Greetings, and welcome to the ClearPoint Neuro, Inc. Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Comments made on this call may include statements that are forward-looking within the meaning of securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the company's plans, prospects and strategies, both preliminary and projected, the size of total addressable markets or the market opportunity for the company's products and services, management's expectations, beliefs, estimates or projections regarding future results of operations. Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information or future events. For more information, please refer to the company's annual report on Form 10-K for the year ended December 31, 2022, and the company's quarterly report on Form 10-Q for the three months ended March 31, 2023, both of which have been filed with the Securities and Exchange Commission and the company's quarterly report on Form 10-Q for the three months ended June 30, 2023, which the company intends to file with the Securities and Exchange Commission on or before August 14, 2023. All the company's filings may be obtained on the SEC or the company's website at www.clearpointneuro.com. I would now like to turn the call over to your host, Joe Burnett, Chief Executive Officer. Please go ahead.

Thank you, and thank you to all of the investors and analysts on today's call. And thank you also for being a part of ClearPoint vision and journey. Our mission and our priority is to help restore quality of life to patients and their families, who are suffering from some of the most debilitating neurological disorders imaginable. In the second quarter of 2023, the company returned to double-digit growth and delivered record revenue of $6 million in the quarter. We have also continued to make progress across our 4-pillar growth strategy, including Pillar 1, biologics and drug delivery; Pillar 2, functional surgery navigation; Pillar 3, therapy and access products; and Pillar 4, achieving global scale. I will now turn the call over to Danilo D'Alessandro, our CFO, to review our financial performance in the quarter, after which I will add some detail to our 4-pillar growth strategy and expectations for the second half of 2023. Danilo?

Thank you, Joe, and thank you all for joining us today. Looking at the second quarter 2023 results. Total revenue was $6 million for the three months ended June 30, 2023, and $5.2 million for the three months ended June 30, 2022, which represents 14% growth versus the second quarter of 2022. As a reminder, our revenues made up of three components: biologics and drug delivery, functional neurosurgery navigation and therapy, and capital equipment and software. Biologics and drug delivery revenue include sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products. Biologics and drug delivery revenue increased 40% to $3.4 million in the second quarter, up from $2.4 million in 2022. This increase was fueled by 155% increase in biologic and drug delivery service revenue as we expand our service offering to pharmaceutical customers. The biologics and drug delivery service growth was partially offset by a $0.9 million decrease in product revenue. Functional neurosurgery navigation revenue consists of commercial sales of disposable products and services related to cases utilizing the ClearPoint system to deliver medical device therapy to the desired target. This revenue segment increased 1% to $2.2 million for the second quarter. Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software and related services decreased 38% to $0.4 million in the quarter from $0.6 million for the same period in 2022, reflecting fewer placements of ClearPoint capital and software. Gross margin for the second quarter of 2023 was 53% as compared to a gross margin of 63% for the second quarter 2022. The decrease in gross margin was primarily due to an increase in biologics and drug delivery preclinical services, which, to date, have had a lower margin than product sales as we increase our presence in…

Thanks, Danilo. The second quarter of 2023 was a record quarter for ClearPoint Neuro, with $6 million in sales, driven by 40% plus growth in our biologics and drug delivery business, which is where the majority of our hiring and investment has taken place in 2023. Let's start the conversation with that first pillar of growth, biologics and drug delivery. We continue to gain traction and earn business from more than 50 pharma and academic partners who are using our ClearPoint Neuro products and services. We expect these partnerships to not only grow in number, but in scale and sophistication. A perfect example of this is a recently signed agreement for a multi-platform gene therapy program. This is a blueprint strategic partnership, whereby ClearPoint Neuro will earn a cash payment for milestones tied to the clinical and regulatory success of the drug product itself. Importantly, these milestones do not begin a commercial approval of the drug, but throughout the drug development process where ClearPoint Neuro specialists play an integral role. This agreement is a clear and concrete example of how a drug candidate successfully navigating the regulatory process can contribute meaningfully to our results. This would only be possible because of our focus and our investment in a preclinical touch point that starts very early in the drug development process and is yielding terrific results thus far. While delays or even cancellations of some programs are expected, we believe our unique product portfolio and our expanded yet neuro service offerings make us the premier partner for drug companies in the space. For perspective, one partnership could generate more than $10 million per program in potential revenue to ClearPoint in products, services and milestones before the drug is ever commercially available. If all 50 current partners were to progress through Phase…

[Operator Instructions] And our first question comes from Frank Takkinen from Lake Street Capital. Go ahead, Frank.

This is Nelson Cox on the phone for Frank today. Thanks for taking the questions. It sounds like growth in OpEx during the quarter was mostly related to the new facility, and it should be lower in the second half of the year. Just trying to think about how OpEx should be moving forward? Is that something that we should look at Q1 for more of a baseline moving forward? Or how should we think about that?

