MRI Interventions, Inc. (OTCQB:MRIC) Q4 2013 Results Earnings Conference Call March 20, 2014 4:30 PM ET
Oscar Thomas - Vice President, Business Affairs
Kim Jenkins - Chief Executive Officer
David Carlson - Chief Financial Officer
Steve Schwartz - First Analysis
Greetings, and welcome to the MRI Interventions Inc. Fourth Quarter and Full-Year 2013 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 will now turn the conference over to your host, Oscar Thomas. Thank you, Mr. Thomas. You may now begin.
Good afternoon. This is Oscar Thomas and I’m the Vice President, Business Affairs for MRI Interventions. With me are Kim Jenkins, our CEO; and David Carlson, our CFO.
Before we begin with our prepared comments this afternoon, I want to point out that some statements we make during today’s call will be forward-looking statements. Forward-looking statements by their nature address matters that to different degrees are uncertain and involve risks 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 and uncertainties that could affect our actual results and the timing of events are described in the Risk Factor section of the Form 10-Q that we filed with the SEC on November 13, 2013. You can find our SEC filings in the Investors section of our website at mriinterventions.com.
With that, I’ll turn the call over to Kim.
Thanks, Oscar, and good afternoon, everyone. Thank you for joining us for our 2013 Q4 and full year earnings call. On behalf of the management team and employees of MRI Interventions, we appreciate your interest in our company. And for those of you who are stockholders, 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 fourth quarter and full-year numbers in a minute. But before he does that, let me comment that I’m very pleased with our results for the fourth quarter and for the full year.
We reached an important milestone in the fourth quarter recording product revenues in excess of $1 million for the first time. We entered the year with over 30 ClearPoint sites. Neurosurgeons use of ClearPoint continues to grow, enabling DBS Lead Placement for movement disorders, laser ablation, for tumors and epilepsy and other uses that include shunt placements and biopsies.
We’re pleased that our ongoing involvement in various drug problems, using ClearPoint to deliver drugs, direct neurological targets and we’ve announced a few important developments in the first couple of months in 2014 with particular financing and a significant progression in our relationship with Siemens. Q4 was a great quarter for us. We wrapped the great year building and growing the company.
Now I’m going to turn it over to David to review our fourth quarter and full-year numbers. Then I’ll come back to you with some additional comments.
Thanks Kim. We’re pleased to report the results for what we believe was a very strong year. I’ll cover the quarter and then we’ll talk about the full-year results.
For the quarter, we recorded product revenues of $1.1 million compared with $339,000 in Q4 of 2012, representing growth of 227%. Disposable product revenues grew to $562,000 in Q4 of 2013 from $308,000 in the fourth quarter of 2012, representing growth of 82%.
We recognized $545,000 in product revenue in Q4 of 2013 related to our capital products compared to $31,000 in the Q4 of 2012. Service revenues included development service revenues of $16,000 for Q4 of 2013 and $127,000 for Q4 of 2012. These development services were performed on a contract basis for a third party and the decrease reflects the winding down of the development project we’ve been working on for them.
During the fourth quarter of 2013, we recorded other service revenues related to installation services and service agreements totaling $54,000. Q4 of 2012 included recognition of $1.4 million in license fee revenues. These license fee revenues relate to amounts we received previously under our agreements 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 previously were recognized as of the end of the first quarter. Total revenues were $1.2 million for Q4 of 2013 compared with $1.9 million in Q4 of 2012. The decrease simply resulting from the expiration of the revenue recognition period for the Boston Scientific license fees.
Gross margin on product revenues was 52% for the fourth quarters of both 2013 and 2012. R&D costs for the fourth quarter of 2013 were $684,000 compared with $735,000 for Q4 of 2012. The primary driver for the decrease related to lower software development expenditures.
SG&A expenses for the quarter were $2 million compared to $1.4 million for Q4 of 2012. The increase resulted primarily from investments we made in our field sales organization. Our sales, clinical support and marketing expenses were up by $484,000 over the fourth quarter of 2012.
Net other income was $485,000 in Q4 of 2013 compared with net other income of $1.5 million in Q4 of 2012. This decrease is almost solely attributable to the change in the fair value of derivative liabilities associated with warrants issued by the company in connection with equity financings.
Our net loss for the quarter was $1.7 million compared to net income of $958,000 in the same period in 2012. This net income reflects the $1.4 million in license fee revenues and the $1.5 million gain on the change in the fair value of derivative liabilities recorded in the fourth quarter of 2012.
