MRI Interventions Inc. (OTCQB:MRIC) Q2 2013 Earnings Call August 13, 2013 4:30 PM ET
Kimble Jenkins – CEO
David Carlson – CFO
Oscar Thomas – VP, Business Affairs
Raymond Pirrello – Pendulum Capital Markets
Greg Chodaczek – First Analysis
Greetings, and welcome to the MRI Interventions Second Quarter 2013 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 Oscar Thomas, Vice President of Business Affairs. Thank you sir. You may begin.
Thanks Jane, and good afternoon, everyone. Thank you for joining us today for MRI Interventions second quarter 2013 financial results conference call. As Jane said, my name is Oscar Thomas, I am the Vice President of Business Affairs for MRI Interventions. With me this afternoon are Kim Jenkins, our CEO; and David Carlson, our CFO.
Before we begin with our presentation, I do want to point out that some statements we make during today’s call will be forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, for example, statements we make of our plans and objectives relating to our commercialization efforts for our ClearPoint system.
Forward-looking statements often can be identified by words such anticipates, believes, could, estimates, expects, intends, may, plans, potential, predicts, projects, should, will, would, and other words of similar meaning. Forward-looking statements by their nature address the matters that to different degrees are uncertain and involve risk, and they are made based on the current beliefs of MRI Interventions’ management.
Uncertainties and risks may cause our actual results and the timing of events to differ materially from those expressed or implied in forward-looking statements we make today. Detailed information regarding the risks, uncertainties and other factors that could affect MRI Interventions actual results and the timing of events are described in the Risk Factor section of our Annual Report on Form 10-Q that we filed with the SEC on March 11, 2013. You can find that SEC filings in the Investor Section of our website at www.mriinterventions com.
And with that, I’ll turn the call over to Kim.
Thanks, Oscar, and good afternoon, everyone. Thank you for joining us for our second quarter earnings call. On behalf of the management team and the 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.
David Carlson, our CFO, will walk you through our first quarter numbers in a minute. But before he does that, let me comment that I’m very pleased with our results for the quarter. We reported record sales for our disposable products which is the key driver for our business model with 98% growth over the prior year second quarter.
We increased the number of ClearPoint size. We expanded our sales and marketing capabilities. We saw higher acceleration in ClearPoint awareness amongst clinicians. We advanced our activities in drug delivery clinical trials, and we strengthened our board of directors. It was another successful quarter for us and the result, our commercial enterprise is continuing to grow.
Now I'll turn it over to David to review our second quarter numbers and then come back to you with some further comments.
Thanks, Kim. We're pleased to report another solid quarter. I will cover the results of the first quarter and then we'll talk about what happened in the first half of the year. For the quarter, we reported product revenues of $497,000 compared with $291,000 in Q2 of 2012. Disposable product revenues grew from $204,000 in Q2 of 2012 to $404,000 in the second quarter of this year, almost doubling with growth of 98%.
We recognized $93,000 in product revenue in Q2 of this year related to our capital products compared with $87,000 for the Q2 of last year. Q2 of 2012 included recognition of $650,000 in license fee revenues. License fee revenues relates to amounts we received previously under our agreement with Boston Scientific. The revenue recognition period for those fees ended in March 2013 and therefore all revenues related to the license fees we received in 2008 were recognized as of the end of the first quarter.
Overall revenues also included development service revenues of $65,000 for Q2 of 2013 and $142,000 for Q2 of 2012. These development services were performed on a contract basis for one of our strategic partners and the decrease reflects the winding down of the development project we have been working on with them. In the aggregate, the Company recorded revenues of about $162,000 for Q2 of 2013 compared with $1.1 million in Q2 of 2012. The decrease resulting from the expiration of the revenue recognition period for the license fees the Company has actually received back in 2008.
Also, product revenues was $296,000 for Q2 of 2013 compared with $157,000 for the second quarter of last year, an increase of 89%. The increase in cost to product revenues was greater and the increase in product revenues was primarily due to inventory write-offs related to obsolete products and an increase in the purchase of certain assemblies for our disposable products.
R&D costs for the second quarter of 2013 was $742,000 compared with $486,000 for Q2 of 2012. The primary drivers for the quarter-over-quarter increase related to sponsored research costs, which increased by $177,000. And these costs were approximately $80,000 for Q2 of this year compared with the credit of $97,000 reported during the same period last year when we (inaudible) with the research partners we've just announced previously invoiced.
