UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ____________
Commission file number: 000-54575
MRI Interventions, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
58-2394628 |
(State or Other Jurisdiction |
(IRS Employer |
of Incorporation or Organization) |
Identification Number) |
One Commerce Square, Suite 2550 |
|
Memphis, Tennessee |
38103 |
(Address of Principal Executive Offices) |
(Zip Code) |
(901) 522-9300 | |
(Registrant's Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) ☒Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☐ | ||
Non-accelerated filer ☐ |
Smaller Reporting Company ☒ | ||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒No
As of August 9, 2013, there were 58,318,640 shares of common stock outstanding.
MRI INTERVENTIONS, INC.
TABLE OF CONTENTS
Page Number | ||
PART I – FINANCIAL INFORMATION |
||
Item 1. |
Financial Statements (unaudited). | |
|
Condensed Balance Sheets as of June 30, 2013 and December 31, 2012 |
1 |
|
Condensed Statements of Operations for the three and six months ended June 30, 2013 and 2012 |
2 |
|
Condensed Statement of Stockholders’ Deficit for the six months ended June 30, 2013 |
3 |
|
Condensed Statements of Cash Flows for the six months ended June 30, 2013 and 2012 |
4 |
|
Notes to Condensed Financial Statements |
6 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
16 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
23 |
Item 4. |
Controls and Procedures. |
23 |
PART II – OTHER INFORMATION |
||
Item 1. |
Legal Proceedings. |
24 |
Item 1A. |
Risk Factors. |
24 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
46 |
Item 3. |
Defaults Upon Senior Securities. |
46 |
Item 4. |
Mine Safety Disclosures. |
46 |
Item 5. |
Other Information. |
46 |
Item 6. |
Exhibits. |
46 |
SIGNATURES |
47 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined under United States federal securities laws. The forward-looking statements are contained principally in the sections of this Quarterly Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements, expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
• |
our ability to market, commercialize and achieve market acceptance for our products; |
• |
our ability to successfully expand our sales and clinical support capabilities; |
• |
our ability to successfully complete the development of, and obtain regulatory clearance or approval for, our current product candidates; and |
• |
the estimates regarding the sufficiency of our cash resources. |
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. You should refer to the section of this Quarterly Report entitled “Risk Factors” under Part II, Item IA below for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake to update any of the forward-looking statements after the date of this Quarterly Report, except to the extent required by applicable securities laws.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MRI INTERVENTIONS, INC.
Condensed Balance Sheets
(Unaudited)
June 30, |
December 31, |
|||||||
2013 |
2012 |
|||||||
ASSETS |
(restated) |
|||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 6,977,875 | $ | 1,620,005 | ||||
Accounts receivable |
440,704 | 445,432 | ||||||
Inventory |
1,196,975 | 899,702 | ||||||
Prepaid expenses and other current assets |
135,305 | 110,873 | ||||||
Total current assets |
8,750,859 | 3,076,012 | ||||||
Property and equipment, net |
1,204,851 | 1,287,115 | ||||||
Software license inventory |
1,015,000 | 1,137,500 | ||||||
Other assets |
17,900 | 51,119 | ||||||
Total assets |
$ | 10,988,610 | $ | 5,551,746 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,714,719 | $ | 1,961,195 | ||||
Accrued compensation |
136,426 | 278,124 | ||||||
Other accrued liabilities |
332,055 | 1,177,142 | ||||||
Derivative liabilites |
2,855,367 | 2,129,091 | ||||||
Related party deferred revenue |
- | 650,000 | ||||||
Deferred product revenue |
75,787 | 112,725 | ||||||
Total current liabilities |
5,114,354 | 6,308,277 | ||||||
Other accrued liabilities |
359,732 | 574,722 | ||||||
Related party convertible notes payable |
4,338,601 | 4,338,601 | ||||||
Note payable, net of unamortized discount of $504,944 and $0 at June 30, 2013 and December 31, 2012, respectively |
3,784,500 | 2,000,000 | ||||||
Junior secured notes payable, net of unamortized discounts of $2,789,777 and $2,804,451 at June 30, 2013 and December 31, 2012, respectively |
210,223 | 195,549 | ||||||
Total liabilities |
13,807,410 | 13,417,149 | ||||||
Commitments and contingencies (Notes 5, 6 and 8) |
- | - | ||||||
Stockholders' deficit: |
||||||||
Common stock, $.01 par value; 100,000,000 shares authorized; 58,119,470 and 57,793,640 shares issued and outstanding, respectively, at June 30, 2013; and 48,418,830 and 48,093,000 issued and outstanding, respectively, at December 31, 2012 |
581,194 | 484,187 | ||||||
Additional paid-in capital |
66,121,248 | 58,995,972 | ||||||
Treasury stock, at cost, 325,830 common shares |
(1,679,234 | ) | (1,679,234 | ) | ||||
Accumulated deficit |
(67,842,008 | ) | (65,666,328 | ) | ||||
Total stockholders' deficit |
(2,818,800 | ) | (7,865,403 | ) | ||||
Total liabilities and stockholders' deficit |
$ | 10,988,610 | $ | 5,551,746 |
See accompanying notes.
MRI INTERVENTIONS, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2013 |
2012 |
2013 |
2012 |
|||||||||||||
Revenues: |
||||||||||||||||
Related party license revenues |
$ | - | $ | 650,000 | $ | 650,000 | $ | 1,300,000 | ||||||||
Service revenues |
65,116 | 142,404 | 219,062 | 250,734 | ||||||||||||
Product revenues |
497,373 | 291,356 | 957,626 | 513,025 | ||||||||||||
Total revenues |
562,489 | 1,083,760 | 1,826,688 | 2,063,759 | ||||||||||||
Costs and operating expenses: |
||||||||||||||||
Cost of product revenues |
295,777 | 156,757 | 522,108 | 258,426 | ||||||||||||
Research and development: |
||||||||||||||||
Research and development costs |
741,817 | 486,022 | 1,513,270 | 1,175,691 | ||||||||||||
Reversal of R&D obligation |
- | (882,537 | ) | - | (882,537 | ) | ||||||||||
Selling, general, and administrative |
1,703,191 | 1,803,045 | 3,336,638 | 3,143,148 | ||||||||||||
Total costs and operating expenses |
2,740,785 | 1,563,287 | 5,372,016 | 3,694,728 | ||||||||||||
Operating loss |
(2,178,296 | ) | (479,527 | ) | (3,545,328 | ) | (1,630,969 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Gain on change in fair value of deriviative liabilities |
955,271 | - | 2,578,969 | (26,545) | ||||||||||||
Loss on note payable modification |
- | - | (1,356,177 | ) | - | |||||||||||
Other income (expense), net |
(6,945 | ) | (25,795 | ) | 367,388 | 1,920 | ||||||||||
Interest income |
7,771 | 1,361 | 14,890 | 2,980 | ||||||||||||
Interest expense |
(129,733 | ) | (96,018 | ) | (235,422 | ) | (2,421,754 | ) | ||||||||
Net loss |
$ | (1,351,932 | ) | $ | (599,979 | ) | $ | (2,175,680 | ) | $ | (4,074,368 | ) | ||||
Net loss per share attributable to common stockholders: |
||||||||||||||||
Basic and diluted |
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | (0.12 | ) | ||||
Weighted average shares outstanding: |
||||||||||||||||
Basic and diluted |
57,384,247 | 40,596,069 | 56,129,908 | 32,891,808 |
See accompanying notes.
MRI INTERVENTIONS, INC.
Condensed Statements of Stockholders' Deficit
Six Months Ended June 30, 2013
(Unaudited)
Additional |
||||||||||||||||||||||||
Common Stock |
Paid-in |
Treasury |
Accumulated |
|||||||||||||||||||||
Shares |
Amount |
Capital |
Stock |
Deficit |
Total |
|||||||||||||||||||
Balances, January 1, 2013 (restated) |
48,093,000 | $ | 484,187 | $ | 58,995,972 | $ | (1,679,234 | ) | $ | (65,666,328 | ) | $ | (7,865,403 | ) | ||||||||||
January 2013 Private Placement (restated) (see Note 5) |
9,201,684 | 92,017 | 6,407,533 | - | - | 6,499,550 | ||||||||||||||||||
Employee share-based compensation |
- | - | 642,591 | - | - | 642,591 | ||||||||||||||||||
Warrant exercises |
438,263 | 4,383 | 8,992 | - | - | 13,375 | ||||||||||||||||||
Issuance of common stock in payment of director fees |
60,693 | 607 | 66,160 | - | - | 66,767 | ||||||||||||||||||
Net loss for the six months ended June 30, 2013 |
- | - | - | - | (2,175,680 | ) | (2,175,680 | ) | ||||||||||||||||
Balances, June 30, 2013 |
57,793,640 | $ | 581,194 | $ | 66,121,248 | $ | (1,679,234 | ) | $ | (67,842,008 | ) | $ | (2,818,800 | ) |
See accompanying notes.
MRI INTERVENTIONS, INC.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, |
||||||||
2013 |
2012 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (2,175,680 | ) | $ | (4,074,368 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: |
||||||||
Depreciation and license amortization |
231,368 | 212,670 | ||||||
Share-based compensation |
642,591 | 1,137,561 | ||||||
Expenses paid through the issuance of common stock |
66,767 | - | ||||||
(Gain) loss on change in fair value of derivative liability |
(2,578,969 | ) | 26,545 | |||||
Gain on negotiated reduction in accounts payable |
(382,263 | ) | - | |||||
Loss on loan modification |
1,356,177 | - | ||||||
Amortization and write-off of debt issuance costs and original issue discounts |
53,553 | 2,057,649 | ||||||
Increase (decrease) in cash resulting from changes in: |
||||||||
Accounts receivable |
4,728 | 231,732 | ||||||
Inventory |
(259,033 | ) | (107,777 | ) | ||||
Prepaid expenses and other current assets |
(24,432 | ) | (56,435 | ) | ||||
Other assets |
- | 1,281 | ||||||
Accounts payable and accrued expenses |
(676,544 | ) | (1,380,990 | ) | ||||
Deferred revenue |
(686,938 | ) | (1,300,000 | ) | ||||
Net cash flows from operating activities |
(4,428,675 | ) | (3,252,132 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(55,844 | ) | (84,861 | ) | ||||
Net cash flows from investing activities |
(55,844 | ) | (84,861 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of convertible notes payable, net of issuance costs |
- | 3,424,950 | ||||||
Proceeds from private placement, net of issuance costs |
9,829,014 | - | ||||||
Deposits received for July 2012 offering |
- | 989,520 | ||||||
Proceeds from warrant exercise |
13,375 | - | ||||||
Net cash flows from financing activities |
9,842,389 | 4,414,470 | ||||||
Net change in cash and cash equivalents |
5,357,870 | 1,077,477 | ||||||
Cash and cash equivalents, beginning of period |
1,620,005 | 145,478 | ||||||
Cash and cash equivalents, end of period |
$ | 6,977,875 | $ | 1,222,955 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Cash paid for: |
||||||||
Income taxes |
$ | - | $ | - | ||||
Interest |
$ | 8,798 | $ | 11,479 |
See accompanying notes.
