ClearPoint Neuro, Inc. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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 every Interactive Data File required to be submitted 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 such files.)

☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 November 12, 2018, there were 11,022,372 shares of common stock outstanding.

MRI INTERVENTIONS, INC.

TABLE OF CONTENTS

Trademarks, Trade Names and Service Marks

ClearPoint^®, ClearTrace^® and MRI Interventions^® are trademarks of MRI Interventions, Inc. Any other trademarks, trade names or service marks referred to in this Quarterly Report on Form 10-Q (this “Quarterly Report”) are the property of their respective owners. As used in this Quarterly Report, Brainlab refers to Brainlab AG and its affiliates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains “forward-looking statements” as defined under the United States federal securities laws. The forward-looking statements are contained principally in the section of this Quarterly Report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

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 titled “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which we filed with the SEC on March 21, 2018, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by the forward-looking statements contained in this Quarterly Report. 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 Consolidated Balance Sheets
(Unaudited) 

See accompanying notes to Condensed Consolidated Financial Statements.

MRI INTERVENTIONS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

MRI INTERVENTIONS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

MRI INTERVENTIONS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to Condensed Consolidated Financial Statements.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements

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’s ClearPoint system, an integrated system comprised of reusable and disposable products, is designed to allow minimally invasive procedures in the brain to be performed in an MRI suite. The Company received 510(k) clearance from the U.S. Food and Drug Administration (“FDA”) in 2010 to market the ClearPoint system in the United States for general neurological interventional procedures. The Company’s ClearTrace system is a product candidate that is designed to allow catheter-based minimally invasive procedures in the heart to be performed in an MRI suite. Although still a product candidate, the Company has suspended its efforts to commercialize the ClearTrace system.

Liquidity

The Company has incurred net losses since its inception which has resulted in a cumulative deficit at September 30, 2018 of $106 million. Since inception, the Company has financed its operations principally from the sale of equity securities, the issuance of notes payable and license arrangements. As discussed in Note 6, in May 2017, the Company completed a private offering of equity units (the “2017 PIPE”) through which the Company received aggregate gross proceeds of approximately $13.25 million, before deducting placement agents’ fees and offering expenses aggregating approximately $1.3 million. As a result of the foregoing, the Company’s cash and cash equivalent balances at September 30, 2018 aggregated approximately $3.7 million.

The Company’s plans for the next twelve months reflect management’s anticipation of increases in revenues from sales of the ClearPoint System and related disposable products, as a result of greater utilization at existing installed sites and the installation of the ClearPoint System at new sites. Management also anticipates that growth in operating expenses will be modest in comparison to the anticipated growth in revenues, thus resulting in decreases in the Company’s operating loss and cash used in operating activities. However, there is no assurance that the Company will be able to achieve its anticipated results, and even in the event such results are achieved, the Company expects to continue to consume cash in its operations over at least the next twelve months.

As a result of the foregoing, the Company believes it will be necessary to seek additional sources of funds from the sale of equity or debt securities, which likely would result in dilution to the Company’s current stockholders, or from the establishment of a credit facility or the entry into an agreement with a strategic partner or some other form of collaborative relationship. There is no assurance, however, that the Company will be able to obtain such additional financing on commercially reasonable terms, if at all, and there is no assurance that any additional financing that the Company does obtain will be sufficient to meet its needs. If the Company is not able to obtain the additional financing on a timely basis, the Company may be unable to achieve its anticipated results, and the Company may not be able to meet its other obligations as they become due. An inability to obtain a sufficient amount of additional funding would create substantial doubt as to the Company’s ability to continue as a going concern.

Basis of Presentation and Use of Estimates

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with the Company’s December 31, 2017 audited consolidated financial statements, and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth therein. These condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) Securities and Exchange Commission (“SEC”) rules for interim financial information, and, therefore, omit certain information and footnote disclosures necessary to present such statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of these condensed consolidated 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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on March 21, 2018 (the “2017 Form 10-K”). The accompanying unaudited condensed consolidated balance sheet as of December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by GAAP for a complete set of financial statements. The results of operations for the three and nine months ended September 30, 2018 may not be indicative of the results to be expected for the entire year or any future periods.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

Derivative Liabilities

As described in Note 7, at December 31, 2017, derivative liabilities represented the fair value of a conversion feature of a note payable and of certain warrants to purchase common stock. These derivative liabilities were calculated utilizing the Monte Carlo simulation valuation method. Changes in the fair values of these warrants were recognized as other income or expense in the related condensed consolidated statements of operations. Also as described in Note 7, neither the conversion feature nor the warrants were existed at September 30, 2018. Accordingly, the Company had no derivative liabilities as of that date.

Fair Value Measurements

The Company measures and records 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, or inputs other than quoted prices that are observable for the asset or liability. The lowest priority, referred to as Level 3, is given to unobservable inputs. There were no amounts in the Company’s condensed consolidated balance sheet at September 30, 2018, that were derived from fair value calculations. The table below reflects the level of the inputs used in the Company’s fair value calculations at December 31, 2017:

Inputs used in the Company’s Level 3 calculation of fair value include the assumed dividend rate on the Company’s common stock, risk-free interest rates, stock price volatility and the likelihood of a future equity financing transaction, all of which are further discussed in Note 7.

Carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their short maturities.

Inventory

Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly to the Company’s ClearPoint system. Software license inventory related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying condensed consolidated balance sheets. All other software license inventory 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 / Recently Adopted Accounting Pronouncement

Effective January 1, 2018, the Company adopted the provisions of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which, with subsequent amendments thereto, created a new Topic 606 within the Accounting Standards Codification (“ASC”). Topic 606 is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Prior to adoption, the Company assessed the impact of Topic 606 and determined that adoption would not have a material effect on its consolidated financial statements. The Company adopted Topic 606 in conformity with its provisions on January 1, 2018 under the modified retrospective method.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

The Company’s revenues are comprised primarily of: (1) product revenues resulting from the sale of functional neurological products, and drug delivery and biologic products; (2) product revenues resulting from the sale of ClearPoint capital equipment; (3) revenues resulting from the rental, service, installation, training and shipping related to ClearPoint capital equipment; and (4) clinical case support revenues in connection with customer-sponsored clinical trials. The Company recognizes revenue when control of the Company’s products and services is transferred to its customers in an amount that reflects the consideration the Company expects to receive from its customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once it has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when it determines there are no uncertainties regarding payment terms or transfer of control.

Lines of Business; Timing of Revenue Recognition

For both types of capital equipment sales described above, the Company’s determination of the point in time at which to recognize revenue represents that point at which the customer has legal title, physical possession, and the risks and rewards of ownership, and the Company has a present right to payment.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

The Company operates in one industry segment, and substantially all its sales are to U.S.-based customers.

Payment terms under contracts with customers generally are in a range of 30-60 days after the customers’ receipt of the Company’s invoices.

The Company provides a one-year warranty on its functional neurology products, biologics and drug delivery systems products, and capital equipment products that are not otherwise covered by a third-party manufacturer’s warranty. The Company’s contracts with customers do not provide for a right of return other than for product defects.

Other Judgments and Estimates – Transaction price

Substantially all the Company’s contracts with customers are based on customer-issued purchase orders for distinct products or services. For these contracts, the transaction price is determined upon establishment of the contract that contains the final terms of the sale.

One of the Company’s contracts bundles performance obligations that include biologics and drug delivery system products, capital equipment products and clinical support services, for which the Company estimates the transaction price by allocating among the performance obligations reductions to revenue for discounts given on certain elements with the bundle.

See Note 3 for additional information regarding revenue recognition.

Net Loss Per Share

The Company computes net loss per share using the weighted-average number of common shares outstanding during the period. Basic and diluted net loss per share are the same because the conversion, exercise or issuance of all potential common stock equivalents, which comprise the entire amount of the Company’s outstanding common stock options and warrants as described in Note 6, would be anti-dilutive.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

Concentration Risks and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company holds its cash and cash equivalents on deposit with financial institutions in the U.S. insured by the Federal Deposit Insurance Corporation. At September 30, 2018, the Company had $219,372 in bank balances that were in excess of the insured limits.

No customers accounted for sales equal to or greater than 10% of total sales in either the three-month or nine-month periods ended September 30, 2018. One customer accounted for 11% of total sales in the three-month period ended September 30, 2017, and no customers accounted for sales equal to or greater than 10% of total sales in the nine-month period ended September 30, 2017.

One customer accounted for 14% of total accounts receivable at September 30, 2018, and one customer accounted for 10% of total accounts receivable at December 31, 2017.

Prior to granting credit, the Company performs credit evaluations of its customers’ financial condition, and generally does not require collateral from its customers. The Company will provide an allowance for doubtful accounts when collections become doubtful. The allowance for doubtful accounts at September 30, 2018 and December 31, 2017 was $33,000 and $29,000, respectively.

The Company is subject to risks common to emerging companies in the medical device industry, including, but not limited to: new technological innovations; acceptance and competitiveness of its products; dependence on key personnel; dependence on key suppliers; changes in general economic conditions and interest rates; protection of proprietary technology; compliance with changing government regulations; uncertainty of widespread market acceptance of products; access to credit for capital purchases by customers; and product liability claims. Certain components used in manufacturing have relatively few alternative sources of supply and establishing additional or replacement suppliers for such components cannot be accomplished quickly. The inability of any of these suppliers to fulfill the Company’s supply requirements may negatively impact future operating results.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases,” which created a new Topic, ASC Topic 842 and established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments, that arise from leases. For leases with a term of 12 months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This standard is effective for the Company beginning in 2019, and early application is permitted. The Company currently has two leases for manufacturing and office space that would be subject to the provisions of ASU 2016-02. The Company believes that adoption of ASC Topic 842 (as amended by ASC 2017-13), will result in the establishment on the Company’s consolidated balance sheet of an asset and liability for each such lease, but that neither such assets and liabilities nor the resulting lease expense recognition will have a material effect on the Company’s consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” which, among other items, changes the classification of certain equity-linked financial instruments (or embedded features) with down round features. The standard is effective for the Company beginning in 2019, and early adoption is permitted. Because the derivative liabilities in existence at December 31, 2017 expired during the three months ended September 30, 2018 as described in Note 7, the Company has concluded that adoption of the standard on its effective date will not have a material effect on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718),” which expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The standard is effective for the Company beginning in 2019, and early adoption is permitted. The Company believes that adoption of the standard will not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which modify the disclosure requirements for fair value measurements. The standard is effective for the Company beginning in 2020, at which time certain modifications are to be applied prospectively and others are to be applied retrospectively, and early adoption is permitted. The Company believes that adoption of the standard will not have a material effect on the Company’s consolidated financial statements.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

