
	September 30, 2017			December 31, 2016			September 30, 2019 (Unaudited)			December 31, 2018
ASSETS
Current Assets:
Current assets:
Cash and cash equivalents	$	11,028,973		$	3,315,774		$	6,235,168		$	3,101,133
Accounts receivable, net of allowance for doubtful accounts of $26,714 and $25,000 at September 30, 2017 and December 31, 2016, respectively		863,758			865,943
Accounts receivable, net								2,129,085			1,233,896
Inventory, net		2,181,245			1,768,382			3,180,250			2,105,976
Prepaid expenses and other current assets		239,326			134,996			364,273			213,684
Total current assets		14,313,302			6,085,095			11,908,776			6,654,689

Property and equipment, net		246,381			328,249			474,226			377,706
Software license inventory		889,400			976,900			451,900			801,900
Operating lease rights of use								400,755			-
Other assets		10,641			10,641			153,141			22,538
Total assets	$	15,459,724		$	7,400,885		$	13,388,798		$	7,856,833

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	957,660		$	1,546,926		$	1,671,722		$	500,929
Accrued compensation		809,323			666,060			993,150			764,960
Operating lease liabilities, current portion								113,263			-
Other accrued liabilities		529,942			450,424			403,054			390,838
Derivative liabilities		72,450			131,173
Deferred product and service revenues		281,826			223,117
Deferred revenue								1,097,644			350,963
Total current liabilities		2,651,201			3,017,700			4,278,833			2,007,690

Accrued interest		734,625			647,500			934,829			857,500
Senior secured note payable		2,000,000			2,000,000
2014 junior secured notes payable, net of unamortized discount and deferred issuance costs of $120,516 and $180,774 at September 30, 2017 and December 31, 2016, respectively		1,854,484			1,794,226
2010 junior secured notes payable, net of unamortized discount of $2,060,865 and $2,302,472 at September 30, 2017 and December 31, 2016, respectively		939,135			697,528
2014 junior secured notes payable, net								-			1,939,850
2010 junior secured notes payable, net								1,867,265			1,540,791
Operating lease liabilities								299,915			-
Total liabilities		8,179,445			8,156,954			7,380,842			6,345,831
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value; 25,000,000 shares authorized at September 30, 2017 and December 31, 2016; none issued and outstanding at September 30, 2017 and December 31, 2016		-			-
Common stock, $0.01 par value; 200,000,000 shares authorized; 10,339,210 shares issued and outstanding at September 30, 2017; and 3,622,032 issued and outstanding at December 31, 2016		103,391			36,220
Stockholders’ equity:
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued and outstanding at September 30, 2019 and December 31, 2018								-			-
Common stock, $0.01 par value; 200,000,000 shares authorized; 14,991,892 shares issued and outstanding at September 30, 2019; and 11,018,364 issued and outstanding at December 31, 2018								149,918			110,183
Additional paid-in capital		106,131,322			93,076,475			116,951,956			108,600,405
Accumulated deficit		(98,954,434	)		(93,868,764	)		(111,093,918	)		(107,199,586	)
Total stockholders’ equity (deficit)		7,280,279			(756,069	)
Total liabilities and stockholders’ equity (deficit)	$	15,459,724		$	7,400,885
Total stockholders’ equity								6,007,956			1,511,002
Total liabilities and stockholders’ equity							$	13,388,798		$	7,856,833

The Company computes net loss per share using the weighted-average number of common shares outstanding during the period. Basic and diluted net loss per share are the same because the conversion, exercise or issuance of all potential common stock equivalents, which comprise the entire amount of the Company’s outstanding common stock options and warrants as described in Note 5,7, would be anti-dilutive.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company holds its cash and cash equivalents on deposit with financial institutions in the U.S. insured by the Federal Deposit Insurance Corporation. At September 30, ~~2017,~~2019, the Company had ~~$245,820~~approximately $280,000 in bank balances that were in excess of the insured limits.

~~Information with respect to customers that~~No customer accounted for sales in excess of 10% of total sales in any of the nine-month or three-month ~~and nine-month~~ periods ended September 30, ~~2017 and 2016 is as follows:~~

At September 30, 2019, an account receivable, related to the Letter of Intent discussed in Note 3, comprised 28% total accounts receivable at that date. Information with respect to accounts receivable from those customers who comprised more than 10% of accounts receivable at ~~September 30, 2017 and~~ December 31, ~~2016~~2018 is as follows:

Customer – 1	17%
Customer – 2	12%

Prior to granting credit, the Company performs credit evaluations of its customers’ financial condition, and generally does not require collateral from its customers. The Company will provide an allowance for doubtful accounts when collections become doubtful. The allowance for doubtful accounts was approximately $45,000 and $38,000 at September 30, ~~2017~~2019 and December 31, ~~2016 was $27,000 and $25,000,~~2018, respectively.

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

~~In August 2015,~~Effective January 1, 2019, the ~~Financial Accounting Standards Board (“FASB”) issued~~Company adopted the provisions of Accounting Standards Update (“ASU”) 2015-14 as an amendment to ASU 2014-09, “Revenue from Contracts with Customers,” which created a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard, and ASUs 2016-10, 2016-12 and 2016-20 discussed below, are effective for the Company beginning in 2018. Earlier application is permitted only as of 2017.

The Company believes, based on a preliminary assessment in which the Company considered such factors as the short duration of its contract terms with customers, that the adoption of ASU 2015-14, and the subsequently issued related ASUs discussed above, will not have a material effect on its consolidated financial statements.

~~In February 2016, the FASB issued ASU~~ 2016-02, “Leases,” which created a new Topic ~~ASC~~842 within the Accounting Standards Codification. Topic 842 ~~and~~ established the core principle that a lessee should recognize the assets, representing rights-of-use, and liabilities to make lease payments that arise from leases. ~~For leases with~~

	Three Months Ended September 30,
	2019		2018
Products:
Disposable products:
Functional neurosurgery	$	1,854,251	$	1,448,850
Biologics and drug delivery		491,257		190,993
Therapy		64,095		-
Capital equipment		184,825		99,961
Total product revenue		2,594,428		1,739,804
Services:
Capital equipment and other		210,538		62,238
Biologics and drug delivery		72,500		5,000
Therapy		50,000		-
Total service revenue		333,038		67,238
Total revenue	$	2,927,466	$	1,807,042

	Nine Months Ended September 30,
	2019		2018
Products:
Disposable products:
Functional neurosurgery	$	5,212,460	$	3,787,712
Biologics and drug delivery		957,673		483,251
Therapy		81,925		-
Capital equipment		700,517		420,039
Total product revenue		6,952,575		4,691,002
Services:
Capital equipment and other		515,695		218,742
Biologics and drug delivery		335,500		167,000
Therapy		202,612		-
Total service revenue		1,053,807		385,742
Total revenue	$	8,006,382	$	5,076,744

During the three and nine months or less, a lessee is permitted to make an election under which such assets and liabilities would not be recognized, and lease expense would be recognized generally on a straight-line basis over the lease term. This standard is effective forended September 30, 2019, the Company ~~beginning~~recognized capital equipment-related service revenue of $38,093 and $173,247, respectively, which was previously included in 2019, and early application is permitted. The Company currently has two leases for manufacturing and office space that would be subject to the provisions of ASU 2016-02. The Company believes that adoption of ASC Topic 842 (as amended by ASC 2017-13 described above) will resultdeferred revenue in the ~~establishment on the Company’s~~accompanying condensed consolidated balance sheet at December 31, 2018.

In September 2019, the Company entered into a Development Services Agreement with a customer under which the Company was entitled to bill the customer for an upfront payment of ~~an asset~~$127,600, which the Company received in September 2019 and ~~liability for each such lease, but that neither such assets~~which is included in accounts receivable and ~~liabilities nor~~deferred revenue in the ~~resulting lease expense recognition will have~~accompanying consolidated balance sheet. Also, in September 2019, the Company entered into a ~~material effect on~~Letter of Intent (the “LOI”) with a customer who is a stockholder and whose Chief Operating Officer is a member of the Company’s ~~consolidated financial statements.~~

~~In August 2016,~~Board of Directors. The purpose of the ~~FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues with~~LOI is to permit the objective of reducing existing diversity in practice. The standard is effective for the Company beginning in 2018, and early adoption is permitted. The Company believes that adoption of ASU 2016-15 will not have a material effect on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718),” which clarifies and reduces both (i) diversity in practice and (ii) cost and complexity when a company changes the terms or conditionscommencement of a ~~share-based payment award. The standard is effective for~~product development project in anticipation of negotiating a detailed Statement of Work (as described in the ~~Company beginning in 2018, and early adoption is permitted. The Company believes that adoption of ASU 2017-09 will not have a material effect on its consolidated financial statements.~~

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” which, among other items, changes the classification of certain equity-linked financial instruments (or embedded features) with down round features. The standard is effective for the Company beginning in 2019, and early adoption is permitted. BecauseLOI) by December 31, 2019. Under the terms of the ~~Company’s currently existing derivative liabilities~~LOI, the Company was entitled to bill the customer for an upfront, nonrefundable payment of $500,000, which amount is included in accounts receivable and deferred revenue in the accompanying September 30, 2019 condensed consolidated balance sheet. The Company intends to recognize each of the upfront payments described in ~~Note 6, all~~this paragraph in proportional relationship to the transaction prices of ~~which~~the performance obligations contained in the related agreements.

During the three and nine months ended September 30, 2019, the Company ~~believes are included in the scope~~offered an upgraded version of its software at no additional charge to customers purchasing a three-year systems service agreement. The transaction prices of the ~~standard, will have expired prior to~~software and the ~~standard’s effective date, the Company believes that adoption~~service agreement were determined through an allocation of the ~~standard on its effective date will not have a material effect~~service agreement price based on the standalone prices of the software and the service agreements. The transaction price of the software was recognized as revenue upon its installation and comprised approximately $113,000 of unbilled accounts receivable at September 30, 2019.

The Company’s ~~consolidated financial statements.~~contracts with customers, other than capital equipment-related service agreements discussed below, are predominantly of terms less than one year. Accordingly, the transaction price of remaining performance obligations related to such contracts at September 30, 2019 are not material.

Revenue with respect to remaining performance obligations related to capital equipment-related service agreements with original terms in excess of one year amounted to $398,943 at September 30, 2019. The Company expects to recognize this revenue within the next three years.

