InspireMD, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited; amounts below are U.S. dollars unless noted. InspireMD develops and commercializes MicroNet-based medical devices, principally CGuard carotid stents and MGuard coronary stents. Products are marketed internationally through distributors; none may be marketed in the United States.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $1.007 million | $0.569 million; up 77.0% |
| Gross profit / margin | $0.293 million / 29.1% | $0.074 million / 13.0% |
| Operating expenses | $2.246 million | $2.478 million |
| Operating loss | $(1.953) million | $(2.404) million |
| Net loss | $(2.389) million | $(2.559) million |
| Basic and diluted loss per share | $(1.08) | $(28.31); share counts and the reverse split affect comparability |
| Operating cash flow | $(1.780) million | $(2.758) million |
Revenue growth was led by CGuard sales, which increased to $831,000 from $359,000; MGuard sales fell to $176,000 from $210,000. Management attributed CGuard growth to the shift to local distributors in Europe, expansion in existing markets, and entry into India. MGuard faced weaker demand for bare-metal stents as physicians increasingly used drug-eluting stents.
Gross margin improved from 13.0% to 29.1%. Operating expenses declined by $232,000 overall: R&D was $252,000, selling and marketing $492,000, and general and administrative $1.502 million. Lower G&A share-based compensation and other costs were partly offset by higher legal expense. Financial expenses rose to $436,000 from $154,000, principally due to a $433,000 revaluation expense on an embedded preferred-stock derivative; interest expense was zero versus $119,000 in the prior period.
Cash and cash equivalents were $4.637 million at March 31, versus $3.710 million at December 31, 2017. Working capital was $3.244 million and the current ratio was 2.1. Cash from financing was $2.718 million, primarily net proceeds from the March public offering; investing cash use was $12,000. The company reported no interest-bearing loan balance at quarter-end; long-term liabilities included an $872,000 derivative liability and $635,000 employee retirement obligation. Accumulated deficit was $142.741 million.
Material changes, financing and outlook
- On March 1, 2018, the company sold 1,000,000 common shares at $3.00 per share for $3.0 million gross proceeds and used $450,000 to redeem Series D preferred shares. The offering reset preferred conversion prices to $3.00 and triggered anti-dilution provisions.
- After quarter-end, on April 2, the company sold 2,857,143 common shares at $1.75 for $5.0 million gross proceeds, before fees, and used $300,000 of proceeds to redeem Series C preferred shares. Conversion prices were reduced to $1.75. These funds are not included in March 31 cash.
- In February, revised financing terms created redemption obligations tied to future offerings and an embedded derivative; the preferred shares subject to contingent redemption were classified outside permanent equity. Conversion and redemption terms, including full-ratchet anti-dilution provisions, may cause substantial dilution and constrain future financings.
- The company effected a 1-for-35 reverse stock split on February 7, 2018. Common shares outstanding were 6,449,832 as of May 4, 2018.
- Management expects continued losses and negative operating cash flows until products, primarily CGuard, reach commercial profitability. It estimated that March 31 resources would fund operations for approximately 12 months from that date and stated there is substantial doubt about the company’s ability to continue as a going concern. Plans include continued commercialization and raising additional equity, debt or strategic-partner capital; success and timing are not assured. No specific revenue or earnings guidance was provided.
- NYSE American had notified the company of equity/net-income listing deficiencies, with a compliance-plan deadline of February 17, 2019, and separately required sustained share-price improvement or a reverse split by July 16, 2018. The company disclosed that it believed gross financings of at least $20 million might be needed to restore certain equity listing compliance; delisting remains a risk.
Risks, contingencies and unusual items
- Commercialization, regulatory approval, clinical evidence, reimbursement and market acceptance remain uncertain. CGuard has CE marking and approvals in certain international markets, including India in January 2018, but the company had not begun U.S. sales and described a U.S. IDE submission as dependent on sufficient funds.
- Manufacturing is concentrated at the company’s Tel Aviv facility, with certain components from single-source suppliers. Political or military disruption in Israel, supply interruption, quality issues and foreign-exchange movements could affect operations.
- NYSE American listing compliance, continued access to capital, preferred-stock redemption/exchange rights and anti-dilution terms create significant financing and dilution risks. The company also cited competition, especially the market shift toward drug-eluting stents, as a risk to MGuard.
- A distributor sought unspecified compensation related to prepaid goods subject to a 2014 voluntary field action; management assessed a reasonably possible loss ranging from a minimal amount to €1.075 million. In the Medpace case, the subsidiary faces a $1.968 million claim plus related costs and is pursuing counterclaims; management said loss was not probable or estimable. The separate $2.2 million finders’ fee case was dismissed and closed after the appeal period expired.
- The quarter included a $433,000 noncash derivative revaluation expense. The company adopted ASC 606 on January 1, 2018, with no effect on initial adoption. Management reported disclosure controls effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Cash runway and financing needs, including the impact of the April offering, subsequent cash burn and any further capital raises.
- NYSE American compliance milestones and whether the company can meet equity and share-price requirements.
- Terms, carrying values and potential dilution from Series B, C and D preferred shares, warrants, conversion-price adjustments and redemption obligations.
- Whether CGuard revenue growth can continue and whether margins, distributor performance and geographic/customer concentration are sustainable.
- Outcome and potential financial exposure of the distributor and Medpace matters, and any developments affecting the going-concern assessment.