InspireMD, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statement amounts are in U.S. dollars; unless stated otherwise, amounts below are in millions. InspireMD develops and commercializes MicroNet-based vascular stent products, principally CGuard EPS for carotid disease and MGuard Prime EPS for coronary procedures. It sells mainly through distributors in international markets; none of its products could then be marketed in the United States.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.354 | $1.003 | $1.769 | $2.010 |
| Gross profit | $0.442 | $0.277 | $0.369 | $0.570 |
| Gross margin | 32.6% | 27.6% | 20.9% | 28.4% |
| Operating expenses | $2.625 | $1.750 | $5.682 | $3.996 |
| Operating loss | $(2.183) | $(1.473) | $(5.313) | $(3.426) |
| Net loss | $(2.206) | $(0.627) | $(5.413) | $(3.016) |
| Net loss per share, basic and diluted | $(1.59) | $(7.66) | $(4.86) | $(38.48) |
Cash flow and liquidity: Cash and equivalents were $4.823 million at June 30, down from $9.384 million at December 31, 2018. For the first half, operating cash use was $6.382 million, investing cash use was $0.224 million, and financing provided $2.046 million; cash declined by $4.561 million. Working capital was $5.277 million, with current assets 3.7 times current liabilities. The company reported no conventional borrowings in the presented balance sheet; it reported $1.095 million of lease liabilities, including $0.347 million current and $0.748 million non-current. Total liabilities were $3.710 million.
Changes versus comparable periods
- Q2 revenue rose 35.0% year over year, with CGuard revenue of $1.116 million and MGuard revenue of $0.238 million. Management attributed the quarter’s growth largely to shipments of about $0.592 million of backlog accumulated in Q1 because of sterilization-provider transition delays.
- First-half revenue fell 12.0% year over year, as those Q1 shipment delays and weaker sales in some markets reduced CGuard and MGuard sales. Management said the transition to the new sterilization provider was complete and it did not anticipate further fulfillment disruptions.
- Q2 gross margin improved to 32.6%, partly reflecting $0.135 million compensation from the former sterilizer and raw-material cost reductions. First-half margin declined to 20.9%, reflecting production-facility upgrades, employee training, and other costs.
- Research and development expense increased sharply: to $0.865 million in Q2 and $1.990 million in the first half, largely due to CGuard clinical/IDE work; first-half expense also included a $0.354 million service-provider settlement provision. First-half selling and marketing expense rose to $1.254 million; general and administrative expense was essentially unchanged at $2.438 million.
- First-half net loss widened by $2.397 million. Q2 financial results also shifted from $0.846 million of financial income in 2018 to $0.023 million of expense in 2019, primarily because prior-period income included revaluation of a Series C preferred-stock embedded derivative.
Outlook, risks, and unusual items
- Going concern: The company had a $153.005 million accumulated deficit and recurring losses and negative operating cash flows. Management said existing resources were expected to fund operations only through the end of Q4 2019, creating substantial doubt about the company’s ability to continue as a going concern. It planned to pursue commercialization and additional financing through equity, debt, or strategic partnerships, with no assurance of obtaining needed funding; failure could require reduced activity or cessation of operations.
- Clinical and regulatory: The company submitted a U.S. IDE application for CGuard EPS on July 26, 2019, after quarter-end. If approved and sufficient funds are available, it intended to begin a U.S. human clinical trial. No commercial U.S. sales were permitted at the time of the filing. No financial guidance was provided.
- Financing and dilution: An April 2019 public offering and partial over-allotment raised approximately $2.047 million net in total. The offering reduced Series B and C preferred conversion prices to $5.00; preferred-stock anti-dilution terms and outstanding warrants could cause further dilution. A 1-for-50 reverse stock split took effect March 29, 2019.
- Listing: NYSE American notified the company in January 2019 of a low-share-price deficiency. The company effected the reverse split, and the exchange confirmed on July 8, 2019 that the deficiency was resolved. Renewed noncompliance could prompt expedited review or delisting action.
- Contingencies: In July 2019, former Russian distributor Bosti Trading sued over returned MGuard products, seeking €1.830 million (about $2.0 million) or alternatively €1.024 million (about $1.1 million). Management assessed a reasonably possible loss ranging from a minimal amount up to €1.830 million. A separate former service-provider dispute was settled for $0.600 million and dismissed in April 2019; the related $0.354 million provision was recorded in first-half R&D expense.
- Other notable change: Adoption of lease accounting on January 1, 2019 resulted in recognition of right-of-use assets and lease liabilities; at June 30, the right-of-use asset was $1.042 million. Management described disclosure controls as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the company secured financing beyond its stated Q4 2019 cash runway, and the resulting dilution, terms, and liquidity impact.
- IDE application status, timing and funding for a U.S. clinical trial, and any subsequent regulatory developments.
- Subsequent sales, distributor orders, and progress in recovering from Q1 sterilization-related shipment delays.
- Developments and any recorded accruals related to the Bosti lawsuit, including the ultimate range of potential loss.
- Compliance with NYSE American listing standards and the potential dilution from preferred stock, warrants, and equity compensation.