~~The indebtedness~~On September 25, 2018, the Company repaid in full all the outstanding debt, together with accrued and unpaid interest, under the senior secured note payable to Brainlab ~~originally issued to Brainlab on April 5, 2011, and subsequently amended and restated on March 6, 2013~~ (the “Brainlab Note”), at December 31, 2015 was approximately $5.0 million, including approximately $740,000 of accrued interest which accrued at a rate of 5.5% and was payable in a single aggregate installment upon maturity of the indebtedness.. The Brainlab Note had a maturity date of December 31, 2018, and interest was ~~to mature~~payable quarterly in ~~April 2016.~~arrears at an annual rate of 5.5%. In connection with the repayment, the security agreement under which the Brainlab Note had been collateralized by all the assets of the Company was terminated.

On June 6, 2019, the Company repaid in full all the outstanding principal, which, together with accrued and unpaid interest, totaled approximately $2.0 million, of its 12% Second-Priority Secured Non-Convertible Promissory Notes due 2019, as amended (the “2014 Secured Notes”). The 2014 Secured Notes had a maturity date of September 30, 2020, and interest was payable semi-annually in arrears. In connection with the repayment, the security agreement under which the 2014 Secured Note had been collateralized by all the assets of the Company was terminated.

~~On April 4, 2016 (the “Closing Date”), the Company and Brainlab finalized a securities purchase agreement (the “2016 Purchase Agreement”), as discussed below.~~

Under the 2016 Purchase Agreement, the Company: (i) paid to Brainlab all accrued and unpaid interest on the Brainlab Note, in the amount of approximately $740,000; (ii) amended and restated the Brainlab Note on the terms described below; (iii) entered into a patent and technology license agreement with Brainlab (the “License Agreement”) for software relating to the Company’s SmartFrame device, in consideration for the cancellation of $1.0 million of the principal amount of the Brainlab Note; (iv) issued to Brainlab, in consideration for the cancellation of approximately $1.3 million of the principal amount of the Brainlab Note, 99,310 units, consisting of: (a) one share of the Company’s common stock; (b) warrants to purchase 0.4 share of common stock (the “2016 Series A Warrants”); and (c) warrants to purchase 0.3 shares of common stock (the “2016 Series B Warrants”) (collectively, the “Equity Units”); and (v) entered into a Registration Rights Agreement, pursuant to which the Company agreed to file a registration statement with the SEC covering the resale of the shares of common stock issued to Brainlab under the 2016 Purchase Agreement, as well as the shares of common stock that are issuable upon exercise of the 2016 Series A Warrants and 2016 Series B Warrants.

The 2016 Purchase Agreement contains covenants, representations and warranties by the Company and Brainlab (including indemnification from the Company in the event of breaches of its representations and warranties), which the Company believes are customary for transactions of this type.

As a result of the foregoing, on the Closing Date, the Company recorded a debt restructuring gain of approximately $941,000 representing the difference between (a) the aggregate fair value of the License Agreement, which had no cost basis on the Company’s consolidated balance sheets, and the Equity Units, and (b) the aggregate principal amount of the Brainlab Note cancelled as consideration.

The 2016 Series A Warrants and 2016 Series B Warrants are exercisable, in full or in part, at any time prior to the fifth anniversary of their issuance, at an exercise price of $16.23 per share (before giving effect to the Note Conversion as defined below) and $21.10 per share, respectively, subject to provisions for: (a) adjustments in the case of certain corporate transactions; (b) consideration to be received in lieu of shares of the Company’s common stock in the case of certain fundamental transactions; and (c) a “cashless exercise” feature.

On the Closing Date and pursuant to the 2016 Purchase Agreement, the Company issued Brainlab an unregistered, amended and restated secured note (the “New Brainlab Note”), which has the same terms and conditions as the Brainlab Note, except that: (i) the principal amount of the New Brainlab Note is $2 million; (ii) interest will be paid quarterly in arrears; and (iii) the maturity date of the New Brainlab Note is December 31, 2018.

On the Closing Date and pursuant to the 2016 Purchase Agreement, the Company and Brainlab entered into the License Agreement, for software relating to the Company’s SmartFrame device, for use in neurosurgery. The License Agreement does not affect the Company’s ability to continue to independently develop, market and sell its own software for the SmartFrame device.

~~The New Brainlab Note is collateralized by a senior security interest in all of the assets of the Company.~~

In March 2014, the Company entered into securities purchase agreements for the private placement of: (i) second-priority secured non-convertible promissory notes (the “2014 Secured Notes); and (ii) warrants to purchase 0.01 shares of the Company’s common stock for each dollar in principal amount of the 2014 Secured Notes sold by the Company (the “investor warrants”). Pursuant to those securities purchase agreements, the Company sold 2014 Secured Notes in a total aggregate principal amount of $3,725,000, together with warrants to purchase up to 27,937 shares of common stock, for aggregate gross proceeds of $3,725,000, before placement agent commissions and other expenses.

The 2014 Secured Notes have a five-year term and bear interest at a rate of 12% per year, payable semi-annually, in arrears. The 2014 Secured Notes are not convertible into shares of the Company’s common stock. Following the third anniversary of the issuance date, the 2014 Secured Notes may be prepaid, without penalty or premium, provided that all principal and unpaid accrued interest under all 2014 Secured Notes is prepaid at the same time. The 2014 Secured Notes are collateralized by a security interest in all of the Company’s assets, which security interest is junior and subordinate to the security interest that collateralizes the New Brainlab Note.

The investor warrants are exercisable, in full or in part, at any time prior to the fifth anniversary of the issuance date, at an original exercise price of $70.00 per share, subject to provisions for: (a) adjustments in the case of certain corporate transactions; (b) consideration to be received in lieu of shares of the Company’s common stock in the case of certain fundamental transactions; and (c) a “cashless exercise” feature.

Under GAAP, the Company allocated the $3,725,000 in proceeds proportionately between the 2014 Secured Notes and the investor warrants based on their relative fair values, with $413,057 being allocated to the fair value of the investor warrants, recorded as equity and as a discount to the carrying amount at the date of issuance. After giving effect to the conversions discussed below under the heading~~“August 31, 2016 Amendments,”~~ the unamortized discount at September 30, 2017 and December 31, 2016 was $81,323 and $121,985, respectively. This discount is being amortized to interest expense over the five-year term of the 2014 Secured Notes using the effective interest method. The carrying amount of the 2014 Secured Notes in the accompanying condensed consolidated balance sheets is also presented net of issuance costs, as discussed further below.

Non-employee directors of the Company purchased a total of $1,100,000 of the 2014 Secured Notes, either directly or through a trust. The Company’s placement agents earned cash commissions of $145,500 as well as warrants (the “placement agent warrants”) to purchase 1,818 shares of the Company’s common stock. The placement agent warrants have the same terms and conditions as the investor warrants.

The placement agent cash commissions, the $30,210 fair value of the placement agent warrants, and other offering expenses, aggregating $76,186, were recorded as deferred financing costs and are presented as reductions of the carrying amount of the 2014 Secured Notes in the accompanying condensed consolidated balance sheets. These deferred financing costs, having an unamortized balance of $39,193 and $58,789 at September 30, 2017 and December 31, 2016, respectively, are being amortized to interest expense over the term of the 2014 Secured Notes using the effective interest method.

~~In November 2010, the Company issued units consisting of a junior secured note~~The Junior Secured Promissory Notes Due 2020 (the “2010 Secured Notes”) and one share of the Company’s common stock. An aggregate of 267,857 units were issued, and the Company received proceeds of $3,000,000 representing the aggregate principal amount of the 2010 Secured Notes. The 2010 Secured Notes mature in November 2020, accrue interest at ~~the~~an annual rate of 3.5% ~~per year,~~ and are collateralized by a security interest in all the Company’s assets, which, subsequent to the repayments of the ~~assets of the Company, which security interest is junior and subordinate to the security interests that collateralize the New~~ Brainlab ~~Note~~Notes and the 2014 Secured ~~Notes.~~Notes described above, is the senior such interest. All outstanding principal and interest on the 2010 Secured Notes will be due and payable upon maturities in ~~a single payment upon maturity.~~October and November 2020.

Under GAAP, the Company allocated the $3 million in proceeds from the sale of the units between the 2010 Secured Notes and the shares of common stock based on their relative fair values that resulted in $2,775,300 being allocated to the value of the shares of common stock, which was recorded as equity and as a discount to theThe carrying ~~value~~amount of the 2010 Secured Notes in the accompanying condensed consolidated balance sheets is presented net of a discount arising from shares issued to the noteholders at ~~their date~~issuance of ~~issuance.~~the 2010 Secured Notes. The unamortized discount at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 was ~~$2,060,865~~$970,390 and ~~$2,302,472,~~$1,459,209, respectively. This discount is being amortized to interest expense over the ~~10-year~~ term of the notes using the effective interest method.

~~Four then-serving officers~~At each of September 30, 2019 and December 31, 2018, the Company purchased an aggregate of 22,068 units in the offering for $247,164. In addition, three non-employee directors of the Company also purchased an aggregate of 14,180 units in the offering for $158,816.

~~On June 30, 2016, the Company entered into amendments (the “June 2016 Amendments”) with: (a) Brainlab, with respect to the New Brainlab Note;~~Company’s Chairman and ~~(b) two holders of the 2014 Secured Notes (the “2014 Convertible Note Holders”), one of which is a trust for which~~ one of the Company’s ~~then non-employee directors serves as a trustee,~~officers held 2010 Secured Notes purchased at the date of original issuance having an aggregate principal balance of $3 million. Pursuant to the June 2016 Amendments, the parties agreed that, in the event the Company closes a qualified public offering: (i) $500,000 of the principal balance of the New Brainlab Note and an aggregate $1.5 million of the principal balance of the 2014 Secured Notes, plus all unpaid accrued interest on such principal amounts, would automatically convert into the security offered in the qualified public offering, based on the public offering price of that security; and (ii) the exercise price for 34,957 shares of common stock underlying warrants issued in connection with the New Brainlab Note and 11,250 shares of common stock underlying warrants issued in connection with the 2014 Secured Notes would be reduced to equal the greater of (x) the public offering price of the security offered in the qualified public offering, or (y) if the security offered in the qualified public offering is or includes convertible stock or common stock warrants, the highest price per whole share for which the Company’s common stock is issuable upon conversion of such convertible stock or upon exercise of such common stock warrants. As discussed under the heading “~~August 31, 2016 Amendments,~~” the 2014 Convertible Note Holders subsequently entered into the August 2016 Amendments (defined below), which superseded the June 2016 Amendments, and converted the 2014 Principal (defined below), under the terms of the August 2016 Amendments.

The provisions of the June 2016 Amendments created: (a) a conversion feature allowing for the principal balances described above, plus all unpaid related accrued interest, to be converted into the security offered in the qualified public offering, and at a price that may be less than the market value per share of the Company’s common stock; and (b) down round strike price protection with respect to the warrants, both of which, under GAAP, are required to be accounted for as derivatives, the calculation and accounting for which is described in Note 6.$197,000.

