NSPR

Business Context and Reporting Period

Company: InspireMD, Inc. (formerly Saguaro Resources, Inc.)
Reporting Period: Quarter ended March 31, 2011
Business Overview: A medical device company developing the MGuard™ stent platform for embolic protection in coronary interventions. The company markets products primarily in Europe and Latin America and manufactures stents via a subcontractor in Germany.
Key Event: On March 31, 2011, the company completed a Share Exchange with InspireMD Ltd., accounted for as a reverse recapitalization. The company changed its name to InspireMD, Inc. on March 28, 2011.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 19.6% to $1.7 million compared to $2.1 million in Q1 2010. This was primarily due to the recognition of deferred revenues in Q1 2010 that had no comparable counterpart in 2011, despite an increase in product shipments.
• Margin Expansion: Gross margin improved to 46.7% from 36.2% due to higher pricing, manufacturing efficiencies, and economies of scale.
• Expense Increases:
  • General & Administrative (G&A): Increased 77.0% to $1.2 million, driven by investor relations activities and litigation provisions.
  • Financial Expenses: Increased significantly to $0.7 million (from $0.1 million) due to a $0.6 million non-cash expense from the fair value revaluation of a convertible loan.
  • Selling & Marketing: Increased 28.5% to $0.4 million due to global promotional activities.
• Liquidity Surge: Cash and cash equivalents increased from $0.6 million at the end of 2010 to $9.6 million at March 31, 2011, primarily due to a private placement of approximately $9.5 million consummated alongside the Share Exchange.
• Debt Structure: Approximately $668,000 of convertible debt was converted into equity. A remaining $1.0 million of convertible principal is due May 15, 2011.

Guidance, Outlook, and Risks

• Liquidity Outlook: Management believes current cash reserves are sufficient to fund operations into 2012. However, additional capital may be required in 2012 depending on operating results.
• Capital Raising: The company intends to use proceeds from the recent private placement for FDA clinical trials (specifically with Harvard Clinical Research Institute) and general corporate purposes. Future capital raises may be necessary and could result in dilution.
• Key Risks:
  • Regulatory Approval: Success depends on obtaining FDA and foreign regulatory approvals for the MGuard™ stent, which involves lengthy and expensive clinical trials.
  • Manufacturing: The company relies on a single manufacturer (QualiMed) and has limited experience scaling production. Manual assembly processes pose quality and yield risks.
  • Competition: The stent market is highly competitive with well-capitalized rivals (e.g., Boston Scientific, Medtronic, Johnson & Johnson).
  • Litigation: The company faces various claims totaling over $1 million, including a court-ordered payment of $105,000 and a provision of $327,000 for a finder's fee dispute.
  • Customer Concentration: One customer (Customer A) accounted for 64% of revenue in Q1 2011.

Investor Verification Checklist

• Cash Runway: Verify if the $9.6 million cash balance is sufficient to cover the high burn rate (operating loss of $1.9M in one quarter) through 2012 without further dilution.
• Convertible Debt Maturity: Confirm the status of the $1.0 million convertible loan due May 15, 2011, and the terms of the $100,000 distributor loan convertible into shares or product.
• Revenue Quality: Assess the sustainability of revenue given the 64% concentration in a single customer and the reliance on deferred revenue recognition in prior periods.
• Regulatory Timeline: Review the specific milestones and costs associated with the planned pivotal U.S. clinical trials for the MGuard Prime stent.
• Litigation Exposure: Monitor the resolution of the $1.03 million in aggregate claims, specifically the $327,000 provision for the Brazil distributor finder's fee.