Revenue by Service Line

Contract Balances

During the three and nine months ended September 30, 2018, the Company recognized capital equipment-related service revenue of $41,391 and $128,725, respectively, which was previously included in deferred revenue in the accompanying condensed consolidated balance sheet at December 31, 2017.

In connection with one customer contract, the Company bills the customer for certain product the customer ordered and is committed to purchase, but which is shipped at a future date. At September 30, 2018, such billings amounted to $129,000, which amount is included in each of accounts receivable and deferred revenue in the accompanying condensed consolidated balance sheet.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

Remaining Performance Obligations

The Company’s contracts with customers are predominantly of terms less than one year. Accordingly, the transaction price of remaining performance obligations related to such contracts at September 30, 2018 are not material.

Revenue with respect to remaining performance obligations related to capital equipment-related service agreements with original terms in excess of one year amounted to $273,561 at September 30, 2018. The Company expects to recognize this revenue within the next three years.

One contract with a customer has a stated term of three years. However, the customer has the right to terminate the contract for convenience upon a 30-day notice, in which event the customer would be obligated to compensate the Company for up to three months of previously forecast purchases. Based on the foregoing, the Company uses the practical expedient available under Topic 606 pursuant to which such contracts are considered to have a term of less than one year and for which disclosure of the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize this revenue is not required. Accordingly, the Company has not included such disclosure for this contract.

Inventory consists of the following as of:

Senior Secured Note Payable

The indebtedness outstanding under the senior secured note payable to Brainlab, originally issued to Brainlab on April 5, 2011, and subsequently amended and restated on March 6, 2013 and April 4, 2016 (the “Brainlab Note”), at December 31, 2017, was $2.0 million and had a maturity date of December 31, 2018. Interest, at an annual rate of 5.5%, was payable quarterly in arrears. On September 25, 2018, the Company repaid in full all the outstanding debt, together with interest. In connection with the repayment, the security agreement under which the Brainlab Note had been collateralized by all the assets of the Company was terminated.

2014 Junior Secured Notes Payable

The indebtedness outstanding under the 2014 Junior Secured Notes Payable (the “2014 Secured Notes”) at each of September 30, 2018 and December 31, 2017 was $1.975 million. On September 25, 2018, the Company entered into an amendment (the “Third Omnibus Amendment”) with the holder of the 2014 Secured Notes representing a majority of the aggregate principal balance of such notes (the “Majority Note Holder”) who, under the terms of the 2014 Secured Notes, has the ability to amend any term of the 2014 Secured Notes. Pursuant to the Third Omnibus Amendment, the Majority Note Holder and the Company agreed to extend the maturity date of all the 2014 Secured Notes by eighteen months from their original maturity date in March 2019 to September 2020. No other terms of the 2014 Secured Notes were modified. The 2014 Secured Notes bear interest at an annual rate of 12%, payable semi-annually in arrears, and are collateralized by a first-priority security interest in all the Company’s assets.

Under the terms of a securities purchase agreement, the 2014 Secured Notes were issued in a private placement that included warrants (the “investor warrants”) to purchase 0.01 shares of the Company’s common stock for each dollar in principal amount. Under GAAP, the Company allocated the private placement proceeds proportionately between the 2014 Secured Notes and the investor warrants based on their relative fair values, with the amount allocated to the fair value of the investor warrants recorded as equity and as a discount to the carrying amount at the date of issuance. This discount is being amortized to interest expense over the contractual life, as amended as described above, of the 2014 Secured Notes using the effective interest method. The unamortized discount at September 30, 2018 and December 31, 2017 was $27,108 and $67,770, respectively. The carrying amount of the 2014 Secured Notes in the accompanying condensed consolidated balance sheets is also presented net of unamortized issuance costs, as discussed further below.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

The Company’s placement agents earned cash commissions of $145,500 as well as warrants (the “placement agent warrants”) to purchase shares of the Company’s common stock. The placement agent warrants have the same terms and conditions as the investor warrants. The placement agent cash commissions, the fair value of the placement agent warrants, and other offering expenses were recorded as deferred financing costs and are presented as reductions of the carrying amount of the 2014 Secured Notes in the accompanying condensed consolidated balance sheets. These deferred financing costs, having an unamortized balance of $13,064 and $32,660 at September 30, 2018 and December 31, 2017, respectively, are being amortized to interest expense over the contractual life, as amended as described above, of the 2014 Secured Notes using the effective interest method.

