ClearPoint Neuro, Inc. (CLPT)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

We are a commercial-stage medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain. We have deployed significant resources to fund our efforts to develop the foundational capabilities for enabling MRI-guided interventions, building an intellectual property portfolio, and identifying and building out commercial applications for the technologies developed by our company.

The first foundational component of our business is a medical device company providing medical devices for neurosurgery applications. Our primary medical device product, the ClearPoint system, is an integrated system comprised of hardware components, disposable components, and intuitive, menu-driven software, which is in commercial use globally. The primary applications for the ClearPoint system are to target and guide the insertion of deep brain stimulation electrodes, biopsy needles, and laser catheters, as well as the infusion of pharmaceuticals into the brain. The ClearPoint system was originally designed for use in an MRI setting. In 2021, we launched the SmartFrame Array Neuro Navigation System and Software, which allows for operating room placement of the ClearPoint system, and in 2024, we launched limited market release of the SmartFrame OR Stereotactic System, which allows for complete procedures to be performed in the operating room. In 2022, we commercialized the ClearPoint Prism Neuro Laser Therapy System as our first therapy product offering. We have exclusive global commercialization rights to the ClearPoint Prism Neuro Laser Therapy System through our Swedish partner, CLS.

The second component of our business is focused on partnerships in the biologics drug and delivery space. Our services include protocol consultation and solutions for preclinical study design and execution. Currently, we have more than 60 biologics and drug delivery customers who are evaluating using our products and services in trials to inject gene and cell therapies directly into the brain. These partnerships involve drug development programs that are at various stages of development ranging from preclinical research to late-stage regulatory trials for multiple distinct disease states. This part of our business potentially represents the largest opportunity for growth; however, our ability to grow in this market is dependent on our ability to maintain and establish new relationships with customers, such customers' continuation of research and development plans, and such customers achieving success in completion of clinical trials and subsequent regulatory approvals of their drugs and biologics.

2024 Developments

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Activated 25 new global centers for the year, reflecting an increase in demand driven by new product offerings, including the PRISM Laser Therapy System and SmartFrame OR.

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Completed a follow-on public offering of common stock, resulting in net proceeds of approximately $16.2 million, and entered into an At-the-Market (“ATM”) Equity Offering Sales Agreement (the "ATM Agreement") pursuant to which we may offer and sell, from time to time, shares of our common stock, having aggregate sales proceeds of up to $50 million.

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Repaid prior to maturity all remaining principal and interest on secured convertible notes issued in 2020, resulting in no outstanding debt at December 31, 2024.

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Reduced cash used in operating activities to $9.0 million in 2024, a 35% year-over-year decrease.

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Several of our partners advanced through preclinical and clinical review, with seven pharmaceutical partners receiving expedited US FDA review designations.

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Received the following regulatory approvals:

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US FDA 510(k) clearance for SmartFrame OR Stereotactic System to support expansion into the operating room;

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Taiwan Food and Drug Administration approval of SmartFlow cannula for commercial use in Taiwan; and

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US FDA De Novo marketing authorization of the SmartFlow Neuro Cannula for intraputaminal administration of eladocagene exuparvovec-tneq for the treatment of adult and pediatric patients with AADC deficiency, representing the first-ever FDA marketing authorization of a device used to deliver gene therapy directly to regions of interest in the brain.

Factors Which May Influence Future Results of Operations

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

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Macroeconomic Trends

We continue to monitor the impacts of various macroeconomic trends, such as inflationary pressure, changes in monetary policy, decreasing consumer confidence and spending, the introduction of or changes in tariffs or trade barriers, and global or local recession. Such changes in domestic and global macroeconomic conditions may lead to increased costs for our business. Additionally, these macroeconomic trends could adversely affect our customers, which could impact their willingness to spend on our products and services, or their ability to make payments, which could harm our collection of accounts receivable and financial results. The world’s financial markets remain susceptible to significant stresses, resulting in reductions in available credit and government spending, economic downturn or stagnation, foreign currency fluctuations and volatility in the valuations of securities generally. As a result, our ability to access capital markets and other funding sources in the future may not be available on commercially reasonable terms, if at all. The rapid development and fluidity of these situations precludes any prediction as to the ultimate impact they will have on our business, financial condition, results of operation and cash flows, which will depend largely on future developments.

Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. for general neurosurgical procedures; in February 2011 and May 2018, we also obtained CE marking for our ClearPoint system and SmartFlow cannula, respectively; and in June 2020 we obtained CE marking for version 2.0 of our ClearPoint software and our Inflexion head fixation frame. In January 2021, we received 510(k) clearance for the SmartFrame Array Neuro Navigation System. In September 2022, the ClearPoint Prism Neuro Laser Therapy System, for which we have exclusive global right to commercialize, received 510(k) clearance through our Swedish partner, CLS. The Prism laser represents the first therapy product we have commercialized. In January 2024, we received 510(k) clearance from the FDA for the SmartFrame OR Stereotactic System.

In 2021, we started providing consulting services to our pharmaceutical and other medical technology customers for improving outcome predictability and optimizing preclinical and clinical workflows. Our expertise is concentrated in benchtop testing, preclinical studies, clinical trial support, regulatory consultation, and over-arching translation from the preclinical to the clinical setting to enhance accuracy and precision of drug delivery.

Future revenue from sales of our ClearPoint platform products and services is difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses.

Generating recurring revenue from the sale of products remains an important part of our business model for our ClearPoint system. Our product revenue was approximately $18.6 million and $10.6 million for the years ended December 31, 2024 and 2023, respectively, and was almost entirely related to our ClearPoint system. Our service revenue was approximately $12.8 million and $13.4 million for the years ended December 31, 2024 and 2023, respectively, of which 92% and 86%, respectively, related to the biologics and drug delivery service line.

Our revenue recognition policies are more fully described in Note 2 to the consolidated financial statements elsewhere in this Annual Report.

Underlying the revenue from sales of products and services to our biologics and drug delivery customers is the number of direct customers and end users of our products and/or services (“Partners”). Our Partners consist of pharmaceutical and biotech companies, academic institutions, or customer-sponsored contract research organizations that are developing methods to deliver a wide variety of molecules, genes or proteins to targeted brain tissue or structures that would need to bypass the blood-brain barrier for the treatment of a variety of disorders. This is a novel area in which commercialization must be preceded by FDA-mandated clinical trials, which are expensive and time consuming to conduct, and for which commercial success is uncertain, pending, in part, on the outcome of those trials. While our revenue from sales of products and services to our biologics and drug delivery customers is indicative of growth, the number of Partner relationships is also of importance as we recognize the possibility that some Partners’ research will reach commercial success, and others may not. To the extent our Partners achieve commercial success, our expectation is that we will share in such success through our Partners’ use of our products and services in their delivery of therapies. At December 31, 2024, we had more than 60 Partners, as compared to over 50 Partners as of the same date in 2023.

Cost of Revenue

Cost of revenue includes the direct costs associated with the assembly and purchase of components for neurosurgery navigation products, biologics and drug delivery products, non-neurosurgery therapy products, and ClearPoint capital equipment that we have sold, and for which we have recognized revenue in accordance with our revenue recognition policy, as well as labor hours for the cost of providing preclinical, consulting, and service revenue. Cost of revenue 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.

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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, cannulas, and enhancements. Such costs include salaries, travel, and benefits for research and development personnel; materials and laboratory supplies in research and development activities; outside 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) develop devices and services for delivery of therapeutics into the central nervous system, (ii) expand products into the OR and therapeutics space, and (iii) expand the application of our technological platforms internationally.

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 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 outside attorneys and 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, information technology and meeting costs.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments are discussed below. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

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

Revenue Recognition. Revenue is recognized when control of our products and services are transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services, in a process that involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations have been satisfied.

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We evaluate each product or service promised in a contract to determine whether it represents a distinct performance obligation. 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. When a contract calls for the satisfaction of multiple performance obligations for a single contract price, we typically allocate the contract price among the performance obligations based on the relative stand-alone selling prices for each such performance obligation customarily charged by us.

We consider a performance obligation satisfied once we have 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. Product revenue is generally recognized at a point in time, generally upon shipment, however, it may be recognized upon delivery based on the contractual terms with certain customers. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method used to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of control to the customer, we may use output methods, such as time elapsed, or input methods, such as labor hours expended or costs incurred, to measure our progress toward complete satisfaction of the performance obligation. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control.

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Under certain agreements, we are entitled to receive event-based payments subject to our customer's achievement of specified development and regulatory milestones. Variable consideration is included in the transaction price if, in our judgment, it is probable that these milestones will be achieved and a significant future reversal of cumulative revenue under the contract will not occur. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary adjust our estimate of the overall transaction price. The probability assessment is largely based on communications with our customers and historical, current, and forecasted information that is reasonably available. A revenue reversal is possible if it is determined that achievement of a milestone which was previously deemed probable, will not occur.

Inventory. Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly to our neurosurgical products, drug delivery and biologic products, therapy products and ClearPoint capital equipment. Software license inventory related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying consolidated balance sheets. All other software license inventory is classified as a non-current asset. We periodically review our inventory for excess and obsolete items and provide a reserve upon giving consideration to factors such as its physical condition, sales patterns, and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete, or damaged inventory. These estimates could vary from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Share-Based Compensation. We account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments (such as restricted stock and options) based on fair value. The fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period. In the case of stock options, the fair value is estimated on the grant dates using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected stock volatility, estimated award terms and risk-free interest rates for the expected terms. To estimate the expected terms, we utilize the simplified method for “plain vanilla” options discussed in the SEC’s Staff Accounting Bulletin 107, or SAB 107. We believe that all factors listed within SAB 107 as prerequisites for utilizing the simplified method apply to us and to our share-based compensation arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available. Expected volatility is based on historical volatility of our common stock. We utilize risk-free interest rates based on U.S. treasury instruments, the term of which is consistent with the expected term of the share-based award. We have not paid, and do not anticipate paying, cash dividends on shares of our common stock; therefore, the expected dividend yield is assumed to be zero. We do not believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to determine share-based compensation expense.