Other software development associated with product enhancements which were up $79,000 accounts further majority of the increase. In addition, the second quarter of 2012 results reflects a reversal of an R&D obligation of $883,000 expense related to our Key Personnel Incentive Program. And it resulted from the program participants volunteer relinquishment of their rights to receive service payments under the program.
SG&A expenses for the quarter were $1.7 million compared with $1.8 million for Q2 of 2012. The decrease related to the lower share-based compensation expense that we issued warrants during Q2 of 2012 resulting in the expense of $572,000 and we did not issue in like markets in Q2 of this year. The lower share based compensation expense was largely offset by increases in sales and marketing expenses of $284,000 and increase in professional services of $108,000 and other increases associated with our being a public company.
We recorded a gain of $955,000 during the second quarter of 2013 resulting from the change in the fair value of derivative liability associated with the warrants we issued in our June 2012 and January 2013 equity capital rises. The gain resulted from decreases in the fair value of the derivative liabilities resulting primarily from the impact of changes in our stock price on the fair value calculation.
Our net loss for the quarter was $1.4 million or $0.02 per share compared with the loss of $600,000 or $0.01 per share for the same period last year. During the first half of 2013, we recorded product revenues of $958,000 compared with $513,000 for the first six months of last year, and an increase of 87%. Disposable product revenues grew about 77% from $426,000 during the first six months of 2012 to $752,000 for the first six months of this year.
We recorded $206,000 in product revenues during the first six months of this year related to our capital products compared with $87,000 during the same period last year. During the first half of 2012, we recognized $1.3 million in license fee revenues compared with $650,000 for the same period of this year. As I mentioned earlier, the license fee revenue relates to amounts we received previously under our agreement with Boston Scientific and the revenue recognition period for those fees ended in March 2013.
Development service revenues were $219,000 for the first half of 2013 compared to $251,000 for the same period last year. In the aggregate, the company recorded total revenues of $1.8 million for the first six months of 2013 compared to $2.1 million for the same period last year, a decrease almost solely relating to the expiration of the revenue recognition period for the license fees the company received in 2008.
Product revenues was $522,000 for the first half of 2013 compared to $258,000 for the same period last year, an increase of 102%. Cost of product revenues again grew faster than the overall 87% growth in product revenues for the same period due to (inaudible) as our margins on disposable products are higher than on capital product sales and the higher growth in cost of product revenue was due to inventory write-offs related to obsolete products and an increase in the purchase of certain assemblies for our disposable products.
R&D costs for the first half of the year were $1.5 million compared to $1.2 million for the same period last year. The primary drivers for the period-over-period increase related to sponsored research costs which increased by $257,000 and higher software development expenses associated with ClearPoint product enhancements which were up $172,000. (Inaudible) were partially offset by a decrease of $121,000 related to our Key Personnel Incentive Program.
SG&A expenses were $3.3 million for the first six months of 2013 compared to $3.1 million for the same period last year. Increase was related to higher marketing expenses which increased by approximately $470,000 and increase in professional service fees of $112,000 and other spending increases associated with our being a public company totaling approximately $100,000. These increases were mostly offset by a decrease of $516,000 related to lower share-based compensation expense.
We recorded a gain of $2.6 million in the first half of 2013 resulting from the change in fair value derivative liability associated with the warrants we issued in our June 2012 and January 2013 equity capital raises. Again, the gain resulted from decreases in the fair value of the derivative liabilities resulting primarily from the impact of changes in our stock price on the fair value calculations.
During the first half of the year, we recorded a loss of $1.4 million related to our March 2013 note payable modification. The note payable modification included a $1.9 million increase to the principal balance of an existing note payable, a decrease in the interest rate from 10% to 5.5%, and the elimination of the note equity conversion future.
The $1.4 million loss we recorded represented the difference between the carrying amount of the note and the related accrued interest immediately prior to the loan modification and the fair value of the note immediately following the loan modification. Under the previous terms of the note, the holder has the right to convert principal and interest in the shares of our common stock at $0.60 per share.
Net interest expense for the first six months of 2013 was $220,000 compared to $2.4 million for the same period in 2012. Approximately $2 million of the period-to-period change relates to the write-offs of debt discounts and deferred financing costs associated with convertible notes that converted into shares of our common stock upon our becoming a public company in February 2012. Our net loss for the first half of the year was $2.2 million or $0.04 per share compared with a loss of $4.1 million or $0.12 per share for the same period last year.