In ~~addition, based on~~July 2019, the ~~provisions~~Company repaid, at a negotiated discount, two of the ~~June 2016 Amendments, the Company recorded a debt restructuring loss~~2010 Secured Notes having an aggregate principal amount of approximately ~~$820,000 resulting from~~$162,000, at the ~~restructuring~~request of the ~~New Brainlab Note and the 2014~~holders of such 2010 Secured ~~Notes subject to the June 2016 Amendments.~~Notes.

~~On August 31, 2016, the Company entered into second amendments (the “August 2016 Amendments”) with the 2014 Convertible Note Holders.~~

Pursuant to the August 2016 Amendments, the parties agreed that, in the event the Company closes a PIPE Transaction (as that term is defined in the August 2016 Amendments; the “2016 PIPE”): (i) an aggregate $1.75 million of aggregate principal balance of the 2014 Convertible Note Holders’ 2014 Secured Notes (the “2014 Principal”) would automatically convert into the security offered by the Company in the 2016 PIPE, based on the offering price of that security in the 2016 PIPE (the “Note Conversion”); and (ii) the exercise price for 13,125 shares of common stock that may be purchased upon exercise of warrants issued in connection with the issuance of the 2014 Secured Notes (the “2014 Warrants”) will be reduced to equal the greater of (x) the offering price of the security offered in the 2016 PIPE, or (y) if the security offered in the 2016 PIPE is or includes convertible stock or common stock warrants, the highest price per whole share for which the Company’s common stock is issuable upon conversion of such convertible stock or upon exercise of such common stock warrants. These provisions maintained but modified: (a) the conversion feature allowing for the 2014 Principal to be converted into the security offered in the 2016 PIPE, and at a price that may be less than the market value per share of the Company’s common stock; and (b) the down round strike price protection with respect to the 2014 Warrants, both of which, under GAAP, are required to be accounted for as derivatives, the calculation and accounting for which is described in Note 6.

Execution of the August 2016 Amendments constituted a debt extinguishment under GAAP, necessitating the Company to record a debt restructuring loss of approximately $933,000, representing the aggregate difference in the fair value of the derivatives described in the preceding paragraph between the points in time (i) immediately preceding, and (ii) immediately subsequent to, the execution of the August 2016 Amendments.

As described in Note 5, the 2016 PIPE was completed on September 2, 2016, resulting in (i) conversion of the 2014 Principal, and (ii) establishment of a fixed exercise price and elimination of the down round price protection with respect to the 2014 Warrants, in conformity with the terms set forth in the August 2016 Amendments. Accordingly, concurrent with completion of the 2016 PIPE,derivative liabilities associated with the conversion feature of the 2014 Principal and the down round price protection for the 2014 Warrants were reduced by $1,207,813, with a corresponding amount being recorded as an increase to stockholders’ equity.

Scheduled principal payments as of September 30, ~~2017~~2019 with respect to notes payable are summarized as follows:

The Company leases office space in Irvine, California that houses its headquarters and manufacturing facility under a non-cancellable operating lease. The lease term commenced on October 1, 2018 and expires in September 2023. The Company has the option to renew the lease for two additional periods of five years each. The Company also leases office space in Mississauga, Ontario, Canada for its software development personnel. The lease term commenced on August 1, 2018, was set to expire in July 2019, was renewed for a one-year period at the Company’s option, and provides for automatic one-year renewals at the Company’s option. Both office leases are classified as operating leases in conformity with the provisions of Topic 842.

The lease cost, included in general and administrative expense, was $27,468 and $82,405 for the three and nine months ended September 30, 2019, respectively.

At September 30, 2019, the weighted average discount rate was 6.7% and the weighted average remaining lease term was 47.36 months with respect to the leases described above.

On ~~September 2, 2016,~~May 9, 2019, the Company ~~completed the 2016 PIPE, pursuant to the terms of~~entered into a Securities Purchase Agreement ~~dated August 31, 2016~~ (the ~~“2016 PIPE Purchase~~“Purchase Agreement”)~~, by and among the Company and~~ with certain accredited investors (collectively, the ~~“2016 PIPE Investors”~~“Investors”)~~. At~~ for the ~~closing, in accordance with the terms and conditions~~private placement of the 2016 PIPE Purchase Agreement, the Company sold to the 2016 PIPE Investors an aggregate of 851,000 units (the “2016 PIPE Units”), with each 2016 PIPE Unit consisting of: (i) one share of the Company’s common stock; and (ii) a warrant to purchase 0.902,426,455 shares of the Company’s common stock ~~(each, a “2016 PIPE Warrant” and collectively, the “2016 PIPE Warrants”~~at $3.10 per share (the “2019 PIPE”).

~~In connection with the sale of the 2016 PIPE Units, the~~ The Company received aggregate gross proceeds of approximately ~~$4.25~~$7.5 million, before deducting ~~placement agents’ fees and~~ offering expenses aggregating approximately ~~$418,000. In addition, the placement agents for the 2016 PIPE received, in the aggregate, warrants (“2016 PIPE Placement Agent Warrants”) to purchase up to 29,680 shares of common stock.~~

The ~~2016 PIPE~~ Purchase Agreement also contains representations and warranties by the Company and the ~~2016 PIPE~~ Investors and covenants of the Company and the ~~2016 PIPE~~ Investors (including indemnification from the Company in the event of breaches of its representations and warranties), certain information rights and other rights, obligations and restrictions, which the Company believes are customary for transactions of this type.

The 2016 PIPE Warrants are exercisable, in full or in part, at any time prior to September 2, 2021, at an exercise price of $5.50 per share, subject to provisions for: (a) adjustments in the case of certain corporate transactions; (b) consideration to be received in lieu of shares of the Company’s common stock in the case of certain fundamental transactions; and (c) a “cashless exercise” feature. The 2016 PIPE Placement Agent Warrants have the same terms and conditions as the 2016 PIPE Warrants.

As discussed in Note 4, pursuant to the August 2016 Amendments, in addition to and simultaneously with the sale of the 2016 PIPE Units, on September 2, 2016: (i) the 2014 Principal automatically converted into 350,000 2016 PIPE Units on the same terms and conditions as applied to purchasers of 2016 PIPE Units; and (ii) the exercise price for 13,125 shares of common stock that may be purchased upon exercise of the holders’ 2014 Warrants was reduced to $5.50 per share, which is equal to the per share exercise price of the 2016 PIPE Warrants.

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

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

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

Concurrent with completion of the 2017 PIPE, the Company and the 2017 PIPE Investors entered into a Registration Rights Agreement (the “2017 PIPE Registration Rights Agreement”) pursuant to which the Company is required to prepare and file a registration statement (the “2017 PIPE Registration Statement”) with the SEC under the Securities Act of 1933, as amended, covering the resale of the shares of common stock to be issued to the 2017 PIPE Investors under the 2017 PIPE Purchase Agreement as well as the shares of common stock underlying the 2017 PIPE Warrants and the 2017 PIPE Placement Agent Warrants. The Company was required to file such 2017 PIPE Registration Statement on or before June 26, 2017, and was required to use its best efforts to have the 2017 PIPE Registration Statement declared effective as soon as practicable. The Company filed the 2017 PIPE Registration Statement on June 26, 2017, and the 2017 PIPE Registration Statement was declared effective by the SEC on July 7, 2016, both dates being in conformity with the foregoing requirements. Pursuant to the 2017 PIPE Registration Rights Agreement, if the Company fails to continuously maintain the effectiveness of the 2017 PIPE Registration Statement (with certain permitted exceptions), the Company will incur certain liquidated damages to the 2017 PIPE Investors. The 2017 PIPE Registration Rights Agreement also contains mutual indemnifications by the Company and each 2017 PIPE Investor, which the Company believes are customary for transactions of this type.

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

Under the terms of the Amended and Restated Non-Employee Director Compensation Plan, each non-employee member of the Company’s Board of Directors may elect to receive all or part of his or her director fees in shares of the Company’s common stock. Director fees, whether paid in cash or in shares of common stock, are payable quarterly on the last day of each fiscal quarter. The number of shares of common stock issued to directors is determined by dividing the product of: (i)(a) the fees otherwise payable to each director in cash, times ~~(ii)~~(b) the percentage of fees the director elected to receive in shares of common stock, by ~~(iii)~~(ii) the volume weighted average price per share of common stock over the last five trading days of the quarter. NoFollowing is information regarding the number of shares were issued to directors as payment for director fees during the three or nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, 4,431 and 10,805 shares, respectively, were issued to directors as payment for director fees in lieu of ~~cash.~~cash:

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

Since ~~June 2015,~~October 2017, the Company has granted share-based awards under the MRI Interventions, Inc. Second Amended and Restated 2013 Incentive Compensation Plan (the “2013 Plan”). Under the 2013 Plan, a total of ~~156,250~~1,956,250 shares of the Company’s common stock are reserved for issuance. Of this amount, stock grants of ~~38,294~~387,975 shares have been awarded and option grants, net of options terminated, expired or forfeited, of ~~103,625~~1,042,166 shares were outstanding as of September 30, ~~2017.~~2019. Accordingly, ~~14,331~~523,609 shares remained available for grants under the 2013 Plan as of that date.

Stock option activity under all of the Company’s Plans during the nine months ended September 30, ~~2017~~2019 is summarized below:

	Shares			Weighted - Average Exercise Price
Outstanding at January 1, 2019		1,386,396		$	11.09
Granted		216,046			3.34
Exercised		(2,500	)		1.74
Expired / forfeited		(12	)		385.60
Outstanding at September 30, 2019		1,599,930		$	9.79

~~The estimated grant date fair values of options granted during the three months ended September 30, 2017 were calculated using the Black-Scholes valuation model, based on the following assumptions:~~

~~Dividend yield~~			0%
~~Expected volatility~~			~~43.38% – 48.62%~~
~~Risk free interest rates~~			~~1.91% – 2.05%~~
~~Expected lives (in years)~~			6

The Company records share-based compensation expense on a straight-line basis over the related vesting period. For the three and nine months ended September 30, 2017 and 2016, share-based compensation expense related to options was:

Three Months Ended September 30,
2017 2016
$ 186,982 $ 238,101

Nine Months Ended September 30,
2017 2016
$ 616,007 $ 736,982

As of September 30, ~~2017,~~2019, there was unrecognized compensation expense of ~~$243,254~~$587,431 related to outstanding stock options, which is expected to be recognized over a weighted average period of ~~1.12~~1.7 years.

