InspireMD, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless otherwise noted, financial amounts below are in U.S. dollars; statement amounts are in thousands. The filing is unaudited.
Business context
InspireMD develops and commercializes medical devices using its MicroNet stent platform. Its principal products are CGuard for carotid artery disease and MGuard Prime for coronary disease. Sales are primarily through international distributors; the company stated that none of its products could then be sold or marketed in the United States.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $540 | $685 | $1,103 | $1,162 |
| Gross profit (loss) | $62 | ($212) | $128 | ($249) |
| Gross margin | 11.5% | (30.9)% | 11.6% | (21.4)% |
| Operating loss | ($1,800) | ($3,573) | ($4,187) | ($8,463) |
| Net loss | ($1,980) | ($3,878) | ($4,589) | ($9,090) |
| Net loss per share | ($0.19) | ($0.51) | ($0.49) | ($1.44) |
- Q2 revenue declined 21.2% year over year; six-month revenue declined 5.1%. CGuard sales rose to $355,000 for Q2 and $675,000 year to date, while MGuard sales fell to $185,000 and $428,000, respectively.
- Gross profitability improved mainly because of lower inventory write-offs and expenses. Operating expenses fell substantially, reflecting cost reductions, lower share-based compensation, and a shift from direct sales toward distributors. These changes reduced losses but did not produce operating profitability.
- At June 30, cash and cash equivalents were $885,000, down from $3.257 million at December 31, 2015. Six-month operating cash use was $2.659 million; investing activities provided $110,000 and financing activities provided $180,000. Cash ended the period at $885,000.
- Current assets were $1.875 million and current liabilities $7.451 million, a working-capital deficit of approximately $5.576 million. Total liabilities were $8.113 million; the balance sheet showed a capital deficiency of $5.093 million.
- Current loan maturity was $3.919 million at June 30; no long-term loan balance was reported. Loan amendments and lender waivers extended maturity to June 1, 2017, increased the end-of-term charge to $520,000, and pledged the company’s intellectual property as collateral.
Material developments, outlook, and risks
- Going concern: Management stated that recurring losses and negative operating cash flows create substantial doubt about the company’s ability to continue as a going concern. Even including the subsequent July financing, management said available resources were insufficient to fund operations beyond Q3 2017. Further financing and successful commercialization were not assured.
- Subsequent financing: On July 7, 2016, the company raised approximately $14.6 million gross through a “best efforts” offering of Series B convertible preferred stock and warrants, before fees and expenses. The preferred shares convert into 44.24 million common shares at $0.33 per share and carry cumulative 15% annual dividends for five years. Warrants cover up to another 44.24 million common shares, are immediately exercisable, and have a $0.20 exercise price. The filing warns of potentially substantial dilution, anti-dilution adjustments with no stated conversion-price floor, and uncertainty over the company’s ability to pay dividends in cash or shares.
- Product and operating risks: MGuard sales faced competition from drug-eluting stents; CGuard growth had not yet offset that decline. Other risks include market acceptance, clinical and regulatory outcomes, manufacturing and supplier dependence, reimbursement, competition, foreign exchange, and operations in Israel.
- Litigation and contingencies: A distributor sought unspecified compensation related to a voluntary field action; management described a reasonably possible loss ranging from a minimal amount to €1.075 million. Microbanc and Todd Spenla sought approximately $2.2 million plus equity-related damages in a finders’ fee dispute. Medpace later sued for approximately $1.965 million plus related costs. Management said losses on the latter claims were not probable or estimable. A separate Argentina labor claim was settled and paid for $100,000 including legal fees.
- Management and reporting: James Barry became CEO on June 6, 2016. Management reported disclosure controls effective at a reasonable-assurance level and no material changes in internal control during the quarter. No financial guidance was provided in the filing.
Important facts for investors to verify
- Cash burn, near-term funding needs, and management’s estimate that resources extend only through Q3 2017 despite the July offering.
- Net proceeds from the preferred-stock offering, the terms and potential dilution from conversion, warrants, anti-dilution provisions, and 15% cumulative dividends.
- Loan repayment and covenant terms, the June 2017 maturity, lender waivers, and the intellectual-property collateral pledge.
- Whether CGuard revenue growth can persist and offset continued MGuard declines, and the impact of distributor concentration and international market conditions.
- Developments in the distributor claim and the Microbanc and Medpace lawsuits, including any change in management’s loss assessments.
- Share-count disclosures: the balance sheet reports 10,675,586 common shares outstanding at June 30, while the filing reports 29,872,018 common shares outstanding on August 9; investors should reconcile the effects of subsequent issuances and other share rights.