MRI INTERVENTIONS, INC.
Condensed Statements of Cash Flows
(Unaudited)
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
● |
In February 2012, the terms of related party notes payable were modified and accrued interest of $838,601 was added to the principal balances of the original notes. |
● |
Upon the effectiveness of the Company’s Form 10 registration statement in February 2012, the principal balance of convertible notes payable totaling $10,811,500 and the related accrued interest of $974,311 were converted into shares of the Company’s common stock. In addition, unamortized debt discounts totaling $405,602 at the conversion date related to the relative fair value of warrants issued in connection with the issuance of the convertible notes (originally accounted for as equity) were offset against additional paid-in capital. |
● |
In February 2012, warrants with a fair value of $237,299 (recorded as deferred financing costs and additional paid-in capital) were issued to the placement agent and its sub-placement agents in connection with the Company’s sale of units consisting of secured convertible notes and common stock warrants. |
● |
In January and February 2012, both the $383,204 relative fair value of warrants and the $383,204 intrinsic value of the beneficial conversion feature associated with notes issued by the Company in an offering of units were recorded as additional paid-in capital and a discount to the convertible notes payable. |
● |
In June 2012, the Company issued 1,500,000 shares of its common stock in exchange for settlement of accounts payable of $612,500 and the purchase of software licenses in the amount of $1,050,000. |
● |
ClearPoint reusable components were transferred from inventory to loaned systems, which is a component of property and equipment, with costs of $84,260 and $137,156 during the six months ended June 30, 2013 and 2012, respectively. |
● |
In March 2013, the Company entered into a loan modification in which accrued interest of $389,444 was added to the principal balance of a note payable and the principal balance of the note payable was also increased by an additional $1,900,000 (see Note 4). |
● |
In recording the January 2013 private placement transaction, deferred financing costs of $24,219 were netted against the proceeds recorded to additional paid-in capital. |
See accompanying notes.
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
1. |
Description of the Business and Liquidity |
MRI Interventions, Inc. (the “Company”) is a medical device company focused on the development and commercialization of technology that enables physicians to see inside the brain and heart using direct, intra-procedural magnetic resonance imaging (“MRI”), guidance while performing minimally invasive surgical procedures. The Company was incorporated in the state of Delaware on March 12, 1998.
The Company’s ClearPoint system, an integrated system comprised of reusable components and disposable products, is designed to allow minimally invasive procedures in the brain to be performed in an MRI suite. In 2010, the Company received 510(k) clearance from the Food and Drug Administration (“FDA”) to market the ClearPoint system in the United States for general neurological interventional procedures. The Company’s ClearTrace system is a product candidate under development that is designed to allow catheter-based minimally invasive procedures in the heart to be performed in an MRI suite. The Company has also entered into exclusive licensing and development agreements with affiliates of Boston Scientific Corporation (“Boston Scientific”), pursuant to which Boston Scientific may incorporate certain of the Company’s MRI-safety technologies into Boston Scientific’s implantable leads for cardiac and neurological applications.
Liquidity and Management’s Plans
For the six months ended June 30, 2013 and for the year ended December 31, 2012, the Company incurred net losses of $2,175,680 and $5,877,718, respectively, and the cumulative net loss since the Company’s inception through June 30, 2013 was $67,842,008. Net cash used in operations was $4,428,675 and $7,433,816, for the six months ended June 30, 2013 and for the year ended December 31, 2012, respectively. Since inception, the Company has financed its activities principally from the sale of equity securities, the issuance of convertible notes and license arrangements.
The Company’s primary financing activities during the six months ended June 30, 2013 and the year ended December 31, 2012 were:
● |
the January 2013 equity private placement (see Note 5), which resulted in net proceeds of $9,829,014; |
● |
the July 2012 equity private placement (the “July 2012 Financing Transaction”), which resulted in net proceeds of $5,516,495; and |
● |
the unit offering the Company completed in February 2012, which resulted in net proceeds of $4,946,560, $3,424,950 of which were received in 2012 and $1,521,610 of which were received in 2011. |
While the Company expects to continue to use cash in operations, the Company believes its existing cash and cash equivalents at June 30, 2013 of $6,977,875, combined with cash generated from product and service revenues, will be sufficient to meet the Company’s anticipated cash requirements through at least March 2014. During the remainder of 2013, the Company plans to increase its spending on sales and marketing activities as it continues the commercial rollout of its ClearPoint system, from which the Company expects to increase ClearPoint system product revenues. Certain planned expenditures are discretionary and could be deferred if the Company is required to do so to fund critical operations. The sale of additional equity or convertible debt securities will likely result in dilution to the Company’s current stockholders. To the extent the Company’s available cash and cash equivalents are insufficient to satisfy its long-term operating requirements, the Company will need to seek additional sources of funds, from the sale of additional equity, debt or other securities or through a credit facility, or to modify its current business plan. There can be no assurances that the Company will be able to obtain additional financing on commercially reasonable terms, if at all.
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
2. |
Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation and Use of Estimates
In the opinion of management, the accompanying unaudited condensed financial statements (“condensed financial statements”) have been prepared on a basis consistent with the Company’s December 31, 2012 audited financial statements, except as described in Note 7, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth therein. The condensed financial statements have been prepared in accordance with Securities and Exchange Commission (“SEC”) rules for interim financial information, and, therefore, omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, subject to the matters described in Note 7. The accompanying condensed balance sheet as of December 31, 2012 has been derived from the audited financial statements at that date, except as described in Note 7, but does not include all information and footnotes required by GAAP for complete financial statements. The results of operations for the three and six month periods ended June 30, 2013 may not be indicative of the results to be expected for the entire year or any future periods.
Fair Value Measurements
Carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their fair values due to their short maturities.
The table below reflects the carrying values and the estimated fair values of the Company’s outstanding notes payable at June 30, 2013:
Estimated |
||||||||
Carrying Value |
Fair Value |
|||||||
Related party Boston Scientific convertible notes payable |
$ | 4,338,601 | $ | 3,815,307 | ||||
Convertible note payable |
3,784,500 | 3,784,500 | ||||||
Junior secured notes payable |
210,223 | 2,015,312 |
The difference between the carrying value of the related party Boston Scientific convertible notes payable, which is equal to the face value due to troubled debt restructuring accounting, and the estimated fair value is attributable to the fact that no interest is charged per the terms of the convertible notes payable, which is below market. The difference between the carrying value and the fair value of the junior secured notes payable relates primarily to the unamortized debt discount. This discount resulted from the relative fair value assigned to the junior secured notes payable at the time of issuance, as the notes were issued in connection with a unit offering, with the units consisting of a note payable and shares of the Company’s common stock.
The Company measures certain financial assets and liabilities at fair value on a recurring basis. GAAP provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority, referred to as Level 1, to quoted prices in active markets for identical assets and liabilities. The next priority, referred to as Level 2, is given to quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability. The lowest priority, referred to as Level 3, is given to unobservable inputs. See Note 5 for fair value information related to the Company’s derivative liabilities, which are the only assets or liabilities carried at fair value by the Company on a recurring basis at June 30, 2013. The table below reflects the level of the inputs used in the Company’s fair value calculation for instruments carried at fair value.
Quoted Prices in Active Markets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value |
|||||||||||||
Derivative liability - warrants |
$ | - | $ | - | $ | 2,855,367 | $ | 2,855,367 | ||||||||
Derivative liability - conversion option |
- | - | - | - |
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
Derivative Liability for Warrants to Purchase Common Stock
The derivative liability for warrants represents the fair value of warrants issued in connection with private placements of shares of the Company’s common stock (see Note 5). These warrants are presented as liabilities based on certain exercise price reduction and net cash settlement provisions. The liability, which is recorded at fair value on the accompanying balance sheets, is calculated by the Monte Carlo simulation valuation method. The change in fair value of these warrants is recognized as other income or expense in the statements of operations.
Inventory
Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. All items included in inventory relate to the Company’s ClearPoint system. Software license inventory that is not expected to be utilized within the next twelve months is classified as a non-current asset. The Company periodically reviews its inventory for obsolete items and provides a reserve upon identification of potential obsolete items.
Revenue Recognition
The Company’s revenues arise from: (1) the sale of ClearPoint system reusable components, including associated installation services; (2) sales of ClearPoint disposable products; and (3) license and development arrangements. The Company recognizes revenue, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-10-S99, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the selling price or fee is fixed or determinable, collection is probable and risk of loss has transferred to the customer. For all sales, the Company requires either a purchase agreement or a purchase order as evidence of an arrangement.
(1) Sale of ClearPoint system reusable components – Generally, revenues related to ClearPoint system sales are recognized upon installation of the system and the completion of training of at least one of the customer’s physicians, which typically occurs concurrently with the ClearPoint system installation. ClearPoint system reusable components include software. This software is integral to the utility of the ClearPoint system as a whole, and as such, the provisions of FASB ASC 985-605, “Software Revenue Recognition,” are not applicable. Sales of reusable components that have stand-alone value to the customer are recognized when risk of loss passes to the customer. Sales of reusable components to a distributor that has been trained to perform ClearPoint system installations are recognized at the time risk of loss passes to the distributor.
(2) Sale of ClearPoint disposable products – Revenues from the sale of ClearPoint disposable products utilized in procedures performed using the ClearPoint system are recognized at the time risk of loss passes to the customer, which is generally at shipping point or upon delivery to the customer’s location, depending upon the specific terms agreed upon with each customer.
(3) License and development arrangements - The Company analyzes revenue recognition on an agreement by agreement basis as discussed below.