Warrants have generally been issued for terms of up to five years. Common stock warrant activity for the nine months ended September 30, ~~2017~~2019 was as follows:

	Shares			Weighted - Average Exercise Price
Outstanding at January 1, 2019		8,676,481		$	4.17
Exercised		(2,437,755	)		2.20
Expired / Terminated		(29,754	)		41.55
Outstanding at September 30, 2019		6,208,972		$	4.76

~~As discussed in Note 4, on June 30, 2016,~~Derivative liabilities arose from an amendment the Company entered into ~~amendments~~ with Brainlab, with respect to the ~~New~~ Brainlab Note and ~~with the 2014 Convertible Note Holders,~~related warrants (the “Brainlab warrants”), the provisions of which created: (a) a conversion feature allowing for $500,000 the principal balance ~~described above~~of the Brainlab Note to be converted in a Qualified Public Offering, as defined in the amendment, at a public offering price that may be less than market value per share of the Company’s common stock; and (b) down round strike price protection with respect to ~~the~~Brainlab warrants. ~~In addition, warrants issued in 2013 contain net-cash settlement and down round provisions.~~

~~Under GAAP, the provisions described above require that the~~The conversion feature and the Brainlab warrants ~~be accounted for as derivatives, thus requiring that they each be adjusted~~described herein terminated unexercised pursuant to ~~estimated fair value at each balance sheet date and shown as liabilities in~~ the ~~accompanying condensed consolidated balance sheets. The fair values~~Company’s September 2018 repayment of the ~~conversion feature~~Brainlab Note as discussed in Note 5, and, ~~the warrants were calculated using the Monte Carlo simulation valuation method. Assumptions used in calculating the fair value of the conversion feature at September 30, 2017 are as follows:~~

~~Assumptions used in calculating the fair value of the warrants at September 30, 2017 are as follows:~~

~~In addition to the assumptions above,~~accordingly, the Company also estimates the likelihood of whether it will participate in a future qualified public offering, as defined in either the amended note or warrant agreements, as applicable, that would trigger the conversion feature or the repricing of warrants, and, if so, the estimated timing and pricing of its offering of common stock.

The fair values and the changes in fair values of derivative liabilities during the nine months ended September 30, ~~2017 and 2016~~2018 are as follows:

Balance, January 1, 2018	$	95,786
Reduction from warrant exercise		(31,468	)
Gain on change in fair value for the period		(64,318	)
Balance, September 30, 2018	$	-

~~Subsequent Events~~

~~Stock Incentive Plan~~

At the Annual Meeting of the Company’s stockholders on October 3, 2017, the Company’s stockholders approved the adoption of the MRI Interventions, Inc. Second Amended and Restated 2013 Incentive Compensation Plan (the “Amended 2013 Plan”). The material change effected in the Amended 2013 Plan was to increase the number of shares of the Company’s common stock available for awards thereunder by 1,800,000 shares.

~~Management Change~~

On October 6, 2017, Francis P. Grillo entered into a Separation, Transition and Consulting Agreement (the “Separation Agreement”) with the Company, under which Mr. Grillo is voluntarily resigning from his position as the Chief Executive Officer and President of the Company, and as a member of the Company’s Board of Directors, and separating from the Company, effective as of November 7, 2017 (the “Transition Date”).

Under the terms of the Separation Agreement, Mr. Grillo will receive the following payments and other benefits, subject to certain conditions, pursuant to the Separation Agreement: (i) his annual bonus, based on his and the Company’s performance for the fiscal year ending December 31, 2017, determined in accordance with the applicable policies and procedures set forth in his employment agreement; (ii) 87,500 unregistered shares of the Company’s common stock; (iii) a lump sum payment of $15,000; and (iv) $30,000 per month for the first two months following his separation from the Company in exchange for transition and consulting services to be provided to the Company by Mr. Grillo, after which Mr. Grillo will be compensated on an hourly basis to the extent he renders any such consulting services. In addition, the option exercise period of all stock options previously granted to Mr. Grillo will be extended to be coterminous with the term of the option award.

In conjunction with Mr. Grillo’s resignation from the positions described above, on October 6, 2017, the Company entered into an Employment Agreement (the “Employment Agreement”) with Joseph M. Burnett, whereby Mr. Burnett will serve as the Company’s Chief Executive Officer and President, effective as of the Transition Date. In addition, the Board expects to elect Mr. Burnett to serve as a director of the Company, effective as of the Transition Date.

Under the terms of the Employment Agreement, Mr. Burnett’s base salary, effective as of the Transition Date, will be $360,000. Starting with the fiscal year commencing on January 1, 2018 and for each year thereafter, Mr. Burnett will be eligible to receive an annual target incentive bonus of 40% of his annual base salary, subject to certain performance goals to be established by the Compensation Committee of the Board of Directors. In addition, the Company will pay Mr. Burnett up to $50,000 in reasonable relocation expenses during the first two years of his employment, subject to Mr. Burnett’s continued employment through such two-year period. The Employment Agreement also provides for certain payments to be made to Mr. Burnett: (a) in the event the Company terminates his employment without cause or if Mr. Burnett voluntarily terminates his employment with the Company for good reason, as those terms are defined in the Employment Agreement; or (b) if the Company terminates his employment without cause or if Mr. Burnett voluntarily terminates his employment with the Company for good reason within two months of a change of control, as such term is defined in the Employment Agreement. Also, in the event of a change of control, any unvested stock options and restricted stock previously granted to Mr. Burnett will become fully vested.

~~MRI INTERVENTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(Unaudited)~~

As an inducement to his employment with the Company, Mr. Burnett is entitled to receive an initial signing bonus in the aggregate amount of $100,000 under the Employment Agreement, to be paid in two equal installments on the Transition Date and the 6-month anniversary of the Transition Date, conditioned upon Mr. Burnett’s continued employment. In addition, on the Transition Date Mr. Burnett will be granted: (i) a non-qualified stock option to purchase up to 350,000 shares of the Company’s common stock; and (ii) 200,000 restricted shares of the Company’s common stock. The per share exercise price of such stock option will be equal to the fair market value of the Company’s common stock on the date of grant. The stock option and restricted shares will vest as follows: (i) one-third on the first anniversary of the date of grant; and (ii) the remainder in equal quarterly installments during each of the second and third years following the date of grant.

~~Mr. Burnett is entitled to participate in any benefit plan from time to time in effect for the Company’s executives and/or employees generally, subject to the eligibility provisions of that plan.~~

In connection with the Employment Agreement, Mr. Burnett also entered into a confidentiality agreement and non-compete agreement, which agreements impose on him customary restrictive covenants prohibiting the disclosure of the Company’s confidential information, requiring Mr. Burnett to assign inventions discovered in the scope of his employment to the Company, prohibiting him from competing with the Company during the term of his employment and for one year following the termination of his employment (subject to applicable law), and prohibiting him from soliciting Company employees, consultants and contractors for two years following the termination of his employment.

ITEM 2.

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 in conjunction with the unaudited condensed financial statements and the notes thereto appearing in Part I, Item 1 of this Quarterly Report. Historical results and trends that might appear in this Quarterly Report should not be interpreted as being indicative of future operations.

Overview

We are a medical device company that develops and commercializes innovative platforms for performing minimally invasive surgical procedures in the brain ~~and heart~~ under direct, intra-procedural MRI guidance. We have two product platforms. Our principal product platform is our ClearPoint system, which is in commercial use and is used to perform minimally invasive surgical procedures in the brain. ~~We anticipate that our ClearTrace~~The ClearPoint system which is a product candidate, will be used to perform minimally invasive surgical procedures in the heart. In 2015, we suspended development of the ClearTrace system so that we could focus our resources on the ClearPoint system. Both systems utilizeutilizes intra-procedural MRI to guide the procedures and ~~are~~is designed to work in a hospital’s existing MRI suite. We believe that ~~our two~~this product ~~platforms, subject to appropriate regulatory clearance and approval,~~platform will deliver better patient outcomes, enhance revenue potential for both physicians and hospitals, and reduce costs to the healthcare system. In addition, we have the ClearTrace product candidate that is designed to allow catheter-based minimally invasive procedures in the heart to be performed in an MRI suite. Although still a product candidate, the Company has reduced its efforts to commercialize the ClearTrace system.

In 2010, we received regulatory clearance from the FDA to market our ClearPoint system in the U.S. for general neurological procedures. In addition, in 2011, we ~~also~~ obtained CE marking approval for our ClearPoint system, which enables us to sell our ClearPoint system in the European Union. Substantially all our product revenues for the three and nine months ended September 30, ~~2017 and 2016~~2019 relate to sales of our ClearPoint system products. ~~We do not have regulatory clearance or approval to sell our ClearTrace system for commercial use.~~ We have financed our operations and internal growth primarily through the sale of equity securities, the issuance of convertible and other secured notes, and license arrangements. We have incurred significant losses since our inception in 1998 as we have devoted substantial efforts to research and development. As of September 30, ~~2017,~~2019, we had accumulated losses of approximately ~~$99~~$111 million. We may continue to incur operating losses as we ~~commercialize~~expand our ClearPoint system ~~products, continue to develop~~platform and our ~~ClearTrace system, and expand our business.~~business generally.

Factors Which May Influence Future Results of Operations

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

Revenues

In 2010, we received 510(k) clearance from the FDA to market our ClearPoint system in the U.S. for general neurological procedures. Future revenues from sales of our ClearPoint system products are difficult to predict and may not be sufficient to offset our continuing research and development expenses and our increasing selling, general and administrative expenses. ~~We cannot sell our ClearTrace system for commercial use until we receive regulatory clearance or approval.~~

Generating recurring revenues from the sale of ~~disposable~~functional neurosurgical products is an important part of our business model for our ClearPoint system. We anticipate that, over time, recurring revenues will constitute an increasing percentage of our total revenues as we leverage installations of our ClearPoint system to generate recurring sales of our ~~ClearPoint disposable~~functional neurosurgical products. Our product revenues were approximately ~~$1.6~~ $2.6 million and ~~$5.4~~$7.0 million for the three and nine months ended September 30, ~~2017~~2019, respectively, and ~~were almost entirely~~predominantly related to our ClearPoint system.

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

Cost of ~~Product~~ Revenues

Cost of ~~product~~ revenues includes the direct costs associated with the assembly and purchase of components for ~~disposable~~functional neurosurgical products, drug delivery and biologic products, and ClearPoint ~~system reusable products~~capital equipment which we have sold, and for which we have recognized the revenue in accordance with our revenue recognition policy. Cost of ~~product~~ revenues also includes the allocation of manufacturing overhead costs and depreciation of loaned systems installed under our ClearPoint placement program, as well as provisions for obsolete, impaired, or excess inventory.