Results of Operations

Comparison of the Year Ended December 31, 2024 to the Year Ended December 31, 2023

NM - The percentage change is not meaningful.

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Revenue. Total revenue was approximately $31.4 million and $24.0 million for the years ended December 31, 2024 and 2023, respectively.

Biologics and drug delivery revenue, which include sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products, increased 27% to $17.3 million for the year ended December 31, 2024, from $13.6 million for the same period in 2023. This increase is attributable to a $3.5 million increase in product revenue resulting from higher demand for disposables as multiple partners progress in their trials, and a $0.3 million increase in service and other revenue related to new preclinical trials and service agreements entered into with our partners for the year ended December 31, 2024, compared to the same period in 2023.

Neurosurgery navigation and therapy revenue, which primarily consists of disposable product commercial sales related to cases utilizing the ClearPoint system, increased 21% to $10.3 million during the year ended December 31, 2024, from $8.5 million for the same period in 2023. Product revenue increased $2.7 million, or 36%, resulting from newly activated accounts, increased case count, and new product offerings, including SmartFrame OR and Prism Laser Therapy, compared to the same period in 2023. This was partially offset by a decrease in service and other revenue of $0.9 million primarily as a result of pausing a co-development program with one of our Brain Computer Interface partners.

Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software and related services, increased 107% to $3.8 million for the year ended December 31, 2024, from $1.8 million for the same period in 2023, due to an increase in the placements of ClearPoint navigation capital equipment and software and Prism laser units.

Cost of Revenue and Gross Profit. Cost of revenue was $12.3 million, resulting in gross profit of $19.1 million and gross margin of 61%, for the year ended December 31, 2024, compared to $10.3 million, resulting in gross profit of $13.6 million and gross margin of 57% for the year ended December 31, 2023. The increase in gross margin was primarily due to lower costs for the year ended December 31, 2024 due to the transition to the new manufacturing facility, occurring in 2023, and higher volumes for the year ended December 31, 2024.

Research and Development Costs. Research and development costs were $12.4 million for the year ended December 31, 2024, compared to $11.7 million for the same period in 2023, an increase of $0.7 million, or 6%. The increase was due primarily to increases in personnel costs, including share-based compensation expense, of $1.2 million due to growth in headcount, partially offset by a decrease of $0.5 million in research costs as a result of reprioritization of certain initiatives.

Sales and Marketing Expenses. Sales and marketing expenses were $14.5 million for the year ended December 31, 2024, compared to $12.6 million for the same period in 2023, an increase of $1.9 million, or 15%. This increase was primarily due to higher personnel costs, including share-based compensation expense, of $1.6 million resulting from increases in headcount in our clinical team, increases in travel expense of $0.4 million, partially offset by $0.1 million in other marketing activities.

General and Administrative Expenses. General and administrative expenses were $12.0 million for the year ended December 31, 2024, compared to $11.8 million for the same period in 2023, an increase of $0.2 million, or 2%. This increase was due primarily to higher personnel costs, including share-based compensation of $1.2 million, an increase in rent and occupancy costs as a result of the new Carlsbad site of $0.5 million, partially offset by a decrease in the allowance for credit losses of $1.5 million mainly as a result of subsequent recoveries.

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Interest Income (Expense). Net interest income for the year ended December 31, 2024 was $0.9 million, compared with $0.4 million for the same period in 2023, as a result of increased investment in U.S. Government debt securities stemming from the capital raise in March 2024 as well as lower interest expense due to the early repayment of the First Closing Note.

Liquidity and Capital Resources

We have incurred net losses since our inception, which has resulted in a cumulative deficit at December 31, 2024 of $191.4 million. In addition, our use of cash from operations amounted to $9.0 million for the year ended December 31, 2024. Since inception, we have financed our operations principally from the sale of equity securities and the issuance of notes payable.

In March 2024, we completed a public offering of 2,653,848 shares of our common stock from which the net proceeds totaled approximately $16.2 million after deducting our payment of underwriting discounts and commissions and other offering expenses. In November 2024, we entered into an ATM Agreement pursuant to which we may offer and sell, from time to time, shares of our common stock, having aggregate sales proceeds of up to $50 million, subject to the terms and conditions of the ATM Agreement. As of December 31, 2024, we did not issue any shares of common stock under the ATM Agreement.

In August 2024, we repaid in full the remaining $10 million outstanding under the secured convertible notes issued in 2020 to two investors raising gross proceeds of $25 million, of which $15 million had been previously converted to common stock.

Additional information with respect to the public offerings and 2020 secured convertible notes is in Note 9 and 7, respectively, to the consolidated financial statements included elsewhere in this Annual Report.

As a result of these transactions and our business operations, our cash and cash equivalents totaled $20.1 million at December 31, 2024. In management’s opinion, based on our current forecasts for revenue, expense and cash flows, our existing cash and cash equivalent balances at December 31, 2024, are sufficient to support our operations and meet our obligations for at least the next twelve months.

We may offer and sell additional equity or issue additional notes payable to raise funds for working capital, capital expenditures, or other general corporate purposes. Our primary uses of cash and operating expenses relate to paying employees and consultants, marketing our products, and supporting our research and development of future product offerings. Our short- and long-term liquidity requirements include the following obligations:

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We have lease arrangements related to our office and manufacturing facilities under non-cancellable operating leases. See Note 8 to the consolidated financial statements included elsewhere in this Annual Report.

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We typically enter into short-term agreements with vendors and suppliers of goods and services in the normal course of business through purchase orders, which are settled in cash upon our receipt of such goods or services. We may also at times enter into long-term commitments or license and collaboration agreements which require commitments that are noncancellable. The total amount as of December 31, 2024 for unfulfilled purchase orders and long-term purchase commitments is $5.4 million, of which approximately 28% is expected to be paid in 2025.

Cash Flows

Cash activity for the years ended December 31, 2024 and 2023 is summarized as follows:

Net Cash Flows from Operating Activities. Net cash flows used in operating activities for the year ended December 31, 2024 were $9.0 million, a decrease of $4.8 million from the year ended December 31, 2023. This decrease was due to a lower net loss of $3.2 million, and a net decrease in operating assets and liabilities of $1.8 million, partially offset by a net decrease in non-cash items of $0.2 million. The change in operating assets and liabilities is primarily due to higher accounts payable and accrued liabilities, partially offset by lower deferred revenue. The change in the non-cash items results primarily from recoveries in the allowance for credit losses, partially offset by higher share-based compensation expense.

Net Cash Flows from Investing Activities. Net cash flows provided by investing activities in 2024 were $0.3 million and related to equipment acquisitions.

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Net cash flows provided by investing activities in 2023 were $8.9 million and consisted of proceeds from the maturities of short-term investments, partially offset by equipment acquisitions related to our new manufacturing site in Carlsbad, California, and acquisition of licensing rights.

Net Cash Flows from Financing Activities. Net cash provided by financing activities in 2024 consisted of proceeds, net of offering costs, of $16.2 million received from the public offering of our common stock and $0.4 million in proceeds from the issuance of common stock under the employee stock purchase plan. This is partially offset by the repayment of the remaining $10 million outstanding under the secured convertible notes issued in 2020 and payments of $0.4 million for taxes related to shares withheld in connection with vesting of restricted stock awards.

Net cash provided by financing activities in 2023 consisted of proceeds of $0.5 million from the issuance of common stock under the employee stock purchase plan, partially offset by payments of $0.2 million for taxes related to shares withheld in connection with vesting of restricted stock awards.

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 products and services and pursue additional applications for our technology platforms. Our cash balances are primarily held in a variety of demand accounts with a view to liquidity and capital preservation.

Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to successfully commercialize our products and pursue additional applications for our technology platforms. Our future capital requirements will depend on many factors, including, but not limited to, the following:

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the ultimate duration and impact of macroeconomic trends, including inflationary pressures, changes in monetary policy, decreasing consumer confidence and spending, the introduction of or changes in tariffs or trade barriers, global or local recession, and geopolitical instability;

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the timing of broader market acceptance and adoption of our products;

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the scope, rate of progress and cost of our ongoing product development activities relating to our products;

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the ability of our Partners to achieve commercial success, including their use of our products and services in their preclinical studies, clinical trials and delivery of therapies;

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the cost and timing of expanding our sales, clinical support, marketing and distribution capabilities, and other corporate infrastructure;

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the cost and timing of establishing inventories at levels sufficient to support our sales;

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the effect of competing technological and market developments;

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the cost of pursuing additional applications of our technology platforms under current collaborative arrangements, and the terms and timing of any future collaborative, licensing or other arrangements that we may establish;

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the cost and timing of any clinical trials;

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the cost and timing of regulatory filings, clearances and approvals; and

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the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

We are a commercial-stage medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain. We have deployed significant resources to fund our efforts to develop the foundational capabilities for enabling MRI-guided interventions, building an intellectual property portfolio, and identifying and building out commercial applications for the technologies developed by our company.

The first foundational part of our business is a medical device company providing medical devices for neurosurgery applications. Our primary medical device product, the ClearPoint system, is an integrated system comprised of hardware components, disposable components, and intuitive, menu-driven software, which is in commercial use globally. The primary applications for the ClearPoint system are to target and guide the insertion of deep brain stimulation electrodes, biopsy needles, and laser catheters, as well as the infusion of pharmaceuticals into the brain. The ClearPoint system was originally designed for use in an MRI setting. In 2021, we launched the SmartFrame Array Neuro Navigation System and Software, which allows for operating room placement of the ClearPoint system, and in 2024, we commenced limited market release of the SmartFrame OR Stereotactic System, which allows for complete procedures to be performed

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in the operating room. In 2022, we commercialized the ClearPoint Prism Neuro Laser Therapy System as our first therapy product offering. We have exclusive global commercialization rights to the ClearPoint Prism Neuro Laser Therapy System through our Swedish partner, CLS.