Moving over to the balance sheet, we ended the quarter with $7 million in cash. Our accounts receivable was relatively flat for the period. We had experienced growth in inventory from year-end increasing from $900,000 to $1.2 million at the end of June as we planned for increased levels of ClearPoint revenues. And we continue to bring down our accounts payable to improve liability balances which is a decrease of $1.5 million from year-end.
You may have noticed the section in our earnings release today stating an accounting for warrant derivative liabilities. We have determined that we should have used derivative liability accounting to account for the fair value warrants issued in our July of 2012 equity financing transactions. We previously reported all of the net proceeds from this financing have equity, that any deletion provisions associated with the exercise prior to the warrant triggered the need to apply derivative liability accounting.
We should have allocated the net proceeds from the financing, the fair value of the warrant resulting in the derivative liability and equity, and thereafter adjusted the derivative liability to the fair value of the warrants at each reporting period. Also, an accounting for our January 2013 equity financing, we applied derivative liability accounting for the warrants issued in that transaction. However, the valuation model we used to calculate the fair value of the warrants only considered the warrants' net cash settlement future.
In accordance with standards for derivative liability accounting, we should have also considered other scenarios that did not result in the application of the net cash settlement future. We're planning to file an amendment Form 10-K for the year ended December 31, 2012 and an amended Form 10-Q for the quarter ended March 31, 2012 in which we will restate our financial statements to correct the non-cash errors related to derivative liability accounting for warrants issued in both financing.
With respect to the impact of this restatement on our balance sheets, the restatement will result in a reclassification between equity and derivative liabilities with respect to our statements of operations. The cumulative net impact of the restatement will result in an incremental net loss of $44,000 over the affected period. A summary of the impact on our financial statements by reporting period is included in our earnings release.
With that, I'll turn it back over to Kim.
Thank you, David. So we're very pleased with the progress we made in the quarter. I'd like to take a few minutes to provide you with additional color and a few highlights. We increased our number of ClearPoint sites adding three new hospitals to our installed base. And these sites included the Mayo Clinic in Jacksonville, City of Hope Hospital in Los Angeles, and the Oregon Health and Science University in Portland.
We ended the quarter with 25 installed sites – that's 23 in the United States and two in Europe. Physicians performed first ClearPoint procedures at Brigham and Women's Hospital in Boston, at Spectrum Health in Grand Rapids, the Mayo Clinic in Jacksonville, in Brodnowski Regional Hospital in Warsaw, Poland. Of note, our first cases in Warsaw generated a significant amount of public interest with a portion of one of the ClearPoint cases of being broadcast on live network television.
The success the ClearPoint procedure prompted an invitation to the Presidential Palace for the Neurosurgeons. ClearPoint cases are going well. In the scope of the ClearPoint platform, it's continuing to expand. During the quarter, physicians performed the first cases utilizing our new ClearPoint Keyhole component. The Keyhole components are procedures to be performed through a hole as small as 2 millimeters in diameter.
During the quarter, our physicians performed the first step electrode placement procedure with ClearPoint for mapping epileptic foci in epilepsy patients. We expanded the ClearPoint system capabilities within the IMRIS VISIUS Surgical Theatre with physicians successfully performing gene delivery and laser ablation procedures in that environment.
During the quarter, we are pleased to see neurosurgeons give talks of their clinical experiences with ClearPoint at a number of medical conferences around the world. And I want to point out that these presenting neurosurgeons are not paid consultants of MRI Interventions. Neurosurgeons' presentations were given at the World Society for Stereotatic and Functional Neurosurgery Quadrennial meeting in Tokyo, the American Association of Neurological Surgeons Annual Meeting in New Orleans, and the Targeted Drug Delivery Conference in San Francisco.
After the quarter, clinical data was presented at the 2013 International Congress of Parkinson’s Disease and Movement Disorders in Sydney, Australia. That presentation highlighted the benefits of lead placement with ClearPoint in treating pediatric patients suffering from primary dystonia. The clinical data presented saw the average accuracy of lead placement with ClearPoint was under 1 millimeter with the average surgical time for lead placement was under three hours. The twelve-month follow-up shows an 88% improvement on the patient's movement disorder scores.