For the year, we recorded product revenues of $2.9 million in 2013 compared with $1.2 million for 2012, an increase of 149%. Disposable product revenues grew by 75% from $1 million during 2012 to $1.8 million in 2013. During 2013, we recorded $1.1 million in product revenues related to sales of our cash flow products compared to $150,000 during 2012.
Service revenues were $366,000 in 2013 compared to $541,000 for 2012. The decrease relates to development services and reflects the winding down of the contract development projects mentioned previously.
During 2012, we recognized $3.3 million in license fee revenues compared with $650,000 for 2013. As I mentioned earlier, the license fee revenues relates to amounts we received previously under our agreements with Boston Scientific.
In the aggregate, the company recorded total revenues of $3.9 million in 2013 compared to $5.1 million for 2012. The decrease again, resulting from the expiration of the revenue recognition period for the license fees.
Gross margin on product revenues was 51% for 2013 compared with 53% for 2012. The decrease reflects the impact of product mix as capital products sales, which yield lower margins represented a much more significant portion of total product revenues in 2013 when compared to 2012.
R&D costs for the year were $2.9 million compared to $2.5 million for 2012. The primary driver was an increase in funding with sponsored research. SG&A expenses were $7.1 million for 2013 compared to $6 million for 2012.
The increase was related to higher spending for sales, clinical support and marketing, which increased by approximately $1.4 million and an increase in professional services of $257,000. These increases were partially offset by decreases of $705,000 related to lower share-based compensation expense.
We recorded net other income of $864,000 for 2013 compared with net other expense of $168,000 for 2012. The 2013 amount reflects other income of $1.7 million related to a gain on the change in fair value of derivative liabilities and other income of approximately $477,000 related to negotiated reductions in amounts payable to service providers.
These gains were mostly offset by $1.4 million loss related to our March 2013 notes -- notes payable modification. Substantially, all of the net other expense for 2012 related to a loss on the change in the fair value of derivative liabilities.
Net interest expense for 2013 was $475,000 compared with $2.6 million in 2012. Approximately, $2 million of the period-to-period change relates to the write-off of debt discounts and deferred financing costs associated with convertible notes that converted into shares of our common stock upon of becoming a public company in February of 2012.
Our net loss for 2013 was $7.1 million or $0.12 per share, compared with the net loss of $5.9 million or $0.15 per share in 2012. One of the key drivers for the increase in net loss related to the expiration of the revenue recognition period for the license fees in early 2013. There was $2.6 million more in license fee revenues recorded in 2012 compared with 2013.
Moving over to the balance sheet, we ended the year with $3.5 million in cash. The cash balance reflects a cash burn of $1.5 million in the fourth quarter of 2013. This compares with the cash burn of $1.9 million in the third quarter and $2.2 million in the second quarter of 2013.
Accounts receivable was up $325,000 from the end of 2013 due to our strong sales. We’ve experienced growth in inventory from the end of 2012, increasing from $900,000 to $1.5 million at the end of 2013, as we plan for increased levels of ClearPoint sales.
Our accounts payable and accrued liabilities balances had decreased by $1.5 million from the end of 2012 compared with December 31, 2013. Our derivative liabilities which is a non-cash item, increased from $2.1 million at the end of 2012 to $3.7 million at the end of 2013. This increase rose primarily from warrants issued in our January 2013 financing.
A couple of additional items to note that impacted the balance sheet subsequent to year end. $4.3 million in notes payable to Boston Scientific that were scheduled to mature in the fourth quarter of this year were extinguished.
In an 8-K we filed yesterday, we reported that the $4.3 million in notes payable to Boston was canceled in connection with an asset purchase agreement with Boston Scientific wherein they purchased from us certain intellectual property.
We expect to record a gain of $4.3 million in the first quarter of 2014 as a result of these agreements, as the assets sold were not previously recorded on our balance sheet. For further details, I refer you to the 8-K we filed yesterday, which can be found on our website.
The other item of note subsequent to year end relates to the private placement financing we announced last week. We had secured commitments for $3.5 million in this financing, which is still ongoing. For more information, please refer to our press release and the related 8-K, both of which were dated March 10, 2014, and are also available on our website.
With that, I will turn it back over to Kim.
Thanks, David. So Q4 was a great quarter for us, and, in fact, a great year, a year of significant building and significant growth.
We ended 2013 as a strong and sturdy company, a company that is revolutionalizing how minimally invasive neurosurgeries performed, a company that is working to bring new therapeutic options to the 2-plus million patients in the U.S. suffering from treatment-resistant neurological diseases, a company that is well-positioned to lead the medtech industry in this growing field. During 2013 we were successful in building value, a durable lasting value in our company and value that will benefit our shareholders.