The second part of our business is focused on partnerships in the biologics drug and delivery space. Our services include protocol consultation and solutions for preclinical study design and execution. Currently, we have more than 50 biologics and drug delivery customers who are evaluating using our products and services in trials to inject gene and cell therapies directly into the brain. These partnerships involve drug development programs that are at various stages of development ranging from preclinical research to late-stage regulatory trials for multiple distinct disease states. This part of our business potentially represents the largest opportunity for growth; however, our ability to grow in this market is dependent on our ability to maintain and establish new relationships with customers, such customers' continuation of research and development plans, and such customers achieving success in completion of clinical trials and subsequent regulatory approvals of their drugs and biologics.

2023 Developments

•We entered into multiple multi-year agreements with pharmaceutical partners to partner on drug delivery platforms for gene therapy, earning success-based milestones based on the successful progression of a drug candidate through the clinical and regulatory process.

•We further expanded our worldwide license and research agreement with Philips to add subnuclei segmentation applied to MRI, and potentially CT scans, for use in the operating room.

•We signed an exclusive multi-year licensing agreement with UCSF to develop and commercialize a radially branching cellular delivery device for use in both the operating room under fluroscopy/CT guidance and under MRI guidance.

•We received FDA clearance for ClearPoint Array Software 1.2 and ClearPoint Neuro Navigation Software 2.2.

•As a result of increased investment in the biologics and drug delivery business to add new clinical, development, regulatory, and preclinical contract research organization services, we successfully completed multiple preclinical studies.

•We exited our manufacturing site in Irvine, California, and are fully operational out of our new Carlsbad, California facility.

Factors Which May Influence Future Results of Operations

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

Macroeconomic Trends

We continue to monitor the impacts of various macroeconomic trends, such as global economic and supply chain disruptions, geopolitical instability (including instability resulting from military conflicts), labor shortages, instability of financial institutions and inflationary conditions. Changes in domestic and global economic conditions, supply chain disruptions, labor shortages, as well as other stimulus and spending programs, have led to higher inflation, which is likely to lead to increased costs and may cause further changes in fiscal and monetary policy. Impacts from inflationary pressures, such as increasing costs for research and development of our products, administrative and other costs of doing business, the potential for instability of the financial institutions where we maintain our deposits or other assets, and our access to capital markets and other sources of funding in the future could adversely affect our business, financial condition and results of operations. Additionally, these trends could adversely affect our customers, which could impact their willingness to spend on our products and services, or their ability to make payments, which could harm our collection of accounts receivable and financial results. The rapid development and fluidity of these situations precludes any prediction as to the ultimate impact they will have on our business, financial condition, results of operation and cash flows, which will depend largely on future developments.

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Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. for general neurosurgical procedures; in February 2011 and May 2018, we also obtained CE marking for our ClearPoint system and SmartFlow cannula, respectively; and in June 2020 we obtained CE marking for version 2.0 of our ClearPoint software and our Inflexion head fixation frame. In January 2021, we received 510(k) clearance for the SmartFrame Array Neuro Navigation System. In September 2022, the ClearPoint Prism Neuro Laser Therapy System, for which we have exclusive global right to commercialize, received 510(k) clearance through our Swedish partner, CLS. The Prism laser represents the first therapy product we have commercialized. In January 2024, we received 510(k) clearance from the FDA for the SmartFrame OR Stereotactic System.

In 2021, we started providing consulting services to our pharmaceutical and other medical technology customers for improving outcome predictability and optimizing preclinical and clinical workflows. Our expertise is concentrated in benchtop testing, preclinical studies, clinical trial support, regulatory consultation, and over-arching translation from the preclinical to the clinical setting to enhance accuracy and precision of drug delivery.

Future revenue from sales of our ClearPoint platform products and services is difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses.

Generating recurring revenue from the sale of products remains an important part of our business model for our ClearPoint system. Our product revenue was approximately $10.6 million and $12.8 million for the years ended December 31, 2023 and 2022, respectively, and was almost entirely related to our ClearPoint system. Our service revenue was approximately $13.4 million and $7.8 million for the years ended December 31, 2023 and 2022, respectively, of which 86% and 70%, respectively, related to the biologics and drug delivery service line.

Our revenue recognition policies are more fully described in Note 2 to the consolidated financial statements elsewhere in this Annual Report.

Underlying the revenue from sales of products and services to our biologics and drug delivery customers is the number of direct customers and end users of our products and/or services (“Partners”). Our Partners consist of pharmaceutical and biotech companies, academic institutions, or customer-sponsored contract research organizations that are developing methods to deliver a wide variety of molecules, genes or proteins to targeted brain tissue or structures that would need to bypass the blood-brain barrier for the treatment of a variety of disorders. This is a novel area in which commercialization must be preceded by FDA-mandated clinical trials, which are expensive and time consuming to conduct, and for which commercial success is uncertain, pending, in part, on the outcome of those trials. While our revenue from sales of products and services to our biologics and drug delivery customers is indicative of growth, the number of Partner relationships is also of importance as we recognize the possibility that some Partners’ research will reach commercial success, and others may not. To the extent our Partners achieve commercial success, our expectation is that we will share in such success through our Partners’ use of our products and services in their delivery of therapies. At December 31, 2023, we had more than 50 Partners, which is similar to the number of Partners as of the same date in 2022.

Cost of Revenue

Cost of revenue includes the direct costs associated with the assembly and purchase of components for functional neurosurgery navigation products, biologics and drug delivery products, non-neurosurgery therapy products, and ClearPoint capital equipment that we have sold, and for which we have recognized revenue in accordance with our revenue recognition policy, as well as labor hours for the cost of providing preclinical, consulting, and service revenue. Cost of revenue 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 and enhancements. Such costs include salaries, travel, and benefits for research and development personnel; materials and laboratory supplies in research and development activities; outside 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) develop devices and services for delivery of therapeutics into

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the central nervous system, (ii) expand products into the OR and therapeutics space, and (iii) expand the application of our technological platforms internationally.

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 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 outside attorneys and 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, information technology and meeting costs.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments are discussed below. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

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

Revenue Recognition. Revenue is recognized when control of our products and services are transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services, in a process that involves identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the distinct performance obligations in the contract, and recognizing revenue when or as the performance obligations have been satisfied.

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We evaluate each product or service promised in a contract to determine whether it represents a distinct performance obligation. 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. When a contract calls for the satisfaction of multiple performance obligations for a single contract price, we typically allocate the contract price among the performance obligations based on the relative stand-alone selling prices for each such performance obligation customarily charged by us.

We consider a performance obligation satisfied once we have 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. Product revenue is generally recognized at a point in time, generally upon shipment, however, it may be recognized upon delivery based on the contractual terms with certain customers. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method used to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Depending on which better depicts the transfer of control to the customer, we may use output methods, such as time elapsed, or input methods, such as labor hours expended or costs incurred, to measure our progress toward complete satisfaction of the performance obligation. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control.

Under certain agreements, we are entitled to receive event-based payments subject to our customer's achievement of specified development and regulatory milestones. Variable consideration is included in the transaction price if, in our

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judgment, it is probable that these milestones will be achieved and a significant future reversal of cumulative revenue under the contract will not occur. At the end of each reporting period, we re-evaluate the probability of achievement of such milestones, and if necessary adjust our estimate of the overall transaction price. The probability assessment is largely based on communications with our customers and historical, current, and forecasted information that is reasonably available. A revenue reversal is possible if it is determined that achievement of a milestone which was previously deemed probable, will not occur.

Inventory. Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly to our functional neurosurgical products, drug delivery and biologic products, therapy products and ClearPoint capital equipment. Software license inventory related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying consolidated balance sheets. All other software license inventory is classified as a non-current asset. We periodically review our inventory for excess and obsolete items and provide a reserve upon giving consideration to factors such as its physical condition, sales patterns, and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete, or damaged inventory. These estimates could vary from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Share-Based Compensation. We account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments (including options) based on fair value. The fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period. The fair values of our share-based awards are estimated on the grant dates using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected stock volatility, estimated award terms and risk-free interest rates for the expected terms. To estimate the expected terms, we utilize the simplified method for “plain vanilla” options discussed in the SEC’s Staff Accounting Bulletin 107, or SAB 107. We believe that all factors listed within SAB 107 as prerequisites for utilizing the simplified method apply to us and to our share-based compensation arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available. Expected volatility is based on historical volatility of our common stock. We utilize risk-free interest rates based on U.S. treasury instruments, the term of which is consistent with the expected term of the share-based award. We have not paid, and do not anticipate paying, cash dividends on shares of our common stock; therefore, the expected dividend yield is assumed to be zero. We do not believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to determine share-based compensation expense.

Results of Operations

Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022

NM - The percentage change is not meaningful.

Revenue. Total revenue was approximately $24.0 million and $20.6 million for the years ended December 31, 2023 and 2022, respectively.

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Biologics and drug delivery revenue, which include sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products, increased 49% to $13.6 million for the year ended December 31, 2023, from $9.1 million for the same period in 2022. This increase is attributable to a $6.0 million increase in service revenue related to new preclinical studies and services entered into with our partners for the year ended December 31, 2023, compared to the same period in 2022, partially offset by a $1.5 million decrease in product revenue.

Functional neurosurgery navigation and therapy revenue, which primarily consists of disposable product commercial sales related to cases utilizing the ClearPoint system, decreased 7% to $8.5 million during the year ended December 31, 2023, from $9.1 million for the same period in 2022. The decrease is driven by lower service revenue of $0.6 million as a result of pausing a co-development program with one of our Brain Computer Interface partners for the year ended December 31, 2023, compared to the same period in 2022.

Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software and related services, decreased 21% to $1.8 million for the year ended December 31, 2023, from $2.3 million for the same period in 2022, due primarily to a decrease in the placements of ClearPoint capital and software.

