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MRIC > SEC Filings for MRIC > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for MRI INTERVENTIONS, INC.

Form 10-K for MRI INTERVENTIONS, INC.


28-Mar-2014

Annual Report


ITEM 7. 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 together with our financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the "Risk Factors" section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

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 magnetic resonance imaging, or MRI. 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 our 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 sell the ClearPoint system in the European Union. Substantially all of our product revenues for 2013 and 2012 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 commercial sales of that product candidate. We have financed our operations and internal growth primarily through the sale of equity securities, license arrangements, and the issuance of convertible notes and other secured notes. We have incurred significant losses since our inception in 1998 as we devoted substantial efforts to research and development. As of December 31, 2013, we had an accumulated deficit of $72.8 million. We may continue to incur operating losses as we commercialize our ClearPoint system products, continue to develop our product candidates and to 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 for commercial use until we receive regulatory clearance or approval.

Generating recurring revenues from the sale of our disposable components is an important part of our business model for our ClearPoint system. We anticipate that over time, 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.

ClearPoint system product revenues were $2.9 million and $1.2 million for the years ended December 31, 2013 and 2012, respectively. 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, which was the period we estimated for our continuing involvement in the development activities, and which period ended in the first quarter of 2013. Our revenue recognition policies are more fully described in the "Critical Accounting Policies and Significant Judgments and Estimates" section below.


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, depreciation of loaned systems installed under our ClearPoint Placement Program, and 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, including related share-based compensation; materials and laboratory supplies in research and development activities; consultant costs; sponsored research and product development with third parties; and licensing costs related to technology not yet commercialized. 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 December 31, 2013, we have incurred approximately $40 million in research and development expenses.

Product development timelines, likelihood of success and total costs can vary widely by product candidate. There are also risks inherent in the regulatory clearance and approval process. At this time, we are unable to estimate with any certainty the costs that we will incur in the continuing development of our ClearTrace system for commercialization.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of: salaries, sales incentive payments, travel and benefits, including related share-based compensation; professional fees, including fees for attorneys and outside accountants; occupancy costs; insurance; marketing costs; medical device excise taxes; and other general and administrative expenses, which include corporate licenses, director fees, hiring costs, taxes, postage, office supplies and meeting costs. Our selling, general and administrative expenses are expected to increase due to costs associated with the commercialization of our ClearPoint system and increased headcount necessary to support our continued growth in operations.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments have an impact on revenue recognition, computation of the fair value of our derivative liabilities and the determination of share-based compensation and financial instruments. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are most critical to a full understanding and evaluation of our reported financial results.

Revenue Recognition. Our revenues arise from: (1) product revenues resulting from the sale of ClearPoint system reusable components and the sale of ClearPoint system disposable products; (2) license and development arrangements;
(3) development service revenues; and (4) other service revenues. We recognize revenue when persuasive evidence of an arrangement exists, the selling price or fee is fixed or determinable, collection is probable and, for product revenues, risk of loss has transferred to the customer. For all sales, we require either a purchase agreement or a purchase order as evidence of an arrangement.


(1) Product Revenues- Sales 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 which is integral to the utility of the ClearPoint system as a whole. 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.

Sales of ClearPoint system disposable products: Revenues from the sale of ClearPoint disposable products utilized in procedures performed using our 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 the customer.

(2) License and Development Arrangements- We analyze revenue recognition on an agreement by agreement basis. We determine whether the deliverables under the arrangement represent separate units of accounting as defined by GAAP. Application of GAAP regarding multiple-element arrangements requires us 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. We defer 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 our performance under other elements of the arrangement. Amounts received related to substantive, performance-based milestones in research and development arrangements will be recognized upon receipt. Future product royalty income under any such arrangements will be recognized as the related products are sold and amounts are payable to us.

(3) Development Service Revenues- We are party to an agreement to provide development services to a third party. Under this agreement, we earn 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 we incur the related costs. During the years ended December 31, 2013 and 2012, we recorded development service revenues of approximately $284,000 and $531,000, respectively, related to this agreement. From time to time, we may also perform development services for other third parties evidenced by either a development agreement or a purchase order. During 2012, we recorded revenues totaling $10,000 for such services.

(4) Other Service Revenues- Other service revenues are comprised primarily of installation fees charged in connection with ClearPoint system installations and service agreement revenues. Typically, we will bill upfront for service agreements that have terms ranging from one to three years. These amounts are recognized as revenues ratably over the term of the related service agreement.

