InspireMD, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; unaudited consolidated results, with financial amounts in U.S. dollars unless noted. InspireMD develops and commercializes MicroNet-based vascular stent products, principally CGuard for carotid disease and MGuard for coronary disease. Products were not approved for sale in the United States; sales were primarily through international distributors.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $563,000 | $477,000; up 18.2% |
| Gross profit (loss) and margin | $66,000; 11.7% | $(37,000); (7.8%) |
| Operating expenses | $2.453 million | $4.853 million |
| Operating loss | $(2.387) million | $(4.890) million |
| Net loss | $(2.609) million | $(5.212) million |
| Basic and diluted loss per share | $(0.32) | $(1.04) |
| Cash used in operating activities | $(1.865) million | $(4.622) million |
| Cash and cash equivalents | $1.999 million at March 31 | $3.257 million at December 31, 2015 |
At March 31, 2016, total assets were $4.244 million and total liabilities were $7.639 million, resulting in a capital deficiency of $3.395 million. Current liabilities were $7.055 million versus current assets of $3.322 million; the working-capital deficit was $3.7 million. Loan balances were reported as $4.294 million current and no long-term loan, compared with $4.149 million current and $1.099 million long-term at year-end 2015. Interest expense was $179,000.
Cash provided by investing activities was $90,000, mainly from employee-retirement funds. Financing activities provided $516,000 net: approximately $1.5 million of share and warrant proceeds, offset by approximately $988,000 of loan repayment and withholding taxes. Cash declined by $1.258 million during the quarter.
Material changes versus the prior comparable period
- Revenue growth reflected CGuard sales of $320,000 versus $60,000 a year earlier, partly offset by MGuard sales of $243,000 versus $417,000. Management attributed the MGuard decline in part to preference for drug-eluting over bare-metal stents.
- Gross profit improved by $103,000, reflecting higher revenue and fewer inventory write-offs, partly offset by higher material and labor costs and manufacturing underutilization.
- Operating expenses fell by $2.4 million, primarily following cost reductions and focused spending: R&D decreased to $478,000 from $1.352 million, selling and marketing to $386,000 from $1.017 million, and G&A to $1.589 million from $1.970 million. The prior-year period also included $514,000 of restructuring and impairment charges, including a royalty buyout impairment.
- Net loss narrowed by about 50%, but the company continued to incur substantial losses and use operating cash.
- On March 21, the company issued 2,933,051 shares and warrants to purchase 1,466,526 shares in a public offering and private placement. Gross proceeds were approximately $1.7 million and net proceeds approximately $1.4 million. Outstanding shares were 10,671,187 at quarter-end and 10,721,082 on May 10, 2016.
Outlook, risks, contingencies and unusual items
Going concern: Management stated that available resources were insufficient to fund operations beyond June 2016 and that substantial doubt existed about the company’s ability to continue as a going concern. Plans included continued commercialization and raising capital through equity, debt or strategic partnerships, with no assurance of success; failure could require reduced activity, curtailment or cessation of operations. No specific financial guidance was provided.
Key risks identified include recurring losses and financing needs; product market acceptance, clinical and regulatory outcomes; reliance on certain suppliers and subcontractors; competition; reimbursement and product-liability risks; foreign-exchange exposure; and potential effects of hostilities in Israel on manufacturing. Management also cited distributor ordering patterns, clinical-trial timing and manufacturing efficiency as sources of operating variability.
Contingencies included a distributor request for unspecified compensation related to prepaid goods subject to a voluntary field action; management considered a loss reasonably possible, ranging from a minimal amount to €1.075 million. A service provider sought $1.965 million, but management believed neither a court loss nor settlement was probable, while noting the outcome could not be estimated. An alleged finder filed suit on April 26, 2016 seeking $2.2 million and unspecified equity compensation; management considered loss neither probable nor estimable. The company paid $100,000 in March 2016 to settle an older Argentina labor claim.
An option cancellation agreement with certain directors and executives was treated as a settlement for no consideration, resulting in recognition of approximately $800,000 of remaining unrecognized compensation cost. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the company obtained sufficient post-quarter financing to address the stated June 2016 funding shortfall and going-concern uncertainty.
- Cash burn, current obligations and loan repayment terms, including the status of the secured loan and collateral arrangements.
- Whether CGuard sales growth and gross-margin improvement continued, and how distributor concentration and MGuard demand affected revenue.
- Potential dilution from the March offering warrants and other outstanding options, warrants and awards; 5,913,420 potential shares were excluded from diluted loss per share as anti-dilutive.
- Developments in the distributor, service-provider and finder matters, and any further costs or claims related to the voluntary field action.