● |
Related Party Revenue Recognition under Boston Scientific Cardiac Agreement – The Company analyzed whether the deliverables under the arrangement represent separate units of accounting as defined by GAAP. Application of GAAP regarding Multiple-Element Arrangements requires management to make subjective judgments about the values of the individual elements and whether delivered elements are separable from the other aspects of the contractual relationship. The Company determined it did not and does not have clear and objective evidence of fair value of the various elements of the agreement and, therefore, under these standards, the deliverables were treated as one unit of accounting. |
The Company defers recognition of non-refundable upfront license fees if there are continuing performance obligations without which the technology, know-how, rights, products or services conveyed in conjunction with the non-refundable fees have no utility to the licensee that could be considered separate and independent of the Company’s performance under other elements of the arrangement. Since the Company had continuing involvement through research and development services that were required because the Company’s know-how and expertise related to the technology were proprietary, such upfront fees were deferred and recognized over the estimated period of continuing involvement on a straight-line basis. |
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
During the six months ended June 30, 2013 and 2012, the Company recognized $650,000 and $1,300,000, respectively, in related party license fee revenues. There were no remaining amounts recorded as deferred related party license revenues subsequent to March 31, 2013 as the Company’s period of continuing involvement ended on that date. Amounts to be received, if any, related to substantive, performance-based milestones in research and development arrangements under the agreement will be recognized upon receipt. Future product royalty income related to the agreement will be recognized as the related products are sold and amounts are payable to the Company. |
● |
Service Revenues – In 2011, the Company entered into an agreement to provide development services to a third party. Under this agreement, the Company earns revenue equal to costs incurred for outside expenses related to the development services provided, plus actual direct internal labor costs (including the cost of employee benefits), plus an overhead markup of the direct internal labor costs incurred. Revenue is recognized in the period in which the Company incurs the related costs. During the six months ended June 30, 2013 and 2012, the Company recorded service revenues of $219,062 and $240,734, respectively, related to this agreement. From time to time, the Company may also perform development services for other third parties evidenced by either a development agreement or a purchase order. During the six months ended June 30, 2012, the Company recorded revenues totaling $10,000 for such services. |
Net Loss Per Share
The Company calculates net loss per share in accordance with FASB ASC 260, “Earnings per Share.” Basic earnings per share (“EPS”) is calculated by dividing the net income or loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without giving consideration to common stock equivalents. Diluted EPS is computed by dividing the net income or loss attributable to common stockholders by the weighted average number of common shares outstanding for the period plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury stock method when net income is reported. For all periods presented, since such periods resulted in net losses, diluted net loss per share is the same as basic net loss per share. The following table sets forth potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:
As of June 30, |
||||||||
2013 |
2012 |
|||||||
Stock options |
6,754,627 | 6,111,127 | ||||||
Warrants |
12,859,512 | 6,258,648 | ||||||
Shares under convertible note agreements |
542,325 | 4,287,695 | ||||||
20,156,464 | 16,657,470 |
New Accounting Pronouncements
In February 2013, the FASB issued guidance that requires an entity to disclose information showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The provisions of this new guidance were effective prospectively as of the beginning of the Company’s 2013 fiscal year. The adoption of this standard update did not have an impact on the Company’s financial statements for the six months ended June 30, 2013.
3. |
Inventory |
Inventory consists of the following as of:
June 30, 2013 |
December 31, 2012 |
|||||||
Work in process |
$ | 611,735 | $ | 494,290 | ||||
Software license inventory |
397,000 | 344,500 | ||||||
Finished goods |
188,240 | 60,912 | ||||||
Inventory included in current assets |
1,196,975 | 899,702 | ||||||
Software license inventory |
1,015,000 | 1,137,500 | ||||||
$ | 2,211,975 | $ | 2,037,202 |
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
4. |
Note Payable Modification |
In April 2011, the Company issued a $2,000,000 subordinated secured convertible note (“April 2011 Note”) to a medical device co-development partner (“Strategic Partner”). Upon issuance, the April 2011 Note was scheduled to mature in April 2016, unless earlier converted, and it accrued interest at the rate of 10% per year. The April 2011 Note was amended in February 2012, to among other things, provide the Strategic Partner the option to convert the April 2011 Note into shares of the Company’s common stock at a conversion price of $0.60 per share at any time on or before February 23, 2013.
On February 21, 2013, the Strategic Partner delivered notice to the Company of its election to convert the April 2011 Note into shares of the Company’s common stock at the conversion price of $0.60 per share. However, prior to the issuance of those conversion shares, on March 6, 2013, the Company and the Strategic Partner entered into a loan modification. As a result of that loan modification, the Strategic Partner revoked its election to convert the April 2011 Note into shares of common stock. Under the loan modification, the Company issued an amended and restated subordinated secured convertible note to the Strategic Partner (the “Amended and Restated Note”) which amended the April 2011 Note (i) to remove the equity conversion feature, such that the Amended and Restated Note is not convertible into any shares of the Company’s capital stock, (ii) to reduce the interest rate, beginning March 6, 2013, from 10% per year to 5.5% per year, (iii) to ease certain restrictive loan covenants, and (iv) to reflect a new note principal balance of $4,289,444, which represents the sum of (A) the original principal balance of the April 2011 Note in the amount of $2,000,000, plus (B) interest accrued under the April 2011 Note through March 6, 2013 in the amount of $389,444, plus (C) $1,900,000. The Amended and Restated Note completely replaced and superseded the April 2011 Note. The Amended and Restated Note matures in April 2016, and principal and accrued interest under the Amended and Restated Note is payable in a single installment upon maturity. Like the April 2011 Note, the Amended and Restated Note is secured by a security interest in the assets of the Company, which security interest is junior and subordinate to the security interest that secures the related party convertible notes payable issued by the Company to Boston Scientific.
The Company has applied guidance in FASB ASC 470-50, “Debt Modifications and Extinguishments,” which requires calculating the fair value of the Amended and Restated Note, as of the loan modification date, based on the amended terms. At the time of the loan modification, the fair value of the Amended and Restated Note, with its principal balance of $4,289,444, was $3,745,621. The difference between the fair value of the Amended and Restated Note immediately following the loan modification and the carrying value of the April 2011 Note and related accrued interest immediately prior to the loan modification, resulted in a charge to other expense of $1,356,177 in the statement of operations during the six months ended June 30, 2013. The $543,823 difference between the principal amount of the Amended and Restated Note and the fair value of the Amended and Restated Note on the date of the loan modification was recorded as a debt discount and is being amortized to interest expense using the effective interest method over the term of the Amended and Restated Note.
5. |
Stockholders’ Equity |
January 2013 Private Placement
In January 2013, the Company entered into a securities purchase agreement for the private placement of shares of the Company’s common stock and warrants to purchase shares of the Company’s common stock, at a purchase price of $1.20 per unit (the “January 2013 Financing Transaction”). Each unit consisted of one share of common stock and a warrant to purchase one-half share of common stock.
In the January 2013 Financing Transaction, the Company sold to the investors 9,201,684 shares of common stock, together with warrants to purchase 4,600,842 shares of common stock, for aggregate gross proceeds of $11,042,021, before commissions and offering expenses. Non-employee directors of the Company invested a total of $402,000 in the January 2013 Financing Transaction. Each warrant is exercisable for five years from the date of issuance and has an exercise price of $1.75 per share, subject to adjustment from time to time for stock splits or combinations, stock dividends, stock distributions, recapitalizations and other similar transactions. In the event the Company issues shares of its common stock or common stock equivalents in a subsequent financing transaction at a price below the then prevailing warrant exercise price, the exercise price of the warrants will be adjusted downward (commonly referred to as a “down round” provision) to the price at which the Company issues the common stock or common stock equivalents.
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
In addition, the warrants contain a net-cash settlement feature which gives the warrant holder the right to net-cash settlement in the event certain transactions occur. Pursuant to the net-cash settlement provision of the warrants, if such a transaction occurs, the warrant holder will be entitled to receive cash equal to the value calculated under the Black-Scholes valuation model using (i) an expected volatility equal to the greater of 100% and the 100-day volatility obtained from the HVT function on Bloomberg, (ii) an expected term equal to the remaining term of the warrant, and (iii) an interest rate equal to the United States Treasury risk-free rate for the term of the lesser of the remaining term of the warrant or twenty-four months.
The Company’s placement agents earned commissions of $1,104,202 and the Company incurred other transaction costs of $133,024 related to the January Financing Transaction.
In connection with the January 2013 Financing Transaction, the Company entered into a registration rights agreement with the investors pursuant to which the Company filed a registration statement with the SEC covering the resale of the shares of common stock and the shares of common stock underlying the warrants issued in the financing. The Company must bear the costs, including legal and accounting fees, associated with the registration of those shares. If the Company fails to continuously maintain the effectiveness of the registration statement (with certain permitted exceptions), the Company will incur certain damages to the investors, up to a maximum amount of 12% of the investors’ investments in the January 2013 Financing Transaction, or approximately $1,300,000.
Common Stock Warrants Requiring Liability Accounting
Under guidance in ASC 815-40, “Contracts in Entity's Own Equity,” the net-cash settlement and down round provisions contained in the warrants issued in the January 2013 Financing Transaction require derivative liability accounting treatment for the warrants. Likewise, under ASC 815-40, the down round provision contained in the warrants issued in the July 2012 Financing Transaction also require derivative liability accounting treatment for the warrants. As of June 30, 2013 and December 31, 2012, the aggregate fair value of these warrants was $2,855,367 and $2,128,302, respectively. The fair value of these warrants was calculated by the Monte Carlo simulation valuation method.
Assumptions used in calculating the fair value of these warrants were as noted below (including assumptions used in calculating the transaction date fair value for the warrants issued in the January 2013 Financing Transaction):
June 30, 2013 January 2013 Financing Transaction December 31, 2012 Dividend yield Expected volatility Risk free interest rate Expected remaining term (in years)
0
%
0
%
0
%
46.54
%
-
100.00
%
47.08
%
-
100.00
%
47.08
%
1.05
%
-
1.27
%
0.91
%
0.65
%
4.01
to
4.57
5
4.51
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
In addition to the assumptions above, the Company also takes into consideration whether or not the Company would participate in another round of equity financing and, if so, what that stock price would be for such a financing at that time. The Company also considers the probability of a qualifying aderse change of control event that would trigger the net cash settlement provision.
The change in the fair value of the warrants accounted for as derivative liabilities is reflected below:
Balance at January 1, 2013 Fair value of warrants issued in January 2013 Financing Transaction at transaction date Decrease in fair value resulting in gain Fair value at June 30, 2013
$
2,128,302
3,305,245
(2,578,180
)
$
2,855,367
The Company will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants, at which time the liability will be reclassified to stockholders' equity, or expiration of the warrants.
Stock Options
In June 2013, the stockholders of the Company approved the creation of a new share-based incentive plan (the “2013 Plan”). Following stockholder approval of the 2013 Plan, no new grants under the Company’s prior stock plans were made. A total of 1,250,000 shares of the Company’s common stock are reserved for issuance under the 2013 Plan, of which awards as to 277,500 shares had been made as of June 30, 2013. Thus, 972,500 shares remained available for award grants as of June 30, 2013 under the 2013 Plan.
Activity under all of the Company’s equity compensation plans during the six months ended June 30, 2013 is summarized below:
Shares |
Weighted - Average Exercise Price |
|||||||
Outstanding at January 1, 2013 |
6,432,127 | $ | 1.58 | |||||
Granted |
347,500 | 1.14 | ||||||
Forfeited |
(25,000 | ) | 2.09 | |||||
Outstanding at June 30, 2013 |
6,754,627 | 1.55 |
The estimated grant date fair values of options granted during the six months ended June 30, 2013 were calculated using the Black-Scholes valuation model, based on the following assumptions:
Dividend yield |
0% | ||||
Expected Volatility |
45.33% | to | 45.96% | ||
Risk free Interest rates |
0.92% | to | 1.38% | ||
Expected lives (years) |
5.5 |
to |
6.0 |
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
The Company records share-based compensation expense on a straight-line basis over the related vesting period. For the periods indicated below, employee share-based compensation expense related to options was:
Three Months Ended June 30, |
Six Months Ended June 30, |
||||||||||||||
2013 |
2012 |
2013 |
2012 |
||||||||||||
$ | 324,124 | $ | 313,707 | $ | 642,591 | $ | 543,562 |
As of June 30, 2013, there was unrecognized compensation expense of $1,429,490 related to outstanding stock options which is expected to be recognized over a weighted average period of approximately 1.5 years.
