Clearpoint Neuro, Inc. quarterly report, Q2 FY2013

ClearPoint Neuro, Inc. (filing registrant: MRI Interventions, Inc.) — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013. The filing is unaudited and reports that certain comparative balances were restated. The company develops MRI-guided minimally invasive medical-device systems; ClearPoint was commercial, while ClearTrace remained under development.

Financial performance and liquidity

Metric	Three months ended June 30, 2013	Six months ended June 30, 2013
Total revenue	$562,489	$1,826,688
Operating loss	$2,178,296	$3,545,328
Net loss	$1,351,932	$2,175,680
Net loss per share, basic and diluted	$0.02	$0.04
Cash used in operating activities	Not separately reported for the quarter	$4,428,675

• Six-month revenue comprised $957,626 product revenue, $650,000 related-party license revenue, and $219,062 service revenue. Product revenue was primarily from ClearPoint; the Boston Scientific license-fee recognition period ended March 31, 2013.
• Cash and cash equivalents were $6,977,875 at June 30, 2013, versus $1,620,005 at year-end 2012. Current assets were $8,750,859 and current liabilities $5,114,354. Total liabilities were $13,807,410; stockholders’ deficit was $2,818,800.
• Debt carrying values included $4,338,601 in related-party convertible notes, $3,784,500 in a note payable, and $210,223 in junior secured notes. A further $2,855,367 derivative liability related to warrants.
• The company raised $9,829,014 net in its January 2013 private placement. Management said cash, together with expected product and service receipts, should fund anticipated requirements through at least March 2014.

Changes versus prior comparable periods

• Q2 revenue declined 48% from $1,083,760; six-month revenue declined 11% from $2,063,759. Product revenue increased 71% in Q2 and 87% for six months, but the decline in license revenue more than offset the growth in product sales for total revenue.
• Six-month operating loss widened from $1,630,969 to $3,545,328. Six-month net loss improved from $4,074,368 to $2,175,680, principally reflecting a $2,578,969 gain from changes in warrant fair value and substantially lower interest expense; results also included a $1,356,177 loss on a loan modification.
• Product costs rose faster than product revenue. Approximate product gross margin was 41% for Q2 and 45% for the first half, compared with 47% and 50%, respectively, in 2012. Management cited obsolete-inventory write-offs, higher component costs, and product mix.
• Cash used in operations increased to $4,428,675 from $3,252,132 for the first half of 2012. Financing cash flow was $9,842,389, mainly from the January placement.

Outlook, risks, and unusual items

• Management expected losses to continue through at least December 31, 2013 and planned higher sales and marketing spending to support ClearPoint commercialization. It said some planned spending could be deferred; additional financing might be needed, with no assurance it would be available on acceptable terms.
• In March 2013, a strategic partner’s note was amended: principal increased to $4,289,444, the interest rate fell from 10% to 5.5%, and the conversion feature was removed. The note matures in April 2016 and is secured, subordinate to Boston Scientific’s security interest.
• The company disclosed restatement errors in accounting for July 2012 and January 2013 financing warrants, including liability classification and fair-value valuation. It planned amendments to its 2012 Form 10-K and Q1 2013 Form 10-Q. The company concluded disclosure controls were ineffective at June 30, 2013 and said it was taking remediation steps. Management stated the restatement changes did not affect net cash flows.
• Warrant liability valuation is Level 3 and sensitive to assumptions, including stock price and volatility. The January placement warrants include down-round and certain net-cash settlement provisions; registration failures could trigger damages of up to approximately $1.3 million.
• Summer Street Research Partners initiated arbitration claiming $480,000 in commissions and warrants for 460,338 shares. The company filed counterclaims; the matter was preliminary and its outcome could not be reasonably estimated. Management believed resolution was unlikely to materially adversely affect the company.
• Effective July 28, 2013, a software agreement amendment gave the company a source-code license and shifted ClearPoint software development, maintenance, and support in-house in exchange for a one-time fee. The filing does not state the fee amount.
• Key risks include continued losses and financing needs, adoption and reimbursement of ClearPoint, sales and manufacturing capacity, supplier dependence, regulatory and clinical development uncertainty for ClearTrace, and dilution from equity financing and warrants.

Important facts for investors to verify

• Whether cash burn, sales growth, and discretionary spending remain consistent with management’s stated cash runway through March 2014.
• Progress on the planned restatements and remediation of ineffective disclosure controls, including the warrant valuation assumptions and resulting financial-statement effects.
• Whether ClearPoint procedure growth translates into durable product revenue and improved product margins, given the end of Boston Scientific license-fee revenue.
• Developments in the Summer Street arbitration and any resulting cash, warrant, or other obligations.
• Debt terms and covenant compliance, and the company’s ability to fund ClearTrace development and commercial expansion without materially dilutive financing.