ClearPoint Neuro, Inc. (CLPT) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the MRI Interventions' Inc. 2017 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Frank Grillo, Chief Executive Officer. Thank you. You may begin.

All right. Thank you, Audrey. I appreciate that introduction. Thank you everyone Good afternoon. Thanks for joining our Q1 2017 earnings call. With me for today's call is Hal Hurwitz, our CFO. And on behalf of the management team and employees of MRI, we appreciate your interest in our company. And for those of you who are shareholders, thank you for your support. In early April, we pre-released our record revenue and ClearPoint case numbers as we wanted to get the news out quickly. For today's call, we have lots of other information to share about both revenue growth and our income statement, as well as new strategic initiatives that expand the treatment opportunities for our MRI-guided surgical platform and do so in a relatively short timeframe. Our momentum going into Q2 is strong as the adaption of our technology continues and we are very pleased with our position and progress on the market. We are honored to be working for you in building this great company and we are 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 Q1 2017 financial results. Then I'll provide further context regarding our progress in the marketplace. Hal, back to you.

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, our 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, 2016, which has been filed with the Securities and Exchange Commission, as well as our quarterly report on Form 10-Q for the quarter ended March 31, 2017 that we will be filing with the SEC on or before May 15, 2017. All our filings may be obtained from the SEC or by visiting our website at www.mriinterventions.com. Now let's discuss our results for the quarter ended March 31, 2017. Total revenues increased 44% to $2 million for the three months ended March 31, 2017, an increase of $613,000 compared with $1.4 million for the same period in 2016. This increase was due primarily to a 51% increase in our disposable product sale, which grew to $1.7 million for the three months ended March 31, 2017, compared with $1.1 million for the same period in 2016. Disposable sales reflected a record 146 ClearPoint narrow navigation system procedures performed in the 2017 first quarter. ClearPoint reusable product sales were $259,000 for the three months ended March 31, 2017, compared with $262,000 for the same period in 2016. Reusable products consist primarily of computer hardware and software bearing sales prices that are appreciably higher than those for disposable products and historically have fluctuated from period to period. Gross margin on product revenues for the three months ended March 31, 2017, was 61% compared to gross margin of 49% for the same period in 2016. The increase in gross margin was due primarily to more favorable equipment configuration of hardware and software and ClearPoint system sold during the 2017 first quarter compared to the prior period. The increase in gross margin also reflected greater production efficiencies achieved due to higher sales and production volumes relative to the same period in 2016. Research and development costs were $558,000 during the three months ended March 31, 2017, down 15% compared to $657,000 during the same period in 2016. This decrease was due primarily to decreases in personnel costs, professional fees, and product development costs. Selling, general and administrative expenses were $2.1 million during the three months ended March 31, 2017, compared with $2 million during the same period in 2016. The increase was primarily attributable to additions to our clinical specialist group to support the increase ClearPoint cases and increased professional fees, partially offset by a decrease in stock-based compensation costs. As a result of the increased revenue, improvements in gross margin, and continued expense management, our operating loss for the three months ended March 31, 2017, declined $580,000 or 30% to $1.4 million as compared with $1.9 million for the same period in 2016. The first quarter 2017 net loss includes a non-cash loss of $93,000 resulting from changes in the fair value of derivative liabilities. In contrast, the first quarter of 2016 included a non-cash gain of $160,000 from derivative liabilities. For the three months ended March 31, 2017, such derivative liabilities related to down round price protection of warrants issued in 2012 and 2013 and an amendment in June 2016 of our note payable to Brainlab that added contingent conversion terms and potential down round pricing protection of warrants issued in connection with our April 2016 restructuring of that note. For the three months ended March 31, 2016, derivative liabilities were limited to the down round price protection related to the warrants issued in 2012 and 2013. Net interest expense during the first quarter of 2017 was $213,000, a decrease of $132,000 or 38% from $345,000 in the 2016 first quarter. This decrease was due to the reduction of principal balances of the note payable to Brainlab following a restructuring of that note and to the conversion as part of the private equity offering in September 2016, a certain notes payable originally issued in 2014. I will expand on the Brainlab note restructuring and the 2014 note convergence in a moment. Reflecting the effects of these non-operational items, net loss for the three months ended March 31, 2017, was $1.7 million as compared with $2 million for the same period in 2016. Regarding the Brainlab note, in April 2016 we restructured our notes payable to Brainlab. And other items we entered into a patent and technology license agreement with Brainlab for software relating to our SmartFrame device in consideration for the cancellation of $1 million of the principal amount of the Brainlab note. And 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 the shares of our common stock and warrants to purchase shares of common stock. Regarding the conversion of the 2014 notes, on August 31, 2016 we entered into amendments with two holders of the 2014 junior secured notes. The amendments provided that in the event we were to close a private equity offering, those noteholders would convert in aggregate $1.7 million of principal based on the private offering price and the exercise price for the related warrants issued in 2014 would be reduced based on the private offerings terms for warrants exercise pricing. On September 2, 2016 we completed a successful private equity offering resulting in the principal conversion and the reduction of the warrant exercise price. With that, I will turn the call back to Frank.

