ClearPoint Neuro, Inc. (CLPT) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the MRI Interventions' Inc. 2017 Second Quarter and Six Months Financial Results Conference Call. [Operator Instructions]. 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, for company's plans, prospects, and strategies both preliminary and projected; management's expectations, beliefs, estimates, and projections regarding future results of operations. Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information on 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, and the company's quarterly report on Form 10-Q for the quarter ended June 30, 2017 that the company will file with SEC on or before August 15, 2017. All the company's filings may be obtained from the SEC or the company's website at www.mriinterventions.com. I would now like to turn the conference over to our host, Mr. Frank Grillo, the CEO. Thank you. You may begin.

Thank you, Jim for the intro. Appreciate that. Thank you and good afternoon everyone. Thanks for joining us for the Q2 2017 earnings call. With me for today's call is Hal Hurwitz, our CFO, and 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 we thank you for your support. Now in early July we prereleased our strong revenue and record clear point case numbers as we wanted to get the good news out quickly. Also as you know we completed a transformational financing round in May adding significant cash to our balance sheet, enough cash we believe to bridge us to breakeven and beyond in our core neurosurgery business. For today's call we have lots of other good news to share about the business and some of the new initiatives we're working on. Our momentum going into Q3 is strong as the adoption of our technology continues and we're very pleased with our position in progress in the market. We're honoured to be working for you and in building this great company and we're proud that 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 2017 financial results and then I will provide further context regarding our progress after Hal. Hal up to you. Thanks.

Thank you, Frank. I will begin with a discussion of our results for the quarter ended June 30, 2017. Total revenues were $2 million for the three months ended June 30, 2017, an increase of $872,000 or 79% compared with $1.1 million for the same period in 2016. This increase was due primarily to an increase in our disposable and reusable product sales. ClearPoint disposable product sales increased $403,000 or 39% to $1.4 million for the three months ended June 30, 2017 compared with $1 million for the same period in 2016. This growth in disposable sales reflected a record 162 ClearPoint procedures performed in the 2017 second quarter. ClearPoint reusable product sales were $457,000 for the three months ended June 30, 2017 compared with $39,000 for the same period in 2016. Reusable products consists 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 margins for the three months ended June 30, 2017 was 60% compared to gross margin of 53% for the same period in 2016. The increase in gross margin primarily reflected greater production efficiencies achieved during the three months ended June 30, 2017 due to higher sales and production volumes relative to the same period in 2016. Research and development costs were $1.1 million during the three months ended June 30, 2017 compared to $750,000 during the same period in 2016, an increase of $334,000 or 45%, the increase was due to upfront payments aggregating $522,000 the majority of which was in the form of shares of our common stock required under the previously announced development agreements entered into an April 2017 with the Mayo Clinic and with Acoustic MedSystems, Inc. Accordingly the level of research and development costs during 2017 second quarter does not reflect anticipated near term spending level. Partially offsetting these upfront payments where reductions in software development and compensation expenses. Selling, general and administrative expenses remain stable at $1.9 million during the three months ended June 30, 2017 and 2016. Our operating loss for the three months ended June 30, 2017 declined $233,000 or 11% to $1.8 million as compared to a $2.1 million for the same period in 2016. Now let's turn to some non-operating items affecting comparability between the second quarter of 2017 and the same period in 2016. During the three months ended June 30, 2017 we recorded a gain of $31,000 resulting from changes in the fair value of derivative liabilities as compared to a gain of $264,000 for the same period in 2016. In April 2016 we recorded a debt restructuring gain of $941,000 resulting from the restructuring of the note payable to BrainLAB and in June 2016 we recorded a debt restructuring loss of $820,000 resulting from note amendments we entered into with BrainLAB and certain other note holders. There were no debt restructuring gains or losses in 2017. Net interest expense during the three months ended June 30, 2017 was $213,000 as compared with interest expense of $251,000 for the same period in 2016. This represents a decrease of $39,000 or 15%, this decrease was due to the reduction of principal balances of the note payable to BrainLAB resulting from the April 2016 restructuring of that note and a certain other notes payable resulting from note amendments we entered into with those note holders in August 2016 that allowed for conversion of an aggregate of $1.75 million with their note balances into equity in connection with our September 2016 private offering of equity unit. Reflecting the effects of these non-operational items net loss for the three months ended June 30, 2017 was $2 million as compared with $1.8 million for the same period in 2016. Now let's discuss our results for the six month period end of June 30, 2017. Total revenues were $4 million for the six months ended June 30, 2017, an increase of $1.5 million or 59% compared to a $2.5 million for the same period in 2016. As was the case with respect to the quarter, this increase for the six month period was due primarily to an increase in the company's disposable and reusable product sales. ClearPoint disposable product sales increased $965,000 or 45% to $3.1 million for six months ended June 30, 2017 compared with $2.1 million for the same period in 2016. This growth in disposable sales reflected a record 308 ClearPoint procedures performed during the six months ended June 30, 2017. ClearPoint reusable product sales were $765,000 for the six months ended June 30, 2017 compared with $301,000 for the same period in 2016. Gross margins for the six months ended June 30, 2017 was 61% compared to gross margin of 51% for the same period in 2016 also due primarily to the effects of relatively greater sales and production volumes in 2017, relative to the same period in 2016. Research and development costs were $1.6 million during the six months ended June 30, 2017 compared to $1.4 million during the same period in 2016, an increase of $235,000 or 17%. The increase was due to the upfront payments under the development agreements with Mayo Clinic and Acoustic MedSystems that we previously discussed which were partially offset by reductions in software development and compensation expenses. Selling, general and administrative expenses slightly increased to $4 million during the six months ended June 30, 2017 compared to $3.9 million for the same period in 2016. Our operating loss for the six months ended June 30, 2017 declined $813,000 or 20% to $3.2 million as compared with $4 million for the same period in 2016. Turning to non-operational items, during the six months ended June 30, 2017 we recorded a loss of $62,000 resulting from changes in the fair value derivative liabilities as compared to a gain of $424,000 that was recorded during the same period in 2016. During the six months ended June 30, 2016 we recorded a net gain from debt restructuring of $121,000 arising from the restructuring of the note payable to BrainLAB and certain other notes payable as we previously discussed. There was no debt restructuring in 2017. Net interest expense during the six months ended June 30, 2017 was $426,000 as compared to interest expense of $596,000 during the same period in 2016. This represents a decrease of $171,000 or 29%. This decrease was due to the reduction of principal balances we previously discussed, reflecting the effects of these non-operational items net loss for the six months ended June 30, 2017 was $3.7 million as compared to a $3.8 million for the same period in 2016. With that I will now turn the call back to Frank.