Cost of Revenue and Gross Profit. Cost of revenue was $10.3 million, resulting in gross profit of $13.6 million and gross margin of 57%, for the year ended December 31, 2023, compared to $7.0 million, resulting in gross profit of $13.5 million and gross margin of 66% for the year ended December 31, 2022. This 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 in prior years, as we launch new services and increase our presence in this space. Increased costs related to the transition to the new manufacturing facility also contributed to the decrease in gross margin compared to the prior year.

Research and Development Costs. Research and development costs were $11.7 million for the year ended December 31, 2023, compared to $10.9 million for the same period in 2022, an increase of $0.8 million, or 7%. The increase was due primarily to increases in personnel costs, including share-based compensation expense, of $1.2 million due to growth in headcount, partially offset by a decrease of $0.6 million in research costs as a result of reprioritization of certain initiatives.

Sales and Marketing Expenses. Sales and marketing expenses were $12.6 million for the year ended December 31, 2023, compared to $9.4 million for the same period in 2022, an increase of $3.2 million, or 35%. This increase was primarily due to increases in personnel costs, including share-based compensation expense, of $3.0 million resulting from increases in headcount in our clinical and marketing teams, and increases in travel expense of $0.2 million.

General and Administrative Expenses. General and administrative expenses were $11.8 million for the year ended December 31, 2023, compared to $9.6 million for the same period in 2022, an increase of $2.1 million, or 22%. This increase was due primarily to an increase in the allowance for credit losses of $1.4 million and increased share-based compensation of $0.8 million.

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Interest Expense. Net interest income for the year ended December 31, 2023 was $0.4 million, compared with $0.1 million in net interest expense for the same period in 2022. The increase in interest income was due to higher interest rates and our investment in U.S. Government debt securities, offset partially by the higher amount of interest paid on the 2020 Secured Convertible Note, for the year ended December 31, 2023, compared to the same period in 2022. Additional information with respect to the 2020 Secured Convertible Note is in Note 7 to the consolidated financial statements included elsewhere in this Annual Report.

Liquidity and Capital Resources

We have incurred net losses since our inception, which has resulted in a cumulative deficit at December 31, 2023 of approximately $172 million. In addition, our use of cash from operations amounted to $13.7 million for the year ended December 31, 2023. Since inception, we have financed our operations principally from the sale of equity securities and the issuance of notes payable. In 2021, we completed a public offering of 2,127,660 shares of our common stock from which the net proceeds totaled approximately $46.8 million. In 2020, we issued secured convertible notes to two investors which raised gross proceeds of $25 million, of which $15 million has been converted to common stock and $10 million remains outstanding.

Additional information with respect to the 2020 Secured Notes is in Note 7 to the consolidated financial statements included elsewhere in this Annual Report.

As a result of these transactions and our business operations, our cash and cash equivalents totaled $23.1 million at December 31, 2023.

As discussed in Note 11 to the consolidated financial statements included elsewhere in this Annual Report, on March 4, 2024 we completed a public offering of 2,307,694 shares of our common stock. Net proceeds from the offering were approximately $14.0 million after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us.

In management’s opinion, based on our current forecasts for revenue, expense and cash flows, our existing cash and cash equivalent balances at December 31, 2023, are sufficient to support our operations and meet our obligations for at least the next twelve months.

We may, in the future, offer and sell additional equity or issue additional notes payable to raise funds for working capital, capital expenditures, or other general corporate purposes. Our primary uses of cash and operating expenses relate to paying employees and consultants, marketing our products, and supporting our research and development of future product offerings. Our short- and long-term liquidity requirements include the following obligations:

•We have a $10 million secured convertible note payable due in January 2025. Future interest payments associated with the note are variable based on the greater of (i) three (3)-month Secured Overnight Financing Rate (“SOFR”) or (ii) 2%, plus a margin of 2%. At current interest rates, we expect the interest expense for the next 12 months to be approximately $0.8 million.

•We have lease arrangements related to our office and manufacturing facilities under non-cancellable operating leases. See Note 8 to the consolidated financial statements included elsewhere in this Annual Report.

•We typically enter into short-term agreements with vendors and suppliers of goods and services in the normal course of business through purchase orders, which are settled in cash upon delivery of such goods or services. We may also at times enter into long-term commitments or license and collaboration agreements which require commitments that are noncancellable. The total amount as of December 31, 2023 for unfulfilled purchase orders and long-term purchase commitments is $3.0 million, of which approximately 40% is expected to be paid in 2024.

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Cash Flows

Cash activity for the years ended December 31, 2023 and 2022 is summarized as follows:

Net Cash Flows from Operating Activities. Net cash flows used in operating activities for the year ended December 31, 2023 were $13.7 million, a decrease of $2.4 million from the year ended December 31, 2022. This decrease consisted of a net decrease in operating assets and liabilities of $3.9 million, and a net increase in non-cash items of $4.2 million, partially offset by an increase in net loss of $5.7 million. The change in operating assets and liabilities is primarily due to lower inventory purchases in 2023, following a ramping up of inventory stock in previous years in response to supply chain disruptions, which were partially offset by increased use of cash in 2023 to pay down accounts payables and accrued expenses. The change in the non-cash items results primarily from increases in share-based compensation and allowance for credit losses.

Net Cash Flows from Investing Activities. Net cash flows provided by investing activities in 2023 were $8.9 million and consisted of proceeds from the maturities of short-term investments, partially offset by equipment acquisitions related to our new manufacturing site in Carlsbad, California, and acquisition of licensing rights.

Net cash flows used in investing activities in 2022 were $10.7 million and consisted primarily of the purchase and maturities of short-term investments and acquisition of equipment licensing rights.

Net Cash Flows from Financing Activities. Net cash provided by financing activities in 2023 consisted of proceeds of $0.5 million from the issuance of common stock under the employee stock purchase plan, partially offset by payments of $0.2 million for taxes related to shares withheld in connection with vesting of restricted stock awards.

Net cash provided by financing activities in 2022 consisted of proceeds of $0.7 million from the exercise of common stock options and warrants and purchases made under the employee stock purchase plan, partially offset by payments of $0.3 million for taxes related to shares withheld in connection with vesting of restricted stock awards.

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 products and services and pursue additional applications for our technology platforms. Our cash balances are primarily held in a variety of demand accounts with a view to liquidity and capital preservation.

Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to successfully commercialize our products and pursue additional applications for our technology platforms. Our future capital requirements will depend on many factors, including, but not limited to, the following:

•the ultimate duration and impact of macroeconomic trends, including inflationary pressures, supply chain disruptions, geopolitical instability (including military conflicts), and instability of financial institutions;

•the timing of broader market acceptance and adoption of our products;

•the scope, rate of progress and cost of our ongoing product development activities relating to our products;

•the ability of our Partners to achieve commercial success, including their use of our products and services in their preclinical studies, clinical trials and delivery of therapies;

•the cost and timing of expanding our sales, clinical support, marketing and distribution capabilities, and other corporate infrastructure;

•the cost and timing of establishing inventories at levels sufficient to support our sales;

•the effect of competing technological and market developments;

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•the cost of pursuing additional applications of our technology platforms under current collaborative arrangements, and the terms and timing of any future collaborative, licensing or other arrangements that we may establish;

•the cost and timing of any clinical trials;

•the cost and timing of regulatory filings, clearances and approvals; and

•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

We are a commercial-stage medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain. We have deployed significant resources to fund our efforts to develop the foundational capabilities for enabling MRI-guided interventions, building an intellectual property portfolio, and identifying and building out commercial applications for the technologies developed by our company. Beginning in 2021, our efforts expanded beyond the MRI suite to encompass development and commercialization of new neurosurgical device products for the operating room, as well as clinical and pre-clinical consulting services for pharmaceutical and biotech companies, academic institutions, and contract research organizations.

Since 2020, we have evolved to become a company comprised of two parts. The first foundational part is a medical device company providing medical devices for neurosurgery applications. The second part is focused on partnerships in the drug and delivery space. Currently, we have more than 50 partners who are pharmaceutical/biotech companies, academic institutions, and contract research organizations, who are evaluating or using our products and services in trials to inject gene and cell therapies directly into the brain.

Our ClearPoint system is in commercial use in the U.S., the EU, and the United Kingdom. The primary applications for the ClearPoint system are to target and guide the insertion of deep brain stimulation electrodes, biopsy needles, and laser catheters, as well as the infusion of pharmaceuticals into the brain. The ClearPoint system was originally designed for use in an MRI setting. In 2021, we launched the SmartFrame Array Neuro Navigation System and Software, which allows for operating room placement of the ClearPoint system.

2022 Developments

•We commenced the limited market commercialization of the ClearPoint Prism Neuro Laser Therapy System. The laser system was developed by CLS, and is indicated for use to necrotize or coagulate soft tissue through interstitial irradiation or thermal therapy under 3.0T magnetic resonance imaging (MRI) guidance. We have exclusive global rights to commercialize the CLS magnetic resonance (MR) guided laser interstitial thermal therapy (MRgLITT) system for neuro applications.

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•Our customer PTC Therapeutics’ gene therapy treatment Upstaza™ was granted full marketing authorization by the European Commission which is the first approved disease-modifying treatment for AADC deficiency and the first marketed gene therapy approved for direct infusion into the brain, using the ClearPoint SmartFlow Cannula.

•We received FDA clearance for version 2.1 of our ClearPoint Neuro Navigation software, which is intended to provide sterotactic guidance for the placement and operation of instruments or devices during planning and operation of neurological procedures within the MRI environment and in conjunction with MR imaging.

•We received FDA clearance for the ClearPoint Maestro Brain Model, which is intended for automatic labeling, visualization, volumetric and share quantification of segmentable brain structures from a set of MRI images.

•We entered into a lease agreement to lease an approximately 19,462 square foot industrial building in Carlsbad, California to use as an office and manufacturing facility. The lease term will commence on June 1, 2023 and end on May 31, 2033.