We're continuing to build up our sales and marketing team. We ended with a total of 11 sales and marketing personnel up from 8 at the end of Q1. We're continuing to process with carefully hiring training and employment of them as we fill out our geographic footprint with additional personnel. On the marketing front, during the quarter we held our first ClearPoint symposium.
The ClearPoint symposium was held in San Francisco included eight neurosurgeons and one neurologist who are interested in getting a deeper value to the ClearPoint. The event featured a lecture session, several hours of hands-on training and q-and-a session. We were very pleased with the level of interest so we plan to hold our second ClearPoint symposium.
In addition, we have successful activation at the American Association of Neurological Surgeons Annual Scientific Meeting during the Targeted Drug Delivery Conference. Use of ClearPoint will enable real time (inaudible) delivery of drug in biologic therapies continues to be an area of focus for us. I'd like to provide a quick update on the status of five clinical trials that we are involved in.
The first trial is the AAV2-hAADC for Parkinson's disease. This is the Phase 1 study at the University of California, San Francisco. Genzyme Corporation with Sanofi is the biotech company involved in the trial. The Michael J. Fox Foundation is supporting the trial. We expect the first patient to be treated a little later this year. The second trial was the AV2-GDNF trial for Parkinson's disease.
This is a Phase 1 study with NIH. uniQure, B.V. is the biotech company involved in this trial. uniQure is noteworthy in part of having received regulatory approval in Europe last November for first gene therapy to treat (inaudible) diseases. The first patient was treated in May and the procedure was a success. According to Dr. John Heiss, the neurosurgeon who performed the procedure, this is a quote, "The ClearPoint system worked exceptionally well enabling us to achieve precision targeting and to observe administration of a therapeutic agent as it occurred."
The third trial was Toca 511 for brain tumors. This is a Phase 1, multicenter trial. Tocagen is the biotech company involved in this trial, and patients are currently being treated. I'd like to note that last week, there were several stories on a recent ClearPoint Tocagen case by Dr. Clark Ken at the University of California, San Diego, including significant television coverage on the San Diego NBC and PBS affiliates.
The fourth trial is IL13-PE38QQR for brain tumors. This is a Phase 1 study being conducted at the National Institutes of Health. Patients have already been treated and the study continues to recruit participants. The fifth trial is the 124I-8H9 which is a radio immunotherapy drug, also they treat brain tumors. This is a Phase 1 study sponsored by the Memorial Sloan-Kettering Cancer Center in New York, and patients are currently being treated in this trial.
Drug delivery with ClearPoint remains an area of interest to us. And we have elaborated on in prior earnings calls and we believe that that occasion represents a very attractive risk return opportunity for our company and for our shareholders. Over the last several quarters, we've been quiet about our ClearTrace program. I'm pleased to report that earlier this month we were awarded a $150,000 SBIR grant from the National Heart, Lung, and Blood Institute, which is a part of the National Institutes of Health.
The activity under this grant relates to our ClearTrace cardiac platform that we told you about. The aim of the grant is to perform certain real-time, MRI-guided catheter-based procedures in the heart. Lastly, we are very pleased to add Dr. Philip Pizzo to our board during the second quarter. Dr. Pizzo served as the Dean of the Stanford University School of Medicine in 2001 until December of last year. Dr. Pizzo is a tremendous addition to our board and brings with him 40 years of leadership in academic medicine as well as a (inaudible) of innovative programs and policies of science, education, and healthcare in the United States.
Let me take a minute to talk about financial values. As you may have seen in our earnings release this afternoon, this is the first quarter in which we are providing guidance for investors. In the first half of 2013, we achieved growth in product revenue of 87% as measured by the product revenues for the same period in 2012. We expect to see a similar growth rate in our product revenues in the third quarter of 2013 compared with the third quarter of 2012.
In the fourth quarter of 2013, we expect an increase in that growth rate as measured against our product revenue in the fourth quarter of 2012. We expect this acceleration in our growth rate in Q4 as we believe our current investment in sales and marketing capabilities will begin to pay off. Based on these expected growth rates, we anticipate total product revenues for 2013 of $2.3 million to $2.7 million, which would equate to total revenues for 2013 of $3.2 million to $3.6 million.
Now, I want to point out that these are product revenues projected by the Company for 2013 do not include significant revenues from drug delivery procedures, as the drug therapies being delivered with ClearPoint are in clinical trials and have not received regulatory approval.
