Inspiremd, Inc. annual report, FY2017

Business context and reporting period

InspireMD, Inc. is a medical-device company developing and commercializing stent products using its MicroNet embolic-protection mesh. This Form 10-K covers the fiscal year ended December 31, 2017; financial amounts below are in U.S. dollars unless stated otherwise. CGuard EPS, for carotid procedures, generated 70% of 2017 revenue; MGuard Prime EPS, a bare-metal coronary stent, generated 30%. Products were sold internationally; none was authorized for sale in the United States.

Financial results and liquidity

CGuard revenue rose 67.6% to $1.922 million; MGuard Prime revenue rose 12.3% to $839,000. Gross-profit improvement reflected higher sales, fewer MGuard inventory write-offs, and lower manufacturing underutilization costs. Selling and marketing expense increased 61.5% to $2.357 million, mainly to support the sales-channel transition and expanded marketing. R&D expense was approximately $1.3 million in both years.

Basic and diluted loss per share was $34.98 in 2017 versus $207.72 in 2016, on retrospectively adjusted share data. The 2017 loss attributable to common shareholders included a $633,000 Series C beneficial-conversion charge and a $3.957 million Series B extinguishment charge; the per-share comparison is therefore affected by preferred-stock accounting and a substantially larger weighted-average share count.

Current assets were $5.155 million and current liabilities $2.482 million at year-end (a 2.1 current-asset-to-current-liability ratio). The company repaid its remaining loan balance in March 2017; no loan was outstanding at December 31, 2017. Financing activities provided $4.633 million net cash in 2017, including proceeds from preferred-stock offerings, partly offset by $2.179 million in loan repayments.

Material changes versus 2016

• Revenue growth was led by CGuard, geographic expansion, and the move from one exclusive European distributor to local distributors. Europe accounted for 82% of 2017 revenue, Latin America 15%, and other regions 3%. Three distributors each represented at least 12% of revenue.
• Gross margin improved significantly, but operating expenses rose by $1.067 million and operating loss widened. Lower financial expense, mainly after debt repayment, helped keep net loss broadly flat.
• Cash declined despite $6.822 million of net preferred-stock issuance proceeds reported in financing activities before loan repayment effects. The company remained dependent on external financing.
• The December 2017 Series D financing reduced the Series B preferred-stock conversion price to $7.00 under anti-dilution terms, increasing potential common-share issuance. Series B preferred stock carries cumulative dividends of 15% annually, payable in cash or common shares at the company’s discretion.

Outlook, risks and unusual items

Management described CGuard as the principal commercial growth opportunity and said it was positioned for growth in 2018; the filing gives no quantified revenue or earnings guidance. Development of a smaller 5 French CGuard delivery catheter and U.S. clinical-trial efforts depend on obtaining sufficient financing. NGuard and other development programs were deferred while resources are focused on commercializing current products. CGuard received approval for commercialization in India in January 2018.

The auditor issued an unqualified opinion on the financial statements but included a going-concern explanatory paragraph. Management said available resources were sufficient for only up to four months of operations from the filing date without materially curtailing operations. The company planned to raise additional capital through equity, debt, or strategic partnerships; it gave no assurance of success. It estimated that offerings totaling at least $20 million might be needed by February 2019 to regain certain NYSE American equity-listing compliance. Further equity issuance could substantially dilute shareholders, in part because preferred-stock anti-dilution and exchange provisions have no stated conversion-price floor.

NYSE American issued notices concerning stockholders’ equity/net-income listing standards and the low share price. The company effected a 1-for-35 reverse stock split on February 7, 2018, after year-end; continued listing remained subject to compliance, and the split might not sustain a higher market price. The filing also reports a single manufacturing facility in Israel, reliance on certain single-source suppliers, competitive pressure from drug-eluting stents, foreign regulatory and reimbursement risks, and currency and geopolitical exposure.

Legal matters include a Medpace claim against the subsidiary for $1.968 million, which the company contests and for which it asserts counterclaims seeking more than $3 million; management said loss was not probable or estimable. A distributor-related field-action matter carried a disclosed reasonably possible loss range from a minimal amount to €1.075 million. The Microbanc matter was dismissed by judgment in January 2018, with an appeal deadline stated as February 22, 2018. The company also reported no material off-balance-sheet arrangements.

Most important facts for investors to verify

1. Whether the company raised enough capital to fund operations and address the disclosed going-concern uncertainty, and the resulting dilution and preferred-stock conversion terms.
2. Cash burn, subsequent cash balances, and whether CGuard sales growth and gross-margin improvement continued after 2017.
3. NYSE American compliance status following the reverse split and the deadlines and milestones under the compliance plans.
4. Current status and outcomes of the Medpace litigation, the distributor field-action contingency, and any appeal in the Microbanc matter.
5. Whether product approvals, reimbursement, clinical evidence, and distributor execution support commercial expansion, particularly given that U.S. sales require FDA authorization.