Factors Which May Influence Future Results of Operations

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

Macroeconomic Trends

We continue to monitor the impact of various macroeconomic trends, such as global economic and supply chain disruptions, geopolitical instability, labor shortages and inflationary conditions, and the continuing impacts of the COVID-19 pandemic. Changes in domestic and global economic conditions, supply chain disruptions, labor shortages, as well as other stimulus and spending programs, have led to higher inflation, which is likely to lead to increased costs and may cause changes in fiscal and monetary policy. Impacts from inflationary pressures, such as increasing costs for research and development of our products, administrative and other costs of doing business, and our availability to access capital markets and other sources of funding in the future could adversely affect our business, financial condition and results of operations. Additionally, these trends could adversely affect our customers, which could impact their willingness to spend on our products and services. The rapid development and fluidity of these situations precludes any prediction as to the ultimate impact they will have on our business, financial condition, results of operation and cash flows, which will depend largely on future developments.

Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. for general neurosurgical procedures; in February 2011 and May 2018, we also obtained CE marking for our ClearPoint system and SmartFlow cannula, respectively; and in June 2020 we obtained CE marking for version 2.0 of our ClearPoint software and our Inflexion head fixation frame. In January 2021, we received 510(k) clearance for the SmartFrame Array Neuro Navigation System. In September 2022, the ClearPoint Prism Neuro Laser Therapy System, for which we have exclusive global right to commercialize, received 510(k) clearance through our Swedish partner, CLS. The Prism laser represents the first therapy product we will commercialize. Future revenue from sales of our ClearPoint platform products and services is difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses.

Generating recurring revenue from the sale of products is an important part of our business model for our ClearPoint system. Our product revenue was approximately $12.8 million and $11.9 million for the years ended December 31, 2022 and 2021, respectively, and was almost entirely related to our ClearPoint system. Our service revenue was approximately $7.8 million and $4.4 million for the years ended December 31, 2022 and 2021, respectively, of which 70% and 78%, respectively, related to the biologics and drug delivery service line.

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

Underlying the revenue from sales of products and services to our biologics and drug delivery customers is the number of direct customers and end users of our products and/or services (“Partners”). Our Partners consist of pharmaceutical and biotech companies, academic institutions, or customer-sponsored contract research organizations that

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are developing methods to deliver a wide variety of molecules, genes or proteins to targeted brain tissue or structures that would need to bypass the blood-brain barrier for the treatment of a variety of disorders. This is a novel area in which commercialization must be preceded by FDA-mandated clinical trials, which are expensive and time consuming to conduct, and for which commercial success is uncertain, pending, in part, on the outcome of those trials. While our revenue from sales of products and services to our biologics and drug delivery customers is indicative of growth, the number of Partner relationships is also of importance as we recognize the possibility that some Partners’ research will reach commercial success, and others may not. To the extent our Partners achieve commercial success, our expectation is that we will share in such success through our Partners’ use of our products and services in their delivery of therapies. At December 31, 2022, we had more than 50 Partners, as compared with approximately 40 Partners as of the same date in 2021.

Cost of Revenue

Cost of revenue includes the direct costs associated with the assembly and purchase of components for functional neurosurgery navigation products, biologics and drug delivery products, non-neurosurgery therapy products, and ClearPoint capital equipment that we have sold, and for which we have recognized revenue in accordance with our revenue recognition policy, as well as labor hours for the cost of providing consulting, and service revenue. Cost of revenue 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 and enhancements. 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; outside 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 and SmartFlow cannula; and (ii) seek to expand the application of our technological platforms. From our inception through December 31, 2022, we have incurred approximately $81 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 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 outside 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, information technology 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 Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments are discussed below. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

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

Revenue Recognition. Our revenue is comprised primarily of: (1) product revenue resulting from the sale of functional neurosurgery, navigation, therapy, and biologics and drug delivery disposable products; (2) product revenue resulting from the sale of ClearPoint capital equipment and software; (3) revenue resulting from the service, installation, training, and shipping related to ClearPoint capital equipment and software; (4) consultation revenue and clinical case support revenue in connection with customer-sponsored pre-clinical and clinical trials; and (5) license revenue for the granting of a license to develop and commercialize our SmartFlow Cannula devices with Partners' proprietary biologics as a combination product. We recognize revenue when control of our products and services are transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services, in a process that 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. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We evaluate each product or service promised in a contract to determine whether it represents a distinct performance obligation. 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. When a contract calls for the satisfaction of multiple performance obligations for a single contract price, we typically allocate the contract price among the performance obligations based on the relative stand-alone prices for each such performance obligation customarily charged by us. We consider a performance obligation satisfied once we have 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. Product revenue is generally recognized at a point in time, generally upon shipment, however, may be upon delivery based on the contractual terms of the contract. Service revenue is generally recognized over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The selection of the method used to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control.

Inventory. Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly to our functional neurosurgical products, drug delivery and biologic products, therapy products and ClearPoint capital equipment. Software license inventory related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying consolidated balance sheets. All other software license inventory is classified as a non-current asset. We periodically review our inventory for excess and obsolete items and provide a reserve upon giving consideration to factors such as its physical condition, sales patterns, and expected future demand in order to estimate the amount necessary to write down any slow moving, obsolete, or damaged inventory. These estimates could vary from actual amounts based upon future economic conditions, customer inventory levels, or competitive factors that were not foreseen or did not exist when the estimated write-downs were made.

Share-Based Compensation. We account for compensation for all arrangements under which employees and others receive shares of stock or other equity instruments (including options and warrants) based on fair value. The fair value of each award is estimated as of the grant date and amortized as compensation expense over the requisite vesting period. The fair values of our share-based awards are estimated on the grant dates using the Black-Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the expected stock volatility, estimated award terms and risk-free interest rates for the expected terms. To estimate the expected terms, we utilize the simplified method for “plain vanilla” options discussed in the SEC’s Staff Accounting Bulletin 107, or SAB 107. We believe that all factors listed within SAB 107 as prerequisites for utilizing the simplified method apply to us and to our share-based compensation arrangements. We intend to utilize the simplified method for the foreseeable future until more detailed information about exercise behavior becomes available. Historically, we have based our estimate of expected volatility on the average of our own historical volatility and the historical volatilities of publicly traded companies we deem similar to us because of a lack of our own relevant historical volatility data. In 2022, we refined this methodology to include only the historical volatility of our own common stock given that trading volumes have increased and we believe that our own historical data is representative of future expected volatility and a better estimate of fair value. The impact of this change is not material to the financial statements. We utilize risk-free interest rates based on a zero-coupon U.S. treasury instrument, the term of which is consistent with the expected term of the share-based award. We have not paid, and do not anticipate paying, cash dividends on shares of our common stock; therefore, the expected dividend yield is assumed to be zero. We do not believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to

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determine share-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material.

Results of Operations

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

NM - The percentage change is not meaningful.

Revenue. Total revenue was approximately $20.6 million and $16.3 million for the years ended December 31, 2022 and 2021, respectively.

Functional neurosurgery navigation and therapy revenue, which primarily consists of disposable product commercial sales related to cases utilizing the ClearPoint system, increased 13% to $9.1 million during the year ended December 31, 2022, from $8.1 million for the same period in 2021. This is primarily driven by $1.5 million of service revenue related to development services for the year ended December 31, 2022, compared to $0.4 million for the same period in 2021.

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Biologics and drug delivery revenue, which include sales of disposable products and services related to customer-sponsored pre-clinical and clinical trials utilizing our products, increased 34% to $9.1 million for the year ended December 31, 2022, from $6.8 million for the same period in 2021. This increase is attributable to a $2.0 million increase in service and license revenue and $0.3 million increase in product revenue for the year ended December 31, 2022, due to expanded commitments from our current biologics and drug delivery partners as well as an increase in new partners.

Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software, and of related services, increased 61% to $2.3 million for the year ended December 31, 2022, from $1.4 million for the same period in 2021. This increase is due primarily to an increase in the placements of ClearPoint capital and software.

Cost of Revenue and Gross Profit. Cost of revenue was $7.0 million, resulting in gross profit of $13.5 million and gross margin of 66%, for the year ended December 31, 2022, compared to $5.2 million, resulting in gross profit of $11.1 million and gross margin of 68% for the year ended December 31, 2021. This decrease in gross margin was due primarily to an increase in indirect labor costs in 2022 as compared to 2021, as well an increase in excess and obsolete inventory reserves.

Research and Development Costs. Research and development costs were $10.9 million for the year ended December 31, 2022, compared to $9.3 million for the same period in 2021, an increase of $1.6 million, or 17%. The increase was due primarily to increases in personnel costs, including share-based compensation expense, of $1.4 million due to growth in headcount and $0.1 million increase in regulatory fees.

Sales and Marketing Expenses. Sales and marketing expenses were $9.4 million for the year ended December 31, 2022, compared to $7.2 million for the same period in 2021, an increase of $2.1 million, or 30%. This increase was primarily due to increases in personnel costs, including share-based compensation expense, of $1.5 million resulting from increases in headcount in our clinical and marketing teams, increases in travel expense of $0.3 million, and increases in marketing activities of $0.2 million.

General and Administrative Expenses. General and administrative expenses were $9.6 million for the year ended December 31, 2022, compared to $8.0 million for the same period in 2021, an increase of $1.6 million, or 20%. This increase was due primarily to increases in personnel costs and share-based compensation of $1.5 million, IT costs of $0.3 million, insurance costs of $0.2 million, offset by a decrease in bad debt expense of $0.3 million.

Interest Expense. Net interest expense for the year ended December 31, 2022 was $0.1 million, compared with $1.0 million for the same period in 2021, due to lower interest expense as a result of the conversion of a portion of the 2020 Secured Convertible Notes in May and November 2021. Additional information with respect to the Secured Notes is in Note 7 to the consolidated financial statements included elsewhere in this Annual Report. Interest expense was partially offset by higher interest income in the year ended December 31, 2022, as a result of increasing interest rates and the Company's investment in U.S. Government debt securities.