Research and Development Costs

Our research and development costs consist primarily of costs associated with the conceptualization, design, testing, and prototyping of our ClearPoint system ~~products and our ClearTrace system components (prior to the suspension of such development).~~products. Such costs include salaries, travel, and benefits for research and development personnel, including related share-based compensation; materials and laboratory supplies in research and development activities; consultant costs; ~~sponsored research and product development with third parties;~~ and licensing costs related to technology not yet commercialized. We anticipate that, over time, our research and development costs may increase as we: (i) continue to develop enhancements to our ClearPoint system; (ii) ~~resume~~increase our ClearTrace system product development efforts; and (iii) seek to expand the application of our technological platforms. From our inception through September 30, ~~2017,~~2019, we have incurred approximately ~~$50~~$55 million in research and development expenses.

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

~~Selling,~~Sales and Marketing, and General and Administrative Expenses

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

Critical Accounting Policies

~~There have been no significant changes in our critical accounting policies during the three months endedSeptember 30, 2017 as compared to the critical accounting policies~~As described in ~~our 2016 Form 10-K.~~

~~Results of Operations~~

~~Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016~~

Three Months Ended September 30,
2017 2016 Percentage
Change
Product revenues $ 1,628,435 $ 1,580,826 3 %
Other revenues 88,635 35,507 150 %
Cost of revenues 688,847 748,305 (8 )%
Research and development costs 589,716 691,330 (15 )%
Selling, general and administrative expenses 1,765,830 1,886,220 (6 )%
Other income (expense):
Loss from debt restructuring - (933,134 ) (100 )%
Gain from change in fair value of derivative liabilities 109,803 324,035 (66 )%
Other income (expense), net 3,363 (4,877 ) 169 %
Interest expense, net (211,362 ) (239,733 ) (12 )%
Net loss $ (1,425,519 ) $ (2,563,231 ) (44 )%

~~Product Revenues.~~~~Product revenues were $1.6 million for each of the three months ended September 30, 2017 and 2016.~~

ClearPoint disposable product sales for the three months ended September 30, 2017 were $1.4 million, compared with $1.3 million for the same period in 2016, representing an increase of $149,000, or 12%. This increase was due primarily to a greater number of procedures performed using our ClearPoint system within a larger installed base for ClearPoint in the three months ended September 30, 2017, relative to the same period in 2016. Disposable product prices in effect during the three months ended September 30, 2017 were less than 1% higher than those prices in effect during the same period in 2016 for a typical customer order.

ClearPoint reusable product sales for the three months ended September 30, 2017 were $208,000, compared with $309,000 of such sales for the same period in 2016, representing a decrease of $101,000, or 33%. Sales of our reusable products, which consist primarily of computer hardware and software bearing sales prices that are appreciably higher than those for disposable products, may vary, sometimes significantly, from quarter to quarter. Reusable product prices in effect during the three months ended September 30, 2017 were approximately 2% higher than those prices in effect during the same period in 2016 for a typical customer order.

~~Other Revenues.~~ Other revenues for the three months ended September 30, 2017 were $89,000, compared with $36,000 for the same period in 2016, an increase of $53,000, or 150%. This increase was due primarily to fees of $33,000 earned during the three months ended September 30, 2017 from our rental of ClearPoint equipment to customers. There were no rentals to customers during the same period in 2016. Also contributing to the increase was a $10,000 increase in fees earned from a greater number of ClearPoint service agreements in effect during the three months ended September 30, 2017, compared to the same period in 2016.

~~Cost of Revenues.~~Cost of revenues was $689,000 for the three months ended September 30, 2017, representing a gross margin of 60%, compared to $748,000 for the same period in 2016, representing a gross margin of 54%. The increase in gross margin was due primarily to a decrease in costs associated with reserves for inventory obsolescence. Also, contributing to the gross margin improvement was a favorable mix of revenues during the three months ended September 30, 2017, relative to the same period in 2016. During the three months ended September 30, 2017, disposable product revenues and other revenues, which bear higher margins relative to reusable product revenues, constituted 89% of total revenues, as compared to 82% during the same period in 2016.

~~Research and Development Costs.~~Research and development costs were $590,000 for the three months ended September 30, 2017, compared to $691,000 for the same period in 2016, a decrease of $101,000, or 15%. The decrease was due to primarily to reductions in software development and intellectual property costs of $96,000 and $105,000, respectively, partially offset by an increase of $108,000 in new product development costs.

~~Selling, General and Administrative Expenses~~. Selling, general and administrative expenses were $1.8 million for the three months ended September 30, 2017, as compared to $1.9 million for the same period in 2016, a decrease of $120,000, or 6%. The decrease was due primarily to: (a) costs of $106,000 that were charged to expense during the three months ended September 30, 2016 in connection with a proposed equity financing transaction that was not completed; and (b) a reduction of $43,000 in stock compensation expense during the three months ended September 30, 2017, relative to the same period in 2016, due to the suspension of stock and option granting activity in 2017, pending approval by our stockholders of the Amended 2013 Plan in October 2017. These decreases were partially offset by recruiting expenses of $33,000 incurred during the three months ended September 30, 2017 that were not incurred during the same period in 2016.

~~Other Income (Expense).~~~~In August 2016, we entered into the August 2016 Amendments with the 2014 Convertible~~ Note ~~Holders, as discussed in Note 4~~2 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly ~~Report. Based on~~Report, effective January 1, 2019, we adopted the provisions of ASC Topic 842, “Leases.”

There have been no other significant changes in our critical accounting policies during the ~~August 2016 Amendments, on August~~three or nine months ended September 30, 2016, we recorded a debt restructuring loss of approximately $933,000, representing the aggregate difference in the fair value of the derivative liabilities created by the June 2016 Amendments between the points in time (i) immediately preceding, and (ii) immediately subsequent2019 as compared to the ~~execution of the August 2016 Amendments.~~critical accounting policies described in our 2018 Form 10-K.

~~During~~Results of Operations

Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018


	Three Months Ended September 30,
	2019			2018			Percentage Change
Product revenues	$	2,594,428		$	1,739,804			49	%
Service and other revenues		333,038			67,238			395	%
Total revenues		2,927,466			1,807,042			62	%
Cost of revenues		983,042			553,221			78	%
Research and development costs		761,881			617,241			23	%
Sales and marketing expenses		1,063,143			764,599			39	%
General and administrative expenses		1,029,929			1,078,171			(4	)%
Other income (expense):
Gain from change in fair value of derivative liabilities		-			22,295			(100	)%
Other income, net		728			2,643			(72	)%
Interest expense, net		(213,167	)		(246,824	)		(14	)%
Net loss	$	(1,122,968	)	$	(1,428,076	)		(21	)%

Revenues. Total revenues were $2.9 million for the three months ended September 30, ~~2017~~2019, and ~~2016, we recorded gains of $110,000 and $324,000, respectively, resulting from changes in the fair value of our derivative liabilities. For~~$1.8 million for the three months ended September 30, ~~2017, such derivative liabilities~~2018, an increase of $1.1 million, or 62%.

Functional neurosurgery revenue, which consists of disposable product commercial sales related ~~to: (a) warrants issued with either or both net-cash settlement and down-round price protection provisions in connection with a 2013 private placement transaction; (b)~~to cases utilizing the ~~June 2016 Amendment of the Brainlab Note as discussed above; and (c) the August 2016 Amendments, entered into with the 2014 Convertible Note Holders, also as discussed above. For~~ClearPoint system, increased 28% to $1.9 million for the three months ended September 30, ~~2016, derivative liabilities included~~2019, from $1.4 million for the ~~foregoing~~same period in 2018. We believe this increase in volume is indicative of several factors, including: (a) an expanded customer base; (b) greater acceptance of the ClearPoint system; (c) more efficient utilization of MRI scanner availability by our existing customers; and ~~warrants issued~~(d) the resolution in late 2018 of FDA actions taken in early 2018 that adversely affected third-party providers in the laser ablation space and, by extension, adversely affected customer orders of the ClearPoint system and related disposable products. There were no increases in functional neurosurgery product prices during the period between the three months ended September 30, 2019 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Biologics and drug delivery revenues, which include sales of disposable products and services related to customer-sponsored clinical trials utilizing the ClearPoint system, increased 188% to $564,000 for the three months ended September 30, 2019, from $196,000 for the same period in 2018. This increase was due primarily to: (a) an increase, during the quarter ended September 30, 2019, relative to the same period in 2018, in biologic and drug delivery product revenues. There were no increases in biologics and drug delivery product prices during the period between the three months ended September 30, 2018 and the same period in 2019 that would be reasonably expected to affect a typical customer order.

Capital equipment revenue, consisting of sales of ClearPoint reusable hardware and software, increased 85% to $185,000 for the three months ended September 30, 2019, from $100,000 for the same period in 2018. Revenues from this product line historically have varied from quarter to quarter. This increase was due primarily to an increase from the third quarter of 2018 to the same period in 2019 in the number of ClearPoint systems sold. There were no increases in capital equipment product prices during the period between the three months ended September 30, 2019 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Capital equipment-related services, consisting of fees for capital equipment rental, service, installation, training and shipping, increased 238% to $211,000 for the three months ended September 30, 2019, from $62,000 for the same period in 2018. The increase was due primarily to an increase in equipment service contracts. Also contributing to the increase were fees associated with ~~down-round price protection provisions~~the aforementioned increase in capital equipment sales.

Cost of Revenues. Cost of revenues was $983,000, representing a gross margin of 66%, for the three months ended September 30, 2019, and was $553,000, representing a gross margin of 69%, for the three months ended September 30, 2018. This decrease in gross margin was due primarily to: (a) a shift in the mix of revenues by line of business that resulted in functional neurosurgery disposable products and ClearPoint system software, which bear higher gross margins in comparison to other product lines, representing a lower percentage in total sales for the three months ended September 30, 2019, relative to the same period in 2018; (b) an increase in the average cost of disposable product components; and (c) an increase in indirect costs from the third quarter of 2018 to the same period in 2019.

Research and Development Costs. Research and development costs were $762,000 for the three months ended September 30, 2019, compared to $617,000 for the same period in 2018, an increase of $145,000, or 23%. The increase was due primarily to increases in personnel and product development costs, with related increases in intellectual property and consulting costs, which were partially offset by decreases in professional fees and costs incurred in connection with ~~a 2012 private placement transaction.~~sponsored research projects which had been undertaken during the quarter ended September 30, 2018, but which had been subsequently discontinued.