Well, I would think - thanks for the question Nelson, I think it a little bit differently in that, as I mentioned, the biggest part of our OpEx is really labor and personnel. We're up to about 115 employees, I think, worldwide. And that's the number that we sit here in Q2 that fell into the operating expense line plus some into the cost of goods, obviously, what I would expect is that overall headcount number to remain relatively flat as again, a lot of the hiring we've done for these biologic services as well as preparation for the launch of products on the commercial side. The hiring has already taken place. The training has begun, and we don't really need to hire many additional people. So the biggest driver of OpEx should not be changing that much. What can change quarter-to-quarter is some things we do with partnerships, whether it's co-development work, whether it's licensing the technology, things like that. So that can be a little bit choppy, but the primary driver should be remaining relatively flat with just some inflationary adjustments over the next six to 12 months. Hopefully, that helps.

Got it. Yes. And then in the past, you've talked about total partnership revenue potentially being up to $10 million prior to commercial approval with milestones included in the recent UCB partnership? And could this be a particular partnership have revenue potential in excess of $10 million. And that going forward, I think you've talked about it being a blueprint. It sounds like we should - is that something we should expect being a standard feature moving forward?

Yes. I would say UCB is one example of the multiple deals that we have either signed that are in term sheet status or are actively being negotiated right now. It just happens to be one of the ones that we announced. But from that standpoint, yes, these are the large incidence type of relationships and target drug markets that require not just quite a bit of preclinical and clinical work, but the clinical trials themselves sometimes can be upwards of 100 or 200 or even more patients. So selling products into the clinical trial prior to the commercial approval is certainly something that drives that. And the larger the incidence level as well as the larger the number of alternative treatments that are available, the more detailed the FDA is going to be - is going to require to go ahead and improve the efficacy of the drug as well as the economics of the drug itself. So again, UCB is an example, but we've got multiple other programs in the works that could potentially exceed that $10 million number if all of the milestones as well as the trial revenue is successful.

Got it. And then one more quick one, if I can. Is there - do you see any opportunities to restructure some previous partnerships to include that driven milestone payment structure?

I think absolutely. In fact, as we have continued to add biologic services, there's a larger part of the menu that we can offer and many of our existing partners are kind of stage things. As a reminder, one level of a partnership could simply just be some initial benchtop testing followed by some consulting services, consulting hours and things like that. So year one might only be $20,000, $30,000, give or take. Where that changes is once they're happy with our product and they recognize that we're very likely going to be a part of their drug label, these companies also realize that our experience is valuable, our head start is valuable and that they're going to be working with us for years, if not decades. And they want some assurances that we are going to be around and supporting them in the future. So it's normally year one or year two into a relationship where we begin talking through these much more sophisticated and strategic agreements, which can include backup manufacturing. They can include access to IP, they can include a lot of different things. So that a pharma company can ensure control and access to this important part of their supply chain. So it's - I would say it's more common than not - that we might have a partner today that will eventually turn into a more sophisticated agreement. That's also a common point where we would negotiate commercial terms of the device itself, which in many cases, can be multiples of the existing sort of break we give in pricing during the development process for the disposable products. So I'd say much - many more of those 50 partners, we still have the opportunity to continue negotiating as they get closer to initiating their clinical trial.

Great. Thank again. Thanks for the color there. And congrats on the quarter.

[Operator Instructions] And our next question comes from Neil Chatterji from B. Riley. Go ahead, Neil.

Hi. This is William Wood on for Neil. Thanks for taking our questions. Really appreciate everything that you've done, it's looking good. I'm not sure - just to start off, a quick question on your gross margins. I know you said those were primarily focused on or as a result of your Carlsbad facility as well as preclinical services sort of being a larger part of that. With the Carlsbad facility coming to an end by year-end. How should we think about - I know you said gross margin should reach into the 70s in the coming years, but maybe give us a little bit more color on how we should be thinking about those for 2023, maybe even 2024. Is preclinical going to be a continued large contributor? And then obviously, Carlsbad will sort of fade off. Just a little bit more color would be appreciated.