2010 Junior Secured Notes Payable

The indebtedness outstanding under the 2010 Junior Secured Notes Payable (the “2010 Secured Notes”) at each of September 30, 2018 and December 31, 2017 was $3.0 million. The 2010 Secured Notes accrue interest at an annual rate of 3.5% and are collateralized by a security interest in all the Company’s assets, which security interest is junior and subordinate to the security interest that collateralizes the 2014 Secured Notes. All outstanding principal and interest on the 2010 Secured Notes will be due and payable in a single payment upon maturity in November 2020.

Under the terms of a securities purchase agreement, the 2010 Secured Notes were issued in a private placement of units that included the 2010 Secured Notes and one share of the Company’s common stock. Under GAAP, the Company allocated the $3.0 million in proceeds from the sale of the units between the 2010 Secured Notes and the shares of common stock based on their relative fair values. The amount allocated to the value of the shares of common stock was recorded as equity and as a discount to the carrying value of the 2010 Secured Notes at their date of issuance. The unamortized discount at September 30, 2018 and December 31, 2017 was $1,607,429 and $1,956,458, respectively. This discount is being amortized to interest expense over the 10-year term of the notes using the effective interest method.

At each of September 30, 2018 and December 31, 2017, the Company’s Chairman and one of the Company’s officers held 2010 Secured Notes they purchased at the date of original issuance having an aggregate principal balance of $197,000.

Scheduled Notes Payable Maturities

Scheduled principal payments as of September 30, 2018 with respect to notes payable are summarized as follows:

2017 Private Placement

On May 26, 2017, the Company completed the 2017 PIPE pursuant to a Securities Purchase Agreement dated May 25, 2017 (the “2017 PIPE Purchase Agreement”) with certain accredited investors (collectively, the “2017 PIPE Investors”) for the private placement of 6,625,000 units (the “2017 PIPE Units”) at a purchase price of $2.00 per unit, with each unit consisting of: (i) one share of the Company’s common stock; and (ii) a warrant to purchase one share of the Company’s common stock (each, a “2017 PIPE Warrant” and collectively, the “2017 PIPE Warrants”).

In connection with the sale of the 2017 PIPE Units, the Company received aggregate gross proceeds of approximately $13.25 million, before deducting placement agents’ fees and offering expenses aggregating approximately $1.3 million. In addition, the placement agents for the 2017 PIPE received, in the aggregate, warrants (“2017 PIPE Placement Agent Warrants”) to purchase up to 509,200 shares of common stock.

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

Purchase Agreement

The 2017 PIPE Purchase Agreement contains representations and warranties by the Company and the 2017 PIPE Investors and covenants of the Company and the 2017 PIPE Investors (including indemnification from the Company in the event of breaches of its representations and warranties), which the Company believes are customary for transactions of this type.

Warrants

The 2017 PIPE Warrants are exercisable, in full or in part, at any time prior to the fifth anniversary of their issuance, at an exercise price of $2.20 per share, subject to provisions for: (a) adjustments in the case of certain corporate transactions; (b) consideration to be received in lieu of shares of the Company’s common stock in the case of certain fundamental transactions; and (c) a “cashless exercise” feature. The 2017 PIPE Placement Agent Warrants have the same terms and conditions as the 2017 PIPE Warrants.

Issuance of Common Stock in Lieu of Cash Payments

Under the terms of the Amended and Restated Non-Employee Director Compensation Plan, each non-employee member of the Company’s Board of Directors may elect to receive all or part of his or her director fees in shares of the Company’s common stock. Director fees, whether paid in cash or in shares of common stock, are payable quarterly on the last day of each fiscal quarter. The number of shares of common stock issued to directors is determined by dividing the product of: (i)(a) the fees otherwise payable to each director in cash, times (b) the percentage of fees the director elected to receive in shares of common stock, by (ii) the volume weighted average price per share of common stock over the last five trading days of the quarter. During the three and nine months ended September 30, 2018, 15,933 and 38,341 shares, respectively were issued to directors as payment for director fees in lieu of cash. No shares were issued to directors as payment for director fees during the three or nine months ended September 30, 2017.

Stock Incentive Plans

The Company has various share-based compensation plans and share-based compensatory contracts (collectively, the “Plans”) under which it has granted share-based awards, such as stock grants, and incentive and non-qualified stock options, to employees, directors, consultants and advisors. Awards may be subject to a vesting schedule as set forth in individual award agreements. Certain of the Plans also have provided for cash-based performance bonus awards.

Since June 2015, the Company has granted share-based awards under the MRI Interventions, Inc. Amended and Restated 2013 Incentive Compensation Plan (the “2013 Plan”). Under the 2013 Plan, a total of 1,956,250 shares of the Company’s common stock are reserved for issuance. Of this amount, stock grants of 162,393 shares have been awarded and option grants, net of options terminated, expired or forfeited, of 895,645 shares were outstanding as of September 30, 2018. Accordingly, 898,212 shares remained available for grants under the 2013 Plan as of that date.

