Clearpoint Neuro, Inc. quarterly report, Q3 FY2012

Business context and reporting period

MRI Interventions, Inc. (the issuer named in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2012. The company develops and commercializes MRI-guided minimally invasive procedure technology. Its ClearPoint system was cleared for general neurological procedures and commercially available; ClearTrace, intended for cardiac procedures, remained under development and had no regulatory clearance or product revenue. The filing describes the company as an early-stage business with substantial accumulated losses.

Financial performance and position

• Nine-month revenue included $1.950 million of related-party license revenue, unchanged year over year; $414,000 of development services revenue; and $831,000 of product revenue. Disposable product sales increased 165% to $713,000, while reusable-component revenue declined.
• Cash and cash equivalents were $3.787 million at September 30, 2012, compared with $145,000 at December 31, 2011. Current assets were $5.043 million and current liabilities $6.243 million; management reported negative working capital of approximately $1.2 million.
• Total liabilities were $13.271 million. Long-term note balances included $4.339 million owed to Boston Scientific and a $2.000 million convertible note; junior secured notes had a $191,000 net carrying value after substantial unamortized discount. The Boston Scientific notes are secured by a first-priority interest in company assets; the Brainlab note is secured on a subordinated basis.
• Financing activities provided $8.942 million in the first nine months. The July private placement raised $6.0 million gross and approximately $5.516 million net; the company also reported $3.425 million net proceeds from convertible-note issuance. Cash rose by $3.642 million during the period.

Changes, outlook, risks and unusual items

• Quarterly product revenue fell 37%, mainly because fewer reusable systems were sold; disposable sales rose 78%, reflecting increased procedure adoption. For the nine-month period, higher disposable sales and third-party service revenue drove overall revenue growth.
• Research and development costs declined 44% for nine months, partly because sponsored ClearTrace research was paused or reduced while the company sought funding. The company recorded an $883,000 R&D expense reversal after program participants relinquished service-based incentive rights.
• Nine-month interest expense rose 36% to $2.508 million, largely due to a $1.9 million write-off of deferred financing costs and debt discounts upon note conversions. In February, approximately $10.812 million of note principal and $974,000 of accrued interest converted into common shares. Boston Scientific also extended its notes to 2014 and reduced their interest rate from 10% to 0%.
• Management believed existing cash and expected product receipts would fund anticipated needs through the first quarter of 2013, but expected to seek additional equity or debt financing before then. The filing states there is no assurance financing will be available on acceptable terms and identifies substantial doubt-related going-concern dependence on additional funding and future revenue.
• Under the Boston Scientific Neuro agreement, specified development milestones were due by December 31, 2012. If unmet, subject to the agreement’s terms, the company could have to repay amounts received; approximately $750,000 received was identified as potentially repayable. Failure to meet specified financial and other covenants while the related notes remain outstanding could also require assignment of certain patents to Boston Scientific.
• The company continued to face commercialization, reimbursement, manufacturing and supplier, product-liability, regulatory, intellectual-property, and financing risks. ClearTrace development and regulatory timing remained uncertain. The company also disclosed a $317,415 university research commitment over one year beginning October 2012 and up to $360,000 in potential registration-related liquidated damages if resale registration effectiveness is not maintained.
• Management reported disclosure controls were effective at September 30, 2012, with no material change in internal control over financial reporting during the quarter. Legal proceedings were reported as not applicable.

Important facts for investors to verify

• Whether the company obtained financing after the stated first-quarter 2013 cash runway, and the resulting dilution, debt terms, and liquidity.
• Whether Boston Scientific milestones due December 31, 2012 were achieved and whether any repayment or patent-assignment obligations arose.
• ClearPoint procedure growth, disposable-product repeat sales, and product margins relative to the company’s operating-cost base.
• ClearTrace development, funding, and regulatory progress, including the status of the Siemens collaboration.
• The carrying value and contractual terms of debt, including the junior secured notes’ large unamortized discount and Boston Scientific covenant compliance.
• Potential effects of share and warrant dilution, including the July placement warrants and the substantial pool of outstanding options and warrants.