InspireMD, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial amounts are in U.S. dollars; unless stated otherwise, figures are in thousands. InspireMD develops and commercializes its MGuard embolic-protection stent platform, selling primarily through international distributors. The statements reflect InspireMD Ltd.’s historical business following the 2011 reverse recapitalization.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $1,138 | $1,686 | Down 32.5% |
| Gross profit / margin | $564 / 49.6% | $787 / 46.7% | Profit down 28.3%; margin up 2.9 percentage points |
| Research and development | $1,349 | $343 | Up 293.3% |
| Selling and marketing | $445 | $428 | Up 4.0% |
| General and administrative | $1,896 | $1,186 | Up 59.9% |
| Operating loss | $(3,126) | $(1,170) | Loss increased |
| Net loss / loss per share | $(3,140) / $(0.05) | $(1,895) / $(0.04) | Net loss increased 65.7% |
| Cash used in operating activities | $(1,579) | $(361) | Use increased |
Revenue fell mainly because there were no India distributor shipments in Q1 2012, compared with approximately $1.2 million of sales to India in Q1 2011; higher sales in other markets partly offset the decline. The company recognized revenue on 1,924 stents at an average selling price of $591, versus 3,104 stents at $543 a year earlier. Average cost per stent remained approximately $290.
R&D growth was driven principally by clinical-trial spending, including approximately $0.5 million for the U.S. FDA trial and $0.4 million for the MASTER Trial. G&A growth primarily reflected higher share-based compensation, including director compensation. Total share-based compensation was $1.188 million, a substantial non-cash expense. The lower financial expense versus Q1 2011 chiefly reflected a prior-year, approximately $0.6 million one-time expense related to revaluation of a convertible loan.
Financial position and liquidity
- At March 31, 2012, cash and cash equivalents were $3.351 million, down from $5.094 million at December 31, 2011. Current assets were $7.801 million and current liabilities $3.408 million, leaving working capital of approximately $4.4 million.
- Total assets were $8.527 million and total liabilities $3.725 million. The company had no current loan maturities at quarter-end; its long-term loan was repaid in January 2012.
- Investing activities used $48,000; financing activities used $94,000. Cash decreased by $1.743 million during the quarter.
- Management said cash available as of May 7, together with expected revenue, was expected to fund operations at least through Q1 2013 if the MASTER Trial succeeded and the company increased sales and marketing spending; if it scaled back expansion and overhead, management estimated runway through year-end 2013. Further capital would be needed to expand the business.
Material developments, outlook and risks
- Post-quarter financing: On April 5, 2012, the company received $11.0 million gross proceeds from senior secured convertible debentures with $11.702 million original principal, due April 5, 2014. They carry 8% annual interest, an initial $1.75 conversion price and five-year warrants for 3,343,465 shares at $1.80; placement agents also received warrants for 312,310 shares and a cash fee of $848,750. Investors may require redemption after 18 months at 112% of principal plus accrued interest. The financing increased reported May 7 cash to approximately $11.8 million, but adds secured debt, restrictive covenants and potential dilution. The filing identifies 10,342,705 shares underlying the debentures and related warrants, approximately 13% of then-outstanding shares if issued.
- Business and funding risks: Revenue depends on distributor ordering patterns, regulatory approvals, clinical-trial progress and manufacturing efficiencies. Management identified the need for additional capital and warned that unavailable or unfavorable financing could require reduced operations or delay or halt the U.S. FDA trial. The debentures are secured by company and subsidiary assets; default could permit foreclosure. Currency movements, competition, reimbursement policies, regulation and protection of intellectual property are also cited risks.
- Contingencies: The filing describes several employment, options and finder-related disputes. A former senior employee’s claim seeks approximately $428,000 plus options to purchase 2,029,025 shares; the company had recorded a $100,000 provision and said additional loss was not considered probable or estimable. Other claims include demands for compensation or options whose outcomes management said it could not assess. A $327,000 finder claim was provided for in Q1 2011. The company reported no material litigation other than the matters described.
- Other items: A license agreement requires royalties of 7% of net sales outside the U.S. and 7% on the first $10 million of U.S. net sales, rising to 10% above that level. Management concluded disclosure controls were effective at a reasonable-assurance level; no material changes in internal control were reported.
Most important facts for investors to verify
- Whether distributor demand recovers after the unusually large India shipment in the prior-year quarter, and whether revenue remains concentrated among a small number of customers.
- Clinical-trial progress, costs and outcomes, particularly for the U.S. FDA trial and MASTER Trial, and their effect on the stated cash runway.
- Cash burn and the financing’s net proceeds after fees, interest and other costs, alongside the debenture redemption, conversion and covenant terms.
- Potential dilution from conversion and warrant exercise, and the effects of the security interest over company assets.
- Developments and potential financial or share consequences of the disclosed litigation and option claims.