InspireMD, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statement amounts below are in U.S. dollars; unless noted otherwise, amounts are in millions. The company develops and commercializes MicroNet-based medical-device stents, including MGuard coronary products and CGuard carotid products.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $0.273 | $1.552 | $1.948 | $4.566 |
| Gross profit (loss) | $(0.076) | $0.802 | $0.390 | $2.310 |
| Gross margin | (27.8)% | 51.7% | 20.0% | 50.6% |
| Operating expenses | $6.405 | $4.687 | $19.641 | $13.621 |
| Loss from operations | $(6.481) | $(3.885) | $(19.251) | $(11.311) |
| Net loss | $(6.775) | $(3.945) | $(20.305) | $(23.777) |
| Net loss per share, basic and diluted | $(0.20) | $(0.12) | $(0.59) | $(0.86) |
- Revenue fell 82.4% in Q3 and 57.3% for the nine-month period, primarily because the MGuard Prime voluntary field corrective action (VFA) temporarily suspended sales.
- Q3 operating expenses rose 36.7% year over year, led by research and development and selling and marketing. Nine-month operating expenses rose 44.1%; R&D increased to $7.485 million and selling and marketing to $5.030 million.
- Nine-month net loss narrowed despite higher operating costs, principally because 2013 included substantial nonrecurring financing expenses associated with convertible debt and warrant-related items. Q3 net loss widened year over year.
- Net cash used in operating activities was $14.272 million for the nine months, versus $7.773 million in 2013. Cash and cash equivalents declined to $4.978 million at September 30 from $17.535 million at December 31, 2013.
- At September 30, current assets were $7.739 million and current liabilities $9.551 million, a working-capital deficit of approximately $1.812 million. Total liabilities were $16.272 million; recorded loan balances were $3.710 million current and $6.002 million long-term. The loan is secured by substantially all assets other than intellectual property.
- Equity was in a capital-deficiency position of $6.381 million, compared with positive equity of $8.639 million at December 31, 2013. Accumulated deficit was $102.621 million.
Material changes and business developments
- On April 30, 2014, InspireMD initiated the MGuard Prime VFA after reports of stent dislodgements. European approval to resume manufacturing with a modified securement process was received June 18. The company reported that returned units had been modified and shipped back to customers and distributors. VFA-related costs were approximately $320,000, with a further $76,000 accrued; the costs were recorded in cost of revenues.
- The VFA adversely affected MGuard commercial and clinical activity through September 30. Q3 revenue decreased by $1.279 million year over year; nine-month revenue decreased by $2.618 million.
- In October, the company began a limited market release of CGuard in certain European countries and reported first commercial orders. A broader launch, alongside a rapid-exchange delivery system, was planned for 2015.
- CARENET, a 30-patient CGuard clinical trial, reported 0% major adverse cardiac events at 30 days and favorable comparisons in new ischemic lesions against historical controls. These are early findings from a small study, not a guarantee of broader outcomes.
- Although the FDA approved resumption of MASTER II trial enrollment in October, InspireMD elected not to restart it, citing market movement toward drug-eluting stents. MASTER II will no longer be an FDA registration trial; management planned to redirect some resources to a MicroNet drug-eluting coronary product.
Outlook, risks and unusual items
- Going concern: Management stated that cash and expected operating needs were insufficient to fund operations for the next 12 months and that substantial doubt existed about the company’s ability to continue as a going concern. The company expected ongoing losses and negative operating cash flows until MGuard and CGuard reached commercial profitability. It planned to commercialize these products and raise additional debt or equity, but gave no assurance of obtaining needed financing; failure could require reducing activities or curtailing or ceasing operations.
- Subsequent financing: On November 7, 2014, after quarter-end, the company sold 6,261,846 shares and warrants for 3,130,923 shares at $1.30 per share, with warrant exercise price of $1.75. Net proceeds were approximately $7.4 million. The filing said this was expected to support operations only for a short period and that additional capital might be needed in the first half of 2015. The offering agreement barred further ATM sales through November 7, 2016.
- Product and market risks: Risks include repeat product defects or corrective actions, uncertain customer acceptance and recovery of MGuard sales, reliance on drug-eluting stents as the market standard, clinical and regulatory uncertainty, competition, supplier concentration, limited manufacturing capacity, and product-liability or distributor claims. Two distributors sought approximately $160,000 and unspecified compensation, respectively; the company disputed entitlement to compensation.
- Other risks and contingencies: The company cited dependence on its Israeli manufacturing facility and exposure to regional instability, foreign exchange, reimbursement and regulatory changes, and potential further dilution. It disclosed an Argentine labor claim with a $250,000 recorded provision and estimated possible additional loss of up to $80,000. Management considered a separate claim over alleged options neither probable nor estimable. The filing also discussed a possible Israeli securities-law violation; the company believed penalties were unlikely.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level as of September 30, 2014 and reported no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether modified MGuard Prime units restore distributor and hospital orders, and whether product-retention performance and any related claims are resolved.
- Cash runway after the November offering, subsequent cash burn, debt-service requirements, and the timing and terms of any further financing.
- Progress, regulatory status, commercial uptake and clinical evidence for CGuard and the planned MicroNet drug-eluting product.
- Whether the small CARENET study’s results are confirmed by larger or longer-term clinical data, and the implications of ending MASTER II as an FDA registration trial.
- Revenue recovery, gross-margin improvement, and the company’s ability to fund operations without substantial additional dilution or curtailing activities.