Yes, the two primary drivers, as you pointed out, for the kind of the reduced gross margin in the quarter. And to frame it appropriately as well. If you look back at our history, quarter-to-quarter, based on what revenue gets recognized, the gross margin can actually jump around quite a bit. But if we look specifically at the second quarter, there were two primary drivers. One is the redundant space and facility that we have relative to our prior Irvine facility and the new Carlsbad facility. So bringing Carlsbad up, having some certain construction but also having redundancy and travel between the sites and things like that, while making the same number of products that is obviously to impact gross margins, and we certainly saw that in the quarter. The second thing, which is also, we believe, somewhat temporary is that when you launch a new product, we're kind of the new kids on the block, and we want to go ahead and demonstrate our services and prove our capabilities. And in a couple of instances in the quarter, we ran some studies and did some testing for really mega cap pharma companies, to get our foot in the door. And I would say that strategy worked. However, giving a discount on that study kind of brought some of the gross margin down as well. So what I would say is that the 53% you saw in Q2, we're definitely not going to switch and be at that 70% mark. But 53% is probably the lowest that we would expect. And as Carlsbad is fully up and running and Irvine kind of shuts down by the end of this year, that's when we'd start seeing a kind of a broad improvement as well. But to answer your other question, we do absolutely expect continued growth of services - so that gross margin of the services is going to continue to be a significant factor. And while that margin is not going to be as high as typical product disposable revenues, which we've seen in the 70% before, it's also not going to be as low as it was necessarily in Q2. So it will be a much more positive contributor to our margin moving forward.

Got it. That's very helpful. Additionally - and correct me if I'm wrong or maybe even fill in the gap, you had mentioned that you were going to be potentially moving into a tumor - laser business in tumor sort of - it sounded like you were going to really sort of take on that. I guess if you could just sort of flesh that out for me on how much of a tumor industry you plan to incorporate into your business strategy?

Yes, I think it's going to be a significant focus for us in a number of different ways. The first comment I would make is that if you look at the hospitals that ClearPoint has a presence in today, primary user of our technology is someone called a functional neurosurgeon. And this is someone that would treat something like essential tremor or Parkinson's disease or epilepsy or things like that. This is commonly where deep brain stimulation is used. But it's also where laser is a common treatment for epilepsy. So if you think about where our strength and most of our relationships are today, it's primarily on the functional neuro side of the business, which is also laser for epilepsy. What's a truly untapped potential for us is the neuro-oncology side of the business, which is generally a different neurosurgeon and a different customer that historically, we've had very little experience with. We have probably five or so sites that are routinely using us for oncology purposes today. So I think the launch of a new laser that's designed and software that's designed specifically for tumor applications is going to be a way to be introduced into that tumor market. And then similarly, we have a number of drug partners that are also interested in doing work for tumors, not treating epilepsy or Huntington's or Parkinson's or things like that. So as some of those partners move into the clinical trial stage, we have an opportunity to work with those hospitals on either laser therapy or drug delivery or what I think is actually going to be somewhat common is what I'd call a hybrid therapy where the procedure starts with an ablation. And then a drug is introduced into the margin to kind of clean up the part that was maybe missed by the ablation itself. So you're absolutely right. Part of the investment that we are making is to go into oncology with a commercial team now that we've got products and pharma partnerships that can kind of carry some of that burden with us.

Thanks, Burnett. That sounds really good, actually. And then additionally, you've mentioned some of your milestone deals are at least sort of hinted to them. Can you talk to your ambition about really trying to incorporate these milestone deals where you have a tie to the drug itself and how you think these will be advancing going into second half and then later on in development? Is this really going to be a top priority? Or just any extra - any details would be appreciated.

Yes, is the way I think of it as this is for the - I don't want to say the first time ever, but first time in sort of recent memory, we have a number of different pharmaceutical companies that are now going to be dependent on a device of some kind to get their drug to the target. So the decision that they need to make is to say, look, do we build our own R&D team that's really a device company and we set up our own device quality system and complaint handling and supply chain, all of these different things, is that an investment as a pharma company that we want to build up from scratch, or we just partner with a company like ClearPoint that effectively can give them that black box solution of a quality system, complaint handling, neuroscientist specialist team that's in the field to help deliver the drug. We're really building ourselves into that turnkey solution, and that turnkey solution is what we feel earns us a seat at the table as it relates to getting a piece of the success of the drug itself. It's really risk-sharing agreement and the bigger part that we play in the development cycle of the drug, the more that we should benefit from some of that risk as well. So I think what you'll see in the future, our expectation is there's going to be a bunch of different flavors. Some might be heavily weighted towards milestones. Some might be heavily weighted towards commercial pricing of the product of our devices. Some might be weighted towards royalties on the drug itself. There might be three or four different players, but the concept will all be the same is that we want a long-term relationship with pharma, and pharma wants a long-term relationship with us. And we feel like we are one of the best value way to do it compared to trying to build it yourself.

That makes sense. And just a quick follow-up. I know you've mentioned or sometimes it's been a bit of an illusion or we can't - we don't quite get all the details on these partnerships, the milestones, et cetera. And sometimes even who your partners are, do you think you'll be giving or providing more color going forward, just so we have a better idea of where to be looking, as you mentioned, Aspen this morning or Aspen, sorry, this morning or just now, we'll be - well, will we be getting better color in the future? Just curious.