Okay. Thank you, Hal. Let me start with a quick perspective on Q1 and then I will discuss the new initiatives that were recently announced and the additional opportunities we are now pursuing. For Q1 2017, we had a great quarter and we've had a number of new records for the company. Some of the highlights from the quarter included year-over-year revenue growth of 44%, including the first time quarterly revenue has exceeded $2 million. We had a record 146 procedures in the first quarter, our eighth quarter in a row of growth in procedure volume. We saw a continued strong growth in both BDS and laser ablation cases within our core narrow surgical user market evidenced in further adoption of our platform and we continue to expand our installed base with two capital deals closed, bringing total to 49 sites worldwide. Also we have four accounts completing our first procedure with ClearPoint in the quarter and we launched three new evaluation sites in the quarter. And perhaps most importantly, our new account pipeline continues to grow positioning us for further success. All of these achievements show the ongoing adaption of the ClearPoint system Neuro Navigation Technology. We continue to see growing interest in the platform and we're pleased to see the progress overall. I would also like to reiterate a few performance metrics on the income statement that demonstrate the result of our progress. We achieved a product gross margin of 61% in Q1. This is the highest to date and we have had very nice progress in this area over the last year. In fact, a year ago in Q1 of 2016, our gross margin was just under 50%. We have made steady progress on this throughout the year and there is definitely more room for improvement as we continue to increase volume of our disposable products. In addition, we have held our operating expenses effectively flat compared to a year ago. As a result of 44% sales growth, improved gross margins and flat operating expenses, we saw a nice decline in our operating loss, a decline of almost 30% versus a year ago. As I've mentioned frequently, we have the opportunity for tremendous leverage in our P&L and our first quarter 2017 certainly showed evidence of that leverage as we continue to ramp procedures. Our use of cash was in line with budget and we continue to focus on reducing our use of cash through tight expense control and more importantly through growing the topline. In short, we had a great Q1 and Q2 is off to a strong start as well. It looks like April will start a new monthly record for ClearPoint procedures and that includes the impact of the annual AANS Conference that's just concluded this week. I was there earlier this week. This is the core sign of the health of our business. It's a little too early to forecast the full results for the quarter, but it's looking like another good one. Okay. Now, let me turn to some of the news we had released in the last few weeks. We are very excited about a couple of new developments as they showcase our ability to leverage the ClearPoint MRI-guided platform into additional procedures and expand our patient opportunities. These opportunities may be additional procedures within our existing user base or entry into a new user base through the combination of our ClearPoint platform with other additional technologies. We've recently announced development agreements with Category William [ph] Partners that evidenced both of these opportunities. The first item for me to discuss is our joint development agreement with Mayo Clinic Phoenix. This is an exciting program for us and we look forward to working with the neuro surgery group headed by Dr. Bernard Bendok and some of the staff there. Our initial focus will be on stroke. Stroke is the fifth leading cause of death in the United States and the leading cause of permanent disability among Americans. The initial focus of our collaboration with Mayo is the development and commercialization of a novel MRI-guided product for the treatment of intracerebral hemorrhage, a form of stroke. As you may know, there are two primary types of strokes, ischemic stroke typically caused by an occlusion in a blood vessel in the brain and intracerebral hemorrhage often referred to as ICH, which is a type of stroke caused by bleeding deep within the brain basically either a blood vessel or an aneurysm burst releasing a significant volume of blood into the brain tissue. ICH is considered the deadliest class of stroke due to accumulation of blood clot in the brain, resulting in compression of adjacent brain tissue and toxicity to brain cells surrounding the damaged area. ICH occurs in 80 to 100,000 Americans annually and it's fatal in 30% to 50% of all occurrences. It represents one of the great unmet clinical needs in acute stroke. This is a development effort and our initial product offering will go directly on our ClearPoint Neuro Nav System. The concept here is to utilize the unparalleled intraprocedural visualization capabilities enabled by the ClearPoint system and combine it with an MRI set of devices for moving the major blood clot from the brain. This is an evolving therapy and we're seeing more interest in this treatment approach in the neurosurgical community. A couple of clinical studies referred to as the MISTIE trials, M-I-S-T-I-E trials, I've shown that removing the clot from the brain as soon as the hemorrhage itself has stopped can lead to better outcomes in patients. These trials - the trial referred to as MISTIE II, in particular, showed that removal of the clot of blood resulted in better outcomes. As you note, the MISTIE II was not large enough to be significant and MISTIE III, an independent study, is looking to provide further definition in this area. Overall, our goal here is to provide a better product offering, which can enable surgeons to remove the blood clot on their MRI