All right. Thanks Hal. Let me start with a quick perspective on Q2 and then I'll discuss some of the new initiatives we have underway. For the second quarter of '17 we had a great quarter and once again set a number of records for the company, some of the highlights from the quarter include as I mentioned year-over-year [Technical Difficulty] of 79% with a very solid quarter in terms of revenue and we're very pleased to have our internal plan for the first half of the year. We completed 162 procedures in the first quarter which was a new record and it was our ninth quarter in a row of growth in procedure volume. We saw growth in all aspects of our procedures, DBS, laser ablation and biopsies and we continue to work with several drug companies on their current and planned approaches to narrow [ph] drug delivery. We continued to expand our installed base with three capital deals closed and two new evaluation sites added bringing the total to 50 sites in the United States and perhaps most importantly our new account pipeline continues to grow and position us for further success at additional hospitals. We achieved a gross margin of 60% in the second quarter while this is down slightly from Q1 mostly due to a shift in product mix driven by three system sales in Q2, it's up from 53% in Q2 a year ago 2016. This gives a clear sense of the leverage we have in our manufacturing as we grow our volume. We've made steady progress on this throughout the year and there's definitely more room for improvement. Given the 79% sales growth continuously improving gross margins and good operating expense management our use of cash was the best we've seen in many years with a net operating cash burn of less than $1.1 million for the quarter. As I frequently mentioned that we have the opportunity for tremendous leverage in our P&L as our revenue base expands and our second quarter results further confirm what our Q1 results already showed. Our P&L and use of cash are improving nicely as we grow procedures. Given the continued decline in cash burn and the financing we just completed in May, we ended the quarter with close to $13 million in cash on the balance sheet. This is important to our customers, to our employees and to all of us. We believe that we now have the running room to get to breakeven in our core neurosurgery business and to accomplish what we set out to do is to enhance patient care and functional neurosurgery through the use of intra-operative MRI. Our customers no longer have questions about our financial status and our employees can easily see a bright future ahead for us. In short we had a great Q2 and Q3 is off to a strong start as well. It looks like August has the potential to set a new monthly record for ClearPoint procedures which is surprising for a summer month. This is the core sign of the health of our business as well as our success and [indiscernible] new sites and progressing them along the adoption curve. It's a little too early to forecast full results for Q3 but at this point we're confident it's looking like another good one. All of these achievements show the ongoing adoption of the ClearPoint system, Neuro Navigation Technology. We continue to see growing interest in the platform and we're pleased to see the progress in marketplace acceptance. To support our growing user base and increasing utilization of ClearPoint procedures we have recently hired on additional clinical support staff and are hiring for at least a couple more as we head to the year end. This is a necessary step to the both the overall increase in number of procedures and also the increasing number of dates where all of our clinical support staff are on site for procedures. We're gaining a reputation for having some of the most qualified clinical support people in the field and this team continues to show its value in driving adoption at our user sites. Our sales team is performing very well in finding increasing awareness of ClearPoint when they contact potential new sites. Anecdotally they used to do cold calls and work to educate potential sites about the benefits of our system but today they more often find sites that are already aware of ClearPoint and interested in learning more. During a neurosurgical procedure doing and a neurosurgical procedure in an MRI is no longer viewed as novel, we're not yet standard of care everywhere but clearly the acceptance of our approach to neurosurgery is growing. All right. Let me switch to an update on some of our major initiatives, as Hal mentioned we had a large increase in R&D expense this quarter mostly due to fees involved in our partnerships with Mayo Phoenix and Acoustic MedSystems. Most of these fees were paid in stock and did not utilize cash. Overall expense control was very strong and remains a priority for our management team. Now then let me provide a quick update on some of our major projects. First one to mention is Software 2.0, we have spoken in the past about our new ClearPoint software initiative and we're seeing nice progress on this front. This software built on an entirely new platform would be a notable step forward for us and we will add a number of new capabilities to our software platform. For example these enhancements include the ability to fuse images from multiple sources such as