Liquidity and Capital Resources

We have incurred net losses since our inception, which has resulted in a cumulative deficit at December 31, 2022 of approximately $150 million. In addition, our use of cash from operations amounted to $16.2 million for the year ended December 31, 2022. Since inception, we have financed our operations principally from the sale of equity securities and the issuance of notes payable.

In January 2020, we entered into the Securities Purchase Agreement (the “SPA”) with two investors under which we issued the secured convertibles notes having an aggregate principal amount of $17.5 million, resulting in proceeds, net of financing costs and a commitment fee paid to one of the purchasers, of approximately $16.8 million.

On December 29, 2020, under the terms of an Amendment to the SPA, we issued an additional secured convertible note in the principal amount of $7.5 million. As of December 31, 2022, except for a note in the principal amount of $10 million, the 2020 secured convertible notes were converted to shares of our common stock. The outstanding note is convertible to our common stock at a conversion price of $6.00, subject to adjustments as set forth in the SPA and note agreement prior to its maturity on January 29, 2025.

Additional information with respect to the 2020 Secured Notes is in Note 7 to the consolidated financial statements included elsewhere in this Annual Report.

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As discussed in Note 9 to the consolidated financial statements included elsewhere in this Annual Report, on February 23, 2021, we completed a public offering of 2,127,660 shares of our common stock. Net proceeds from the offering were approximately $46.8 million after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us.

As a result of these transactions and our business operations, our cash, cash equivalents, and short-term investments totaled $37.5 million at December 31, 2022. In management’s opinion, based on our current forecasts for revenue, expense and cash flows, our existing cash and cash equivalent balances and short-term investments at December 31, 2022, are sufficient to support our operations and meet our obligations for at least the next twelve months.

We may, in the future, offer and sell additional equity or issue additional notes payable to raise funds for working capital, capital expenditures, or other general corporate purposes. Our primary uses of cash and operating expenses relate to paying employees and consultants, marketing our products, and research and development of future product offerings. Our short- and long-term liquidity requirements include the following obligations:

•We have a $10 million secured convertible note payable due in January 2025. Future interest payments associated with the note are variable based on the three (3)-month London Interbank Offered Rate (“LIBOR”) plus 2% (the reference to LIBOR will need to be replaced by June 30, 2023). At current interest rates, we expect the interest expense for the next 12 months to be around $0.7 million.

•We have lease arrangements related to our office and manufacturing facilities under non-cancellable operating leases. See Note 8 to the consolidated financial statements included elsewhere in this Annual Report.

•We typically enter into short-term agreements with vendors and suppliers of goods and services in the normal course of business through purchase orders, which are settled in cash upon delivery of such goods or services. We may also at times enter into long-term commitments or license and collaboration agreements which require commitments that are noncancellable. The total amount as of December 31, 2022 for unfulfilled purchase orders and long-term purchase commitments is $5.5 million, of which approximately 60% is expected to be paid in 2023.

Cash Flows

Cash activity for the years ended December 31, 2022 and 2021 is summarized as follows:

Net Cash Flows from Operating Activities. Net cash flows used in operating activities for the year ended December 31, 2022 were $16.2 million, an increase of $3.5 million from the year ended December 31, 2021. This increase consisted of a higher net loss of $2.0 million and the effects of net changes of operating assets and liabilities of $2.6 million, partially offset by a change in non-cash items of $1.2 million. The change in operating assets and liabilities is primarily due to the use of cash for the buildup of inventory stock in response to supply chain disruptions and the change in the non-cash items results from increases in share-based compensation.

Net Cash Flows from Investing Activities. Net cash flows used in investing activities in 2022 were $10.7 million and consisted primarily of the purchase and maturities of short-term investments and acquisition of equipment and licensing rights.

Net cash flows used in investing activities in 2021 were $0.2 million and consisted primarily of equipment acquisitions.

Net Cash Flows from Financing Activities. Net cash provided by financing activities in 2022 consisted of proceeds of $0.7 million from the exercise of common stock options and warrants and purchases made under the employee stock

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purchase plan, partially offset by payments of $0.3 million for taxes related to shares withheld in connection with vesting of restricted stock awards.

Net cash provided by financing activities in 2021 consisted of: (a) the proceeds, net offering costs, of $46.8 million received from the public offering of our common stock; (b) proceeds from the exercise of common stock options and warrants aggregating $0.5 million; and (c) issuance of common stock under the employee stock purchase plan of $0.2 million, which were partially offset by tax payments of $0.6 million related to shares withheld in connection with vesting of restricted stock awards.

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 products and services and pursue additional applications for our technology platforms. Our cash balances are typically held in a variety of demand accounts with a view to liquidity and capital preservation.

Because of the numerous risks and uncertainties associated with the development and commercialization of medical devices, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to successfully commercialize our products and pursue additional applications for our technology platforms. Our future capital requirements will depend on many factors, including, but not limited to, the following:

•the ultimate duration and impact of macroeconomic trends, including the COVID-19 pandemic, inflationary pressures and supply chain disruptions;

•the timing of broader market acceptance and adoption of our products;

•the scope, rate of progress and cost of our ongoing product development activities relating to our products;

•the ability of our Partners to achieve commercial success, including their use of our products and services in their clinical trials and delivery of therapies;

•the cost and timing of expanding our sales, clinical support, marketing and distribution capabilities, and other corporate infrastructure;

•the cost and timing of establishing inventories at levels sufficient to support our sales;

•the effect of competing technological and market developments;

•the cost of pursuing additional applications of our technology platforms under current collaborative arrangements, and the terms and timing of any future collaborative, licensing or other arrangements that we may establish;

•the cost and timing of any clinical trials;

•the cost and timing of regulatory filings, clearances and approvals; and

•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks, assumptions and uncertainties. You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

We are a commercial-stage medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain. We have deployed significant resources to fund our efforts to develop the foundational capabilities for enabling MRI-guided interventions, building an intellectual property portfolio, and identifying and building out commercial applications for the technologies developed by our company. In 2021, our efforts expanded beyond the MRI suite to encompass development and commercialization of new neurosurgical device products for the operating room, as well as consulting services for pharmaceutical companies.

Starting in 2020, ClearPoint Neuro has evolved to become a company comprised of two parts. The first foundational part is a medical device company providing medical devices for neurosurgery applications. The second part is focused on pharmaceutical companies in the biologics and drug delivery space, approximately 40 of whom are either evaluating or using our SmartFlow cannula and, in certain cases, in conjunction with our full ClearPoint Neuro Navigation platform.

Our ClearPoint system is in commercial use in the United States, the EU, and the United Kingdom. The primary applications for the ClearPoint system are to target and guide the insertion of deep brain stimulation electrodes, biopsy needles and laser catheters into the brain. The ClearPoint system was originally designed for use in an MRI setting. In 2021, we launched the SmartFrame Array Neuro Navigation System and Software, which allows for operating room placement of the ClearPoint system.

Our revenue is comprised primarily of: (1) product revenue resulting from the sale of functional neurosurgery, navigation, therapy, and biologics and drug delivery disposable products; (2) product revenue resulting from the sale of ClearPoint capital equipment and software; (3) revenue resulting from the service, installation, training and shipping related to ClearPoint capital equipment and software; and (4) consultation revenue and clinical case support revenue in connection with customer-sponsored clinical trials.

We have financed our operations and internal growth primarily through the sale of equity securities and the issuance of convertible and other secured notes. We have incurred significant losses since our inception in 1998 as we have devoted substantial efforts to research and development. As of December 31, 2021, we had accumulated losses of approximately $134 million. We may continue to incur operating losses as we expand our ClearPoint system platform and our business generally.

Factors Which May Influence Future Results of Operations

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

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COVID-19

In March 2020, the World Health Organization characterized the spread of a novel strain of coronavirus (“COVID-19”) as a global pandemic, and the President of the United States later proclaimed that the COVID-19 outbreak in the United States constituted a national emergency. Extraordinary actions were taken by federal, state and local governmental authorities to combat the spread of COVID-19, including issuances of “stay-at-home” directives and similar mandates that substantially restricted daily activities and for many businesses curtailed or ceased normal operations. These measures led to reduced economic activity, including the postponement or cancellation of elective surgical procedures, which historically have represented approximately 80% of the number of surgical procedures using our ClearPoint system. Although economic activity is returning to normalized levels, new variants of COVID-19, such as Delta and Omicron, continue to spread in the United States and across the globe. The ultimate impact of the COVID-19 pandemic cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of vaccines against different variants and the response by governmental bodies and regulators. We are unable to determine the timing and extent to which the vaccination process will affect the progression of the virus; the timing, adoption or viability of periodic resumption, if any, of elective procedures; and the resulting length of time that the COVID-19 pandemic will adversely affect our product revenues.

Furthermore, the recessionary conditions on the global economy caused by the COVID-19 pandemic could have a material adverse effect on our business. Although most segments of the United States economy have reopened, the effects of the COVID-19 pandemic remain intense in many areas of the country, and many public health experts continue to anticipate future surges of COVID-19 due to new variants. Accordingly, reinstatement of directives and mandates requiring businesses to again curtail or cease normal operations, including the postponement or cancellation of elective surgeries, remains a possibility. Additionally, global economic and supply chain disruptions, labor shortages, which may affect our ability to retain and attract new talent, and inflationary conditions caused by the COVID-19 pandemic could have a material adverse effect on our business. The rapid development and fluidity of the situation precludes any prediction as to the ultimate impact COVID-19 will have on our business, financial condition, results of operation and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 outbreak in the United States.