guidance in imaging and therefore be confident in the amount of clot they remove, a thoroughness of the clot removal and also be confident that no further hemorrhaging is occurring. I want to note also that almost all of our user sites that are not children's hospitals have a stroke program and/or Level I or Level II stroke treatment center. As I've discussed, most of our sites have large academic medical institutions and most of these treat stroke patients. This means our existing user base will already be familiar with and looking for means of treating ICH. We believe the development timeline for this approach could be approximately 12 to 18 months. AMS, all right, let me move on to our next agreement, which we announced, actually just announced this morning in a press release. The press release described our license and collaboration with Acoustic MedSystems. Excuse me, I'm going to have to pause. I have to sneeze. I'll be right back with you. Sorry about that. Just this morning we announced the license and collaboration agreement with Acoustic MedSystems, a technology development company outside of Champaign, Illinois. AMS has developed Acoustic MedSystems goes by the initials AMS and they have developed an Ultrasonic Ablation Technology, which is quite unique. Their technology puts ultrasonic transducers at the typical catheter or surgical pro and enables us the surgeon to carefully control and steer the energy from the transducer to ablate tissue in a precise manner. With up to four transducers on the tip and each of those able to be segmented further into four quartiles, we believe the surgeon can sculpt the ablation zone to fit the contours of the tumor. Our license with AMS is for pancreatic cancer and this is our initial progress. Pancreatic cancer is a debilitating form of cancer with over 50,000 patients diagnosed each year in the United States. And approximately half of these patients, the cancer has already metastasized to other locations up on diagnosis and it's not treatable surgically. In cases where the cancer has not metastasized and it's still locally confined to the pancreas, the tumor is often complex in shape and structure due to the vascular structure adjacent to the cancerous tissue. Due to this complexity, it is estimated that surgeons are unable to surgically resect these otherwise local pancreatic tumors in approximately 12 to 16,000 patients per year. By combining our know-how in MRI-guided procedures with AMS' ability to utilize ultrasonic energy to ablate complex tumors, we believe we can provide a therapy for these patients, which will enable surgeons to reduce the size and shape of the tumor with ablation and then resect the previously unresectable pancreatic cancer. We look forward to further developing this exciting technology with AMS. This agreement represents an expansion of our platform into a new user base that we're pursuing an unmet clinical need through the combination of two 510(k) cleared medical technologies. As such, we believe our development timeline could be 18 to 24 months to begin commercial sales of this technology. In each of these cases, we not only expand the potential treatment opportunities for our platform technology, but also enhance the potential usability of our MRI-guided platform in our install sites. By leveraging the platform with these new applications, we believe we can, not only increase the utility of our platform to the hospital site seeking value from its capital asset, but also further integrate MRI-guided therapies into the center's medical regiment and generate additional disposable sales. As you can see, we are very excited for the second quarter and the rest of the year. Not only do we see further growth in procedures across our user base, we continue to launch new sites which are beginning their own ClearPoint programs. With the addition of our development agreement in ICH, we add an additional procedure to an existing user base expanding the potential treatment opportunities at our user sites. With the addition of ablation technologies from Acoustic Medical Systems, we believe we can enter an entirely new treatment area where the precise real-time imaging and thermography provided by our MRI-guided platform can address an unmet need. To close my comments, I would like to highlight a recent story about a recent patient who benefited from the use of the ClearPoint system. This is a story about a young, very active young woman. She suffered from unexplained episodes throughout her life, not quite procedures, but more described as episodes, uncontrolled laughing, sobbing, shivering, other unexplained behaviors that could occur at very awkward times. She was very active in school and went to college as a Division 1 athlete. However, the pressures of school and sports mounted and the episodes got somewhat worse. She took some time off and made a full effort to understand her health. She ended that search in front of one of our customers' who was able to diagnose her with a hypothalamic hamartoma of the nine tumor in the brain putting pressure on the hypothalamus. Our surgeon customer was very confident he could treat her and he did. He utilized ClearPoint to guide a laser fiber to the tumor and he was able to ablate the tumor and relieve the pressure on the young woman's hypothalamus. She is now back at school and intends to be a nurse. She has not had episodes since the surgery and she and her parents are thrilled at the outcome. She even said she wants to become a nurse at the hospital where she was treated. Once again, I and all the employees of MRI Interventions are reminded why we do what we do and we are proud of what we do. With that, I will hand it back to the moderator for any Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Jeb Terry with Aberdeen Investment Management. Please state your question.