Stock option activity under all of the Company’s Plans during the nine months ended September 30, 2018 is summarized below:

MRI INTERVENTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

The Company records share-based compensation expense on a straight-line basis over the related vesting period. For the three and nine months ended September 30, 2018 and 2017, share-based compensation expense related to options was:

As of September 30, 2018, there was unrecognized compensation expense of $616,879 related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.64 years.

Warrants

Warrants have generally been issued for terms of up to five years. Common stock warrant activity for the nine months ended September 30, 2018 was as follows:

Derivative liabilities at December 31, 2017 arose from an amendment the Company entered into with Brainlab, with respect to the Brainlab Note and related warrants (the “Brainlab warrants”), the provisions of which created: (a) a conversion feature allowing for $500,000 the principal balance of the Brainlab Note to be converted in a Qualified Public Offering, as defined in the amendment, at a public offering price that may be less than market value per share of the Company’s common stock; (b) down round strike price protection with respect to Brainlab warrants; and (c) warrants, issued in 2013, that contained net-cash settlement and down-round provisions (the “2013 warrants”). The conversion feature and the Brainlab warrants described herein terminated unexercised pursuant to the Company’s September 2018 repayment of the Brainlab Note as discussed in Note 5. The 2013 warrants expired in January 2018.

The fair values and the changes in fair values of derivative liabilities during the nine months ended September 30, 2018 and 2017 are as follows:

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited 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, is used to perform minimally invasive surgical procedures in the brain. We anticipate that our ClearTrace system, which is a product candidate, will be used to perform minimally invasive surgical procedures in the heart. In 2015, we suspended development of the ClearTrace system so that we could focus our resources on the ClearPoint system. Both systems utilize intra-procedural MRI to guide the procedures and 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 U.S. for general neurological procedures. In 2011, we also obtained CE marking approval for our ClearPoint system, which enables us to sell our ClearPoint system in the European Union. Substantially all our product revenues for the three and nine months ended September 30, 2018 relate to sales of our ClearPoint system products. We do not have regulatory clearance or approval to sell our ClearTrace system for commercial use. We have financed our operations and internal growth primarily through the sale of equity securities, the issuance of convertible and other secured notes, and license arrangements. We have incurred significant losses since our inception in 1998 as we have devoted substantial efforts to research and development. As of September 30, 2018, we had accumulated losses of approximately $106 million. We may continue to incur operating losses as we drive commercialization efforts related to our ClearPoint system products, potentially reinitiate development of our ClearTrace system, and expand our business.

Factors Which May Influence Future Results of Operations

The following is a description of factors that may influence our future results of operations, and that we believe are important to an understanding of our business and results of operations.

Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. 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 our ClearTrace system for commercial use until we receive regulatory clearance or approval.

Generating recurring revenues from the sale of disposable products 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 installations of our ClearPoint system to generate recurring sales of our ClearPoint disposable products. Our product revenues were approximately $1.7 million and $4.7 million for the three and nine months ended September 30, 2018, respectively, and were almost entirely related to our ClearPoint system.

Our revenue recognition policies are more fully described in Note 2 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

Cost of Product Revenues

Cost of product revenues includes the direct costs associated with the assembly and purchase of components for disposable products and ClearPoint system reusable products 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 provisions for 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. Such costs include salaries, travel, and benefits for research and development personnel, including related share-based compensation; materials and laboratory supplies in research and development activities; consultant costs; and licensing costs related to technology not yet commercialized. We anticipate that, over time, our research and development costs may increase as we: (i) continue to develop enhancements to our ClearPoint system; (ii) resume our ClearTrace system product development efforts; and (iii) seek to expand the application of our technological platforms. From our inception through September 30, 2018, we have incurred approximately $53 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 either the further development of our ClearTrace system for commercialization, or in our efforts to expand the application of our technological platforms.

Sales and Marketing, and General and Administrative Expenses

Our sales and marketing, and general and administrative expenses consist primarily of salaries, incentive-based compensation, travel and benefits, including related share-based compensation; marketing costs; professional fees, including fees for attorneys and outside accountants; occupancy costs; insurance; and other general and administrative expenses, which include, but are not limited to, corporate licenses, director fees, hiring costs, taxes, postage, office supplies and meeting costs. Our sales and marketing expenses are expected to increase due to costs associated with the commercialization of our ClearPoint system and the increased headcount necessary to support growth in operations.

Critical Accounting Policies

As described in Note 2 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, effective January 1, 2018, we adopted the provisions of ASC Topic 606, “Revenue from Contracts with Customers.”

There have been no other significant changes in our critical accounting policies during the three or nine months ended September 30, 2018 as compared to the critical accounting policies described in our 2017 Form 10-K.

Results of Operations

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017

Revenue. Total revenues were $1.8 million for the three months ended September 30, 2018, and $1.7 million for the three months ended September 30, 2017, an increase of $90,000, or 5%.