Key Performance Indicators

The key performance indicators we utilize on a tactical basis are integrated into our longer-term strategic plan within the following categories:

•Functional neurosurgery navigation

◦Case volume – Underlying the revenue from sales of our functional neurosurgical navigation products reflected in the accompanying consolidated financial statements appearing elsewhere in this Annual Report are the procedures, or cases, performed in hospitals or at customer-sponsored contract research organizations utilizing one or more of our products or our clinical services. Case volume data is not influenced by variations in pricing or quantities of product used on a per case basis, and thus provide a more reliable indicator of the growth of our functional neurosurgery navigation line of business. Management analyzes case volume by customer and by type of procedure to gain information that informs targeted sales and marketing activities. During the year ended December 31, 2021, the ClearPoint system was used in 929 cases, as compared to 682 cases during 2020, representing an increase of 36%. Consistent with the discussion in the section “Results of Operations –Revenues,” we attribute this increase primarily to the reduced levels of elective procedures resulting from the initial onset and progression of the COVID-19 pandemic during 2020.

◦Number of “Active Surgery Centers” – For purposes of analyzing this performance indicator, an Active Surgery Center is a hospital or customer-sponsored research organization that has purchased products from us or has performed procedures utilizing our ClearPoint system within a rolling 24-month period, and includes sites having purchased the ClearPoint system, as well as sites in which the ClearPoint system is being used on an evaluation basis. The justification for including “evaluation sites” is that our disposable neurosurgery product is sold to such sites for their use in cases. In addition to signifying growth, the number of Active Surgery Centers, when analyzed in conjunction with case volume data, further informs targeted sales and marketing activities and confirms where these activities have led to increased penetration of our product lines. As of December 31, 2021, the ClearPoint system was used in approximately 60 Active Surgery Centers, which is comparable to the number of such centers in 2020.

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•Biologics and drug delivery

◦Number of “Partners” – Underlying the revenue from sales of products and services to our biologics and drug delivery customers is the number of customers, or “Partners.” Our Partners consist of pharmaceutical and biotech companies, academic institutions, or customer-sponsored contract research organizations that are developing methods to deliver a wide variety of molecules, genes or proteins to targeted brain tissue or structures that would need to bypass the blood-brain barrier for the treatment of a variety of disorders. This business is a novel area in which commercialization must be preceded by FDA-mandated clinical trials, which are expensive and time consuming to conduct, and for which the commercial success is uncertain, pending, in part, the outcome of those trials. While our revenues from sales of products and services to these Partners in support of their clinical trials are indicative of growth, the number of such relationships is also of importance as we recognize the possibility that some Partners’ research will reach commercial success, and others may not. To the extent our Partners achieve commercial success, our expectation is that we will share in such success through our Partners' use of our products and services in their delivery of therapies. At December 31, 2021, we had commercial relationships with approximately 40 Partners, as compared with approximately 25 Partners at December 31, 2020.

•Therapy products – We do not expect meaningful revenue from therapy products insofar as we are targeting a limited market release of such products in 2022. As a result, our milestones in the therapy space are focused on refining the product and obtaining regulatory clearance. Should we be successful in achieving these milestones, we believe our initial performance indicators will focus on case volume and number of Active Surgical Centers, as are currently used in measuring our performance in functional neurosurgery navigation.

•Global scale and efficiency – We have been cautious in setting our goals for operations beyond the U.S. so as to conserve our resources and not establish a foreign presence in advance of being assured of a corresponding revenue stream. In late 2020 we took the first steps in leveraging the CE Marks we have for our ClearPoint system and SmartFlow cannula by establishing an initial presence in Europe for product sales and clinical advisory services. From this initial presence, we believe that future global key performance indicators will be similar to those described above for our U.S. business: case volume, number of Active Surgery Centers and number of biologics and drug delivery Partners.

Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. for general neurosurgical procedures; in February 2011 and May 2018, we also obtained CE marketing approval for our ClearPoint system and SmartFlow cannula, respectively; and in June 2020 we obtained CE marking approval for version 2.0 of our ClearPoint software and our Inflexion head fixation frame. In January 2021, we received 510(k) clearance for the SmartFrame Array Neuro Navigation System. Future revenue from sales of our ClearPoint platform products and services is difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses.

Generating recurring revenue from the sale of products is an important part of our business model for our ClearPoint system. Our product revenue was approximately $11.9 million and $8.8 million for the years ended December 31, 2021 and 2020, respectively, and was almost entirely related to our ClearPoint system. Our service revenue was approximately $4.4 million and $4.0 million for the years ended December 31, 2021 and 2020, respectively.

Our revenue recognition policies are more fully described in the “Critical Accounting Estimates” section below.

Cost of Revenues

Cost of revenue includes the direct costs associated with the assembly and purchase of components for functional neurosurgery navigation products, biologics and drug delivery products, non-neurosurgery therapy products, and ClearPoint capital equipment which we have sold, and for which we have recognized the revenue in accordance with our revenue recognition policy. Cost of revenue 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.

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Research and Development Costs

Our research and development costs consist primarily of costs associated with the conceptualization, design, testing, and prototyping of our ClearPoint system products and enhancements. 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; and (ii) seek to expand the application of our technological platforms. From our inception through December 31, 2021, we have incurred approximately $70 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 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 outside 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 Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as the reported expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments are discussed below. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

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

Revenue Recognition. Our revenue is comprised primarily of: (1) product revenue resulting from the sale of functional neurosurgery, navigation, therapy, and biologics and drug delivery disposable products; (2) product revenue resulting from the sale of ClearPoint capital equipment and software; (3) revenue resulting from the service, installation, training and shipping related to ClearPoint capital equipment and software; and (4) consultation revenue and clinical case support revenue in connection with customer-sponsored clinical trials. We recognize revenue when control of our products and services is transferred to its customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services, in a process that 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. When a contract calls for the satisfaction of multiple performance obligations for a single contract price, we allocate the contract price among the performance obligations based on the relative stand-alone prices for each such performance obligation we customarily charge. We consider 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. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control.

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Lines of Business; Timing of Revenue Recognition

•Functional neurosurgery navigation product, biologics and drug delivery systems product, and therapy product sales: Revenue from the sale of functional neurosurgery navigation products (consisting of disposable products sold commercially and related to cases utilizing our ClearPoint system), biologics and drug delivery systems (consisting primarily of disposable products related to customer-sponsored clinical trials utilizing the ClearPoint system), and therapy products (consisting primarily of disposable laser-related products used in non-neurosurgical procedures) is generally based on customer purchase orders, the predominance of which require delivery within one week of the order having been placed, and are recognized at the point in time of delivery to the customer, which is the point at which legal title, and risks and rewards of ownership, along with physical possession, transfer to the customer.

•Capital equipment and software sales:

◦Capital equipment and software sales preceded by evaluation periods: The predominance of capital equipment and software sales (consisting of integrated computer hardware and software that are integral components of our ClearPoint system) are preceded by customer evaluation periods. During these evaluation periods, installation of, and training of customer personnel on, the systems have been completed and the systems have been in operation. Accordingly, revenue from capital equipment and software sales following such evaluation periods is recognized at the point in time that we are in receipt of an executed purchase agreement or purchase order.

◦Capital equipment and software sales not preceded by evaluation periods: Revenue from sales of capital equipment and software not having been preceded by an evaluation period is recognized at the point in time that the equipment and software has been delivered to the customer.

For both types of capital equipment and software sales described above, our 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 we have a present right to payment.

•Functional neurosurgery navigation and therapy services: We recognize revenue for such services at the point in time that the performance obligation has been satisfied.

•Biologics and drug delivery services:

◦Consultation Services: We recognize consultation revenue at the point in time such services are performed.

◦Clinical Service Access Fees: For contracts in which we receive a periodic fixed fee, irrespective of the number of cases attended by our personnel during such periods, revenue is recognized ratably over the period covered by such fees. A time-elapsed output method is used for such fees because we transfer control evenly by providing a stand-ready service.

◦Clinical Service Procedure-Based Fees: We recognize revenue at the point in time a case is attended by our personnel.

•Capital equipment-related services:

◦Equipment service: Revenue from service of ClearPoint capital equipment and software previously sold to customers is based on agreements with terms ranging from one to three years and revenue is recognized ratably on a monthly basis over the term of the service agreement. A time-elapsed output method is used for service revenue because we transfer control evenly by providing a stand-ready service.

We may also enter into contracts with customers who own ClearPoint capital equipment, which bundle maintenance and support services and access to software and hardware upgrades made commercially available over the term of the contract, for a single contract price, typically paid on an annual basis. We allocate the contract price among the performance obligations based on the relative

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stand-alone prices for each such performance obligation and recognize the revenue ratably on a monthly basis. In line with equipment service, a time-elapsed output method is used as we are providing a stand-ready service.

◦Installation, training, and shipping: Consistent with our recognition of revenue for capital equipment and software sales as described above, fees for installation, training, and shipping in connection with sales of capital equipment and software that have been preceded by customer evaluation periods are recognized as revenue at the point in time we are in receipt of an executed purchase order for the equipment and software. Installation, training, and shipping fees related to capital equipment and software sales not having been preceded by an evaluation period are recognized as revenue at the point in time that the related services are performed.

Inventory. Inventory is carried at the lower of cost (first-in, first-out method) or net realizable value. Items in inventory relate predominantly to our functional neurosurgical products, drug delivery and biologic products, therapy products and ClearPoint capital equipment. Software license inventory related to ClearPoint systems undergoing on-site customer evaluation is included in inventory in the accompanying consolidated balance sheets. All other software license inventory is classified as a non-current asset. We periodically review our inventory for obsolete items and provide a reserve upon identification of potentially obsolete items.

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

Results of Operations

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

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Revenue. Total revenue was approximately $16.3 million and $12.8 million for the years ended December 31, 2021 and 2020, respectively.

