InspireMD, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited financial statements; amounts below are in U.S. dollars unless noted. InspireMD develops and sells MicroNet-based vascular stents, principally CGuard for carotid disease and MGuard Prime for coronary procedures. Sales are primarily through international distributors. Its products were not approved for sale in the United States.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1.003 million | $0.640 million | $2.010 million | $1.209 million |
| Gross profit | $0.277 million | $0.147 million | $0.570 million | $0.221 million |
| Gross margin | 27.6% | 23.0% | 28.4% | 18.3% |
| Operating expenses | $1.750 million | $2.441 million | $3.996 million | $4.919 million |
| Operating loss | $1.473 million | $2.294 million | $3.426 million | $4.698 million |
| Net loss | $0.627 million | $2.294 million | $3.016 million | $4.853 million |
| Basic and diluted loss per share | $0.15 | $7.30 | $0.76 | $25.64 |
Q2 revenue rose 56.7%; six-month revenue rose 66.3%. Growth was led by CGuard sales, up 93.7% in Q2 and 110.9% for the first half. MGuard revenue declined 19.0% and 17.6%, respectively, amid continued preference for drug-eluting stents over bare-metal products. Management attributed improved gross margin mainly to higher volume and more efficient use of manufacturing capacity.
Net losses narrowed year over year, but results included noncash financial income from revaluation of the Series C embedded derivative: $846,000 in Q2 and $438,000 for the first half. Six-month operating expenses fell 18.8%; reductions included lower R&D and share-based compensation, partly offset by increased legal costs. The filing reports no material tax expense in 2018.
At June 30, 2018, cash and cash equivalents were $6.442 million, versus $3.710 million at December 31, 2017. Working capital was $5.761 million; current assets were 3.3 times current liabilities. Six-month operating cash use was $3.974 million, investing cash use $41,000, and financing cash inflow $6.780 million. The company reported no outstanding loan balance; total liabilities were $3.109 million, including $2.480 million of current liabilities and $629,000 of employee retirement obligations. Accumulated deficit was $143.368 million.
Material changes and financing
- During the first half, the company raised gross proceeds of $3.0 million in a March common-stock offering and $5.0 million in an April offering. It used $450,000 and $300,000, respectively, to redeem preferred shares. The six-month cash flow statement reports $7.530 million of net proceeds from share and warrant issuance and option exercise, before preferred redemptions.
- After quarter-end, the July 3 offering generated approximately $9.8 million gross and $8.7 million net proceeds, excluding potential warrant exercise proceeds. The company used $2.264 million of net proceeds to redeem Series C and Series D preferred shares held by an investor. The financing included common shares, pre-funded warrants and five-year warrants, and creates substantial potential dilution.
- Full-ratchet anti-dilution provisions reduced the Series B and C preferred conversion price to $0.30 per share in connection with the July financing. The filing notes there is no floor on the conversion price and the number of shares potentially issuable cannot be determined. Preferred-share conversions and warrants could further increase common shares outstanding.
- A one-for-35 reverse stock split became effective February 7, 2018. The company reported 23,784,846 common shares outstanding as of August 6, 2018; this is a later-date figure and should be considered alongside potential warrant and preferred conversions.
Outlook, risks and unusual matters
- Going concern: Management said available resources at June 30 were sufficient to fund operations for approximately 12 months from the balance-sheet date and disclosed substantial doubt about the company’s ability to continue as a going concern. It expects continued losses and negative operating cash flows until commercial profitability, and plans to pursue product commercialization and additional financing. No assurance was given that needed funding will be obtained; failure could require reduced activity or cessation of operations.
- Commercial and regulatory risks: Growth depends heavily on CGuard adoption, distributor performance, regulatory approvals and reimbursement in international markets. Management intends to pursue U.S. IDE approval for CGuard, but the company had no U.S.-marketed products. MGuard demand faces the market shift away from bare-metal stents. The company also cited clinical, manufacturing, competition, supplier, foreign-exchange and Israel operating risks.
- Listing: NYSE American had previously notified the company of stockholders’ equity/net-loss listing deficiencies, with a compliance-plan deadline of February 17, 2019. The company stated it believed July offering proceeds would help it regain equity compliance; this remained subject to exchange review. A low-share-price deficiency was reported resolved on July 16, 2018.
- Legal matters: A distributor’s claim related to a 2014 voluntary field action could, in management’s view, result in a reasonably possible loss ranging from a minimal amount to €1.075 million. A former service provider, Medpace, seeks approximately $1.968 million plus interest and costs; the subsidiary is contesting the claim and has counterclaims, with motions pending. The filing did not record a quantified loss for Medpace.
- The company adopted ASC 606 on January 1, 2018; management reported no effect on initial application. Disclosure controls were considered effective at a reasonable-assurance level, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Cash runway after the July financing, redemptions, ongoing operating cash burn and any subsequent financing.
- Actual dilution from the July common shares, pre-funded warrants, Series D warrants, remaining preferred shares and anti-dilution provisions.
- Progress toward NYSE American equity compliance by the February 17, 2019 deadline.
- CGuard revenue growth and margins, market expansion and regulatory/clinical progress; continued MGuard sales decline and inventory exposure.
- Developments and potential financial exposure in the distributor and Medpace disputes.