Functional neurology revenue, which consists of disposable product commercial sales related to cases utilizing the ClearPoint system, increased 13% to $1.4 million for the three months ended September 30, 2018, from $1.3 million for the same period in 2017. The increase was due primarily to a 9% increase in ClearPoint cases performed during the quarter ended September 30, 2018, relative to the same period in 2017. Of this increase, we experienced a favorable mix of ClearPoint cases during the quarter ended September 30, 2018, relative to the same period in 2017, as deep brain stimulation cases, the majority of which consume two ClearPoint kits, increased 11%, and laser ablation cases, the majority of which consume one ClearPoint kit, decreased 9%. We believe the decrease in laser ablation cases was influenced by FDA actions taken in early 2018 that adversely affected third-party providers in the laser ablation space. While one of the third-party providers regained FDA clearance of its system in October 2018, and we believe the other third-party provider will eventually resolve matters with FDA, there can be no assurance as to when, or if at all, such resolution will occur, or whether such resolutions will result in an increase of laser ablation cases utilizing ClearPoint. There were no increases in functional neurology product prices during the period between the three months ended September 30, 2017 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Biologics and drug delivery revenues, which include sales of disposable products and services related to customer-sponsored clinical trials utilizing the ClearPoint system, increased 40% to $191,000 for the three months ended September 30, 2018, from $137,000 for the same period in 2017. This increase was due primarily to an increase in biologic and drug delivery product revenues resulting from their use in a greater number of cases during the quarter ended September 30, 2018, relative to the same period in 2017. There were no increases in biologics and drug delivery product prices during the period between the three months ended September 30, 2017 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Capital equipment revenue, consisting of sales of ClearPoint reusable hardware and software, decreased 52% to $100,000 for the three months ended September 30, 2018, from $208,000 for the same period in 2017. Revenues from this product line historically have varied from quarter to quarter. This decrease was due primarily to a decrease from the third quarter of 2017 to the same period in 2018 in the number of ClearPoint systems sold. There were no increases in capital equipment product prices during the period between the three months ended September 30, 2017 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Capital equipment-related services, consisting of fees for capital equipment rental, service, installation, training and shipping, decreased 30% to $62,000 for the three months ended September 30, 2018, from $89,000 for the same period in 2017. The decrease was due primarily to decreases in fees from installation, training and shipping services, consistent with the decrease in capital equipment sales revenue.

Cost of Revenues. Cost of revenues was $553,000 for the three months ended September 30, 2018, representing gross margin of 69%, compared to $689,000 for the same period in 2017, representing gross margin of 60%. The increase in gross margin was due primarily to decreases in overhead and indirect costs as a percentage of revenues during the three months ended September 30, 2018, relative to the same period in 2017, and to a favorable mix of product sales, with capital equipment sales, which have a lower margin relative to other revenue lines, representing a lower percentage of sales during the three months ended September 30, 2018, relative to the same period in 2017.

Research and Development Costs. Research and development costs were $617,000 for three months ended September 30, 2018, compared to $590,000 for the same period in 2017, an increase of $27,000, or 5%. The increase was due primarily to increases in regulatory legal fees, licensing fees and compensation costs. These increases were partially offset by: (a) a reduction in payments related to certain license and product co-development agreements made during the quarter ended September 30, that did not recur during the same period in 2018; and (b) costs related to intellectual property.

Sales and Marketing Expenses. Sales and marketing expenses were $765,000 for the three months ended September 30, 2018, compared to $899,000 for the same period in 2017, a decrease of $134,000, or 15%. This decrease was primarily due to a decrease in incentive compensation earned by our sales and clinical personnel.

General and Administrative Expenses. General and administrative expenses were $1.1 million for the three months ended September 30, 2018, compared to $867,000 for the same period in 2017, an increase of $211,000, or 20%. This increase was due primarily to: (a) increases in stock-based compensation, legal fees and directors’ compensation; and (b) a decrease in the activity-based cost allocation to other departments. These fluctuations were partially offset by a decrease in hiring and relocation costs.

Other Income (Expense). During the three months ended September 30, 2018 and 2017, we recorded gains of $22,000 and $110,000, respectively, resulting from changes in the fair value of our derivative liabilities. Derivative liabilities at September 30, 2017 arose from: (a) warrants, issued in 2013, that contained net-cash settlement and down-round provisions; and (b) an amendment the Company entered into with Brainlab, with respect to the Brainlab Note and related warrants, the provisions of which created a conversion feature allowing for $500,000 the principal balance of the Brainlab Note to be converted in a Qualified Public Offering, as defined in the amendment, at a public offering price that may be less than market value per share of the Company’s common stock, and down round strike price protection with respect to Brainlab warrants (the “Brainlab warrants”). The warrants discussed in (a) above expired in January 2018, and the derivatives related to the Brainlab Note discussed in (b) above were terminated upon our repayment in full of the Brainlab Note as discussed in Note 5 to the Condensed Consolidated Financial statements included elsewhere in this Quarterly Report. Accordingly, there were no remaining derivative liabilities at September 30, 2018.

