# ClearPoint Neuro, Inc. (CLPT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ClearPoint Neuro, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1285550/000128555022000003/clpt-20211231.htm
Accession: 0001285550-22-000003
Filing date: 2022-03-09
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CLPT/
All MD&A years: /company/CLPT/mda/
Next year: /company/CLPT/mda/fy2022/ (FY 2022)

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.

45

Table of Contents

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.

46

Table of Contents

•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.

47

Table of Contents

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.

48

Table of Contents

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

49

Table of Contents

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage"],["(Dollars in thousands)","2021","","2020","","Change"],["Product revenue","$","11,913","","","$","8,832","","","35","%"],["Service and other revenue","4,386","","","3,997","","","10","%"],["Total revenue","16,299","","","12,829","","","27","%"],["Cost of revenue","5,008","","","3,709","","","35","%"],["Gross Profit","11,291","","","9,120","","","24","%"],["Research and development costs","8,985","","","4,686","","","92","%"],["Sales and marketing expenses","6,919","","","5,384","","","29","%"],["General and administrative expenses","8,761","","","5,270","","","66","%"],["Other income (expense):"],["Other (expense) income, net","(63)","","","882","","","(107)","%"],["Interest expense, net","(973)","","","(1,444)","","","(33)","%"],["Net loss","$","(14,410)","","","$","(6,782)","","","112","%"]]
[[/GREPCENT_TABLE]]

50

Table of Contents

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.

51

Table of Contents

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:

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["(in thousands)","2021","","2020"],["Cash from operating activities","$","(12,697)","","","$","(7,807)"],["Cash from investing activities","(168)","","","(482)"],["Cash from financing activities","46,875","","","22,692"],["Net change in cash and cash equivalents","$","34,010","","","$","14,403"]]
[[/GREPCENT_TABLE]]

52

Table of Contents

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;

53

Table of Contents

•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.