Good afternoon, Frank.

Hey, Jeb. How are you?

Fantastic, great to see this growth, can you add some color on the utilization rates and how it's continued in April and what you might think that rate going forward and furthermore what the impact on that utilization might be from the recent article in the journal for healthcare risk management?

Okay, great. Thanks for that question, Jeb. Yeah, so utilization, I mean, we've seen nice steady procedure growth over the last several quarters. So, utilization in total and on a per se basis has definitely risen over the last few quarters. And we continue to see that trends happening and if you can hold on a minute, I have some sirens in the background, just hold one moment please. My apologies. I'm in New York for this call today. So, the utilization trends we are seeing continue to go in the right direction. As I mentioned, I think April will be our strongest or highest month for procedures ever. So, we are very pleased to see that. And I expect that we will have another pretty strong quarter in Q2. And now the paper you are mentioning, the risk management paper, this is a paper that was published two weeks ago and we actually were so pleased to see it. We put out a press release on Monday of this week describing the patient risk reduction methods for doing later ablation and a two-room procedure or a one room procedure. So, a two-room procedure means they are doing - starting the procedure in the operating room and then transporting the patient down the hallway with a hole in their head and a laser fiber sticking out and all the risks inherent in that kind of transport and then they have to take the patient out and put them in the MRI as well to do the actual ablation. One-room procedure really refers to - it's a generic term essentially for using our system, the ClearPoint system where the whole procedure is done inside the MRI. The paper provides some guidelines and hints and techniques on reducing risk either way frankly and if you flip through it you will see that the recommendations of the paper on how to reduce risks for the two-room procedure are much more involved in extensive and for the one-room procedure since you don't have the whole patient transport challenge there. So, what will be impacted by a Paper D, I do think it would definitely get some attention amongst the laser ablation customers out there and you can be assured that our sales people will bring it to their attention, so we are very pleased to see it overall.

In that respect, I mean, it's just coming off of the AMS. I'm just kind of curious can you tell me about some of the doctors who are doing double-digit number of cases per quarter versus prior quarter and how - you mentioned in the earlier - I think in the fourth quarter call, something about reaching that 10% penetration or 20% penetration where you would expect to see more growth. Is that still the case?

Yeah. I still feel that the magic number in medical type adoption is probably in that 15% to 20% share as the need at adoption curve if you will. In laser ablation, we estimate that we are right in that 15% to 20% share range of share procedures done with our technology and we continue to see some great results. We had a few instances this quarter of folks attempting laser ablation procedures without our technology and they stopped the procedure and rescheduled it to make sure they could use ClearPoint. So, when I see that, that's very encouraging. We also had a couple of folks this quarter who really saw - we really saw some volume ramping for a couple of doctors who somehow within their local community and their neurology referral groups, they had critical mass. Now, I don't know the exact numbers of patient populations for that doctor, but clearly there are a couple of doctors where the neurology community in their area after four or five quarters of good results and modest volume from the local neurosurgeon with our technology have started to shift all their patients to that individual and we've seen some really nice pickup with a couple of folks in that way. And that's exactly what we want to see across the board and it's also why I've described on previous calls. We are at the point where we have enough penetration in the United States that we need to begin marketing too in neurology community more than we had in the past. We have traditionally just started with the neurosurgeon. There are prime customers. They drive the purchases and that's where we should start as an early stage company and now we are reaching that point where it's time to go out more to the referring physicians or not instead of the neurosurgeons, but in addition to them. And that's what we will start working on over the next few quarters as well, these marketing programs in that area.