Net interest expense for the three months ended September 30, 2018 was $247,000, compared with $211,000 for the same period in 2017. The increase was due to increased amortization of the discount and deferred issuance costs associated with the 2014 Secured Notes and the 2010 Secured Notes, both as described in Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017

Revenue. Total revenues were $5.1 million for the nine months September 30, 2018, and $5.7 million for the nine months ended September 30, 2017, a decrease of $623,000, or 11%.

Functional neurology revenue, which consists of disposable product commercial sales related to cases utilizing the ClearPoint system, decreased 10% to $3.8 million for the nine months ended September 30, 2018, from $4.2 million for the same period in 2017. The decrease was due primarily to a decrease in the number of ClearPoint kits sold during the nine months ended September 30, 2018, relative to the same period in 2017. We believe the decrease in sales was influenced by two factors: (a) FDA actions taken in early 2018 that adversely affected third-party providers in the laser ablation space; and (b) the introduction of a new deep brain stimulation system that did not have approval for use in the MRI suite for most of 2018. While the FDA actions was resolved by one of the affected third-parties in October 2018, and the new deep brain stimulation system received FDA clearance during the quarter ended September 30, 2018, no assurance can be given that such resolutions will result in a resumption of cases utilizing ClearPoint to previously experienced levels. There were no increases in functional neurology product prices during the period between the nine months ended September 30, 2017 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Biologics and drug delivery revenues, which include sales of disposable products and services related to customer-sponsored clinical trials utilizing the ClearPoint system, increased 66% to $483,000 for the nine months ended September 30, 2018, from $291,000 for the same period in 2017. This increase was due primarily to the commencement of such services during the nine months ended September 30, 2018, consisting primarily of fees earned for the designation of clinical services liaisons for a customer’s use in a clinical trial of its drug. There were no service revenues related to this product line in the same period of 2017. There were no increases in biologics and drug delivery product prices during the period between the nine months ended September 30, 2017 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Capital equipment revenue, consisting of sales of ClearPoint reusable hardware and software, decreased 54% to $420,000 for the nine months ended September 30, 2018, from $923,000 for the same period in 2017. Revenues from this product line historically have varied from period to period. This decrease was due primarily to a decrease in the number of ClearPoint systems sold. There were no increases in capital equipment product prices during the period between the nine months ended September 30, 2017 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Capital equipment-related services, consisting of fees for capital equipment rental, service, installation, training and shipping, decreased 15% to $219,000 for the nine months ended September 30, 2018, from $257,000 for the same period in 2017. The decrease was due primarily to decreases in fees from installation, training and shipping services, consistent with the decrease in capital equipment sales revenue.

Cost of Revenues. Cost of revenues was $1.7 million for the nine months September 30, 2018, representing gross margin of 66%, compared to $2.2 million for the same period in 2017, representing gross margin of 61%. The increase in gross margin was due primarily to a favorable sales mix, with capital equipment sales, which have a lower margin relative to other revenue lines, representing a lower percentage of sales during the nine months ended September 30, 2018, relative to the same period in 2017.

Research and Development Costs. Research and development costs were $1.8 million for nine months ended September 30, 2018, compared to $2.2 million for the same period in 2017, a decrease of $403,000, or 18%. The decrease was due primarily to upfront payments, aggregating $610,000, the majority of which was paid in shares of our common stock, required under certain license and product co-development agreements entered into in April 2017. No such payments were made during the nine months ended September 30, 2018. Adding to the decrease were decreases in software development costs. These decreases were partially offset by increases in each of regulatory legal costs, compensation and outside engineering services.

Sales and Marketing Expenses. Sales and marketing expenses were $2.7 million for the nine months ended September 30, 2018, compared to $2.9 million for the same period in 2017, a decrease of $292,000, or 10%. This decrease was primarily due to a decrease in compensation, both base and incentive, which was partially offset by an increase in marketing costs.

General and Administrative Expenses. General and administrative expenses were $3.1 million for the nine months ended September 30, 2018, compared to $2.8 million for the same period in 2017, an increase of $333,000, or 12%. This increase was due primarily to increases in stock-based compensation, Board compensation and insurance, and a decrease in costs allocated to other departments, which were partially offset by decreases in investor relations.

Other Income (Expense). During the nine months ended September 30, 2018 and 2017, we recorded gains of $64,000 and $48,000, respectively, resulting from changes in the fair value of our derivative liabilities. Derivative liabilities at September 30, 2017 arose from: (a) warrants, issued in 2013, that contained net-cash settlement and down-round provisions; and (b) an amendment the Company entered into with Brainlab, with respect to the Brainlab Note and related warrants, the provisions of which created a conversion feature allowing for $500,000 the principal balance of the Brainlab Note to be converted in a Qualified Public Offering, as defined in the amendment, at a public offering price that may be less than market value per share of the Company’s common stock, and down round strike price protection with respect to Brainlab warrants (the “Brainlab warrants”). The warrants discussed in (a) above expired in January 2018, and the derivatives related to the Brainlab Note discussed in (b) above were terminated upon our repayment in full of the Brainlab Note as discussed in Note 5 to the Condensed Consolidated Financial statements included elsewhere in this Quarterly Report. Accordingly, there were no remaining derivative liabilities at September 30, 2018.