As I move to a close in our prior earnings calls, I've provided a few patient stories. Today I'd like to close with a few public statements from neurosurgeons who are using ClearPoint. And again I want to point out that these doctors are not paid consultants of MRI Interventions. Dr. (inaudible) says the advantage of this technology is that it permits very accurate placements of any device within a small region of the brain. You get confirmation immediately with the image where you place the device where you want it to.
Dr. (inaudible) from Indiana, ClearPoint provides amazing clear images that allows us to directly see the target structures. Dr. (inaudible) from Arkansas, ClearPoint allows me to surgically treat patients. I would not be able to treat using other platform systems. Dr. (inaudible) from UCFF, The data from this study suggests that a sleek DBS can be performed extremely accurately when guided by ClearPoint.
Dr. (inaudible), This new ability would deliver large volumes of the drug rapidly into the framework under real-time visualization represent a major technological advance. Dr. Clark Ken from UC, San Diego, "This approach effectively scans a section of drug that we can use to treat brain cancer spot a hundred-fold. The more drug that we have available to treat brain cancer, the closer we move towards curing this disease."
Dr. (inaudible), The ClearPoint system represents a major step forward in our ability to treat complex neurological diseases. Dr. (inaudible), The move to real time guidance for minimally-invasive neurosurgical procedures is inevitable and the ClearPoint system is now bringing these capabilities to the clinic."
So with that I will wrap up and open the call up to questions.
Ladies and gentlemen, we will now be conducting the question-and-answer session. (Operator Instructions) Your first question comes from the line of Greg Chodaczek with First Analysis. Please proceed with your question.
Greg Chodaczek – First Analysis
Thank you. Good afternoon, guys. I have a handful of questions I'll just try to pick the most important ones here. Based on your results utilization rate picked up a little bit. Can you talk about utilization of ClearPoint when it – can you prepare it from day one when it goes into the hospital compared to month number six or seven, and how that's changing over time?
What we're doing, as you know, in connection with commercializing ClearPoint, our sales and support team have two objectives. One is to get systems in place, to get systems installed; and secondly, to increase utilization. And we split our time between those two efforts. What we're doing on the utilization front is we start with a target really of doing a couple of procedures. In the first month or so, let the neurosurgeon find his leg, if you will, get comfortable that the system works as he expects, that his patients are doing well. And that we want to see that utilization pick up over time.
In our investor deck, our investor deck, we have a slide that speaks to a case study from one of our hospitals. And it outlines what we call our immersion strategy. Again, following those first couple of successful cases, we then send our people in there to talk with the surgeon the procedure as well as his other colleagues to explain to them the diff things they can do with ClearPoint, the different patients they can treat.
What we found in this immersion strategy is success in enrolling the procedure. So in this case study hospital, we went from initially one to two cases a month, and now we're over six, in excess of six per month. So our goal now, Greg, is to replicate the success we're having at that hospital across the platform, the footprint of sites that we've got. That's under way. We've got success at several sites already and we're seeing that followed over across the platform, across the footprint as the year advances.
So really it's a process of just spending some time at the site. It's a process of education. But when we apply that effort, we're getting excellent results.
Greg Chodaczek – First Analysis
Thanks, Kim, another question. Looking at the hospitals out there and the potential for ClearPoint, what's your number of potential sites you think you can put this in?
When we think of the potential for ClearPoint, we really think about neurosurgeons rather than hospitals. They're the guys that, again we don't care if we're in one hospital, if they run neurosurgeon time, if they send neurosurgeons all the better, right? There are 3,500 neurosurgeons in the United States. Some of those neurosurgeons are performing just back surgeries and those aren't a target for us.
But a nice chunk of them are performing cranial surgeries and those are all within our real house. Now, the center of the bull's eye are those neurosurgeons performing functional and stereotactic neurosurgical procedures. That's about 10% of the total number or 350 neurosurgeons. That's the center of the bull's eye and it grows out towards that 3,500 number.
Greg Chodaczek – First Analysis
Roughly, how many hospitals do you think? 200?
At least. I would say several hundred would be the right number.
Greg Chodaczek – First Analysis
Okay. It was nice that you showed the five studies with drug delivery. Can you remind us that all these studies used ClearPoint and ClearPoint is based in those studies? So if we have one successful study ClearPoint has to be used, actually give a label to what I'm going for, right?