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 our ClearPoint system. Software license inventory that is not expected to be utilized within the next twelve months is classified as a non-current asset. We periodically review our inventory for obsolete items and provide a reserve upon identification of potential obsolete items.

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 our common stock. These warrants are presented as liabilities based on certain exercise price reset and net cash settlement provisions. The liability, which is recorded at fair value at each balance sheet date, is calculated utilizing the Monte Carlo simulation valuation method. The change in fair value of these warrants is recognized as other income or expense in the statement of operations.


Share-Based Compensation. We account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments (including options and warrants) based on fair value. The fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period. The fair values of our share-based awards are estimated on the grant dates using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected stock volatility, estimated award terms and risk-free interest rates for the expected terms. To estimate the expected terms, we utilize the "simplified" method for "plain vanilla" options discussed in the SEC's Staff Accounting Bulletin 107, or SAB 107. We believe that all factors listed within SAB 107 as pre-requisites for utilizing the simplified method apply to us and to our share-based compensation arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available. We based our estimate of expected volatility on the average of historical volatilities of publicly traded companies we deemed similar to us because we lack our own relevant historical volatility data. We will consistently apply this methodology until a sufficient amount of historical information regarding the volatility of our own share prices becomes available. We utilize risk-free interest rates based on a zero-coupon U.S. treasury instrument, the term of which is consistent with the expected term of the share-based award. We have not paid and do not anticipate paying cash dividends on shares of our common stock; therefore, the expected dividend yield is assumed to be zero.

Research and Development Costs. Costs related to research, design and development of products are charged to research and development expense as incurred. These costs include direct salary and employee benefit-related costs for research and development personnel, costs for materials used in research and development activities, sponsored research and costs for outside services. Since most of the expenses associated with our development service revenues relate to existing internal resources, these amounts are included in research and development costs.

Results of Operations



Comparison of the Year Ended December 31, 2013 to the Year Ended December 31,
2012



                                                 Year Ended December 31,            Percentage
($s in thousands)                               2013                2012              Change
Product and service revenues                $       3,281       $       1,712                 92 %
License revenues                                      650               3,346                (81 )%
Cost of product revenues                            1,421                 556                156 %
Research and development:
Research and development costs                      2,923               2,485                 18 %
Reversal of R&D obligations                             -                (883 )               NM
Selling, general and administrative
expenses                                            7,061               6,030                 17 %
Other income (expense):
Gain (loss) on change in fair value of
derivative liability                                1,686                (171 )               NM
Loss on loan modification                          (1,356 )                 -                 NM
Other income, net                                     533                   4                 NM
Interest expense, net                                (475 )            (2,581 )              (82 )%
Net loss                                           (7,086 )            (5,878 )               21 %

NM= not meaningful

Product and Service Revenues. Product and service revenues were $3.3 million for the year ended December 31, 2013, and $1.7 million for the prior year, an increase of $1.6 million, or 92%. Product revenues for the year ended December 31, 2013 were $2.9 million compared to $1.2 million for the prior year, an increase of $1.7 million, or 149%. Product revenues included ClearPoint system disposable product sales for the year ended December 31, 2013 of $1.8 million, compared with $1.0 million for the prior year, an increase of $763,000, or 75%. That increase in disposable product sales resulted primarily from the higher number of ClearPoint procedures that were performed during the year ended December 31, 2013. Revenues related to sales of ClearPoint system reusable components were $1.1 million for the year ended December 31, 2013 compared with $150,000 for the prior year, representing an increase of $982,000. During the years ended December 31, 2013 and 2012, we recorded development service revenues of $284,000 and $541,000, respectively, a decrease of $257,000. We do not expect development service revenues to be a long-term ongoing source of revenues. Other service revenues, mostly related to installation services and ClearPoint system service agreements, were $82,000 for the year ended December 31, 2013. No such revenues were recorded during the prior year.


License Revenues. License revenues of $650,000 and $3.3 million for the years ended December 31, 2013, and 2012, respectively, related to license fees we received in 2008 from Boston Scientific that were deferred and recognized over the period we estimated for our continued involvement with Boston Scientific's development program for the licensed technology. That period ended on March 31, 2013; thus, all revenues related to the license fees we received in 2008 were recognized as of March 31, 2013.

Cost of Product Revenues. Cost of product revenues was $1.4 million for the year ended December 31, 2013, compared to $556,000 for the prior year, an increase of 156%. The increase in cost of product revenues was primarily attributable to the 149% increase in product revenues for the same period. Cost of product revenues grew at a somewhat higher rate that revenues due to sales mix, as ClearPoint reusable component sales, which yield lower margins, grew faster than ClearPoint disposable component sales.