Warrants
Warrants have generally been issued for terms of up to five years. Common stock warrant activity for the six months ended June 30, 2013 is as follows:
Shares |
Weighted - Average Exercise Price |
|||||||
Outstanding at January 1, 2013 |
8,763,836 | $ | 0.95 | |||||
Issued |
4,600,842 | 1.75 | ||||||
Forfeited |
(41,666 | ) | 1.00 | |||||
Exercised |
(463,500 | ) | 0.13 | |||||
Outstanding at June 30, 2013 |
12,859,512 | 1.27 |
During the six months ended June 30, 2013, certain warrants were exercised on a net settlement basis which resulted in the Company withholding 25,237 shares out of the common stock warrants exercised.
6. |
Legal Proceeding |
In June 2013, Custom Equity Research, Inc. d/b/a Summer Street Research Partners, or Summer Street, commenced an arbitration proceeding alleging breach of contract and quantum meruit claims against the Company. Summer Street claims, among other things, that the Company owes Summer Street $480,000 in cash commissions, as well as warrants to purchase 460,338 shares of our common stock, in connection with the Company’s engagement of Summer Street to serve as its financial advisor and placement agent for two financing transactions undertaken by the Company in 2011 and 2012, respectively. As required under the Company’s engagement agreements with Summer Street, the arbitration has been brought before JAMS, The Resolution Experts, an alternative dispute resolution provider. In the arbitration, the Company has filed counter-claims against Summer Street alleging fraud and misrepresentation, abuse of process and malicious prosecution, and the Company is seeking unspecified monetary damages from Summer Street in connection with the counter-claims. The arbitration proceeding is at a preliminary stage. The Company intends to vigorously defend itself and pursue its claims against Summer Street in the arbitration.
Due to the uncertainty surrounding the arbitration process, the Company is unable to reasonably estimate the ultimate outcome of the foregoing matter at this time. Based on currently available information, the Company believes that it has meritorious defenses to Summer Street’s claims and that the resolution of this matter is not likely to have a material adverse effect on the Company’s business, financial condition or future results of operations.
7. |
Restatements |
In connection with the preparation of the Company’s financial statements as of June 30, 2013, and for the three and six months then ended the Company determined that it should have used derivative liability accounting to account for the fair value of the warrants issued inthe Company's July 2012 Financing Transaction in recording the net proceeds received, due to the down round provision associated with the exercise price of the warrants. The Company previously recorded all of the net proceeds from the July 2012 Financing Transaction as equity. In addition, in accounting for the warrants issued in the January 2013 Financing Transaction, the Company did apply derivative liability accounting; however, the valuation model used by the Company to determine the fair value of the warrants only considered the net cash settlement feature which gives the warrant holder the right to net cash settlement in the event certain transactions occur. The Company also should have included other scenarios that did not result in application of the net cash settlement feature and should have considered the down round provision in determining the fair value of the warrants.
The Company has calculated the fair value of the warrants issued in both the July 2012 Financing Transaction and the January 2013 Financing Transaction for each relevant reporting period using the Monte Carlo simulation valuation method. The Company plans to file a Form 10-K/A for the year ended December 31, 2012 and a Form 10-Q/A for the quarterly period ended March 31, 2013, in which it will restate its financial statements to correct the non-cash errors related to derivative liability accounting for warrants issued in both the July 2012 Financing Transaction and the January 2013 Financing Transaction. The Company also will disclose the affected quarterly information for 2012 in the Form 10-K/A.
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
The impact of the restatements is reflected below for the periods indicated:
As of December 31, 2012 |
As of March 31, 2013 |
|||||||||||||||||||||||
As previously |
As previously |
|||||||||||||||||||||||
reported |
Adjustment |
As restated |
reported |
Adjustment |
As restated |
|||||||||||||||||||
Balance sheet: |
||||||||||||||||||||||||
Total assets |
$ | 5,551,746 | $ | - | $ | 5,551,746 | $ | 13,023,682 | $ | - | $ | 13,023,682 | ||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Derivative liabilities |
$ | 789 | $ | 2,128,302 | $ | 2,129,091 | $ | 3,771,310 | $ | 39,328 | $ | 3,810,638 | ||||||||||||
All other current liabilities |
4,179,186 | - | 4,179,186 | 2,518,349 | - | 2,518,349 | ||||||||||||||||||
Total current liabilities |
4,179,975 | 2,128,302 | 6,308,277 | 6,289,659 | 39,328 | 6,328,987 | ||||||||||||||||||
All other liabilities |
7,108,872 | - | 7,108,872 | 8,565,829 | - | 8,565,829 | ||||||||||||||||||
Total liabilities |
11,288,847 | 2,128,302 | 13,417,149 | 14,855,488 | 39,328 | 14,894,816 | ||||||||||||||||||
Additional paid-in capital |
60,953,692 | (1,957,720 | ) | 58,995,972 | 65,716,715 | 4,999 | 65,721,714 | |||||||||||||||||
Accumulated deficit |
(65,495,746 | ) | (170,582 | ) | (65,666,328 | ) | (66,445,749 | ) | (44,327 | ) | (66,490,076 | ) | ||||||||||||
Other stockholders' equity |
(1,195,047 | ) | - | (1,195,047 | ) | (1,102,772 | ) | - | (1,102,772 | ) | ||||||||||||||
Total deficit |
(5,737,101 | ) | (2,128,302 | ) | (7,865,403 | ) | (1,831,806 | ) | (39,328 | ) | (1,871,134 | ) | ||||||||||||
Total liabilities and stockholders' deficit |
$ | 5,551,746 | $ | - | $ | 5,551,746 | $ | 13,023,682 | $ | - | $ | 13,023,682 |
Year Ended December 31, 2012 |
Three Months Ended March 31, 2013 |
|||||||||||||||||||||||
As previously |
As previously |
|||||||||||||||||||||||
reported |
Adjustment |
As restated |
reported |
Adjustment |
As restated |
|||||||||||||||||||
Statements of operations: |
||||||||||||||||||||||||
Operating loss |
$ | (3,129,278 | ) | $ | - | $ | (3,129,278 | ) | $ | (1,367,032 | ) | $ | - | $ | (1,367,032 | ) | ||||||||
Gain (loss) on change in fair value of derivative liabilities |
(789 | ) | (170,582 | ) | (171,371 | ) | 1,497,443 | 126,255 | 1,623,698 | |||||||||||||||
All other income (expense) |
(2,577,069 | ) | - | (2,577,069 | ) | (1,080,414 | ) | - | (1,080,414 | ) | ||||||||||||||
Net Loss |
$ | (5,707,136 | ) | $ | (170,582 | ) | $ | (5,877,718 | ) | $ | (950,003 | ) | $ | 126,255 | $ | (823,748 | ) | |||||||
Net loss per share (basic and diluted) |
$ | (0.14 | ) | $ | (0.01 | ) | $ | (0.15 | ) | $ | (0.02 | ) | $ | 0.00 | $ | (0.02 | ) |
Certain amounts in the related statements of cash flows will be corrected, but those changes will not impact the net cash provided from or used in operations, investing or financing activities.
MRI INTERVENTIONS, INC.
Notes to Condensed Financial Statements
(Unaudited)
8. |
Subsequent Event |
Effective July 28, 2013, the Company and its software development partner (“Software Partner”) entered into a Third Amendment to the Master Services and Licensing Agreement between the parties (the “Third Amendment”).
The Company entered into the Master Services and Licensing Agreement (the “Master Software Agreement”) in July 2007 for the Software Partner to develop on the Company’s behalf, based on the Company’s detailed specifications, a customized software solution for the Company’s ClearPoint system. The Software Partner was in the business of providing software development and engineering services on a contract basis to a number of companies. In developing the Company’s ClearPoint system software, the Software Partner utilized certain of its own pre-existing software code. Under the Master Software Agreement, the Company received a non-exclusive, worldwide license to the pre-existing software code, in object code form, as an integrated component of the Company’s ClearPoint system software. In return, the Company agreed to pay the Software Partner a license fee for each copy of the ClearPoint system software that the Company distributes. In addition, under the Master Software Agreement, the Software Partner has been performing ongoing custom engineering, maintenance and support services with respect to the Company’s ClearPoint system software, for which services the Company has been compensating the Software Partner.
At the Company's request, the parties entered into the Third Amendment to enable the Company to internally handle development, maintenance and support of its ClearPoint system software going forward. As a result, the services which the Company was outsourcing to the Software Partner will now be performed by the Company itself. Under the Third Amendment, the Software Partner granted the Company a non-exclusive, non-transferable, worldwide license to the source code for the pre-existing software to use in the Company’s further development and commercialization of its ClearPoint system software. In return, the Company agreed to pay the Software Partner a one-time license fee. The Software Partner may terminate the source code license only for cause. The Company will continue to pay the Software Partner a license fee for each copy of the ClearPoint system software that the Company distributes, but only for licenses in excess of those licenses already purchased or otherwise acquired by the Company prior to the Third Amendment. The Company had already satisfied its minimum license purchase commitments from the Master Software Agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.
Overview
We are a medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain and heart under direct, intra-procedural MRI guidance. We have two product platforms. Our ClearPoint system, which is in commercial use in the United States and Europe, is used to perform minimally invasive surgical procedures in the brain. We anticipate that the ClearTrace system, which is still in development, will be used to perform minimally invasive surgical procedures in the heart. Both systems utilize intra-procedural MRI to guide the procedures. Both systems are designed to work in a hospital’s existing MRI suite. We believe that our two product platforms, subject to appropriate regulatory clearance and approval, will deliver better patient outcomes, enhance revenue potential for both physicians and hospitals, and reduce costs to the healthcare system.
In 2010, we received regulatory clearance from the FDA to market our ClearPoint system in the United States for general neurological procedures. In 2011, we also obtained CE marking approval for the ClearPoint system, which enables us to market the ClearPoint system in the European Union. Substantially all of our product revenues for 2012 and 2011 and the six months ended June 30, 2013 relate to sales of our ClearPoint system products. We do not have regulatory clearance or approval to sell our ClearTrace system, and, therefore, we have not generated revenues from sales of that product candidate. In 2008, we received licensing fees totaling $13.0 million from Boston Scientific for our MRI-safety technologies, which we used to finance our operations and internal growth. We have also financed our operations and internal growth through private placements of securities, borrowings and interest earned on the net proceeds from our private placements and the Boston Scientific licensing fees. Prior to 2008, we were a development stage enterprise. We have incurred significant losses since our inception in 1998 as we devoted substantial efforts to research and development. As of June 30, 2013, we had an accumulated deficit of $67.8 million. We expect to incur losses through at least December 31, 2013, and we may continue to incur losses thereafter, as we commercialize our ClearPoint system products, continue to develop our product candidates and expand our business generally.
