Business context and reporting period
InspireMD, Inc. filed this Form 10-K for the fiscal year ended December 31, 2014. The company develops and sells medical stents using its MicroNet embolic-protection mesh. Its MGuard coronary stents and newly launched CGuard carotid system were marketed outside the United States; no products were approved for U.S. commercial sale. The company has one reportable operating segment.
Fiscal-period comparisons require care: the company changed its year-end, and the prior December 31 reporting period was a six-month transition period. The filing also presents a management comparison with a 12-month 2013 period; that comparison is not the same basis as the audited six-month 2013 figures shown in the financial statements.
Financial results and liquidity
Amounts below are U.S. dollars; financial-statement amounts are in thousands unless stated otherwise.
| Metric | FY 2014 | Prior period / comparison |
|---|---|---|
| Revenue | $2.818 million | $3.105 million for the six months ended December 31, 2013; management separately reports a 53.9% decline versus its 12-month 2013 comparison |
| Gross profit / margin | $0.784 million / 27.8% | $1.663 million / 53.6% for the six-month transition period |
| Operating expenses | $24.482 million | $10.490 million for the six-month transition period |
| Operating loss | $23.698 million | $8.827 million for the six-month transition period |
| Net loss / loss per share | $25.095 million / $0.71 | $9.336 million / $0.27 for the six-month transition period |
| Operating cash flow | $(19.362) million | $(6.799) million for the six-month transition period |
| Cash and cash equivalents at year-end | $6.300 million | $17.535 million at December 31, 2013 |
| Working capital | $0.895 million | $15.480 million at December 31, 2013 |
| Debt | $8.895 million carrying value: $3.809 million current and $5.086 million long-term | $9.774 million at December 31, 2013 |
Management states revenue fell 53.9% to $2.8 million versus its 12-month 2013 comparison, primarily because the voluntary field action halted MGuard Prime shipments. Gross margin fell from 51.8% on that comparison basis to 27.8%, reflecting lower sales and about $0.4 million of field-action costs, partly offset by lower labor and material costs. R&D rose to $8.7 million and selling and marketing to $6.6 million, while G&A was $9.1 million. Net loss improved from $29.2 million in the 12-month 2013 management comparison, mainly because 2013 included substantial nonrecurring financing expenses; operating losses increased.
In the fourth quarter of 2014, revenue was $870,000, gross profit $394,000, operating loss $4.447 million, and net loss $4.790 million, or $0.12 per share. Cash used in investing activities was $86,000 and financing activities provided $8.272 million during FY 2014. The filing lists contractual obligations totaling $15.014 million, including loan, lease, purchase, and employee-retirement obligations.
Material changes and notable developments
- On April 30, 2014, the company began a voluntary field corrective action after reports of MGuard Prime stent dislodgements during preparation or delivery. It modified the securement process, resumed manufacturing after European approval in June and U.S. FDA approval in October, and resumed shipments to direct Western European customers in late 2014. The filing reports approximately $326,000 of incurred modification costs and a further $55,000 accrued.
- Enrollment in the 1,114-patient MASTER II trial stopped after 310 patients had enrolled. Although FDA allowed enrollment to resume in October, management discontinued the trial in its existing form because the market was shifting toward drug-eluting stents; it will not serve as a U.S. registration trial. The company planned one-year follow-up of enrolled patients.
- CGuard received EU CE Mark approval in 2013 and entered limited market release in selected European countries in October 2014. The rapid-exchange delivery system received CE Mark approval in January 2015.
- In the fourth quarter of 2014, management shifted development emphasis from bare-metal stents toward a MicroNet drug-eluting stent and CGuard. The filing reports initial technical feasibility testing of drug-eluting stent candidates, with further development dependent in part on strategic partnerships and funding.
Outlook, risks and contingencies
Management expected the company’s resources to fund operations through the second quarter of 2016, subject to its plans and assumptions. On March 9, 2015, after year-end, the company completed an offering of 34.4 million shares and matching warrants, generating approximately $12.5 million net proceeds. Management also described a 2015 cost-reduction plan involving headcount reductions, concentrating development spending on the drug-eluting stent, limiting sales and marketing to the CGuard launch, and cutting other expenses. It warned that additional capital could be needed in 2016 and might not be available on acceptable terms.
Key risks include continuing substantial losses and negative operating cash flow; dependence on future financing and product commercialization; product safety, regulatory approval and clinical evidence; competition from larger device companies and the market shift to drug-eluting stents; reliance on key suppliers and the Israeli manufacturing site; foreign-exchange, political and operating risks in Israel; and customer concentration. A Saudi distributor represented 21% of 2014 revenue and a Belarus distributor 10%. The $10 million term loan bears interest at a floor of 10.5%, is secured by substantially all assets other than intellectual property, and requires monthly principal and interest payments; its scheduled maturity is February 2017. The company also disclosed distributor demands related to the field action and certain legal matters, including a previously accrued Argentine claim; management did not consider the described matters material proceedings as of filing.
The company reported that its 2014 financial statements did not include a going-concern explanatory paragraph following the March 2015 offering and cost reductions. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at year-end. The NYSE MKT had notified the company of listing-standard deficiencies. It submitted a compliance plan and expected the March offering to support compliance, subject to exchange review and continued compliance.
Important facts for investors to verify
- Confirm the correct comparable revenue and expense periods, given the year-end change and the difference between the audited six-month 2013 data and management’s 12-month comparison.
- Track post-offering cash, operating cash burn, debt service, and whether management’s Q2 2016 runway estimate remains achievable.
- Verify the scope and completion of the MGuard corrective action, any further adverse events or claims, and progress of the planned MGuard re-launch.
- Assess CGuard commercial uptake and the evidence supporting its safety and efficacy; distinguish company-reported clinical findings from larger controlled trials and historical comparisons.
- Monitor drug-eluting stent development, partnership funding, regulatory pathway, and the company’s ability to fund planned trials.
- Review dilution and capital structure after the March 2015 share-and-warrant offering, as well as NYSE MKT compliance and the status of disclosed distributor and legal disputes.