Again, as I've mentioned in my prepared notes, we're very excited about the drug delivery application for this. As you heard with a few of the quotes I read, it's really a game-changer for drug delivery. We really hope to, in our process of revolutionizing needle-invasive neurosurgery, we hope to have a similar impact on drug delivery into targets inside of the brain. The challenging of delivering drugs to targets in the brain is enormous. And we solved that problem. So what you see in those five trials is we have partnered, if you will, with those – with the drug companies that are making those, they are using our technology to deliver the drug to those targets. The drug companies, the researchers believe that they need the precision that – therapy requires the precision provided by ClearPoint and so that’s why we are involved. So yes, with – as the trials proceed if the drugs fail and they fail, but if they succeed, then we will be the delivery platform for those drugs which represents an enormous revenue opportunity for us. The business model as we spelled out before is very simple, the drug company makes whatever money it makes, it gets all the revenue from the drugs and we get the revenue from the sale of the disposable components used to deliver the drug.
Greg Chodaczek – First Analysis
And it will be very similar to a DBS procedure?
Yes, that’s what we create – look, the workflow is almost identical, if neurosurgeon is doing – using ClearPoint to enable DBS lead placement procedure, if they are using it to enable the direct delivery of drugs, if they are using it to oblate tissue, if they are using it for a biopsy, if they are using it for points of [deflector] all of those are essentially the exact same workflow. So once a neurosurgeon learned how to do this, there’re very minor differences between these different procedures types that I have described to you.
Greg Chodaczek – First Analysis
ClearPoint placement program, can you talk about it how successful is it going, what’s the time that you convert a placement from this program to a capital sale?
As you know the driver for our business is the sale of the disposables. We need to get the capital into a hospital to generate that revenue stream from the sale of the disposables, and so of course, that’s the first necessary step. We – under the ClearPoint placement program, and there’s a couple different versions of it but generally speaking we are providing the capital components to the hospitals on a time limited evaluation basis. And then during that period, this evaluation period, the hospital is paying us full fare for the disposables that they use during the period. So we are generating revenue from that throughout the evaluation period. At the end of it, the hospital either buys the equipment or we take it back. The timing varies with these hospitals, it can be six months, it can be a year, frankly, as long as the procedures are happening, then we are pretty happy.
What we found in this day and age of intense scrutiny on hospital budgets and these small windows when hospitals have capital allocated for these kind of programs, it’s really helpful to give to the hospital lot of flexibility on the way to get into ClearPoint.
Greg Chodaczek – First Analysis
I guess my last question is based on the number of placements or total 25 out there, would you give the number of placements, those are net placements. So if something doesn’t work out, you take something back, those would be reflected in your numbers?
Greg Chodaczek – First Analysis
Eventually I am assuming it’s not going to happen but eventually it could happen.
Our next question comes from the line of Raymond Pirrello with Pendulum Capital Markets.
Raymond Pirrello – Pendulum Capital Markets
Any update on the shape of the [market] goals for this year and for next year in terms of the amount of new sites that you guys would like to achieve?
We decided to – this is our – as I mentioned before this is our first maiden voyage into guidance, and we restricted our guidance to the – what we provided to you. We do not break out the number of sites, so I won’t elaborate on that. What I can tell you is that we’ve got a meaningful interest among hospitals for bringing ClearPoint in, we want to continue to do that, we want to continue to expand the geographic footprint that we’ve got in our hospitals as we have done so far this year, we want to split our sales and marketing and support teams’ time between getting new sites and increasing utilization. And so we sort of balance that each month deciding where we want to spend more and more of our time. But now we expect to see a continued growth in that footprint but we didn’t lay out a specific number.
Our next question comes from the line of [Don Duncan with CST].
My question is will you be doing equity financing in the next six months or a year?
I would take a minute to talk about our cash which is sort of – what you are asking here. The cash on hand at the end of Q2 was $7 million. If you look at our numbers you will see the burn rate for this prior quarter was about $700,000 per month. I know from talking with some investors, there has been a concern about the potential for dilution at the current stock price, look, to the extent we need additional funds to get our ClearPoint business to breakeven we do not intend to sell equity, at the current price of our stock that we don’t want to incur additional dilution for our company and for our investors.
How would you finance – you do some debt down or what will you do to get the money?
So that would be one of the possibilities, that’s right.
