InspireMD, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. InspireMD develops and commercializes MGuard stent products, sold primarily through international distributors and direct hospital sales in Europe. Financial amounts below are in U.S. dollars, thousands, except per-share data.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2014: $193; 2013: $1,500 | 2014: $1,675; 2013: $3,014 |
| Gross profit (loss) | 2014: $(391); 2013: $668 | 2014: $466; 2013: $1,508 |
| Gross margin | 2014: (202.6)%; 2013: 44.5% | 2014: 27.8%; 2013: 50.0% |
| Operating expenses | 2014: $6,844; 2013: $4,883 | 2014: $13,236; 2013: $8,934 |
| Operating loss | 2014: $(7,235); 2013: $(4,215) | 2014: $(12,770); 2013: $(7,426) |
| Net loss | 2014: $(7,562); 2013: $(14,947) | 2014: $(13,530); 2013: $(19,832) |
| Basic and diluted loss per share | 2014: $(0.22); 2013: $(0.48) | 2014: $(0.40); 2013: $(0.80) |
Q2 revenue fell 87.2% year over year and six-month revenue fell 44.4%, principally because shipments of the main commercial product were suspended during the voluntary field action. Six-month R&D expense rose to $5,025 from $1,954, largely reflecting MASTER II trial setup and enrollment, CARENET activity, and stent-retention work. Selling and marketing expense rose to $3,224 from $2,008 as the company expanded its sales force. General and administrative expense was broadly flat for the six-month period.
Net losses were lower than in 2013 mainly because the prior-year periods included substantial non-cash charges tied to convertible-debt conversion, warrant revaluations, and anti-dilution rights. Management’s adjusted comparisons indicate losses would have been higher in 2014 after excluding those prior-year items.
Cash, liquidity, and debt
- Cash and cash equivalents were $8,988 at June 30, 2014, down from $17,535 at December 31, 2013.
- Operating cash use was $8,354 for the first six months, versus $4,501 in the prior-year period. Investing cash use was $65; financing cash use was $115. The prior-year period included $22,880 of share-issuance proceeds.
- Working capital was approximately $2,506 at June 30, down by about $13 million from year-end. Current assets were $11,630 and current liabilities were $9,124.
- Total loan principal carrying amounts were $9,923: $3,037 current and $6,886 long-term. The October 2013 $10 million loan bears interest at a variable rate with a 10.5% floor, has scheduled maturity on February 1, 2017, and is secured by company assets other than intellectual property.
- Equity was in a capital-deficiency position of $(2,797), compared with positive equity of $8,639 at December 31, 2013. Accumulated deficit was $95.8 million.
Management stated that existing resources were insufficient to fund operations for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. Plans include commercializing MGuard products and raising additional equity or debt, including through its at-the-market equity program; success and adequate financing are not assured.
Material developments, outlook, and risks
- On April 30, 2014, InspireMD began a voluntary field corrective action after reports of MGuard Prime EPS stent dislodgements. Shipments were suspended and MASTER II enrollment was paused pending FDA review. The filing reported no deaths or serious injuries from the dislodgements.
- European approval to modify the stent securement process and modify and redeploy returned units was received in June. The company said manufacturing and distribution could resume with the modified process, but the action had adversely affected commercial and clinical activities and no new customer sales agreements had been executed as of the filing’s discussion.
- The company recorded an estimated $400,000 of field-action modification costs in Q2 cost of revenue. All finished goods were classified as work in process while modifications were underway.
- Risks include further delays or restrictions relating to the field action and MASTER II, product-liability exposure, additional corrective actions, ongoing losses and financing uncertainty, clinical and regulatory outcomes, competition, manufacturing quality and dependence on its Israeli facility, and political and security conditions in Israel.
- No financial guidance or quantified revenue outlook is provided. A new revenue-recognition standard, ASC 606, was disclosed as effective for annual periods beginning on or after January 1, 2017, with early adoption permitted.
- Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of June 30, 2014; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Current status and pace of MGuard Prime EPS modifications, shipments, sales agreements, and any further safety or regulatory developments.
- FDA review outcome and timing for resuming MASTER II enrollment, and implications for U.S. market access.
- Cash burn, available borrowing or ATM capacity, financing terms, and whether funding can cover the next 12 months.
- Loan repayment obligations, interest costs, and security terms, alongside the company’s ability to meet current liabilities.
- Whether the reported revenue decline, customer concentration, and product-action costs persist as commercial activity resumes.
- Potential exposure from the disclosed legal claims and any additional product-liability or corrective-action costs.