Factors Which May Influence Future Results of Operations
The following is a description of factors which may influence our future results of operations, and which we believe are important to an understanding of our business and results of operations.
Revenues
In June 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the United States for general neurological procedures. Future revenues from sales of our ClearPoint system products are difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses. We cannot sell any of our product candidates until we receive regulatory clearance or approval.
The generation of recurring revenues through sales of our disposable components is an important part of our business model for our ClearPoint system. We first generated revenues through the sale of ClearPoint system disposable components in the third quarter of 2010. We anticipate that recurring revenues will constitute an increasing percentage of our total revenues as we leverage each new installation of our ClearPoint system to generate recurring sales of these disposable components.
Since inception, the most significant source of our revenues has been related to our collaborative agreements with Boston Scientific, principally from recognition of the $13.0 million of licensing fees, which we received in 2008. Revenues associated with these licensing fees were recognized on a straight-line basis over a five year period, representing our estimated period of continuing involvement in the development activities, which ended at March 31, 2013. Any additional payments related to substantive, performance-based milestones that may be received under the agreement regarding implantable cardiac leads will be recognized upon receipt. These revenue recognition policies are more fully described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2012 which we filed with the SEC on March 11, 2013.
Cost of Product Revenues
Cost of product revenues includes the direct costs associated with the assembly and purchase of disposable and reusable components of our ClearPoint system which we have sold, and for which we have recognized the revenue in accordance with our revenue recognition policy. Cost of product revenues also includes the allocation of manufacturing overhead costs and depreciation of loaned systems installed under our ClearPoint Placement Program, as well as write-offs of obsolete, impaired or excess inventory.
Research and Development Costs
Our research and development costs consist primarily of costs associated with the conceptualization, design, testing and prototyping of our ClearPoint system products and our product candidates. This includes: the salaries, travel and benefits of research and development personnel; materials and laboratory supplies used by our research personnel; consultant costs; sponsored contract research and product development with third parties; and licensing costs. We anticipate that, over time, our research and development expenses may increase as we: (1) continue our product development efforts for the ClearTrace system; (2) continue to develop enhancements to our ClearPoint system; and (3) expand our research to apply our technologies to additional product applications. From our inception through June 30, 2013, we have incurred approximately $38 million in research and development expenses.
Product development timelines, likelihood of success and total costs vary widely by product candidate. At this time, given the stage of development of the ClearTrace system and due to the risks inherent in the product clearance and approval process, we are unable to estimate with any certainty the costs that we will incur in the continuing development of that product candidate for commercialization.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of: salaries, sales incentive payments, travel and benefits; share-based compensation; professional fees, including fees for attorneys and outside accountants; occupancy costs; insurance; marketing costs; and other general and administrative expenses, which include corporate licenses, director fees, hiring costs, taxes, postage, office supplies and meeting costs. We expect our selling, general and administrative expenses to increase due to costs associated with the commercialization of our ClearPoint system, increased headcount necessary to support our continued growth in operations, and the operational and regulatory burdens and costs associated with operating as a public company.
Critical Accounting Policies
There have been no significant changes in our critical accounting policies during the six months ended June 30, 2013 as compared to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012 which we filed with the SEC on March 11, 2013, except for the following new accounting policy:
Derivative Liability for Warrants to Purchase Common Stock
Our derivative liability for warrants represents the fair value of warrants issued in connection with private placements of shares of our common stock. These warrants are presented as liabilities based on certain exercise price reduction and net cash settlement provisions. The liability, which is recorded at fair value on our balance sheet, is calculated using the Monte Carlo simulation valuation method. The change in fair value of these warrants is recognized as other income or expense in our statement of operations.
Results of Operations
Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012
Three Months Ended June 30, |
Percentage |
|||||||||||
($s in thousands) |
2013 |
2012 |
Change |
|||||||||
Revenues |
$ | 562 | $ | 1,084 | (48 | )% | ||||||
Cost of product revenues |
296 | 157 | 89 | % | ||||||||
Research and development: |
||||||||||||
Research and development costs |
742 | 486 | 53 | % | ||||||||
Reversal of R&D obligations |
- | (883 | ) |
NM |
||||||||
Selling, general and administrative expenses |
1,703 | 1,803 | (6 | )% | ||||||||
Other income (expense): |
||||||||||||
Other income (expense), net |
948 | (26 | ) | NM | % | |||||||
Interest expense, net |
(121 | ) | (95 | ) | 27 | % | ||||||
Net loss |
(1,352 | ) | (600 | ) | 125 | % |
NM= not meaningful
Revenues. Revenues were $562,000 for the three months ended June 30, 2013, and $1.1 million for the same three month period in 2012, a decrease of $522,000, or 48%. Product revenues for the three months ended June 30, 2013 were $497,000 compared to $291,000, for the same period in 2012, an increase of $206,000, or 71%. Product revenues included ClearPoint system disposable product sales for the three months ended June 30, 2013 of $404,000 compared with $204,000 for the same three month period in 2012, an increase of $200,000, or 98%. The increase in disposable product sales reflects an increasing number of ClearPoint procedures being performed as adoption of the ClearPoint system continues to increase. Approximately $93,000 of the product revenues for the three months ended June 30, 2013 related to the sale of ClearPoint system reusable components compared with $87,000 for the same three month period in 2012. License fee revenues of $650,000 recorded during the three months ended June 30, 2012 related to license fees we received in 2008 from Boston Scientific that were deferred and recognized over the period of our continued involvement with Boston Scientific’s development program for the licensed technology. The period of our continued involvement ended on March 31, 2013, thus, all revenues related to the license fees we received in 2008 were recognized as of March 31, 2013. During the three months ended June 30, 2013 and 2012, we recorded development service revenues of $65,000 and $142,000, respectively, a decrease of 54%. We do not expect the development service revenues to be a long-term ongoing source of revenues.
Cost of Product Revenues. Cost of product revenues was $296,000 for the three months ended June 30, 2013, compared to $157,000 for the same three month period in 2012, an increase of 89%. The increase in cost of product revenues was greater than the increase in product revenues due primarily to inventory write-offs related to obsolete product and an increase in the purchase cost of certain assemblies for our disposable products.
Research and Development Costs. Research and development costs were $742,000 for the three months ended June 30, 2013, compared to $486,000 for the same three month period in 2012, an increase of $256,000, or 53%. The primary driver for the increase relates to sponsored research costs, which increased by $177,000. Sponsored research costs were approximately $80,000 for the three months ended June 30, 2013, compared with a credit of $97,000 recorded during the same period last year, as we negotiated with a research partner to reduce amounts previously invoiced to us, but not yet paid, in order to reflect an adjustment for work outlined in our agreement with the research partner that was not completed. Spending on development related to ClearPoint system software enhancements was $79,000 during the three months ended June 30, 2013, and no software development costs were incurred during the same period last year.
Reversal of R&D Obligation. For the three months ended June 30, 2012, we recorded a credit to expense of $883,000. This credit was recorded to reverse expenses previously accrued as research and development costs under our Key Personnel Incentive Program. The reversal occurred as a result of the program participants’ voluntary and irrevocable relinquishment, in June 2012, of their rights to receive any incentive bonus payments related to performance of services under the program and our corresponding discharge from our obligations to make any and all such service-based payments. Of the amount reversed, $121,000 of the expense had been recorded during the three months ended March 31, 2012, and the remaining amounts had been accrued as research and development costs in 2010 and 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.7 million for the three months ended June 30, 2013, compared with $1.8 million for the same three month period in 2012, a decrease of $100,000, or 6%. The decrease related to lower share-based compensation expense, as we issued common stock warrants during the three months ended June 30, 2012 to two non-employee directors, two research contributors, and a long-time financial adviser resulting in expense of $572,000, and we issued no such warrants during the three months ended June 30, 2013. However, the lower share-based compensation expense was largely offset by increases in sales and marketing expenses of $284,000, an increase in professional services of $108,000, and other increases associated with our being a public company, such as higher insurance premiums, director compensation, and investor relations expenses.
Other Income (Expense), Net. During the three months ended June 30, 2013 we recorded a $955,000 gain related to the change in the fair value of the derivative liability associated with the warrants we issued in two equity private placement transactions. The decrease in the fair value of the derivative liability between March 31, 2013 and June 30, 2013 was mostly due to the decrease in our stock price during that period and the impact the lower stock price had on the fair value computation.
Net interest expense for the three months ended June 30, 2013 was $121,000, compared with $95,000 for the same three month period in 2012. The increase relates mostly to debt discount amortization associated with debt discount arising from the loan modification we effected in March 2013.
Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012
Six Months Ended June 30, |
Percentage |
|||||||||||
($s in thousands) |
2013 |
2012 |
Change |
|||||||||
Revenues |
$ | 1,827 | $ | 2,064 | (11 | )% | ||||||
Cost of product revenues |
522 | 258 | 102 | % | ||||||||
Research and development: |
||||||||||||
Research and development costs |
1,513 | 1,176 | 29 | % | ||||||||
Reversal of R&D obligations |
- | (883 | ) |
NM |
||||||||
Selling, general and administrative expenses |
3,337 | 3,143 | 6 | % | ||||||||
Other income (expense): |
||||||||||||
Gain on change in fair value derivative liability |
2,579 | (26) |
NM |
|||||||||
Loss on loan modification |
(1,356 | ) | - |
NM |
||||||||
Other income (expense), net |
367 | (1 | ) |
NM |
||||||||
Interest expense, net |
(220 | ) | (2,419 | ) | (91 | )% | ||||||
Net loss |
(2,175 | ) | (4,074 | ) | (47 | )% |
Revenues. Revenues were $1.8 million for the six months ended June 30, 2013, and $2.1 million for the same six month period in 2012, a decrease of $237,000, or 11%. Product revenues for the six months ended June 30, 2013 were $958,000 compared to $513,000, for the same period in 2012, an increase of $445,000, or 87%. Product revenues included ClearPoint system disposable product sales for the six months ended June 30, 2013 of $752,000 compared with $426,000 for the same six month period in 2012, an increase of $326,000, or 77%. The increase in disposable product sales reflects an increasing number of ClearPoint procedures being performed as adoption of the ClearPoint system continues to increase. Approximately $206,000 of the product revenues for the six months ended June 30, 2013 related to the sale of ClearPoint system reusable components compared with $87,000 for the same six month period in 2012, an increase of $119,000, or 136%. License fee revenues of $650,000 recorded during the six months ended June 30, 2013 were down from $1.3 million recorded during the six months ended June 30, 2012 as the revenue recognition period ended in March 2013. That revenue recognition period coincided with the period of our continued involvement in Boston Scientific’s development program for the licensed technology. During the six months ended June 30, 2013 and 2012, we recorded development service revenues of $219,000 and $251,000, respectively, a decrease of 13%. We do not expect the development service revenues to be a long-term ongoing source of revenues.
