall.

And is that growth really basically volume or have you had any pricing action -- material pricing action on kits?

It’s volume. It’s not pricing.

Okay. Thanks very much. I appreciate it.

You bet.

[Operator Instructions] The next question comes from Bruce Conway, a Private Investor. Please go ahead.

Hi, Frank. I just want to say congratulations for record disposables for the first quarter under your helm. You are off to a great start. I appreciate it. Could you provide an approximate breakdown on the number of DBS versus ablation procedures? And maybe offer a little color on the future outlook for ablation? Thank you.

Sure. Thanks, Bruce. I appreciate the comments. Our procedure mix is evolving and what we are seeing is DBS as a percent of the total is much less than it was a year-ago. I would say, a year-ago it was probably in the 80% plus range and it's much lower than that. However, before -- I'm not quite prepared to give you an actual number as it does bounce around quarter-to-quarter. So we are seeing these other procedures come in from additional new accounts. We are also seeing them come from our existing accounts. I can think of that at least three or four accounts this quarter who added existing accounts from prior times, who added additional types of procedures, so that's exciting to see. And I would expect over time we'll continue to see growth in DBS, but I think that the mix of DBS will continue to decline over the next several quarters in terms of the percent of total. In terms of the fastest growing areas, I’d predict at this point that our laser ablation procedures have the potential to grow faster than DBS. But again, it does bounce around a lot month-to-month, quarter-to-quarter. So I don't think I could peg actual percentages quite yet.

Thank you.

There are no further questions at this time. I would like to turn the floor back over -- I'm sorry, actually there is another question. The next question comes -- another repeat question comes from Tracy Marshbanks from First Analysis. Please go ahead.

Thanks for taking that. I apologize for extending the call. But I know you had -- you deal with some of the actual laser ablation companies in partnerships or in delivering therapy as you know one got acquired, could you talk about the relationship and/or not with that company and how you see sort of the market moving forward since you have part of the solution and the laser itself the other part?

Sure. Sure. Thanks for the additional question Tracy. So I would describe our whole approach to the laser market as a friendly Switzerland approach. Meaning, we want to be working with both companies and with both Monteris and Visualase/Medtronic. And currently we do, we’ve been doing cases with both types of lasers. I would say that we do more with Visualase and I think that reflects their share in the marketplace. And so right now and for the foreseeable future our goal is to work with both companies as we provide -- as we believe we provide a good solution for navigation and placement of those fibers regardless of which choice a customer makes. I know that those two are fighting tooth and nail in the marketplace as two competitors should, and we just want to be the friendly Switzerland and work with both. We have not had a challenge in doing that. Both companies understand our position and that continues to go fairly well. We do education whenever we can with those companies. We have AANS coming up this weekend. We actually had one event with Monteris and another one where we will be talking -- we will have a Visualase surgeon speaking. So we’re doing a good job I think of being that friendly Switzerland.

Okay. Thanks.

There are no other further -- there are no further questions at this time. I like to turn the call back over to Mr. Grillo for closing comments. End of Q&A

All right. Well, I just appreciate having you folks join us and hearing about our progress. We thank you for your support and we look forward to the call another quarter from now. Thanks again. Bye, bye.

This concludes today’s conference. You may disconnect your phone. Thank you for your participation.