MRI or CT so a surgeon can be even more confident in the visualization of all of the critical structures of the patient's brain during the planning stages of the procedure. We received excellent feedback from surgeons on our latest working version of Software 2.0 and we expect to submit it to the FDA prior to the end of this year. Our ICH initiative, intracerebral haemorrhage. We recently visited our development partners at Mayo Clinic in Phoenix to review concepts, prototypes and workflow with the neurosurgery team there. We have a number of early stage concepts which look quite interesting and we continue to explore ideas on treatment of intracerebral haemorrhage. MRI visualization during such a procedure could add great value and we're pleased with the progress so far, this is a development effort and our initial product offering has potential to build directly on our ClearPoint Neuro Navigation system. The concept here is to utilize the unparalleled intra-procedural visualization capabilities enabled by the ClearPoint system and combine it with an MRI safe set of devices for removing 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. Okay, Let me move on to the next major initiative as we've discussed we have also licensed in certain rights to technology developed by Acoustic MedSystems or AMS. AMS has developed an ultrasonic ablation technology which is quite unique. Their technology puts ultrasonic transducers at the tip of the catheter or surgical probe and enables the surgeon to carefully control and steer the energy from the transducer to ablate tissue in a very precise manner. With up to four transducers on the tip and each of those can be segmented into four quartiles we believe the surgeon can scope the ablation zone to fit the contours of the tumour. Our license with AMS is for pancreatic cancer and this is our initial focus. Our goal here is to enable surgeons to initially ablate a local non-resectable tumor and then surgically resect the rest of it. Our goal is to enable an initial ablation to be done from inside the splenic vessel with a goal of destroying the tumor near the vessel thus ensuring the rest of the tumor is easily resected. This will be a complex procedure yet these patients have very little hope when diagnosed with these types of tumors presently. We have formally kicked off this project and conducted an initial animal lab to further scope our records. We're now diving in deep and as we get further into this program we will provide additional updates. Finally I want to mention that we welcome John Fletcher to our Board of Directors this past quarter. John is the Founder and Managing partner of Fletcher Spaght, a well-known healthcare strategy firm in Boston. John has extensive experience in healthcare and was on the boards of several companies, one of those is Spectranetics by the way which was recently sold to Philips for $2.2 billion or little doer seven time sales. Given our sales appear to be on track for 8 million to 9 million this year and our enterprise value is at about three times sales we find the ratio very interesting. As you can see we're very excited for the third quarter and the rest of this year. Not only do we see further growth in procedures across our user base we continue to watch new sites which are beginning their own ClearPoint programs. A new account pipeline continues to build and we expect additional sites to come on board throughout the rest of this year. Our Software 2.0 project is progressing nicely and recent feedback has been promising. With the Mayo and AMS agreements we have the opportunity to expand our product offerings and capitalize on the technology was developed over the years. To close my comments I would like to highlight a recent story about a patient who benefited from the use of ClearPoint. This patient was a 50 year old male who works as a chef and owns his own restaurant in the Pittsburgh area. He has won numerous awards and his prior restaurant was named The Restaurant of the Year in unprecedented eight years in a row in Pittsburgh. Over time he noticed his left arm was starting to shake and it continued to worsen, he sought help from his primary care physician who diagnosed him with Parkinson's disease. He began a prescription of meds and continued with his life. As you know Parkinson's is a progressive disease and this was no exception. Eventually this patient was referred to a surgeon at UPMC and they discussed implementation of a DBS system utilizing ClearPoint for the surgery to place the electrodes. The patient was much more comfortable with the ClearPoint approach then and awake surgery in a stereotactic headframe where he would have to guide the doctor in the placement of the leads. The surgery was successful and when the pulse generator was turned on the patient's symptoms dramatically improved. In fact his wife described the results by saying that once the generator was turned on "I saw the Parkinson's literally drained from his body." The patient's life is back to normal and he's back at work doing what he loves, including cooking, working out and playing soccer. It's tremendously satisfying to see the use of our technology contributing to these kind of outcomes. With that I will turn back to the operator to open up the call for Q&A. Operator?