Cost of Product Revenues. Cost of product revenues was $522,000 for the six months ended June 30, 2013, compared to $258,000 for the same six month period in 2012, an increase of 102%. The increase in cost of product revenues was greater than the increase in product revenues due primarily to inventory write-offs related to obsolete product, an increase in the purchase cost of certain assemblies for our disposable products and the change in product mix, as margins on ClearPoint system reusable components are lower than on disposable components.
Research and Development Costs. Research and development costs were $1.5 million for the six months ended June 30, 2013, compared to $1.2 million for the same six month period in 2012, an increase of $337,000, or 29%. The primary driver for the increase relates to sponsored research costs, which increased by $257,000. Sponsored research costs were approximately $160,000 for the six months ended June 30, 2013 compared with a credit of $97,000 recorded during the same period last year as we negotiated with a research partner to reduce amounts previously invoiced to us, but not yet paid, in order to reflect an adjustment for work outlined in our agreement with the research partner that was not completed. Spending on development related to ClearPoint system software enhancements was $172,000 during the three months ended June 30, 2013 and no software development costs were incurred during the same period last year. These increases were partially offset by a decrease of $121,000 related to our Key Personnel Incentive Program.
Reversal of R&D Obligation. For the six months ended June 30, 2012, we recorded a credit to expense of $883,000. This credit was recorded to reverse expenses previously accrued as research and development costs under our Key Personnel Incentive Program. The reversal occurred as a result of the program participants’ voluntary and irrevocable relinquishment, in June 2012, of their rights to receive any incentive bonus payments related to performance of services under the program, and our corresponding discharge from our obligations to make any and all such service-based payments. Of the amount reversed, $121,000 of the expense had been recorded during the three months ended March 31, 2012, and the remaining amounts had been accrued as research and development costs in 2010 and 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $3.3 million for the six months ended June 30, 2013, compared with $3.1 million for the same six month period in 2012, an increase of $194,000, or 6%. The increase was related to higher sales and marketing expenses, which increased by approximately $470,000, an increase in professional services of $112,000, and other increases associated with our being a public company totaling approximately $100,000, such as higher insurance premiums, director compensation, and investor relations expenses. These increases were mostly offset by a decrease of $516,000 related to lower share-based compensation expense. The lower share-based compensation expense was primarily due to the common stock warrants we issued during the six months ended June 30, 2012 to two non-employee directors, two research contributors, and a long-time financial adviser, while we issued no such warrants during the six months ended June 30, 2013.
Other Income (Expense), Net. During the six months ended June 30, 2013, we recorded a $2.6 million gain related to the change in the fair value of the derivative liability associated with the warrants we issued in our two equity private placement transactions. The decrease in the fair value of the derivative liability was almost exclusively due to the decrease in our stock price, as our stock price is a key input to the calculation of the fair value of the derivative liability.
During the six months ended June 30, 2013 we recorded a loss of $1.4 million related to the March 2013 loan modification, which included a $1.9 million increase to the principal balance of the note, a decrease in the interest rate from 10% to 5.5%, and the elimination of the note’s equity conversion feature. The $1.4 million loss we recorded represented the difference between the carrying amount of the note and related accrued interest immediately prior to the loan modification and the fair value of the note immediately following the loan modification.
Net interest expense for the six months ended June 30, 2013 was $220,000, compared with $2.4 million for the same period in 2012. Approximately $2.0 million of the interest expense during the six months ended June 30, 2012 related to the write-off of debt discounts and deferred financing costs associated with convertible notes that converted into shares of our common stock upon the effectiveness of our Form 10 registration statement in February 2012. The remainder of the decrease relates primarily to the conversion of convertible notes payable into shares of our common stock in February 2012, which notes payable were outstanding during a portion of the six month period ended June 30, 2012. The decrease in net interest expense is also attributable to a February 2012 loan modification pursuant to which the interest rate on our related party notes payable to Boston Scientific was reduced from 10% to 0%.
Liquidity and Capital Resources
For the six months ended June 30, 2013 and the year ended December 31, 2012, we incurred net losses of $2.2 million and $5.9 million, respectively, and the cumulative net loss since our inception through June 30, 2013 was $67.8 million. We expect such losses to continue through at least the year ended December 31, 2013 as we continue to commercialize our ClearPoint system and pursue research and development activities. Net cash used in operations was $4.4 million and $7.4 million for the six months ended June 30, 2013 and year ended December 31, 2012, respectively. Since inception, we have financed our activities principally from the sale of equity securities, the issuance of convertible notes and license arrangements.
Our primary financing activities during the six months ended June 30, 2013 and the year ended December 31, 2012 were:
● |
our January 2013 equity private placement, which resulted in net proceeds of $9.8 million; |
● |
our July 2012 equity private placement, which resulted in net proceeds of $5.5 million; and |
● |
the unit offering we completed in February 2012, which resulted in net proceeds of $4.9 million, $3.4 million of which we received in 2012 and $1.5 million of which we received in 2011. |
While we expect to continue to use cash in operations, we believe our existing cash and cash equivalents at June 30, 2013 of $7.0 million, combined with cash generated from product and service revenues, will be sufficient to meet our anticipated cash requirements through at least March 2014. During the remainder of 2013, we plan to continue to increase our spending on sales and marketing activities as we continue the commercial rollout of our ClearPoint system, from which we expect to increase ClearPoint product revenues. Certain planned expenditures are discretionary and could be deferred if required to do so to fund critical operations. The sale of additional equity or convertible debt securities will likely result in dilution to our current stockholders. To the extent our available cash and cash equivalents are insufficient to satisfy our long-term operating requirements, we will need to seek additional sources of funds, from the sale of additional equity, debt or other securities or through a credit facility, or modify our current business plan. There can be no assurance that we will be able to obtain additional financing on commercially reasonable terms, if at all.
Cash Flows
Cash activity for the six months ended June 30, 2013 and 2012 is summarized as follows:
Six Months Ended June 30, |
||||||||
($s in thousands) |
2013 |
2012 |
||||||
Cash used in operating activities |
$ | (4,430 | ) | $ | (3,252 | ) | ||
Cash used in investing activities |
(56 | ) | (85 | ) | ||||
Cash provided by financing activities |
9,842 | 4,414 | ||||||
Net increase (decrease) in cash and cash equivalents |
$ | 5,356 | $ | 1,077 |
We used $4.4 million and $3.3 million of cash for operating activities during the six months ended June 30, 2013 and 2012, respectively. Net cash used in operating activities during the six months ended June 30, 2013 primarily reflects our $3.5 million loss from operations, reduced by $643,000 in share-based compensation and $231,000 in depreciation and amortization, but increased by the $687,000 change from year end in deferred revenue and the $1.1 million reduction in accounts payable and accrued expenses. The reductions in accounts payable and accrued expenses occurred as we paid down certain previously existing outstanding balances. Net cash used in operating activities in the six months ended June 30, 2012 primarily reflects our $1.6 million loss from operations, reduced by $1.1 million in share-based compensation and $213,000 in depreciation and amortization, but increased by the $1.3 million change from year end in deferred revenue and the $1.4 million reduction in accounts payable and accrued expenses
Net cash provided by financing activities for the six months ended June 30, 2013 relates to the $9.8 million of net proceeds generated from our January 2013 private placement. Net cash provided by financing activities for the six months ended June 30, 2012 relates to $3.4 million in net proceeds from the unit offering we concluded in February 2012, and the $1.0 million we received in June 2012 in advance of the closing of a financing transaction in July 2012.
Operating Capital and Capital Expenditure Requirements
To date, we have not achieved profitability. We could continue to incur net losses as we commercialize our ClearPoint system products, continue to develop the ClearTrace system, expand our corporate infrastructure and pursue additional applications for our technology platforms. Our cash balances are typically held in a variety of interest bearing instruments, including interest bearing demand accounts and certificates of deposit. Cash in excess of immediate requirements is invested primarily with a view to liquidity and capital preservation.
Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to successfully commercialize our products and complete the development of our product candidates. Our future capital requirements will depend on many factors, including, but not limited to, the following:
● |
the cost and timing of expanding our sales, clinical support, marketing and distribution capabilities and other corporate infrastructure; |
● |
the cost of establishing inventories; |
● |
the effect of competing technological and market developments; |
● |
the scope, rate of progress and cost of our research and development activities; |
● |
the achievement of milestone events under, and other matters related to, our agreements with Boston Scientific and Siemens Aktiengellseschaft, Healthcare Sector, or Siemens; |
● |
the terms and timing of any future collaborative, licensing or other arrangements that we may establish; |
● |
the cost and timing of any clinical trials; |
● |
the cost and timing of regulatory filings, clearances and approvals; and |
● |
the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, because all of our investments are in short-term bank deposits and institutional money market funds. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income received without significantly increasing risk. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure.
Foreign Currency Risk
To date we have recorded no product sales in other than U.S. dollars. We have only limited business transactions in foreign currencies. We do not currently engage in hedging or similar transactions to reduce our foreign currency risks. We believe we have no material exposure to risk from changes in foreign currency exchange rates at this time. We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act. Our disclosure controls and procedures are designed to ensure that material information relating to us is made known to our principal executive officer and principal financial officer by others within our organization. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2013 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
In light of the pending restatements of our financial statements for the year ended December 31, 2012 and the quarterly period ended March 31, 2013 that are described in Note 7 to the accompanying condensed financial statements, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2013.
Changes in Internal Control Over Financial Reporting
During the quarter ended June 30, 2013 there were no changes in our internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. We are committed to a strong internal control environment. Therefore, we are currently taking steps to remediate the accounting errors described in Note 7 to the accompanying condensed financial statements.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 2013, Custom Equity Research, Inc. d/b/a Summer Street Research Partners, or Summer Street, commenced an arbitration proceeding alleging breach of contract and quantum meruit claims against us. Summer Street claims, among other things, that we owe Summer Street $480,000 in cash commissions, as well as warrants to purchase 460,338 shares of our common stock, in connection with our engagement of Summer Street to serve as our financial advisor and placement agent for two financing transactions we undertook in 2011 and 2012, respectively. As required under our engagement agreements with Summer Street, the arbitration has been brought before JAMS, The Resolution Experts, which is an alternative dispute resolution provider. In the arbitration, we have filed counter-claims against Summer Street alleging fraud and misrepresentation, abuse of process and malicious prosecution, and we are seeking unspecified monetary damages from Summer Street in connection with our counter-claims. The arbitration proceeding is at a preliminary stage. We intend to vigorously defend ourselves and pursue our claims against Summer Street in the arbitration.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this Quarterly Report before deciding to invest in our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition could be materially adversely affected, the trading price of our common stock could decline significantly, and you might lose all or part of your investment. Additional risks and uncertainties that we are unaware of or that we believe are not material at this time could also materially adversely affect our business, results of operations or financial condition. In any case, the value of our securities could decline, and you could lose all or part of your investment.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K which we filed with the SEC on March 11, 2013. In addition, the risks described under, and the caption entitled, “We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets or other proprietary information of their former employers.” included under Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2013 have been removed.