I would like to take a few minutes now to review our accomplishments, by again looking at revenue which we grew significantly throughout the year. As David mentioned, our Q4 product revenues were $1.1 million, our first $1 million quarter, up 227% over Q4 of 2012. We ended the year with $2.9 million in product revenues, which exceeded our guidance and represented 149% increase over product revenues in 2012.
We ended 2013 with 31 ClearPoint sites, up over 50% from our customer site total at the end of 2012. As previously mentioned, we are proud to begin 5 of the top 10 neurosurgical hospitals in the United States as ranked by U.S. News & World Report.
Our ClearPoint install base is an important and valuable asset to this company. It enables us to reach a growing population patient, it allows us to expand the uses of ClearPoint as more neurosurgeons become familiar with the unique capabilities of the ClearPoint platform, and it constitutes a strategic asset for a company going forward. We ended 2013 with the platform capabilities of ClearPoint firmly established.
So why is this important? Since ClearPoint is a platform, our business is not dependent on one single patient population or one type of neurological therapy. ClearPoint is being used to deliver therapies for patients suffering from Parkinson’s disease, dystonia, brain tumors, epilepsy among others.
Neurosurgeons are using ClearPoint to enable DBS electrode placement, which alters the electrical activity in the brain. They are using ClearPoint to enable direct drug delivery, which alters the chemical activity in the brain. And they are using ClearPoint to enable laser ablation, which alters the physical structure of the brain.
What this means is that if a certain patient population is less responsive to a therapy than hoped or certain therapeutic approach proves to be less effective than other, our business can still continue to grow. Looking out a few years no one can be certain what therapies would be most effective in treating Parkinson’s disease for example. However, because of the efficacies of the human brain, we at MRI Interventions, strongly believe that precise MRI-guided local delivery will be needed regardless of the therapy. These expanding platform capabilities ClearPoint is a valuable and growing asset for our shareholders.
We ended 2013 involved in five human clinical trials, some investigational drugs to treat Parkinson’s disease and brain tumors. These trials involve well-known companies, like Sanofi and institutions, like the National Institute of Health.
As previously discussed, our participation in these drug trials provides MRI Interventions with the favorable risk return opportunities offering drug company-like revenue upside but without the typical commensurate all or nothing expense downside. Our opportunity in these drug trials is a valuable and growing asset for our shareholders.
During 2013 we made great strides in building a strong and stable infrastructure to pursue the large and growing market opportunity that we have with our ClearPoint system. Central to our effort was the initial build out of our sales and clinical support team. By the end of 2013, our sales, clinical support, and marketing team numbered 15, up from just six at the end of 2012.
And most importantly, we believe the quality of our sales and clinical support team is second to none, made up of seasoned professionals with significant prior experiences in the neuro field from companies including Medtronic, J&J Codman, Stryker, Integra LifeSciences and Covidien.
The infrastructure we built during 2013 also included expanded capabilities to deliver cost effective marketing. I will summarize all of our activities for 2013, but just in the fourth quarter alone, our marketing efforts resulted in seven media stories, reaching our company and/or ClearPoint nine press releases, four physician presentations of medical conferences, a very successful boot presence and well attended physician reception at the Congress of Neurological Surgeons Annual Meeting, a nationwide mail-out to neurologists near, existing or targeted ClearPoint sites, and the launching of our patient-facing websites.
Throughout 2013 we also added to our growing library a peer-reviewed journal support for ClearPoint and at the Board of Directors level. During 2013 and into our first quarter, we have added significant healthcare and med device expertise to provide our company with additional experienced leadership to guide us.
Our two most recent additions, Maria Sainz and Tim Richards bring with them exceptional capabilities. Mr. Sainz’s background includes leadership positions at Guidant, Stryker Neurovascular and Concentric Medical. Mr. Richard’s background includes leadership position at Covidien, B. Braun Medical and Becton Dickinson.
Our season sales and support team, our expanded marketing capabilities and our experienced Board Leadership are all valuable assets for our shareholders and position us well to lead the industry in the delivery of next-generation therapies to treat neurological diseases. And to help protect our franchise for the future, we’ve continued to grow our intellectual property to safe, which at year end stood at 95 issued patents and a 100 patent applications pending both U.S. and foreign.