Net interest expense for the nine months ended September 30, 2018 was $742,000, compared with $637,000 for the same period in 2017. The increase was due to increased amortization of the discount and deferred issuance costs associated with the 2014 Secured Notes and the 2010 Secured Notes, both as described in Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

Liquidity and Capital Resources

At September 30, 2018, we had cash and cash equivalent balances aggregating $3.7 million, resulting primarily from completion of the 2017 PIPE discussed in Note 6 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Net cash used in operating activities was $4.0 million for the nine months ended September 30, 2018.

Our plans for the next twelve months reflect our anticipation of increases in revenues from sales of the ClearPoint System and related disposable products, as a result of greater utilization at existing installed sites and the installation of the ClearPoint System at new sites. We also anticipate that growth in operating expenses will be modest in comparison to the anticipated growth in revenues, thus resulting in decreases in our operating loss and cash used in operating activities. However, there is no assurance that we will be able to achieve our anticipated results, and even in the event such results are achieved, we expect to continue to consume cash in our operations over at least the next twelve months.

As a result of the foregoing, we believe it will be necessary to seek additional sources of funds from the sale of equity or debt securities, which likely would result in dilution to our current stockholders, or from the establishment of a credit facility or the entry into an agreement with a strategic partner or some form of collaborative relationship. There is no assurance, however, that we will be able to obtain such additional financing on commercially reasonable terms, if at all, and there is no assurance that any additional financing that we do obtain will be sufficient to meet our needs. If we are not able to obtain the additional financing on a timely basis, we may be unable to achieve our anticipated results, and we may not be able to meet our other obligations as they become due. An inability to obtain a sufficient amount of additional funding would create substantial doubt as to our ability to continue as a going concern.

Cash Flows

Cash activity for the nine months ended September 30, 2018 and 2017 is summarized as follows:

Net Cash Flows from Operating Activities. We used $4.0 million and $4.2 million of cash for operating activities during the nine months ended September 30, 2018 and 2017, respectively.

During the nine months ended September 30, 2018, uses of cash in operating activities primarily consisted of: (i) our $4.9 million net loss; (ii) increases in accounts receivable of $106,000, inventory of $204,000 and prepaid expenses and other current assets of $69,000; and (iii) a decrease in accounts payable and accrued expenses of $362,000. These uses were partially offset by: (a) net non-cash expenses included in our net loss aggregating $1.5 million and consisting primarily of depreciation and amortization, share-based compensation, expenses paid through the issuance of common stock, change in fair value of derivative liabilities and amortization of debt issuance costs and original issue discounts; and (b) a decrease in other assets of $1,000 and an increase in deferred revenue of $165,000.

During the nine months ended September 30, 2017, uses of cash in operating activities primarily consisted of: (i) our $5.1 million net loss; (ii) increases in inventory of $312,000, and in prepaid expenses and other current assets of $104,000; and (iii) a decrease in accounts payable and accrued expenses of $271,000. These uses were partially offset by: (a) non-cash expenses included in our net loss aggregating $1.5 million and consisting primarily of depreciation and amortization, share-based compensation, expenses paid through the issuance of common stock, and amortization of debt issuance costs and original issue discounts; and (b) an increase in deferred revenue of $59,000.

Net Cash Flows from Investing Activities. Net cash flows used in investing activities for the nine months ended September 30, 2018 and 2017 were $63,000 and $25,000, respectively, and consisted of equipment acquisitions.

Net Cash Flows from Financing Activities. Net cash flows from financing activities for the nine months ended September 30, 2018 consisted of the $2 million repayment of the Brainlab Note as described in Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, net of cash proceeds received from warrant exercises of $532,000.

Net cash flows from financing activities for the nine months ended September 30, 2017 consisted of net cash proceeds of $12.0 million received from the 2017 PIPE.

Operating Capital and Capital Expenditure Requirements

To date, we have not achieved profitability. We could continue to incur net losses as we continue our efforts to expand the commercialization of our ClearPoint system products, resume the currently suspended development of our ClearTrace system, and pursue additional applications for our technology platforms. Our cash balances are primarily held in non-interest-bearing demand accounts. 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 ClearPoint system products, complete the development of our ClearTrace system and pursue additional applications for our technology platforms. Our future capital requirements will depend on many factors, including, but not limited to, the following:

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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 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 we receive 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 currencies 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, which at present, are not material. 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.

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 (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 September 30, 2018 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. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2018, 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.

PART II – OTHER INFORMATION

None.

Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our 2017 Form 10-K. Additional information regarding some of those risks and uncertainties is contained in the notes to the Condensed Consolidated Financial Statements appearing in Part I, Item 1 of this Quarterly Report, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report. The risks and uncertainties disclosed in our 2017 Form 10-K, our quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all the risks and uncertainties that may affect our business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in our 2017 Form 10-K.

None.

None.

None.

None.

The exhibits listed below are filed, furnished or incorporated by reference as part of this Quarterly Report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 13, 2018