Functional neurosurgery navigation and therapy revenue, which primarily consists of disposable product commercial sales related to cases utilizing the ClearPoint system, increased 30% to $8.1 million during the year ended December 31, 2021 from $6.2 million for the same period in 2020. This increase reflects the resumption in 2021 of elective surgery procedures, which were postponed or cancelled during 2020 due to the effects of the COVID-19 pandemic. Although elective surgeries resumed during the year ended December 31, 2021, with the emergence of new COVID-19 variants we are unable to determine the extent to which such factors as the timing, adoption or viability of such resumption will impact our revenue due to the persistence of the COVID-19 pandemic and our inability to determine the length of time that the COVID-19 pandemic will adversely affect our product revenue. There were no material increases in functional neurosurgery navigation product prices during the period between the year ended December 31, 2021 and the same period in 2020 that would be reasonably expected to affect a typical customer order.

Biologics and drug delivery revenue, which include sales of disposable products and services related to customer-sponsored clinical trials utilizing our products, increased 31% to $6.8 million for the year ended December 31, 2021, from $5.2 million for the same period in 2020. This increase was due to an increase in biologic and drug delivery product revenue of $1.8 million for the year ended December 31, 2021 due to an increase in the number of biologics and drug delivery customers and as customer-sponsored pre-clinical research and customer-sponsored clinical trials resumed from the same period in 2020. This increase notwithstanding, our biologic and drug delivery customers are reestablishing their estimated timelines for initiation or resumption of their clinical trials, however, these timelines have not been finalized, given the uncertainties of when hospitals will be able to resume such clinical trial cases. Accordingly, depending on the length and severity of the COVID-19 pandemic, future biologics and drug delivery revenue could be adversely impacted. There were no increases in biologics and drug delivery product prices during 2021 that would be reasonably expected to affect a typical customer order.

Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software, and of related services, stayed relatively consistent at $1.4 million for the years ended December 31, 2021 and 2020. While revenue from this product line historically has varied from quarter to quarter, we believe that hospitals' capital equipment acquisition activities remained at a low level, relative to the acquisition activity prior to the onset of the COVID-19 pandemic. There were no increases in capital equipment product prices during the period between the year ended December 31, 2021 and the same period in 2020 that would be reasonably expected to affect a typical customer order.

Cost of Revenue and Gross Profit. Cost of revenue was $5.0 million, resulting in gross profit of $11.3 million and gross margin of 69%, for the year ended December 31, 2021, compared to $3.7 million, resulting in gross profit of $9.1 million and gross margin of 71% for the year ended December 31, 2020. This decrease in gross margin was due primarily to an increase in overhead allocated to costs of sales in 2021 as compared to 2020. This was partially offset by an increased contribution of disposable products and service revenue during the year ended December 31, 2021 as compared to the same period in 2020, which carry a higher gross margin relative to other revenue lines, and a reduced contribution during the same comparative periods in sales of capital equipment, which carry a lower gross margin relative to other product lines.

Research and Development Costs. Research and development costs were $9.0 million for the year ended December 31, 2021, compared to $4.7 million for the same period in 2020, an increase of $4.3 million, or 92%. The increase was due primarily to increases in personnel costs of $2.3 million, due to growth in headcount, and product and software development of $2.2 million, both increases resulting from our efforts to develop new products and expand the applications of our technological platform, offset slightly by lower amortization.

Sales and Marketing Expenses. Sales and marketing expenses were $6.9 million for the year ended December 31, 2021, compared to $5.4 million for the same period in 2020, an increase of $1.5 million, or 29%. This increase was primarily due to increases in personnel costs of $1.0 million resulting from our geographical expansion and increases in headcount in our clinical and marketing teams, travel expense of $0.4 million due to increased activity, and marketing activity of $0.1 million.

General and Administrative Expenses. General and administrative expenses were $8.8 million for the year ended December 31, 2021, compared to $5.3 million for the same period in 2020, an increase of $3.5 million, or 66%. This increase was due primarily to increases in share-based compensation of $1.0 million, professional fees of $0.4 million, personnel costs of $0.4 million, insurance costs of $0.4 million, state franchise taxes of $0.4 million, occupancy costs of $0.3 million, IT costs of $0.2 million, and the allowance for doubtful accounts of $0.2 million.

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Other Expense/Income. Other expense was $0.1 million for the year ended December 31, 2021, compared to other income of $0.9 million for the same period in 2020. This decrease was due primarily to the gain recognized on the forgiveness of the PPP Loan in November 2020, the proceeds of which we received in April 2020. Additional information with respect to the PPP Loan is in Note 6 to the consolidated financial statements included elsewhere in this Annual Report.

Interest Expense, net. Net interest expense for the year ended December 31, 2021 was $1.0 million, compared with $1.4 million for the same period in 2020. The decrease in interest expense is primarily due to the repayment of the 2010 Secured Notes in the first quarter of 2020, the conversion of one of the First Closing Notes in May 2021 and the conversion of the Second Closing Note in November 2021. Additional information related thereto is in Note 6 to the consolidated financial statements included elsewhere in this Annual Report.

Liquidity and Capital Resources

At December 31, 2021, we had cash and cash equivalent balances aggregating $54.1 million, resulting primarily from the 2021 public equity offering and the private note issuances pursuant to the 2020 Financing Transaction as discussed in Notes 8 and 6, respectively, to the consolidated financial statements included elsewhere in this Annual Report and as discussed further below.

We have incurred net losses since our inception which has resulted in a cumulative deficit at December 31, 2021 of approximately $134 million. In addition, our use of cash from operations amounted to $12.7 million for the year ended December 31, 2021. Since inception, we have financed our operations principally from the sale of equity securities and the issuance of notes payable.

In January 2020, we entered into the Securities Purchase Agreement (the “SPA”) with the 2020 Convertible Noteholders under which we issued the First Closing Notes having an aggregate principal amount of $17.5 million, resulting in proceeds, net of financing costs and a commitment fee paid to one of the 2020 Convertible Noteholders, of approximately $16.8 million. From the net proceeds received from the issuance of the First Closing Notes, which have a five-year term, we repaid and retired the 2010 Secured Notes that otherwise would have matured in October and November 2020.

The SPA also gave us the right, but not the obligation, to request one of the 2020 Convertible Noteholders to purchase an additional $5.0 million in principal amount of the Second Closing Note. On December 29, 2020, under the terms of an Amendment to the SPA which, among other provisions, increased the principal amount of the Second Closing Note, we issued the Second Closing Note to the 2020 Convertible Noteholder in the principal amount of $7.5 million.

Additional information with respect to the 2020 Secured Notes is in Notes 6 to the consolidated financial statements included elsewhere in this Annual Report.

As discussed in Note 8 to the consolidated financial statements included elsewhere in this Annual Report, on February 23, 2021, we completed a public offering of 2,127,660 shares of our common stock. Net proceeds from the offering were approximately $46.8 million after deducting the underwriting discounts and commissions and other estimated offering expenses payable by us.

Based on the foregoing, in management’s opinion, cash and cash equivalent balances at December 31, 2021, are sufficient to support the Company’s operations and meet its obligations for at least the next twelve months.

Cash Flows

Cash activity for the years ended December 31, 2021 and 2020 is summarized as follows:

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Net Cash Flows from Operating Activities. We used $12.7 million and $7.8 million of cash for operating activities in 2021 and 2020, respectively.

In 2021, uses of cash in operating activities consisted primarily of: (i) our $14.4 million loss; (ii) an increase in accounts receivable of $0.7 million and inventory of $1.7 million; and (iii) a decrease in lease liabilities of $0.4 million. These uses were offset primarily by: (a) an increase in accounts payable and accrued expenses of $1.3 million; and (b) net non-cash expenses included in our net loss aggregating $3.4 million and consisting primarily of changes in the allowance for doubtful accounts, expenses related to share-based compensation, payment-in-kind interest, and net amortization of lease right of use assets.

In 2020, uses of cash in operating activities consisted primarily of: (i) our $6.8 million loss; (ii) an increase in accounts receivable of $0.8 million; and (iii) decreases in accounts payable and accrued expenses of $0.5 million, accrued interest of $1.0 million, and deferred revenue of $0.4 million. These uses were offset primarily by net non-cash expenses included in our net loss aggregating $1.6 million and consisting primarily of expenses related to depreciation and amortization, share-based compensation, amortization of debt issuance costs and original issue discounts and net amortization of lease right of use assets, which were partially offset by the gain recognized with the forgiveness of the PPP loan.

Net Cash Flows from Investing Activities. Net cash flows used in investing activities in 2021 were $0.2 million and consisted of equipment acquisitions.

Net cash flows used in investing activities in 2020 were $0.5 million and consisted primarily of an acquisition of medical device license rights.

Net Cash Flows from Financing Activities. Net cash provided by financing activities in 2021 consisted of: (a) the proceeds, net offering costs, of $46.8 million received from the public offering of our common stock; and (b) proceeds from the exercise of common stock options and warrants aggregating $0.5 million and (c) issuance of common stock under the employee stock purchase plan of $0.2 million, which were partially offset by tax payments of $0.6 million related to shares withheld in connection with vesting of restricted stock awards.

Net cash provided by financing activities in 2020 consisted of proceeds from: (a) the issuance of the 2020 Secured Notes amounting to $24.3 million net of financing cost and discount; (b) the PPP Loan, amounting to $0.9 million; and (c) the exercise of common stock warrants and options, amounting to $0.4 million, which were partially offset by repayments of notes payable amounting to $2.8 million.

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 and pursue additional applications for our technology platforms. Our cash balances are typically held in a variety of demand accounts 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 and pursue additional applications for our technology platforms. Our future capital requirements will depend on many factors, including, but not limited to, the following:

•the timing of broader market acceptance and adoption of our ClearPoint system products;

•the scope, rate of progress and cost of our ongoing product development activities relating to our ClearPoint system;

•the cost and timing of expanding our sales, clinical support, marketing and distribution capabilities, and other corporate infrastructure;

•the cost and timing of establishing inventories at levels sufficient to support our sales;

•the effect of competing technological and market developments;

•the cost of pursuing additional applications of our technology platforms under current collaborative arrangements, and the terms and timing of any future collaborative, licensing or other arrangements that we may establish;

•the cost and timing of any clinical trials;

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•the cost and timing of regulatory filings, clearances and approvals; and

•the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.