Yes. I mean I think that we don't necessarily do it by choice - if I wanted to or if I could, I would simply announce all the partners. But I think what we try to do is, most importantly, be a good and loyal partner to these people we're working with in the pharma industry. And if they ask us to keep it secret up until a certain point, we're happy to oblige by that. I think the 2x that you've seen us really announce these types of partnerships in the past, which I would expect to continue in the future is, one, maybe where we do a multi-platform type deal like we announced with UCB. That could be one trigger, if you will, for an announcement. The second one could be the announcement of an IDE or a first patient enrolled in a trial. It's very common that you would see a press release from us that says, hey, congratulations, happy to be a part of this. Those are kind of the two key milestones that we've seen in the past. But at the end of the day, we want to be good partners and we let the pharma company decide when is the right time for them to announce it. I can tell you, in some cases, especially with some of the smaller pharma and biotech companies, the fact that they're able to announce that they're working with ClearPoint, actually can benefit them from a fundraising standpoint or from an awareness standpoint or even when they're recruiting centers or sites for their clinical trial, which often starts way before the first patient is enrolled. Having the ClearPoint name attached to them, we believe is a benefit to their brand and their trial as well. So it's possible that, that could be accelerated, but it's probably not going to be something that we drive.

Great - all makes sense. And then - with your lasers, you - I know it's a limited launch, but - and you mentioned that you already installed five worldwide and expect five more. I'm just curious, should we - is this - once you do a full - like what would be the maybe year-over-year growth? Or what would be the growth rate? Or what type of installation do you think we could be expecting once you had a full release? Or is it just too early to sort of tell?

Yes. I mean, I don't know we want to give too many details. What I would tell you, just to set expectations is that getting an installation is not a simple process. There's really three things to consider that are barriers that need to be overcome. And it's really why there's only a couple of companies in this space. They've done a lot of hard work to build the market to where it is, but it has not been easy. The first is that you need to have and be able to show compatibility on all of the different systems. So you have to get FDA clearance for all of the different systems. If you look at our approval today with CLS, we actually only have approval for three Tesla scanners that are manufactured by Siemens and by GE. So we really only have access to part of the known universe, and we have to continue with some more testing and another FDA submission before we can add Philips or before we can add 1.5 Tesla to the equation. So that's one sort of thing that rate limits how quickly we go. The second one is that, as we shared with our navigation software as well, getting any new piece of hardware or software into a hospital is so much harder than it's ever been in my career, specifically from an IT standpoint, the level of testing and questionnaires to ensure there's no cyber-criminal activity or you're introducing anything to a hospital. The hoops you have to jump through are so significantly more severe than they've ever been, that any new capital equipment is hard and laser fits into that as well. And then the third part is that there's quite a bit of testing that actually has to go…

That makes sense. I appreciate that. And then last question. You gave some updates last time and hear now about you're - the recent regulatory pathway, setting up sites in the EU and then most recently, in Brazil, just - I believe you may be mentioned China in the past also. Just curious where we might be, if there's any additional countries that you're sort of currently in the works and where - when we might expect to see some of these additional operational areas come online?

Yes. There's probably a few like - one of the key first step was the MDSAP certification that our quality system received last year, that opens the door for a - from a quality system standpoint into a number of countries, including I think Canada, Japan, Australia, Brazil, a few other ones that are included in that consortium. So that's one place where I think you could look to that you should expect sometime in the next couple of years that we'll be expanding or at least starting the regulatory process. The priority, I would say we have outside of the U.S. and the EU is again based on our pharmaceutical partners. So we might have a pharma partner that is based in one particular country in Europe or in Asia or the Middle East that really wants to do some clinical work on their home turf, if you will. And is willing to put some funds into that process to go ahead and get that specific regulatory approval. So we're in a world with access to unlimited capital, yes, we would go as quickly as we possibly could. But again, we want to make every dollar count these days. So our focus is still growing the strategy in the U.S. and Europe. However, opportunistically, when we can satisfy the needs of one of our pharma partners, we're happy to oblige.

Got it, understood, and very helpful. Thanks. So I'll jump back into queue.

Thank you. That was our last question. I would now like to turn it back to Joe Burnett for any closing remarks.

Once again, thank you to everyone interested in being a part of our team's journey here at ClearPoint. At this point, we are, in fact, sort of reiterating our guidance for the year of revenue between $25 million and $27 million, which you saw in our press release. This is an exciting time as we plan for new product and service launches across all four of our growth pillars. We've worked very hard to get to the spot and are excited for our team, but also for the patients that we hope to treat with these new devices and therapies in the near future. The patient and the family are why we are here and ultimately, we are working for. So thank you very much, and good night.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.