Risks Related to Our Business
We have incurred losses since our inception and we may continue to incur losses. If we fail to generate significant revenues from sales of our products, we may never achieve or sustain profitability.*
As of June 30, 2013, we had an accumulated deficit of approximately $67.8 million. The accumulated deficit has resulted principally from costs incurred in our research and development efforts and general operating expenses. We have incurred significant losses in each year since our inception in 1998. Net losses were approximately $2.2 million for the six months ended June 30, 2013, approximately $5.9 million for the year ended December 31, 2012, approximately $8.3 million for the year ended December 31, 2011, and approximately $9.5 million for the year ended December 31, 2010. We may continue to incur operating losses as we continue to invest capital in the sales and marketing of our products, development of our product candidates and development of our business generally.
As a result of the numerous risks and uncertainties associated with developing medical devices, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Our profitability will depend on revenues from the sale of our products. We cannot provide any assurance that we will ever achieve profitability and, even if we achieve profitability, that we will be able to sustain or increase profitability on a quarterly or annual basis. Further, because of our limited commercialization history, we have limited insight into the trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business and financial condition. Any failure to achieve and maintain profitability would continue to have an adverse effect on our stockholders’ equity (deficit) and working capital and could result in a decline in our stock price or cause us to cease operations.
Our ClearPoint system may not achieve broad market acceptance or be commercially successful.
We expect that sales of our ClearPoint system products will account for the vast majority of our revenues for at least the next several years. Our ClearPoint system may not gain broad market acceptance unless we continue to convince physicians, hospitals and patients of its benefits. Moreover, even if physicians and hospitals understand the benefits of our ClearPoint system, they still may elect not to use our ClearPoint system for a variety of reasons, such as the shift in location of the procedure from the operating room to the MRI suite, increased demand for the MRI suite, and the familiarity of the physician with other devices and approaches.
If physicians and hospitals do not perceive our ClearPoint system as an attractive alternative to other products and procedures, we will not achieve significant market penetration or be able to generate significant revenues. To the extent that our ClearPoint system is not commercially successful or is withdrawn from the market for any reason, our revenues will be adversely impacted, and our business, operating results and financial condition will be harmed.
If we are unable to expand our sales and clinical support capabilities, we may be unable to generate significant product revenues.
We are dependent on our sales team to obtain new customers for our ClearPoint system and to increase sales of our ClearPoint products to existing customers. We expect to continue building a small, highly focused sales force to market and sell our ClearPoint system products, and to provide clinical support for customer use of our ClearPoint system products, in the United States. That effort, though, could take longer than we anticipate, in which case our commercialization efforts would be delayed. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining a sufficient number of qualified sales and clinical support personnel. New hires require significant training and, in most cases, take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. If we are unable to hire, train and retain sufficient numbers of effective personnel, or our personnel are not successful in obtaining new customers or increasing sales to our existing customer base, our business will be harmed.
We have entered into a co-development and distribution agreement with Brainlab pursuant to which we appointed Brainlab as a distributor of our ClearPoint system products in the United States and Europe. However, there is no assurance that Brainlab will be successful in marketing and selling our ClearPoint system products. Under our agreement, Brainlab is not subject to any minimum sales or other performance requirements.
If hospitals and physicians are unable to obtain adequate coverage and reimbursement from third-party payors for procedures utilizing our ClearPoint system, our revenues and prospects for profitability will suffer.
Our ClearPoint system components are purchased primarily by hospitals, which bill various third-party payors, including governmental healthcare programs, such as Medicare, and private insurance plans, for procedures in which our ClearPoint system is used. Reimbursement is a significant factor considered by hospitals in determining whether to acquire medical devices such as our ClearPoint system. Therefore, our ability to successfully commercialize our ClearPoint system depends significantly on the adequacy of coverage and reimbursement from these third-party payors.
Medicare pays hospitals a prospectively determined amount for inpatient operating costs. The prospective payment for a patient’s stay is determined by the patient’s condition and other patient data and procedures performed during the inpatient stay using a classification system known as Medicare Severity Diagnosis Related Groups, or MS-DRGs. Medicare pays a fixed amount to the hospital based on the MS-DRG into which the patient’s stay is assigned, regardless of the actual cost to the hospital of furnishing the procedures, items and services provided. Therefore, a hospital must absorb the cost of our products as part of the payment it receives for the procedure in which the product is used. In addition, physicians that perform procedures in hospitals are paid a set amount by Medicare for performing such services under the Medicare physician fee schedule. Medicare payment rates for both systems are established annually. Some hospitals could believe third-party reimbursement levels are not adequate to cover the cost of our ClearPoint system. Furthermore, some physicians could believe third-party reimbursement levels are not adequate to compensate them for performing the procedures in which our products are used. Failure by hospitals and physicians to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used will deter them from purchasing or using our products and will limit our sales growth.
One result of the current Medicare payment system, which is also utilized by most non-governmental third-party payors, is that a patient’s treating physician orders a particular service and the hospital in which the procedure is performed bears the cost of delivery of the service. Hospitals have limited ability to align their financial interests with those of the treating physician because Medicare law generally prohibits hospitals from paying physicians to assist in controlling the costs of hospital services, including paying physicians to limit or reduce services to Medicare beneficiaries even if such services are medically unnecessary. As a result, hospitals have traditionally stocked supplies and products requested by physicians and have had limited ability to restrict physician choice of products and services.
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, together, the Affordable Care Act, includes a number of provisions that will likely result in more coordination between hospitals and physicians resulting in the alignment of financial incentives between hospitals and physicians to control hospital costs. Most significantly, the Affordable Care Act provides for the establishment of a Medicare shared savings program, which went into effect in 2012, whereby Medicare will share certain savings realized in the delivery of services to Medicare beneficiaries with accountable care organizations, which may be organized through various different legal structures between hospitals and physicians. Other payment reform provisions in the Affordable Care Act include pay-for-performance initiatives, payment bundling and the establishment of an independent payment advisory board. We expect that the overall result of such payment reform efforts and the increased coordination among hospitals and physicians will be voluntary reductions in the array of choices currently available to physicians with respect to diagnostic services, medical supplies and equipment. Such a reduction in physician choices may also result in hospitals reducing the overall number of vendors from which they purchase supplies, equipment and products. The Affordable Care Act could limit the acceptance and availability of our products, which would have an adverse effect on our financial results and business.
If there are changes in coverage or reimbursement from third-party payors, our revenues and prospects for profitability could suffer.
In the United States, we believe that existing billing codes apply to procedures in which physicians use our ClearPoint system. Reimbursement levels for procedures using our ClearPoint system or any product that we may market in the future could be decreased or eliminated as a result of future legislation, regulation or reimbursement policies of third-party payors. Any such decrease or elimination would adversely affect the demand for our products and our ability to sell our products on a profitable basis. Furthermore, if procedures using our ClearPoint system gain market acceptance and the number of these procedures increases, Centers for Medicare and Medicaid Services, or CMS, the federal agency that administers the Medicare Program, as well as other public or private payors, may establish new billing codes for those procedures that provide for a lower reimbursement amount than traditional approaches, which would adversely affect our financial results and business.
Among other things, the Affordable Care Act will ultimately increase the overall pool of persons with access to health insurance in the United States, at least in those states that expand their Medicaid programs. Although such an increase in covered lives should ultimately benefit hospitals, the Affordable Care Act also includes a number of cuts in Medicare reimbursement to hospitals that may take effect prior to the time hospitals realize the financial benefit of a larger pool of insured persons. Those cuts in Medicare reimbursement could adversely impact the operations and finances of hospitals, reducing their ability to purchase medical devices, such as our products. Further, Congress has not yet addressed in a comprehensive and permanent manner the pending reduction in Medicare payments to physicians under the sustainable growth rate formula, which if not resolved will likely result in an overall reduction in physicians willing to participate in Medicare.
If third-party payors deny coverage or reimbursement for procedures using our ClearPoint system, our revenues and prospects for profitability will suffer.
Notwithstanding the ClearPoint system’s regulatory clearance in the United States, third-party payors may deny coverage or reimbursement if the payor determines that the use of our ClearPoint system is unnecessary, inappropriate, experimental or not cost-effective, or that the ClearPoint system is used for a non-approved indication. In addition, no uniform policy of coverage and reimbursement for medical technology exists among third-party payors. Therefore, coverage and reimbursement for medical technology can differ significantly from payor to payor. Any denial of coverage or reimbursement for procedures using our ClearPoint system could have an adverse effect on our business, financial results and prospects for profitability.
We have limited internal manufacturing resources, and if we are unable to provide an adequate supply of our ClearPoint disposable products, our growth could be limited and our business could be harmed.
Final assembly of many of our ClearPoint disposable components occurs at our Irvine, California facility. If our facility experiences a disruption, we would have no other means of assembling those components until we are able to restore the manufacturing capability at our current facility or develop the same capability at an alternative facility.
In connection with the continued commercialization of our ClearPoint system, we expect that we will need to increase, or “scale up,” the production process of our disposable components over the current level of production. While we have taken steps in anticipation of growth, manufacturers often encounter difficulties in scaling up production, such as problems involving yields, quality control and assurance, and shortages of qualified personnel. If the scaled-up production process is not efficient or produces a product that does not meet quality and other standards, we may be unable to meet market demand and our revenues, business and financial prospects would be adversely affected.
Our reliance on single-source suppliers could harm our ability to meet demand for our ClearPoint system in a timely manner or within budget.
Many of the components and component assemblies of our ClearPoint system are provided to us by single-source suppliers. We generally purchase components and component assemblies through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory. While alternative suppliers exist and have been identified, the disruption or termination of the supply of components and component assemblies could cause a significant increase in the cost of these components, which could affect our operating results. Our dependence on a limited number of third-party suppliers and the challenges we may face in obtaining adequate supplies involve several risks, including limited control over pricing, availability, quality and delivery schedules. A disruption or termination in the supply of components could also result in our inability to meet demand for our ClearPoint system, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. Furthermore, if we are required to change the supplier of a key component or component assembly of our ClearPoint system, we may be required to verify that the new supplier maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new supplier could also adversely affect our ability to meet demand for our ClearPoint system.
Our business will be subject to economic, political, regulatory and other risks associated with international operations.
We have CE marking approval to market our ClearPoint system in the European Union, which subjects us to rules and regulations in the European Union relating to our products. As part of our product development and regulatory strategy, we also intend to market our ClearPoint system in other foreign jurisdictions. There are a number of risks associated with conducting business internationally, including:
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differences in treatment protocols and methods across the markets in which we expect to market our ClearPoint system; |
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requirements necessary to obtain product reimbursement; |
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product reimbursement or price controls imposed by foreign governments; |
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difficulties in compliance with foreign laws and regulations; |
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changes in foreign regulations and customs; |
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changes in foreign currency exchange rates and currency controls; |
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changes in a specific country’s or region’s political or economic environment; trade protection measures, import or export licensing requirements or other restrictive actions by United States or foreign governments; and |
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negative consequences from changes in tax laws. |
Any of these risks could adversely affect our financial results and our ability to operate outside the United States, which could harm our business.