I'm sorry. I will ask one question and get back in the queue. But on the number of evals, you had a - you were very pleased with the paces of new evaluations and I think you had two new installs or purchases in the first quarter. Is that continuing? Is there something that's going to drive that? Is that with the article if you just refer to first that number [indiscernible] have you seen anything that suggests that might be the case?

Well, Jeb, that article came out a week ago, so I'm not sure if I can point to anything quite yet. But certainly it is a key sale for our sales guys. On the capital front, we've already had a couple of capital sales this quarter. I think it's okay to disclose that since I know we've got the POs and we do expect additional evaluations to come in this quarter. I don't want to give too much color on those yet, because the paper work is not signed. But we expect that as well. So, continued focus on growing that installed base and making it happen.

Great. Thank you.

Thank you, Jeb.

Thank you. [Operator Instructions] Our next question comes from the line of Rodney Baber with Paulson Investment Company. Please state your question.

Hey, Frank, terrific quarter. I appreciate it. The good news [indiscernible]. A couple of things, I mean, yeah, we're sitting around that and there is a lot of metrics that play into it, but I've asked you for a long time if there is a figure seeing a serious reduction in the sales cycle and when your revenues are going up 44% and things like that, that explains it. Obviously, that's going on. But with the success you are having and the new docs and all those things, are you seeing a meaningful improvement in the sales cycle that you could explain to us so that we could understand?

Hey, Rodney, well, thanks for joining the call and thanks for the question. That's a great question, Rodney. And we are definitely seeing that sales cycle and that level of interest from surgeons continue to increase. Not the sales cycle, the sale cycle is reducing the level of interest from surgeons is increasing. And I would say for - in the beginning of the quarter of the first quarter, we had a couple of small meetings and trade shows where we met some surgeons from children's hospitals who did not know much about ClearPoint and almost immediately they were on the phone with our reps and, hey, I've got a young patient. I want to get this right now. And so in a few instances, we are definitely seeing that sales cycle come through very quickly and happen in the very positive way. Now, there is still a couple of accounts we've been working on for a long time and they have been suddenly flipped for us. But what I do feel really good about now in the marketplace is when we start talking to neurosurgeons about this concept of anatomic targeting, seeing where you are going as you insert things into the brain, the concept is well accepted and what we provide is the tools to be able to do that and that's definitely accelerating some of the conversations. So, in general, I would say, yes, we are seeing some more progress there for sure.

We still have the issues of proven things, which move into the new - the two new products are pretty much - I know you answered this, but just to get your thoughts on it. Is there any other meaningful competition out there that could be delivering the solutions that you guys can deliver to Mayo and AMS and then is there anything else out there right now that you see coming down the pipe?

In terms of being - it will provide MRI-guided therapies. I do not see additional technologies out there, biting at our heels or coming up from behind us. I strongly believe that we still have a unique leading platform for MRI-guided procedures and I am very excited this quarter to add some technologies that allow us - enable us to really pursue broadening our procedure days in addition to functional neurosurgery bringing some new areas and I don't see other companies that can provide that level of real-time imaging guidance. Now, I always give the caveat. There is competition in forms of other technologies and other surgical approaches, but I believe that, A, we have the best imaging guidance out there, a navigation system and I do not see anyone coming close to us in the MRI-guided arena.

Great. Thanks very much.

Thank you, Rodney. Thanks for joining.

Yeah, bye-bye.

Thank you. There are no further questions at this time. That does conclude our question-and-answer session. I would now turn it back to Mr. Frank Grillo for closing comments.

All right. Well, thank you, Audrey. Thank you. And to everyone on the phone, I appreciate you joining and listening in. We appreciate the interest of our investors and we hope that you sent our excitement about the progress of the company both in our core functional neurosurgery business, as well as our excitement about the new technologies that we've recently brought in to the company and provide us a great opportunity to expand the use of our MRI guidance platform into additional procedural areas. We had a great Q1 to kick off 2017 and we expect this momentum to continue. We've added two new exciting potential platforms and we are eager to jump into these programs. We are changing how neurosurgery is done, where it's done, and in some instances what can be done. And now we have the potential to change ICH treatment and pancreatic cancer surgery as well. 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 and we look forward to speaking more over the next several months. Bye-bye.

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