Sales and Marketing Expenses. Sales and marketing expenses were $1.1 million for the three months ended September 30, 2019, compared to $765,000 for the same period in 2018, an increase of $299,000, or 39%. This increase was primarily due to increases in personnel costs attributable to increases in: (a) incentive compensation consistent with the increase in revenues during the three months ended September 30, 2019 as compared to the same period in 2018; and (b) clinical personnel headcount during the three months ended September 30, 2019 as compared to the same period in 2018.

General and Administrative Expenses. General and administrative expenses were $1.0 million for the three months ended September 30, 2019, compared to $1.1 million for the same period in 2018, a decrease of $48,000, or 4%. This decrease was due primarily to a decrease in the accrual for directors’ fees which was partially offset by increases in personnel costs and professional fees.

Other Income (Expense). Net interest expense for the three months ended September 30, ~~2017~~2019 was ~~$211,000,~~$213,000, compared with ~~$240,000~~$247,000 for the same period in ~~2016.~~2018. The decrease was primarily due to the repayment, in June 2019, of the 2014 Secured Notes as described in Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018


	Nine Months Ended September 30,
	2019			2018			Percentage Change
Product revenues	$	6,952,575		$	4,691,002			48	%
Service and other revenues		1,053,807			385,742			173	%
Total revenues		8,006,382			5,076,744			58	%
Cost of revenues		2,899,837			1,743,981			66	%
Research and development costs		2,044,224			1,828,846			12	%
Sales and marketing expenses		3,246,912			2,653,044			22	%
General and administrative expenses		2,991,305			3,119,617			(4	)%
Other income (expense):
Gain from change in fair value of derivative liabilities		-			64,318			(100	)%
Other income, net		8,100			1,284			531	%
Interest expense, net		(726,292	)		(742,387	)		(2	)%
Net loss	$	(3,894,088	)	$	(4,945,529	)		(21	)%

Revenue. Total revenues were $8.0 million for the nine months ended September 30, 2019, and $5.1 million for the nine months ended September 30, 2018, an increase of $2.9 million, or 58%.

Functional neurosurgery revenue, which consists of disposable product commercial sales related to cases utilizing the ClearPoint system, increased 38% to $5.2 million for the nine months ended September 30, 2019, from $3.8 million for the same period in 2018. We believe this increase in volume is indicative of several factors, including: (a) an expanded customer base; (b) greater acceptance of the ClearPoint system; (c) more efficient utilization of MRI scanner availability by our existing customers; and (d) the resolution in late 2018 of FDA actions taken in early 2018 that adversely affected third-party providers in the laser ablation space and, by extension, adversely affected customer orders of the ClearPoint system and related disposable products. There were no increases in functional neurosurgery product prices during the period between the nine months ended September 30, 2019 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Biologics and drug delivery revenues, which include sales of disposable products and services related to customer-sponsored clinical trials utilizing the ClearPoint system, increased 99% to $1.3 million for the nine months ended September 30, 2019, from $650,000 for the same period in 2018. This increase was due primarily to an increase in biologic and drug delivery product revenues during the nine months ended September 30, 2019, relative to the same period in 2018, as well as to an increase, between the same periods, in services revenues due primarily to this service line not having commenced until the second fiscal quarter of 2018. There were no increases in biologics and drug delivery product prices during the period between the nine months ended September 30, 2018 and the same period in 2019 that would be reasonably expected to affect a typical customer order.

Capital equipment revenue, consisting of sales of ClearPoint reusable hardware and software, increased 67% to $701,000 for the nine months ended September 30, 2019, from $420,000 for the same period in 2018. Revenues from this product line historically have varied from quarter to quarter. This increase was due primarily to an increase from the nine months ended September 30, 2018 to the same period in 2019 in the number of ClearPoint systems sold. There were no increases in capital equipment product prices during the period between the nine months ended September 30, 2019 and the same period in 2018 that would be reasonably expected to affect a typical customer order.

Capital equipment-related services, consisting of fees for capital equipment rental, service, installation, training and shipping, increased 136% to $516,000 for the nine months ended September 30, 2019, from $219,000 for the same period in 2018. The increase was due primarily to an increase in equipment service contracts.

Cost of Revenues. Cost of revenues was $2.9 million for the nine months ended September 30, 2019, representing a gross margin of 64%, and was $1.7 million for the same period in 2018, representing gross margin of 66%. This decrease in gross margin was due primarily to: (a) a shift in the mix of revenues by line of business that resulted in functional neurosurgery disposable products and ClearPoint system software, which bear higher gross margins in comparison to other product lines, representing a lower percentage in total sales for the nine months ended September 30, 2019, relative to the same period in 2018; (b) an increase in the average cost of disposable product components; and (c) an increase in indirect costs from the nine months ended September 30, 2018 to the same period in 2019.

Research and Development Costs. Research and development costs were $2.0 million for the nine months ended September 30, 2019, compared to $1.8 million for the same period in 2018, an increase of $215,000, or 12%. The increase was due primarily to increases in personnel and product development costs, and related intellectual property and consulting costs, which were partially offset by decreases in regulatory legal fees.

Sales and Marketing Expenses. Sales and marketing expenses were $3.2 million for the nine months ended September 30, 2019, compared to $2.7 million for the same period in 2018, an increase of $600,000, or 22%. This increase was primarily due to an increase in personnel costs due to increases in headcount of clinical personnel and in incentive compensation which is consistent with increases in revenue for the nine months ended September 30, 2019 as compared to the same period in 2018.

General and Administrative Expenses. General and administrative expenses decreased 4% to $3.0 million for the nine months ended September 30, 2019 and compared to $3.1 million for the same period in 2019. This decrease was due primarily to decrease in personnel costs and an increase in activity-based cost allocations to other departments, which were partially offset by increases in license fees and taxes and insurance premiums.

Other Income (Expense). Net interest expense for the ~~conversion of an aggregate $1.74 million~~nine months ended September 30, 2019 was $726,000, compared with $742,000 for the same period in ~~principal balance~~2018. The decrease was primarily due to the repayment, in June 2019, of the 2014 Secured ~~Convertible~~ Notes, ~~held~~which was partially offset by increased amortization of the discount and deferred issuance costs associated with the 2014 ~~Convertible Note Holders in connection with~~Secured Notes and the ~~2016 PIPE and pursuant to the terms of the August 2016 Amendments,~~2010 Secured Notes, as ~~discussed~~described in Note 45 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

Liquidity and Capital Resources

~~Nine Months Ended~~At September 30, ~~2017 Compared to the Nine Months Ended September 30, 2016~~

Nine Months Ended September 30,
2017 2016 Percentage
Change
Product revenues $ 5,443,287 $ 4,013,531 36 %
Other revenues 256,860 100,818 155 %
Cost of revenues 2,239,808 1,965,839 14 %
Research and development costs 2,231,616 2,098,465 6 %
Selling, general and administrative expenses 5,731,961 5,748,524 <1 %
Other income (expense):
Loss from debt restructuring - (811,910 ) (100 )%
Gain from change in fair value of derivative liabilities 48,064 748,080 (94 )%
Other income, net 6,774 209,505 (97 )%
Interest expense, net (637,270 ) (836,208 ) (24 )%
Net loss $ (5,085,670 ) $ (6,389,012 ) (20 )%

~~Product Revenues.~~~~Product revenues were $5.4~~2019, we had cash and cash equivalent balances aggregating $6.2 million. Net cash used in operating activities was $2.4 million for the nine months ended September 30, ~~2017, and $4.0 million for the same period in 2016, an increase of $1.4 million, or 36%.~~2019.

ClearPoint disposable product sales for the nine months ended September 30, 2017 were $4.5 million, compared with $3.4 million for the same period in 2016, representing an increase of $1.1 million, or 33%. This increase was due primarily to a greater number of procedures performed using our ClearPoint system within a larger installed base for ClearPoint in the nine months September 30, 2017, relative to the same period in 2016. Disposable product prices in effect during the nine months ended September 30, 2017 were less than 1% higher than those prices in effect during the same period in 2016 for a typical customer order.

ClearPoint reusable product sales for the nine months ended September 30, 2017 were $923,000, compared with $608,000 of such sales for the same period in 2016, representing an increase of $315,000, or 52%. Sales of our reusable products, which consist primarily of computer hardware and software bearing sales prices that are appreciably higher than those for disposable products, may vary, sometimes significantly, from quarter to quarter. Reusable product prices in effect during the nine months ended September 30, 2017 were approximately 2% higher than those prices in effect during the same period in 2016 for a typical customer order.

~~Other Revenues.~~ Other revenues for the nine months ended September 30, 2017 were $257,000, compared with $101,000 for the same period in 2016, an increase of $156,000, or 155%. This increase was due primarily to: (a) fees of $99,000 earned during the nine months ended September 30, 2017 from our rental of ClearPoint equipment to customers, as compared to no rental fees earned during the same period in 2016; and (b) a $33,000 increase in fees earned from a greater number of ClearPoint service agreements in effect during the nine months ended September 30, 2017, compared to the same period in 2016.

~~Cost of Product Revenues.~~Cost of product revenues was $2.2 million for the nine months ended September 30, 2017, representing gross margin of 61%, compared to $2.0 million for the same period in 2016, representing gross margin of 52%. The increase in gross margin was due primarily to: (a) lower costs for scrap, expired product and reserves for inventory obsolescence during the nine months ended September 30, 2017, relative to the same period in 2016; and (b) a favorable mix of reusable products sold during the nine months ended September 30, 2017, relative to the same period in 2016. During the nine months ended September 30, 2017, we sold a greater number of complete ClearPoint systems, which includes our proprietary ClearPoint software that bears higher margins relative to system hardware, as compared to the same period in 2016.

~~Research and Development Costs.~~Research and development costs were $2.2 million for the nine months ended September 30, 2017, compared to $2.1 million for the same period in 2016, an increase of $133,000, or 6%. The increase was due to: (a) payments aggregating $552,000, the majority of which was in the form of shares of our common stock, required under certain license and product co-development agreements entered into in April 2017, that were partially offset by: (b) an aggregate decrease of $282,000 in software development and intellectual property-related costs; and (c) a decrease of $157,000 in personnel costs related to a lower headcount during the nine months ended September 30, 2017, relative to the same period in 2016.

~~Selling, General and Administrative Expenses~~. Selling, general and administrative expenses were $5.7 million for each of the nine months ended September 30, 2017 and 2016. Increases during the nine month period ended September 30, 2017, relative to the same period in 2016 related to: (a) personnel costs, related primarily to increases in our number of clinical representative, amounting to $117,000; (b) recruiting costs of $63,000; (c) insurance premiums of $25,000; and (d) investor relations expenses of $29,000. These increases were substantially offset by decreases related to: (a) professional fees, primarily related to financing activities undertaken during the nine month period ended September 30, 2016 that did not recur during the same period in 2017, amounting to $85,000; and (b) stock-based compensation expenses of $101,000, due to the suspension of stock-based grants during 2017 pending stockholder approval of the Amended 2013 Plan in October 2017.