The Affordable Care Act and other payment and policy changes may have a material adverse effect on our business.
In addition to the changes discussed above, the Affordable Care Act imposes a 2.3% excise tax on the sale of any taxable human medical device after December 31, 2012, subject to certain exclusions, by the manufacturer, producer or importer of such device. The total cost to the industry is expected to be approximately $30 billion over ten years. This new and significant tax burden could have a material negative impact on the results of our operations and the operations of our strategic partners. Further, the Affordable Care Act encourages hospitals and physicians to work collaboratively through shared savings programs, such as accountable care organizations, as well as other bundled payment initiatives, which may ultimately result in the reduction of medical device acquisitions and the consolidation of medical device suppliers used by hospitals. While passage of the Affordable Care Act may ultimately expand the pool of potential patients for our ClearPoint system, the above-discussed changes could adversely affect our financial results and business.
Further, with the increase in demand for healthcare services, we expect both a strain on the capacity of the healthcare system and more proposals by legislators, regulators and third-party payors to keep healthcare costs down. Certain proposals, if passed, could impose limitations on the prices we will be able to charge for our ClearPoint system, or the amounts of reimbursement available from governmental agencies or third-party payors. These limitations could have a material adverse effect on our financial position and results of operations.
Federal healthcare reform continues to be a political issue, and various healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. However, an expansion in government’s role in the United States healthcare industry may lower reimbursements for our ClearPoint system, reduce medical procedure volumes and adversely affect our business, possibly materially.
We may not realize the anticipated benefits from our collaborative agreement with Siemens regarding the ClearTrace system.*
In May 2009 we entered into a co-development agreement with Siemens with respect to the development of the hardware and MRI software necessary for the ClearTrace system. Development efforts are ongoing, and there can be no assurance that development efforts will be successful or that development of the ClearTrace system hardware and MRI software will be completed. The progress of the development efforts for the ClearTrace system, including both the hardware and the MRI software, has been, and may continue to be, negatively impacted by our focus on the commercialization of our ClearPoint system.
Under our co-development agreement, through June 30, 2013 we had paid Siemens approximately $1.4 million in connection with Siemens’ MRI software development work. The co-development agreement provides that, once the software for the ClearTrace system is commercially available, Siemens will pay us a fixed amount for each software license sold by Siemens until we recoup our investment in the software. However, if our agreement with Siemens is terminated, or if Siemens does not commercialize the software, we will not recover our investment in the software.
Our future success may depend on our ability to obtain regulatory clearances or approvals for the ClearTrace system. We cannot be certain that we will be able to do so in a timely fashion, or at all.
The ClearTrace system is still under development. To date, we have conducted only animal studies and other preclinical work with respect to the ClearTrace system. We cannot predict a timetable for completion of our development activities, and there can be no assurance that the development efforts will be successfully completed. Accordingly, we are not able to estimate when we will make a filing seeking regulatory approval or clearance to market the ClearTrace system in the United States or in any foreign market.
In the United States, without clearance or approval from the FDA we cannot market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, unless an exemption applies. To obtain FDA clearance or approval, we must first receive either premarket clearance under Section 510(k) of the federal Food, Drug, and Cosmetic Act or approval of a premarket approval application, or PMA, from the FDA.
In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology, safety and effectiveness, in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The 510(k) clearance process generally takes three to twelve months from submission, but can take significantly longer.
The process of obtaining PMA approval is much more costly and uncertain than the 510(k) clearance process. The PMA approval process can be lengthy and expensive and requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on data obtained in clinical trials. The PMA process generally takes one to three years, or even longer, from the time the PMA application is submitted to the FDA until an approval is obtained.
Outside the United States, the regulatory approval process varies among jurisdictions and can involve substantial additional testing. Clearance or approval by the FDA does not ensure clearance or approval by regulatory authorities in other jurisdictions, and clearance or approval by one foreign regulatory authority does not ensure clearance or approval by regulatory authorities in other foreign jurisdictions. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval in addition to other risks. In addition, the time required to obtain foreign clearance or approval may differ from that required to obtain FDA clearance or approval and we may not obtain foreign regulatory clearances or approvals on a timely basis, if at all.
The FDA or any applicable foreign authority may not act favorably or quickly in its review of any regulatory submission that we may file. Additionally, we may encounter significant difficulties and costs in obtaining clearances or approvals. If we are unable to obtain regulatory clearances or approvals for the ClearTrace system, or otherwise experience delays in obtaining regulatory clearances or approvals, the commercialization of the ClearTrace system will be delayed or prevented, which will adversely affect our ability to generate revenues. Such delay may also result in the loss of potential competitive advantages that might otherwise be attained by bringing products to market earlier than competitors. Any of these contingencies could adversely affect our business. Even if cleared or approved, the ClearTrace system may not be cleared or approved for the indications that are necessary or desirable for successful commercialization.
Assuming successful completion of development activities, we anticipate that the initial market for the ClearTrace system would be the European Union and, at the appropriate time, we would expect to seek CE marking approval for the ClearTrace system. The ClearTrace system consists of several components, including an ablation catheter. The FDA has determined that ablation catheters specifically indicated to treat atrial fibrillation require the submission of a PMA. Therefore, in the United States, we would be required to pursue the PMA process in order to specifically indicate our ablation catheter for the treatment of atrial fibrillation.
To the extent we seek a new indication for use of, or new claims for, our ClearPoint system, the FDA may not grant 510(k) clearance or PMA approval of such new use or claims, which may affect our ability to grow our business.
We received 510(k) clearance to market our ClearPoint system for use in general neurological interventional procedures. In the future, we could seek to obtain additional, more specific indications for use of our ClearPoint system beyond the general neurological intervention claim, although we have no present plan to do so. Some of these expanded claims could require FDA 510(k) clearance. Other claims could require FDA approval of a PMA. Moreover, some specific ClearPoint system claims could require clinical trials to support regulatory clearance or approval. In the event we seek a new indication for use of, or new claims for, the ClearPoint system that we believe are necessary or desirable for successful commercialization, the FDA may refuse our requests for 510(k) clearance or PMA approval. Likewise, to the extent clinical trials are necessary, we may not successfully complete or have the funds to initiate such clinical trials.
Clinical trials necessary to support 510(k) clearance or PMA approval for the ClearTrace system or any new indications for use for our ClearPoint system will be expensive and may require the enrollment of large numbers of suitable patients, who may be difficult to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any modified or new product candidates and will adversely affect our business, operating results and prospects.
Initiating and completing clinical trials necessary to support 510(k) clearance or PMA approval for the ClearTrace system or any other product candidates that we may develop, or additional safety and efficacy data that the FDA may require for 510(k) clearance or PMA approval for any new specific indications of our ClearPoint system that we may seek, will be time consuming and expensive with an uncertain outcome. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product candidate we advance into clinical trials may not have favorable results in later clinical trials.
Conducting successful clinical trials may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomforts and risks associated with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators and support staff, the proximity to clinical sites of patients that are able to comply with the eligibility and exclusion criteria for participation in the clinical trial, and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness of our product candidates or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable risks or discomforts. In addition, patients participating in clinical trials may die before completion of the trial or suffer adverse medical events unrelated to our product candidates.
Development of sufficient and appropriate clinical protocols to demonstrate safety and efficacy will be required and we may not adequately develop such protocols to support clearance or approval. Further, the FDA may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an increase in costs and delays in the approval and attempted commercialization of our product candidates or result in the failure of the clinical trial. Such increased costs and delays or failures could adversely affect our business, operating results and prospects.
The results of our clinical trials may not support our product candidate claims or any additional claims we may seek for our products and may result in the discovery of adverse side effects.
Even if any clinical trial that we need to undertake is completed as planned, we cannot be certain that its results will support our product candidate claims or any new indications that we may seek for our products or that the FDA or foreign authorities will agree with our conclusions regarding the results of those trials. The clinical trial process may fail to demonstrate that our products or a product candidate is safe and effective for the proposed indicated use, which could cause us to stop seeking additional clearances or approvals for our ClearPoint system, abandon the ClearTrace system or delay development of other product candidates. Any delay or termination of our clinical trials will delay the filing of our regulatory submissions and, ultimately, our ability to commercialize a product candidate. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
The markets for medical devices are highly competitive, and we may not be able to compete effectively against the larger, well-established companies in our markets or emerging and small innovative companies that may seek to obtain or increase their share of the market.
We will face competition from products and techniques already in existence in the marketplace. The markets for the ClearPoint system and the ClearTrace system are intensely competitive, and many of our competitors are much larger and have substantially more financial and human resources than we do. Many have long histories and strong reputations within the industry, and a relatively small number of companies dominate these markets. Examples of such large, well-known companies include Medtronic, Inc., St. Jude Medical Inc. and Biosense Webster Inc., a division of Johnson & Johnson.
These companies enjoy significant competitive advantages over us, including:
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broad product offerings, which address the needs of physicians and hospitals in a wide range of procedures; |
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greater experience in, and resources for, launching, marketing, distributing and selling products, including strong sales forces and established distribution networks; |
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existing relationships with physicians and hospitals; |
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more extensive intellectual property portfolios and resources for patent protection; |
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greater financial and other resources for product research and development; |
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greater experience in obtaining and maintaining FDA and other regulatory clearances or approvals for products and product enhancements; |
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established manufacturing operations and contract manufacturing relationships; and |
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significantly greater name recognition and more recognizable trademarks. |
We may not succeed in overcoming the competitive advantages of these large and established companies. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These companies may introduce products that compete effectively against our products in terms of performance, price or both.
We could become subject to product liability claims that could be expensive, divert management’s attention and harm our business.
Our business exposes us to potential product liability risks that are inherent in the manufacturing, marketing and sale of medical devices. We may be held liable if our products cause injury or death or are found otherwise unsuitable or defective during usage. Our ClearPoint system and the ClearTrace system incorporate mechanical and electrical parts, complex computer software and other sophisticated components, any of which can have defective or inferior parts or contain defects, errors or failures. Complex computer software is particularly vulnerable to errors and failures, especially when first introduced.
Because our ClearPoint system and the ClearTrace system are designed to be used to perform complex surgical procedures, defects could result in a number of complications, some of which could be serious and could harm or kill patients. The adverse publicity resulting from any of these events could cause physicians or hospitals to review and potentially terminate their relationships with us.
The medical device industry has historically been subject to extensive litigation over product liability claims. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. Although we maintain product liability insurance, the coverage is subject to deductibles and limitations, and may not be adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or in adequate amounts. A product liability claim, regardless of its merit or eventual outcome could result in:
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decreased demand for our products; |
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injury to our reputation; |
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diversion of management’s attention; |
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significant costs of related litigation; |
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payment of substantial monetary awards by us; |
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product recalls or market withdrawals; |