InspireMD, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, compared with fiscal 2017. The filing is an annual report; it does not provide standalone fourth-quarter results. Financial amounts below are U.S. dollars unless noted.
Business context
InspireMD develops and sells vascular stents using its MicroNet mesh technology, intended to limit embolic debris during stenting. Its principal product is CGuard EPS for carotid artery disease, sold internationally under CE mark and other local approvals. MGuard Prime EPS is a bare-metal coronary stent. No InspireMD product was authorized for sale in the United States at the filing date.
Management’s leading development priority was pursuing U.S. clinical testing and eventual approval for CGuard. It planned to submit an IDE application in mid-2019. The company also reported Australian reimbursement and commercial approval for CGuard in November 2018, with a launch planned for 2019.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $3.601 million | $2.761 million | Up 30.4% |
| Gross profit / margin | $995,000 / 27.6% | $585,000 / 21.2% | Margin up 6.4 percentage points |
| Operating expenses | $8.606 million | $8.817 million | Down $211,000 |
| Loss from operations | $7.611 million | $8.232 million | Improved $621,000 |
| Net loss | $7.240 million | $8.438 million | Improved $1.198 million |
| Net loss per share, basic and diluted | $0.33 | $34.98 | Per-share comparison is affected by the reverse split and major share-count changes |
| Net cash used in operating activities | $7.606 million | $8.131 million | Use decreased $525,000 |
| Cash and cash equivalents at year-end | $9.384 million | $3.710 million | Up $5.674 million |
| Working capital | $8.499 million | Not stated here | Current assets exceeded current liabilities by 3.9 times |
CGuard revenue increased 54.5%, from $1.922 million to $2.970 million, while MGuard Prime revenue fell 24.8%, from $839,000 to $631,000. Management attributed growth primarily to CGuard sales through local distributors and expansion in existing and new markets; MGuard was affected by market preference for drug-eluting stents. Gross-margin improvement was attributed mainly to more efficient use of manufacturing capacity.
Financing activities provided $13.370 million in cash in FY2018, chiefly from equity offerings and warrant exercises, partly offset by $3.014 million of preferred-stock redemptions. The prior year included $2.179 million of loan repayment. The Hercules loan had been fully repaid in 2017; the December 2018 balance sheet showed no outstanding borrowing debt.
Despite year-end cash of $9.384 million, the company reported recurring losses and negative operating cash flows, and estimated that available resources would fund operations only through the end of the third quarter of 2019. The auditor’s report included a going-concern explanatory paragraph. Management said additional financing would be needed; no assurance was given that financing would be available on acceptable terms or at all.
Material changes and unusual items
- The commercial transition from a single European distributor to local distributors, alongside internal sales initiatives, contributed to CGuard growth.
- Three 2018 public equity offerings and related warrant/pre-funded-warrant issuance raised substantial capital. The July offering reset Series B and C preferred conversion prices to $0.30 per share under full-ratchet anti-dilution provisions.
- Common shares outstanding rose from 1.48 million at December 31, 2017 to 38.41 million at December 31, 2018, following the February 2018 1-for-35 reverse split and subsequent financings and conversions. There were 41,888,895 common shares outstanding on February 18, 2019.
- Series B preferred stock carries cumulative dividends of 15% annually, payable in cash or common shares at the company’s discretion. The preferred-stock anti-dilution terms can increase future share issuance and dilute existing holders. At year-end, Series B and C preferred stock were convertible into approximately 4.64 million common shares, excluding possible future conversion-price adjustments; 40.75 million warrants were outstanding, many with a $0.30 exercise price.
- FY2018 financial income included a $438,000 gain from revaluation of an embedded preferred-stock derivative. FY2017 included $179,000 of net financial expense, including interest expense.
- The company adopted ASC 606 in 2018 with no material effect on initial application. It expected the lease standard effective in 2019 to add approximately $1.1 million of right-of-use assets and lease liabilities.
Outlook, risks and contingencies
- Management prioritized CGuard commercialization, international market expansion and U.S. IDE submission efforts. It described the smaller-profile CGuard catheter and additional product development as dependent on sufficient financing. No quantified revenue or earnings guidance was provided.
- NYSE American listing compliance remained a risk. The company reported equity and net-income deficiencies and received a further low-share-price notice in January 2019, with a deadline of July 7, 2019 to effect a reverse split or otherwise demonstrate sustained price improvement. Delisting could impair trading and access to capital.
- Key business risks include dependence on continued financing, unproven profitability, regulatory and clinical approval uncertainty, competition, reliance on a single manufacturing facility in Israel and certain single-source suppliers, and foreign-exchange and geopolitical exposure.
- A Medpace lawsuit seeks $1,967,822 plus interest and costs; the company filed counterclaims seeking damages it believes exceed $3 million. Motions were under submission as of January 29, 2019. Management stated a loss was neither probable nor estimable.
- A distributor claim relating to prepaid goods subject to a 2014 voluntary field action could, according to management, result in a reasonably possible loss ranging from a minimal amount up to €1.075 million. The filing also describes potential product-liability and regulatory-recall risks.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018. The auditor did not provide an opinion on internal control.
Important facts for investors to verify
- Whether the company obtained financing after the filing and extended its cash runway beyond the stated third-quarter 2019 estimate.
- Progress and actual timing of the CGuard IDE submission, U.S. clinical trial, and any subsequent regulatory milestones.
- Whether listing deficiencies were resolved, including the stock-price requirement and related deadlines.
- The fully diluted share count and potential dilution from preferred-stock conversion, 15% preferred dividends, warrants, and equity awards.
- Subsequent developments in the Medpace litigation and the distributor claim, including any change in management’s loss assessment.
- Whether CGuard sales growth and margin gains continued, and whether MGuard’s declining sales persisted.