InspireMD, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013; comparative period is the three months ended September 30, 2012. The filing reports U.S. dollars in thousands unless otherwise noted. Although the request labels this 2013 Q1, the filing itself identifies the period by its September 30, 2013 quarter-end.
Business context and financial results
InspireMD develops and commercializes the MGuard stent platform, which uses a micron-mesh sleeve intended to provide embolic protection. It sells primarily through international distributors, mainly in Europe and Latin America.
| Metric | Quarter ended Sep. 30, 2013 | Quarter ended Sep. 30, 2012 |
|---|---|---|
| Revenue | $1.552 million | $509,000 |
| Gross profit / margin | $802,000 / 51.7% | $279,000 / 54.8% |
| Operating expenses | $4.687 million | $3.560 million |
| Operating loss | $3.885 million | $3.281 million |
| Net loss | $3.945 million | $7.506 million |
| Basic and diluted loss per share | $0.12 | $0.44 |
| Cash used in operating activities | $3.272 million | $2.356 million |
Liquidity, debt, and balance sheet
- At September 30, 2013, cash and cash equivalents were $11.440 million, down from $14.820 million at June 30. Current assets were $15.644 million and current liabilities $4.042 million; management reported a $11.6 million working-capital surplus and a 3.9-to-1 current-asset/current-liability ratio.
- The balance sheet lists no term loan at September 30. Subsequent to quarter-end, on October 23, the company and its subsidiary borrowed $10 million under a secured term loan; the filing says net proceeds were approximately $9.9 million. Interest is variable, with a stated minimum rate of 10.5%; payments are interest-only for nine months, followed by 30 monthly principal-and-interest payments, with maturity on February 1, 2017. Substantially all assets other than intellectual property secure the loan.
- The loan includes a $500,000 end-of-term charge, prepayment penalties, and restrictive covenants. A five-year warrant for 168,351 shares at $2.97 per share was also issued to the lender.
- Management said cash resources, including the April 2013 offering proceeds and the subsequent loan, should fund operations into 2015; additional funding may be needed in 2015 depending on 2014 results.
Material changes and management commentary
- Revenue rose about 205%, primarily from higher sales volume, with additional contribution from price increases to repeat distributors. Management attributed growth to distributor stabilization and targeted selling in Brazil and selected European countries. Russia contributed $454,000 of quarterly revenue, versus $24,000 a year earlier; one customer represented 29% of revenue.
- Gross margin fell to 51.7% from 54.8%. Management attributed this partly to about $178,000 of non-recurring manufacturing-consolidation costs; excluding those costs, it reported an adjusted margin of 63.1%.
- Research and development expense increased 63% to $1.544 million, principally as the U.S. FDA trial moved into site setup and enrollment; the first patient enrolled in July 2013. Management expected trial-related R&D costs to rise sharply. Selling and marketing expense more than doubled to $830,000 as worldwide sales activities expanded.
- Net loss improved year over year largely because the prior-year quarter included substantial non-cash warrant revaluation and convertible-debt amortization. Excluding the cited non-cash items, management said the net loss increased about 9.6% year over year.
- Operating cash use increased to $3.272 million. Management cited the net loss and higher working capital, partly offset by non-cash share-based compensation.
- The company amended its MGuard Prime license royalty terms in August 2013, including an advance payment of $192,000 and a 2% royalty on the first $10.56 million of sales through June 30, 2015, subject to the amendment’s terms.
- The company adopted a stockholder rights plan after quarter-end, generally triggered by an unapproved acquisition of 15% or more of its common stock. The board also approved a fiscal year-end change from June 30 to December 31, effective December 31, 2013.
Risks, contingencies, and unusual items
- The company cited recurring losses and negative operating cash flow, uncertainty about future liquidity, clinical-trial and regulatory approval risks, competition, reliance on a single manufacturing facility, and potential customer, supplier, product, and foreign-exchange risks.
- A former service provider’s Argentine claim was previously accrued at $250,000; management estimated a possible loss of up to $80,000 above the accrual. The filing also describes a separate options-related dispute for which management said a loss was not probable or estimable.
- The secured loan’s collateral, default provisions, variable interest rate, and covenants could constrain financing flexibility and expose company assets to foreclosure following a default.
- Management concluded disclosure controls were effective at the reasonable-assurance level as of September 30, 2013. It reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth—particularly in Europe, Latin America, and concentrated distributor accounts—continues and converts into collections.
- Whether reported gross-margin improvement excluding manufacturing-consolidation costs is repeatable, and how manufacturing changes affect future costs.
- Clinical-trial enrollment, spending, results, and regulatory progress, including the U.S. FDA trial.
- Cash burn and runway relative to management’s projection, including the full cost and covenants of the secured loan and the $500,000 end-of-term charge.
- Resolution and potential exposure for the disclosed legal claims, as well as the effects of the royalty amendment and stockholder rights plan.