Our next question comes from the line of [Nick Shangle with Curation].
Just a couple of things, so clearly there is going to be no problem regarding the top line, right, 87% growing. Clearly the product works and – so we understand this is a great story. I think what I still don’t understand is whether a great story translates to great profitability, because I don’t understand cost of sales because sometimes to get into the hospital you are financing it and obviously there is a cost of sales in terms of training people and getting your sales force to hold their hands, what they are getting them to use it, can you give us any idea of the sort of margins that you would expect from the top line once you sort of get this enormous uplift?
This is David, Nick. From a contribution standpoint, working down just the product costs, over time as our revenues ramp up to get some critical mass, I think from a gross margin standpoint you should expect to see kind of what you would typically see with other medical device companies. Our disposable sales over time and again will become – than they do now, the capital sales. On the capital sales, our margins – we just really are focused on getting the systems placed and so our focus is really on to profitability through our capital sales. From a gross margin standpoint, what you see other medical device companies here in the U.S. I think it would be consistent with what you expect to see from us and again, at this point we are making an investment in our sales and marketing effort and so those costs are going to be relatively high as a percentage of revenue but over the course of time as we get some critical mass on the top line, then we will be able to leverage those selling and marketing expenses and we will look to see them a bit into a pattern like what you again would expect to see in other medical device companies that have some critical mass in terms of revenue.
Please forgive me, but there is number one on the America but there is number two, I don’t own any of the medical device companies. Can you tell me what a typical medical device company – what that margin is for a typical medical device company?
I would say just kind of a range in from a gross margin standpoint, this is not an operating income contribution but somewhere in the 65% to 75%, 80% range would be what you would see as you look at medical device companies here, mature medical device companies.
It’s Kim, let me elaborate just a bit. The one thing that I think is meaningful about our company is there is an inherent leverage in this business model. If you are a medical device company and you are selling widgets and you make all your money selling a widget to a hospital and then you move on with no recurring revenue stream, your sales guys are essentially starting from scratch every time. Your spending can be fairly high in getting through the capital budget cycle at each account. We’ve got an advantage there because we get into hospital and that’s really when – and sure there are some time and effort, money involved in getting into the hospital and getting through the various committees and what not.
Once we are through that, when a hospital does from doing a case a month to three cases a month, to six cases a month and beyond, there’s enormous leverage in that for us. And as David said, we’ve got a very attractive margins on our disposable products which over time will be more and more of our total revenues – I talked about sort of having attractive business model, and that’s what I mean by it.
And you described the target number of hospitals is several hundreds, if I set the number 200 to 300, right? What sort of number of hospitals can one sales guy cover or how many sort of – how many people do you think you need to hire to cover your target market I guess is –
What we found so far is it varies by geography, right? And in the north-eastern United States, you’ve got a lot of hospitals, if you live in Manhattan, there is an awful lot of hospitals that are doing neurosurgical procedures within 50 miles. If you go to – and so that person for us can cover more hospitals efficiently. If you move up to Texas, it’s a little more spread out, if you move to the Midwest, it really becomes very spread out. So right now it varies – it varies so much that I really don’t think I have a meaningful average to give to you. What you see across our sales guys and our support people is pretty significant difference in the number of hospitals covered by our East Coast folks versus our Southwest guys.
And if I can indulge in one final question, which is it just sort of occurred to me that if I was doing any trials of any drug relating to the brain, the literature that I have read from the doctors suggests that it’s very, very important to know what is the delivery and where it’s going and what is the actual drug and which one of those things you need to modify. That would suggest to me that anyone that was conducting a clinical trial into anything that was going into the head would be empowered by your product because the data that they receive would be more powerful, is that correct and does that – is that a new market of clinical trials?
It’s not opinion that delivering drugs to target locations in the brain is an enormous issue. If you look over the last 10 or 15 years, and you look at the number of drugs, new drugs, that have been approved for treating neuro-diseases in the brain or neuro-trauma, it’s tiny, it’s a trickle. One of the primary reasons we believe the primary reason for that paltry number of new drugs is this delivery problem, right? The brains are the body’s natural defense mechanism for keeping toxins out of the brain, what brain barrier is unfortunately very effective in keeping drugs out of the brain, out of the neurological target, out of brain tumors, out of the attainment for Parkinson’s disease, et cetera. So yes, I completely agree with your statement. I think we have an opportunity to really have a dramatic impact on the drugs that can – that will affect, that will eventually be successful in treating neurological diseases here over the coming years. Yeah, I think we changed – it’s a dramatic change.