[Operator Instructions]. Our first question comes from the line of Scott Billeadeau of Walrus Partners. Please proceed with your question.

Just a question on what's the sales force look like at this point? You kind of mentioned SG&A is kind of flat, trying to get sense how many guys are they -- how much maturity can they go up the curve and kind of give me a little picture of the current sales force and maybe what you expect it to be 12 months from now that would be helpful. Thanks.

Sure. Thanks for joining the call, Scott. So when people ask about our sales force I always like to first of all do some definitions. So we have a structure where we have four to five sales positions in the United States and these are folks who are going out really with a focus on opening new accounts and getting them up to speed and kind of managing the accounts themselves from a financial point of view and general account manager. We also have clinical specialists and we currently have I think it's nine or 10 of them. In the field who cover cases and are in most of our surgeries, most of the surgeries utilizing our products and that group is the group we've been hiring more aggressively on lately as our procedures continue to build. Over time you know I expect we will not have a huge number of sales reps, the guys that are really driven on new accounts. It's a fairly focused customer base and so you know could we grow that to 10 over the next year or two, yes, that's probably the kind of numbers we're talking about. The clinical specialists however as cases ramp up we ramp up clinical specialists. It's not quite a linear relationship because there's some economies of scale as we build and people spend less time traveling to cases but I would expect that that's a group that could grow to 15, 20, 30 over the next couple years as we continue to grow the number of procedures we're doing. SG&A was flat quarter over quarter, we had some high level turnover and we consolidated a couple of high level positions and hired folks in the field rather than replacing the top level and so we're able to continue to drive a great case coverage and good expense control by doing that.

Great. A follow-up is, is there the specialist and maybe talk about the kind of the different whether it's ablation or diagnostic or deep brain, DBS, is there one place growing faster than the other? Is there some place where we have a bottleneck because we have 9 or 10 guys but there's only four in one of these it's really grown. Any granularity there at all?

You know the key procedures for us now and this has been the case for a while our electrode placement for deep brain stimulation and laser ablation, both of those procedure areas grew nicely this quarter about in lockstep. So we continue to see DBS somewhere between 55% and 60% of our procedures and laser somewhere right around 30% of our procedures and the remaining procedures being split up amongst biopsy, drug delivery and couple other miscellaneous procedures. So we saw a nice growth across both. I think what we'll see over the course of the next two years is we'll see laser grow faster and laser over the last year did not grow as fast the market in general did not grow as fast as we anticipated due to some quality problems and organizational changes at the two companies that market the lasers but I think those are actually behind us in my conversations with those folks and they seem like they're back on track and pretty focused on the market and we're looking forward to seeing that growth as we benefit from it as well.

Great. And is there any different clinical specialists for either our guys basically handling both?

Our goal is to have our clinical specialists trained and familiar with all the types of procedures where our navigation system is utilized and we continue down that path, I do not foresee specialization within our clinical group. I don't think we'll need to do that with the technology -- use of our technology is similar and not across those procedures that we shouldn't need to do that.

[Operator Instructions]. There are no further questions over the audio portion of this conference. I would now like to turn the conference back over to management for closing remarks.

All right. Thank you, Jim. We appreciate the interest of the investors and hope that you sense our excitement about the progress of our company. We had a great Q2 and we expect this momentum to continue. We have added two new exciting potential platforms to our pipeline and we're eager to jump into these programs. We're changing our neurosurgery is done, where it's 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, in the marketplaces responding with growing interest and use of our products. We will be attending a number of conferences this fall as well as conducting Non-Deal Roadshow Outreach. These include a road show in New York and Baltimore and the Southern California investors conference in Orange County later this month and with our new investor relations firm we're lining up three or four conferences for the fall. If you're interest in meeting on these or other events in the future please contact Matt Kreps at Darrow Associates, our investor relations firm using the contact information on our press release. They will work to ensure you are added to our meeting rosters at these upcoming events Thank you everyone and we will keep in touch. Operator?

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.