~~Other Income (Expense).~~In April 2016, we entered into the 2016 Purchase Agreement with Brainlab under which the Brainlab Note was restructured and reissued as the New Brainlab Note, as discussed in Note 4 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. As a result of the foregoing, we recorded a debt restructuring gain of $941,000.

In June 2016, we entered into the June 2016 Amendments with Brainlab, with respect to the New Brainlab Note, and with the 2014 Convertible Note Holders, as discussed in Note 4 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Based on the provisions of the June 2016 Amendments, on June 30, 2016, we recorded a debt restructuring loss of $820,000 resulting from the restructuring of the New Brainlab Note and those 2014 Secured Notes subject to the June 2016 Amendments.

In August 2016, we entered into the August 2016 Amendments with the 2014 Convertible Note Holders, as discussed in Note 4 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Based on the provisions of the August 2016 Amendments, on August 30, 2016 we recorded a debt restructuring loss of approximately $933,000, representing the aggregate difference in the fair value of the derivative liabilities created by the June 2016 Amendments between the points in time (i) immediately preceding, and (ii) immediately subsequent to, the execution of the August 2016 Amendments.

During the nine months ended September 30, 2017 and 2016, we recorded gains of $48,000 and $748,000, respectively, resulting from changes in the fair value of our derivative liabilities. Such derivative liabilities related to: (a) warrants issued with either or both net-cash settlement and down-round price protection provisions in connection with 2012 and 2013 private placement transactions; (b) the June 2016 Amendment of the Brainlab Note as discussed above; and (c) the August 2016 Amendments, entered into with the 2014 Convertible Note Holders, also as discussed above.

During the nine months ended September 30, 2017, we recorded other income of $7,000, as compared with other income of $210,000 recorded during the same period in 2016, representing a decrease of $203,000, or 97%. This decrease was due primarily to grant income from a U.S. federal agency of $203,000 earned from a project in process during the nine months ended September 30, 2016, which was discontinued by the agency later in 2016. We have not since undertaken any additional such projects.

Net interest expense for the nine months ended September 30, 2017 was $637,000, compared with $836,000 for the same period in 2016. The decrease was due primarily to the conversion of an aggregate $1.74 million in principal balance of the 2014 Secured Convertible Notes held by the 2014 Convertible Note Holders in connection with the 2016 PIPE and pursuant to the terms of the August 2016 Amendments, as discussed in Note 4 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

~~Liquidity and Capital Resources~~

At September 30, 2017, we had cash and cash equivalent balances aggregating $11.0 million, resulting primarily from completion of the 2017 PIPE discussed in Note 5 to the Condensed Consolidated Financial Statement included elsewhere in this Quarterly Report. Net cash used in operating activities was $4.2 million and $4.7 million for the nine months ended September 30, 2017 and 2016, respectively.

Our plans for the next twelve months reflect ~~management’s~~our anticipation ofof: (a) increases in revenues from sales of the ClearPoint system and related disposable products resulting from greater utilization at existing installed sites and the installation of the ClearPoint system at new ~~sites. Management also anticipates increases over the next twelve months~~sites, and from expansion of our product and service platforms; (b) growth in operating expenses that will be modest in comparison to ~~support~~ the ~~expected increase~~anticipated growth in revenues, with resulting decreases in loss from operations and in cash ~~flow~~ used in ~~operations.~~operations, albeit continuing to result in operations consuming cash over at least the next twelve months; and (c) financing activities to support repayment of debt obligations maturing in 2020 as discussed in Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. In management’s opinion, cash and cash equivalent balances at September 30, 2019, when combined with our operational and financing plans as set forth herein, are sufficient to support our operations and meet our obligations for at least the next twelve months. There is no assurance, however, that we will be able to achieve ~~our anticipated results, and even~~the objectives set forth in ~~the event~~ such ~~results are achieved, we expect to continue to consume cash inouroperations over at least the next twelve months.~~plans.

~~As a result of the foregoing, we believe we will have sufficient cash resources to support our operations for at least the next twelve months.~~

Cash Flows

Cash activity for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 is summarized as follows:

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2019			2018
Cash used in operating activities	$	(4,246,781	)	$	(4,708,157	)	$	(2,383,705	)	$	(4,048,210	)
Cash used in investing activities		(24,515	)		(100,324	)		(160,190	)		(62,651	)
Cash provided by financing activities		11,984,495			3,832,379
Netincrease (decrease) in cash and cash equivalents	$	7,713,199		$	(976,102	)
Cash provided (used) by financing activities								5,677,928			(1,468,023	)
Net change in cash and cash equivalents							$	3,134,035		$	(5,578,884	)

Net Cash Flows from Operating Activities.We used ~~$4.2~~$2.4 million and ~~$4.7~~$4.0 million of cash for operating activities during the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

During the nine months ended September 30, ~~2017,~~2019, uses of cash in operating activities primarily consisted of: (i) our ~~$5.1~~$3.9 million net loss; (ii) increases in accounts receivable of $895,000, inventory of ~~$312,000,~~$908,000, and in prepaid expenses and other current assets of ~~$104,000;~~$151,000; and (iii) a decrease in lease liabilities of $82,000. These uses were partially offset by: (a) a decrease in other assets of $12,000; (b) increases in accounts payable and accrued expenses of $1.5 million and in deferred revenue of $747,000; and (c) net non-cash expenses included in our net loss aggregating $1.3 million and consisting primarily of depreciation and amortization, share-based compensation, and amortization of debt issuance costs, original issue discounts on debt and lease rights-of-use, net of accretion in lease liabilities.

During the nine months ended September 30, 2018, uses of cash in operating activities primarily consisted of: (i) our $4.9 million net loss; (ii) increases in accounts receivable of $106,000, inventory of $204,000 and prepaid expenses and other current assets of $69,000; and (iii) a decrease in accounts payable and accrued expenses of ~~$270,000.~~$362,000. These uses were partially offset by: (a) net non-cash expenses included in our net loss aggregating $1.5 million and consisting primarily of depreciation and amortization, share-based compensation, expenses paid through the issuance of common stock, change in fair value of derivative liabilities and amortization of debt issuance costs and original issue discounts; and (b) a decrease in other assets of $1,000 and an increase in deferred revenue of ~~$59,000.~~$165,000.

During the nine months ended September 30, 2016, uses of cash in operating activities primarily consisted of: (i) our $6.4 million net loss; (ii) the addition to net loss of the non-cash gain from the change in fair value of derivative liabilities of $748,000; (iii) a decrease in accounts payable and accrued liabilities of $220,000; (iv) an increase in inventory of $34,000; and (v) an increase in prepaid expenses and other current assets of $96,000. These uses were partially offset by: (a) non-cash expenses included in our net loss aggregating approximately $2.3 million and consisting of depreciation and amortization, share-based compensation, expenses paid through the issuance of common stock, loss from debt restructuring, amortization of debt issuance costs and original issue discounts, and loss from retirement of fixed assets; (b) a decrease in accounts receivable of $415,000; and (c) an increase in deferred revenue of $106,000.

Net Cash Flows from Investing Activities.Net cash flows used in investing activities for the nine months ended September 30, ~~2017~~2019 were $160,000 and ~~2016 were $24,000 and $100,000, respectively,~~consisted primarily of an acquisition of medical device license rights.

Net cash flows used in investing activities for the nine months ended September 30, 2018 was $63,000 and consisted of equipment ~~acquisitions in both periods.~~acquisitions.

Net Cash Flows from Financing Activities.Net cash flows from financing activities for the nine months ended September 30, ~~2017~~2019 consisted ofof: (a) net ~~cash~~ proceeds of ~~$12.0~~$7.4 million received from the ~~2017 PIPE. Cash~~sale of shares of our common stock under the terms of the 2019 PIPE as described in Note 7 to the condensed consolidated financial statements included elsewhere in this Quarterly Report; and (b) $387,000 received from warrant exercises. These proceeds were partially offset by the $2.0 million repayment, in June 2019, of the 2014 Secured Notes, and the $162,000 repayment of certain of the 2010 Secured Notes, both as described in Note 5 to the condensed consolidated financial statements included elsewhere in this Quarterly Report.

Net cash flows from financing activities for the nine months ended September 30, ~~2016~~2018 consisted ~~primarily~~ of the $2.0 million repayment of the Brainlab Note as described in Note 5 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, net of cash proceeds ~~of $3.8 million,~~ received from ~~the 2016 PIPE.~~warrant exercises of $532,000.

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, develop our ClearTrace system, and pursue additional applications for our technology platforms. Our cash balances are ~~typically~~primarily held in a variety of ~~interest bearing instruments, including interest bearing~~ demand accounts ~~and certificates of deposit. Cash in excess of immediate requirements is invested primarily~~ with a view to liquidity and capital preservation.

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

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

Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, because all our investments are in short-term bank deposits and institutional money market funds. The primary objective of our investment activities is to preserve principal while at the same time maximizing ~~the~~ income we receive without significantly increasing risk. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure.

To date, we have recorded no product sales in currencies other than U.S. dollars. We have only limited business transactions in foreign currencies. We do not currently engage in hedging or similar transactions to reduce our foreign currency risks, which at present, are not material. We believe we have no material exposure to risk from changes in foreign currency exchange rates at this time. We will continue to monitor and evaluate our internal processes relating to foreign currency exchange, including the potential use of hedging strategies.

We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934(~~the~~“~~Exchange~~ (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that material information relating to us is made known to our principal executive officer and principal financial officer by others within our organization. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, ~~2017~~2019 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, ~~2017.~~2019.

During the quarter ended September 30, ~~2017,~~2019, there were no changes in our internal control over financial reporting that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

Our business, future financial condition and results of operations are subject to a number of factors, risks and uncertainties, which are disclosed in Item 1A, “Risk Factors,” in Part I of our ~~2016~~2018 Form 10-K. Additional information regarding some of those risks and uncertainties is contained in the notes to the Condensed Consolidated Financial Statements appearing in Part I, Item 1 of this Quarterly Report, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part I, Item 2 of this Quarterly Report. The risks and uncertainties disclosed in our ~~2016~~2018 Form 10-K, our quarterly reports on Form 10-Q and other reports filed with the SEC are not necessarily all the risks and uncertainties that may affect our business, financial condition and results of operations in the future.

There have been no material changes to the risk factors as disclosed in our ~~2016~~2018 Form 10-K.