And presumably I mean given how litigious medicine is in America, if you were delivering a drug that had already been passed by the FDA but you aren’t using the best delivery mechanism available, you would be excused of not using best market practice at this point in time, is that stretched or no?
I can’t disagree with that, sure.
I mean there must be some litigation risk to people that don’t use it?
It’s been a lot of fun talking with the biotech companies and the drug companies about our capability. If you are a drug company and you’ve got promising drug, you’ve got one question, does the drug work? And secondly, can you get the drug to the target? Thirdly, what sort of side effects will this drug cause that you don’t – that you didn’t want to achieve or you didn’t want to cause? We can have any – we are not in a drug business. So we don’t know whether drugs work or not but we can solve problems two and three, we can reliably get a drug to the target locations every time, and we make the statement that is 100% of the time because the surgeon can see what the drug does, it’s on the target. And secondly, because the drug is only going to the target, we dramatically reduce any systemic side effects that would be associated with that drug. You don’t have liver toxicity for example if the drug never gets to the liver, if it’s only in the brain tumor. You don’t have heart valve problems for a drug that’s only delivered into the neurological target.
Our next question comes from the line of [Edward Anders], private investor.
I would like to understand little bit more how the cost sharing economics of your clinical trial participation affects your R&D costs or your cost of goods, going into – is the total cost bear by MRI Interventions or is your some sort of reimbursement of the cost sharing for cost of goods things of that nature?
Unfortunately the drug companies pay for these trials.
So do they a – so the more specifically, they are clearly paying for the trial but is there any reimbursement to the company for the cost of the disposables?
Yes, and there is a little variation between the five trials but generally speaking, yes we get paid for our devices used in the clinical trials.
Our next question comes from the line of Gary Peller, private investor.
My question is, you mentioned there is about 350 target neurosurgeons in the country, that you are kind of focused on, based on all the medical meetings that you have presented at and just a general literature would you assume and then of course your own marketing, would you assume that most if not all of these neurosurgeons know of your technology today?
That’s a good question. Yeah, certainly most, I don’t think all of them do, but most of them do. One thing – we have been talking about ClearPoint for the last several years, we’ve been attending these meetings for the last several years, surgeons have been presenting on ClearPoint and a predecessor system for a number of years, and so I think the knowledge awareness of our technology is pretty broad and I would say that certainly of those 350 most of them are aware of ClearPoint. Now just to clarify 350 is the center of the bull’s eye for us, however we are going – surgeons outside of that bull’s eye are interested in ClearPoint and we are interested in them, give you an example, we are at one of the hospitals we are in, I don’t give it by name but it’s up in the northeast, that hospital brought the system in for – i-connection with the functional program, DBS lead placement program and specifically the surgeon there was a functional neuro-surgeon, one of these 350, we are doing the emergent program that I discussed earlier, one of the – in response to one of the questions earlier, and in that emergent we talked to a tumor doctor who is not one of our 350, he said, hey, that’s really neat and I am interested – I would be interested in looking at ClearPoint. He came, observed the procedure and is now doing procedures.
So although the 350 is the center of the bull’s eye for us that we are reaching now beyond those into the broader group of neurosurgeons which is about 3500.
Approximately how many separate hospital facilities would the 350 be spread over, assuming there is some hospitals have two or three of these 350 whereas others may just have one, I am just wondering –
I just don’t know, as we mentioned earlier we really think –we think about the market in terms of the number of neurosurgeons rather than the number of hospitals and so our business model is driven on the disposables. I think it was said earlier though I mentioned is probably in the aggregate of couple of hundred hospitals that would be ideal candidate hospitals for ClearPoint. And that’s a US number.
Ladies and gentlemen at this time, I would like to turn the floor back over to management for any closing comments.
Thank you. Listen, thanks everyone for your time, for your interest. We are working hard at building your company. We are having good success. We are happy with the way things are going, I guess mostly with the fact that we are continuing to impact every quarter a larger and larger group of patients who need therapies that we can – for which we can enable the delivery of whether it be to Parkinson’s patients, or tumor patients or epilepsy patients et cetera. So thank you for your support and we appreciate your time.
Thank you. Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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