Let me turn to the balance sheet for a moment. Over the course of recent weeks, we’ve taken two very important steps to further strengthen our financial position. As David mentioned, we consummated a transaction with Boston Scientific, which extinguishes a $4.3 million debt obligation of our company. And in a separate transaction, we secured commitments for $3.5 million to renew long-term debt financing, which will provide the company with the cash to execute our business plan.
These two transactions taken together are important because they significantly improve our working capital, eliminating $4.3 million in short-term obligations and providing us with $3.5 million cash. In the aggregate, this is a $7.8 million positive swing for our working capital position.
A few weeks ago, we announced a significant progression in our relationship with Siemens Healthcare related to our cardiac system ClearTrace. Over the coming months, we will be telling you more about this program. However, at this time I want to make three important points.
First, similar to ClearPoint, the market opportunity for ClearTrace is very large. Last year, there were over a 130,000 cardiac ablation procedures performed. Over three million patients in the U.S. suffer from atrial fibrillation, 6.7 million patients in the U.S. and Europe combined.
Now assuming an average selling price for the disposable components of $5,000, this is a $33 billion plus market opportunity in the U.S. and Europe. So this is a very large and very attractive market.
Now second point, we’re pursuing this large market opportunities in partnership with Siemens Healthcare. Now, let me be clear. This is an exclusive relationship. We’re exclusive to Siemens. Siemens is exclusive to us.
In addition, Siemens has designated MRI Interventions as its therapy partner of choice in this field of endeavor Siemens is a $110 billion market cap company. Siemens is a global market leader in MRI scanners. So, we’re going after this large cardiac ablation market arm in arm with a very powerful partner.
And my third point, we expect commercial release of our first ClearTrace product in Europe by the fourth quarter of next year. We’ve been working quietly on our ClearTrace systems for many quarters. This significant effort in the background by both MRI Interventions and Siemens has put us in a good position to get a commercial product on the market in the relative near-term.
2013 was an important and successful year for MRI Interventions, the year of success in building and in growing the company. We achieved record product revenues from both disposable product sales and capital product sales. We successfully built up the sales and clinical support team needed for the ongoing growth of our business.
We successfully expanded our marketing capabilities which is enabling us to reach more neurosurgeons, referring neurologists and patients. We made a number of enhancements to the ClearPoint system. We added new components to our ClearPoint product offering. And we significantly expanded our ClearPoint footprint with additional ClearPoint sites.
2013 was a very good year. With the commitment of our employees and the support of our shareholders, we look forward to making a continued and significant impact in the field of minimally invasive medicines and in the lives of many, many patients.
So with that, I’ll open the call for questions.
Thank you. (Operator Instructions) Our first question comes from Steve Schwartz from First Analysis.
Steve Schwartz - First Analysis
Good afternoon, gentlemen.
Steve Schwartz - First Analysis
The decline in R&D expense you noted was because of some reduction in software development expense, is that right?
Yes. It really had to do with the timing with some contract development work that we had, that we did in the fourth quarter of 2012. And as Kim mentioned, we actually hired a couple of internal resources during 2013. And so with that support in the development work, it is being done little more evenly throughout the year.
Steve Schwartz - First Analysis
Okay. And that is all connected with the new products that you highlight in the release having come out, is that correct?
Some of it is just related to enhancements that we released in early 2013 that’s with the expenditures in 2012 related to primarily.
Steve Schwartz - First Analysis
It is related to ClearPoint enhancements that we are making.
Steve Schwartz - First Analysis
Okay, all right. And then just in terms of more nuts-and-bolts type question from an SG&A expense standpoint, was the fourth quarter number indicative of your current run rate because of the new hires or was just because you were truing up at year end some expenses and so forth?
It should be pretty close to being indicative of a run rate that we ended at the end of 2014.
Steve Schwartz - First Analysis
Okay. And then lastly with respect to the notes offering since it does include warrants, how does that factor diluted share count, is there any impact?
Currently, because we have a net loss in terms of our fully diluted and basic earnings per share, earnings per loss number, it doesn’t have any impact because of the addition of those would be anti-dilutive. But the warrants that are included in this financing, they are priced at a $1.75 and they were intentionally priced at that to prevent any pricing recess on any previously issued warrants.
Steve Schwartz - First Analysis
I see, okay. All right. Thank you.
Thank you. (Operator Instructions) We appear to have no further questions. I will turn the call back over to our speakers for closing comments.
Thank you, moderator and thank you all for your time and attention. We appreciate it. We appreciate your support and we look forward to working with you and growing the company through 2014. Hope everyone has a good evening.
Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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