Research and Development Costs. Research and development costs were $2.9 million for the year ended December 31, 2013, compared to $2.5 million for the prior year, an increase of $438,000, or 18%. The primary driver for the increase was costs for research that we sponsored, which increased by $302,000. Sponsored research costs were approximately $286,000 for the year ended December 31, 2013, compared with a net credit of $16,000 recorded during the prior year as we negotiated with a research partner to reduce by $97,000 amounts previously invoiced to us, but not yet paid. Spending on development related to ClearPoint system software enhancements increased by approximately $150,000 during the year ended December 31, 2013 compared to the prior year. In addition, share-based compensation expense for the year ended December 31, 2013 increased by $133,000 compared to the prior year. This increase in share-based compensation was primarily a result of certain options we granted in 2013 that were vested immediately upon grant. These increases were partially offset by a decrease of $121,000 related to our Key Personnel Incentive Program.

Reversal of R&D Obligation. During the year ended December 31, 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 $7.1 million for the year ended December 31, 2013, compared with $6.0 million for the prior year, an increase of $1.1 million, or 17%. The increase was mostly related to higher sales and marketing expenses, which increased by approximately $1.4 million, and an increase in professional services of $256,000. These increases were partially offset by a decrease of $705,000 related to lower share-based compensation expense. The lower share-based compensation expense was primarily the result of fewer common stock warrants issued in the year ended December 31, 2013 compared to the prior year. During the year ended December 31, 2012, we issued common stock warrants to two non-employee directors, two research contributors, a service provider and a long-time financial adviser. In comparison, during the year ended December 31, 2013, we issued common stock warrants to only a single service provider.


Other Expense. We recorded a gain $1.7 million and a loss $171,000 during the years ended December 31, 2013 and 2012, respectively. Both the gain and the loss resulted from changes in the fair value of the derivative liability associated with the warrants we issued in equity private placement transactions.

During the year ended December 31, 2013 we recorded a loss of $1.4 million related to the March 2013 Brainlab 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 plus the related accrued interest immediately prior to the loan modification and the fair value of the note immediately following the loan modification.

Net other income was $533,000 for the year ended December 31, 2013, compared with $4,000 for the prior year. Net other income for the year ended December 31, 2013 was primarily related to negotiated reductions in amounts payable to service providers.

Net interest expense for the year ended December 31, 2013 was $475,000, compared with $2.6 million for the prior year. Approximately $2.0 million of the interest expense during the year ended December 31, 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 decrease in net interest expense was 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 years ended December 31, 2013 and 2012, we incurred net losses of $7.1 million and $5.9 million, respectively, and the cumulative net loss since our inception through December 31, 2013 was $72.8 million. We expect such losses to continue through at least the year ending December 31, 2014 as we continue to commercialize our ClearPoint system and pursue research and development activities related to our ClearTrace system. Net cash used in operations was $7.8 million and $7.4 million for the years ended December 31, 2013 and 2012, respectively. Since inception, we have financed our activities principally from the sale of equity securities, license arrangements, and the issuance of convertible notes and other secured notes.

Our primary financing activities during the years ended December 31, 2013 and 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.

In March 2014, we conducted a private offering in which we sold securities, consisting of non-convertible notes payable and common stock warrants, for net proceeds of approximately $3.4 million. In addition, in March 2014 we completed a transaction with Boston Scientific that resulted in the cancellation of $4.3 million in related party convertible notes payable which were scheduled to mature in 2014. While we expect to continue to use cash in operations, we believe our cash and cash equivalents at December 31, 2013 of $3.5 million, combined with the net proceeds from the March 2014 private offering and cash expected to be generated from product sales, will be sufficient to meet our anticipated cash requirements through at least March 2015.

During 2014, we expect to increase revenues from sales of ClearPoint system products as a result of the additions we made in 2013 to our sales and clinical support team. If necessary, certain planned expenditures, including expenditures related to research and development projects, sponsored research, public and investor relations efforts, planned hires, and patent filings, could be deferred or forgone if we believe it is necessary to do so in order to fund our operations. In addition, if necessary, we could implement restrictions on non-essential travel, put in place a salary deferral program for certain employees, reduce utilization of outside professional service providers and implement a reduction in our workforce.

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 equity or debt securities or through a credit facility, or we will need to modify our current business plan. There can be no assurances that we will be able to obtain additional financing on commercially . . .

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