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

+ This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and it is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, ~~2017~~2019

Or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from_____to _____

Commission file number: 001-34822

MRI Interventions, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware	58-2394628
(State or Other Jurisdiction	(IRS Employer
of Incorporation or Organization)	Identification Number)

5 Musick
Irvine, California	92618
(Address of Principal Executive Offices)	(Zip Code)

(949) 900-6833
(Registrant’s Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	MRIC	NYSE American

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐☒	Smaller Reporting Company ☒
~~(Do not check if smaller reporting company)~~	Emerging Growth Company ☒☐

			Page Number

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)			4
	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018		4
	Condensed Consolidated Statements of Operations for the three months ended September 30, ~~2017~~2019 and ~~2016~~2018		5
	Condensed Consolidated Statements of Operations for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018		6
	Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2019 and 2018	7
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018		7	8
	Notes to Condensed Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29	24
Item 4.	Controls and Procedures		29	24

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		29	25
Item 1A.	Risk Factors		30	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30	25
Item 3.	Defaults Upon Senior Securities		30	25
Item 4.	Mine Safety Disclosures		30	25
Item 5.	Other Information		30	25
Item 6.	Exhibits		30	26

SIGNATURES			32	27

	For The Three Months Ended September 30,						For The Three Months Ended September 30,
	2017			2016			2019			2018
Revenues:
Product revenues	$	1,628,435		$	1,580,826		$	2,594,428		$	1,739,804
Service and other revenues		88,635			35,507			333,038			67,238
Total revenues		1,717,070			1,616,333			2,927,466			1,807,042
Cost of product revenues		688,847			748,305
Cost of revenues								983,042			553,221
Research and development costs		589,716			691,330			761,881			617,241
Selling, general, and administrative expenses		1,765,830			1,886,220
Sales and marketing expenses								1,063,143			764,599
General and administrative expenses								1,029,929			1,078,171
Operating loss		(1,327,323	)		(1,709,522	)		(910,529	)		(1,206,190	)
Other income (expense):
Loss from debt restructuring		-			(933,134	)
Gain from change in fair value of derivative liabilities		109,803			324,035			-			22,295
Other income (expense), net		3,363			(4,877	)
Other income, net								728			2,643
Interest expense, net		(211,362	)		(239,733	)		(213,167	)		(246,824	)
Net loss	$	(1,425,519	)	$	(2,563,231	)	$	(1,122,968	)	$	(1,428,076	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.14	)	$	(0.92	)	$	(0.08	)	$	(0.13	)
Weighted average shares outstanding:
Basic and diluted		10,339,210			2,779,803			14,053,508			11,006,959

	For The Nine Months Ended September 30,						For The Nine Months Ended September 30,
	2017			2016			2019			2018
Revenues:
Product revenues	$	5,443,287		$	4,013,531		$	6,952,575		$	4,691,002
Service and other revenues		256,860			100,818			1,053,807			385,742
Total revenues		5,700,147			4,114,349			8,006,382			5,076,744
Cost of product revenues		2,239,808			1,965,839
Cost of revenues								2,899,837			1,743,981
Research and development costs		2,231,616			2,098,465			2,044,224			1,828,846
Selling, general, and administrative expenses		5,731,961			5,748,524
Sales and marketing expenses								3,246,912			2,653,044
General and administrative expenses								2,991,305			3,119,617
Operating loss		(4,503,238	)		(5,698,479	)		(3,175,896	)		(4,268,744	)
Other income (expense):
Loss from debt restructuring		-			(811,909	)
Gain from change in fair value of derivative liabilities		48,064			748,080			-			64,318
Other income, net		6,774			209,504			8,100			1,284
Interest expense, net		(637,270	)		(836,208	)		(726,292	)		(742,387	)
Net loss	$	(5,085,670	)	$	(6,389,012	)	$	(3,894,088	)	$	(4,945,529	)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.75	)	$	(2.59	)	$	(0.31	)	$	(0.45	)
Weighted average shares outstanding:
Basic and diluted		6,783,605			2,467,437			12,477,790			10,903,675

For The Nine Months Ended September 30, 2019
					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balances, January 1, 2019		11,018,364	$	110,183	$	108,600,405		$	(107,199,586	)	$	1,511,002
Cumulative adjustment for adoption of new accounting standard		-		-		-			(244	)		(244	)
Issuances of common stock:
Share-based compensation		28,462		285		152,301			-			152,586
Cashless warrant exercises		20,381		204		(204	)		-			-
Net loss for the period		-		-		-			(1,220,725	)		(1,220,725	)
Balances, March 31, 2019		11,067,207		110,672		108,752,502			(108,420,555	)		442,619
Issuances of common stock:
Share-based compensation		3,251		32		203,962			-			203,994
Warrant exercises		189,407		1,894		381,182			-			383,076
May 2019 private placement, net of offering costs of $94,162		2,426,455		24,265		7,403,583			-			7,427,848
Net loss for the period		-		-		-			(1,550,395	)		(1,550,395	)
Balances, June 30, 2019		13,686,320		136,863		116,741,229			(109,970,950	)		6,907,142
Issuances of common stock:
Share-based compensation		157,169		1,571		217,861			-			219,432
Cashless warrant exercises		1,145,903		11,459		(11,459	)		-			-
Stock option exercise		2,500		25		4,325			-			4,350
Net loss for the period		-		-		-			(1,122,968	)		(1,122,968	)
Balances, September 30, 2019		14,991,892	$	149,918	$	116,951,956		$	(111,093,918	)	$	6,007,956

	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value

September 30, 2017
Derivative liabilities - warrants	$	-	$	-	$	54,950	$	54,950
Derivative liabilities – debt conversion feature	$	-	$	-	$	17,500	$	17,500
December 31, 2016
Derivative liabilities - warrants	$	-	$	-	$	91,173	$	91,173
Derivative liabilities – debt conversion feature	$	-	$	-	$	40,000	$	40,000

	Carrying Values		Estimated Fair Values
Senior secured note payable, including accrued interest	$	2,028,111	$	2,028,111
2014 junior secured notes payable, including accrued interest		1,862,859		1,983,375
2010 junior secured notes payable, including accrued interest		1,665,385		2,724,293

	September 30, 2017		December 31, 2016		September 30, 2019		December 31, 2018
Raw materials and work in process	$	1,230,481	$	1,025,368	$	1,624,342	$	1,219,753
Software licenses		52,500		70,000		402,500		122,500
Finished goods		898,264		673,014		1,153,408		763,723
Inventory, net, included in current assets		2,181,245		1,768,382		3,180,250		2,105,976
Software licenses – non-current		889,400		976,900		451,900		801,900
	$	3,070,645	$	2,745,282
Total					$	3,632,150	$	2,907,876

Years ending December 31,
2018	$	2,000,000
2019		1,975,000		$	-
2020		3,000,000			2,837,655
Total scheduled principal payments		6,975,000			2,837,655
Less: Unamortized discounts		(2,142,188	)
Unamortized deferred financing costs		(39,193	)
	$	4,793,619
Less: Unamortized discount					(970,390	)
Total				$	1,867,265

	Shares			Weighted - Average Exercise Price
Outstanding at December 31, 2016		337,441		$	42.07
Granted		13,625			2.90
Forfeited		(40,117	)		36.06
Outstanding at September 30, 2017		310,949		$	41.95

	Shares			Weighted - Average Exercise Price
Outstanding at December 31, 2016		1,991,293		$	13.00
Issued		7,134,200			2.20
Exercised		(3,845	)		2.00
Terminated		(172,070	)		32.77
Outstanding at September 30, 2017		8,949,578		$	4.12

~~Dividend yield~~			0%
~~Expected volatility~~			~~55%~~
~~Risk free interest rates~~			~~1.06 – 1.70%~~
~~Expected remaining term (in years)~~			~~0.32 – 3.51~~

	Three Months Ended September 30,
	2017			2016			Percentage Change
Product revenues	$	1,628,435		$	1,580,826			3	%
Other revenues		88,635			35,507			150	%
Cost of revenues		688,847			748,305			(8	)%
Research and development costs		589,716			691,330			(15	)%
Selling, general and administrative expenses		1,765,830			1,886,220			(6	)%
Other income (expense):
Loss from debt restructuring		-			(933,134	)		(100	)%
Gain from change in fair value of derivative liabilities		109,803			324,035			(66	)%
Other income (expense), net		3,363			(4,877	)		169	%
Interest expense, net		(211,362	)		(239,733	)		(12	)%
Net loss	$	(1,425,519	)	$	(2,563,231	)		(44	)%


	Nine Months Ended September 30,
	2017			2016			Percentage Change
Product revenues	$	5,443,287		$	4,013,531			36	%
Other revenues		256,860			100,818			155	%
Cost of revenues		2,239,808			1,965,839			14	%
Research and development costs		2,231,616			2,098,465			6	%
Selling, general and administrative expenses		5,731,961			5,748,524			<1	%
Other income (expense):
Loss from debt restructuring		-			(811,910	)		(100	)%
Gain from change in fair value of derivative liabilities		48,064			748,080			(94	)%
Other income, net		6,774			209,505			(97	)%
Interest expense, net		(637,270	)		(836,208	)		(24	)%
Net loss	$	(5,085,670	)	$	(6,389,012	)		(20	)%

Exhibit Number		Exhibit Description
~~10.1~~		MRI Interventions, Inc. 2013 Second Amended and Restated Incentive Compensation Plan (incorporated by reference to Appendix A to MRI Interventions, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the SEC on September 5, 2017)
~~10.2~~		Separation, Transition and Consulting Agreement, dated as of October 6, 2017, by and between MRI Interventions, Inc. and Francis P. Grillo (incorporated by reference to Exhibit 10.1 to MRI Interventions, Inc.’s Current Report on Form 8-K (File No. 001-34822) filed with the SEC on October 10, 2017)
~~10.3~~		Employment Agreement, dated as of October 6, 2017, by and between MRI Interventions, Inc. and Joseph Michael Burnett (incorporated by reference to Exhibit 10.2 to MRI Interventions, Inc.’s Current Report on Form 8-K (File No. 001-34822) filed with the SEC on October 10, 2017)
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934
32+		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and Section 1350 of Chapter 60 of Title 18 of the United States Code
101.INS*		XBRL Instance
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation
101.DEF*		XBRL Taxonomy Extension Definition
101.LAB*		XBRL Taxonomy Extension Labels
101.PRE*		XBRL Taxonomy Extension Presentation


	MRI INTERVENTIONS, INC.

	By:	/s/ ~~Francis P. Grillo~~Joseph M. Burnett
		~~Francis P. Grillo~~ Joseph M. Burnett
		Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Harold A. Hurwitz
		Harold A. Hurwitz
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)