InspireMD, Inc. — Form 10-Q Summary
Business context and reporting period
The filing reports unaudited results for the three months ended September 30, 2012, compared with the three months ended September 30, 2011. Balance-sheet amounts are compared with June 30, 2012. Amounts below are in U.S. dollars; financial statement figures are generally in millions. InspireMD develops and commercializes MGuard stent products, which use a mesh sleeve intended to provide embolic protection during stenting procedures.
Key financial metrics
| Metric | Three months ended September 30, 2012 | Prior-year period or comparison |
|---|---|---|
| Revenue | $0.509 million | $1.986 million; down 74.4% |
| Gross profit and margin | $0.279 million; 54.8% | $1.185 million; 59.7% |
| Operating expenses | $3.560 million | $3.335 million |
| Operating loss | $3.281 million | $2.150 million |
| Financial expenses, net | $4.218 million | $0.108 million |
| Net loss | $7.506 million; $0.11 per share | $2.283 million; $0.04 per share |
| Cash used in operating activities | $2.356 million | $2.065 million |
| Cash and cash equivalents | $8.297 million at September 30 | $10.284 million at June 30 |
Research and development expense rose to $0.946 million from $0.547 million, primarily due to MASTER and MGuard Carotid clinical-trial costs and added clinical personnel. Selling and marketing expense increased to $0.402 million from $0.302 million. General and administrative expense fell to $2.212 million from $2.486 million, mainly due to lower share-based compensation.
The $4.218 million of financial expense included approximately $3.225 million from changes in fair value of warrants and embedded derivatives and approximately $0.988 million of interest and debt-issuance-cost amortization. The warrant liability was $4.979 million at September 30, versus $1.706 million at June 30.
Liquidity, debt and balance sheet
Working capital was approximately $8.6 million, and current assets exceeded current liabilities by 3.6 times. Cash declined by $1.987 million during the quarter. Investing activities used $0.057 million; financing activities provided $0.432 million, principally from option and warrant exercises. The company reported a capital deficiency of $0.756 million at September 30, compared with positive equity of $5.386 million at June 30.
The balance sheet reported a $5.635 million carrying amount for the convertible loan and $4.979 million for contingently redeemable warrants. The April 2012 senior secured convertible debentures had original principal of approximately $11.7 million, bear 8% annual interest, and are secured by substantially all company and subsidiary assets. Holders may require redemption after October 5, 2013 for 112% of outstanding principal plus accrued interest. Management estimates that a redemption at that time could require approximately $13.3 million, including accrued interest.
Material changes, outlook and risks
- Management attributed the sharp revenue decline mainly to lower distributor sales volume while it realigned distributor relationships ahead of the MASTER trial results and shifted toward direct sales in certain European markets. The filing reports 826 stents recognized in revenue at an average selling price of $569, versus 3,186 stents at $624 in the prior-year quarter.
- MASTER results were published October 24, 2012. The filing describes the study as a randomized comparison of MGuard Coronary with commercially approved stents for primary angioplasty in acute STEMI.
- The FDA disapproved the company’s investigational device exemption application for a pivotal U.S. trial of MGuard Coronary with bio-stable mesh on August 29, 2012, citing deficiencies that may require additional or repeated testing. The filing gives no assurance that the company can resolve them or obtain approval.
- Management said available working capital should fund operating cash outflows until October 2013, but also disclosed recurring losses, negative operating cash flow and substantial doubt about the company’s ability to continue as a going concern. Additional capital will be needed; unavailable or unfavorable financing could force significant cuts, including delays or suspension of U.S. clinical trials.
- No formal revenue or earnings guidance is provided. Management cites distributor ordering patterns, regulatory approvals, clinical-trial timing, manufacturing efficiencies, currency movements and reimbursement policies as factors affecting future results.
- After quarter-end, the company issued 1,836,906 shares from option and warrant exercises for approximately $0.6 million. On October 22, it amended its MGuard Prime license: royalties were reduced to 2.9% of net sales worldwide, in exchange for specified payments and 860,000 shares valued at $2.05 per share on October 19.
- The filing describes several legal claims. A former employee’s suit was settled for $88,000 in June 2012; another option-related claim was settled for $7,000 plus VAT in July. Management considered certain other claims not probable or not estimable. The potential $1 million finder-fee demand had not resulted in a filed lawsuit, according to the filing.
- Other stated risks include reliance on a single manufacturing facility and key suppliers, clinical and regulatory uncertainty, competition, product liability, foreign-exchange exposure, and potential dilution. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether distributor changes and direct-sales efforts restore sales volume and improve customer concentration.
- Progress in addressing FDA objections and the cost, timing and prospects of U.S. clinical trials, including the MASTER and MGuard Carotid programs.
- Cash burn and financing needs relative to the October 2013 redemption option, including the ability to refinance or satisfy the debentures.
- The effect of warrant revaluation and debt-related charges on reported earnings, and the potential dilution from outstanding convertible securities, warrants and options.
- Implementation and accounting for the October license amendment, including the royalty reduction and 860,000-share consideration.
- Developments in disclosed litigation and any other claims, as well as manufacturing capacity, supplier continuity and product-quality risks.