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NSPR > SEC Filings for NSPR > Form 10-K on 17-Sep-2013All Recent SEC Filings

Show all filings for INSPIREMD, INC.

Form 10-K for INSPIREMD, INC.


17-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying condensed consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

We are a medical device company focusing on the development and commercialization of our proprietary stent platform technology, MGuard. MGuard provides embolic protection in stenting procedures by placing a micron mesh sleeve over a stent. Our initial products are marketed for use mainly in patients with acute coronary syndromes, notably acute myocardial infarction (heart attack) and saphenous vein graft coronary interventions (bypass surgery).

On March 31, 2011, we completed a series of share exchange transactions pursuant to which we acquired all of the capital stock of InspireMD Ltd., a company formed under the laws of the State of Israel, in exchange for an aggregate of 12,666,665 (as adjusted for the one-for-four reverse stock split of our common stock that occurred on December 21, 2012) shares of our common stock. As a result of these share exchange transactions, InspireMD Ltd. became our wholly-owned subsidiary, we discontinued our former business and succeeded to the business of InspireMD Ltd. as our sole line of business.

The share exchange transactions were accounted for as a recapitalization. InspireMD Ltd. is the acquirer for accounting purposes and we are the acquired company. Accordingly, the historical financial statements presented and the discussion of financial condition and results of operations herein are those of InspireMD Ltd., retroactively restated for, and giving effect to, the number of shares received in the share exchange transactions, and do not include the historical financial results of our former business. The accumulated earnings of InspireMD Ltd. were also carried forward after the share exchange transactions and earnings per share have been retroactively restated to give effect to the recapitalization for all periods presented. Operations reported for periods prior to the share exchange transactions are those of InspireMD Ltd.

On June 1, 2012, our board of directors approved a change in our fiscal year-end from December 31 to June 30, effective June 30, 2012.

We effectuated a one-for-four reverse stock split of our common stock on December 21, 2012.

Recent Events

On April 16, 2013, we consummated an underwritten public offering pursuant to which we sold 12.5 million shares of common stock. The public offering price of our common stock in this offering was $2.00 per share, resulting in aggregate net proceeds to us of approximately $22.6 million, after the underwriters' commissions and offering expenses. On April 11, 2013, following the pricing of the offering, our common stock commenced trading on the NYSE MKT.

Critical Accounting Policies

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates using assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Actual results could differ from those estimates.

As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to inventory write-off, intangible assets, provisions for returns, legal contingencies, estimation of the fair value of share-based compensation and estimation of the fair value of warrants.

Functional currency

The currency of the primary economic environment in which our operations are conducted is the U.S. dollar ("$" or "dollar"). Accordingly, the functional currency of us and of our subsidiaries is the dollar.

The dollar figures are determined as follows: transactions and balances originally denominated in dollars are presented in their original amounts. Balances in foreign currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. The resulting translation gains or losses are recorded as financial income or expense, as appropriate. For transactions reflected in the statements of operations in foreign currencies, the exchange rates at transaction dates are used. Depreciation and changes in inventories and other changes deriving from non-monetary items are based on historical exchange rates.

Fair value measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In determining fair value, we use various valuation approaches, including market, income and/or cost approaches. Hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs.

Concentration of credit risk and allowance for doubtful accounts

Financial instruments that may potentially subject us to a concentration of credit risk consist of cash, cash equivalents and restricted cash which are deposited in major financial institutions in the U.S., Germany and Israel, and trade accounts receivable. Our trade accounts receivable are derived from revenues earned from customers from various countries. We perform ongoing credit evaluations of our customers' financial condition and, generally, require no collateral from our customers. We also have a credit insurance policy for some of our customers. We maintain an allowance for doubtful accounts receivable based upon the expected ability to collect the accounts receivable. We review our allowance for doubtful accounts quarterly by assessing individual accounts receivable and all other balances based on historical collection experience and an economic risk assessment. If we determine that a specific customer is unable to meet its financial obligations to us, we provide an allowance for credit losses to reduce the receivable to the amount our management reasonably believes will be collected. To mitigate risks, we deposit cash and cash equivalents with high credit quality financial institutions. Provisions for doubtful debts are netted against "Accounts receivable-trade."

Inventory

Inventories include finished goods, work in process and raw materials. Inventories are stated at the lower of cost (cost is determined on a "first-in, first-out" basis) or market value. Our inventories generally have a limited shelf life and are subject to impairment as they approach their expiration dates. We regularly evaluate the carrying value of our inventories and when, in our opinion, factors indicate that impairment has occurred, we establish a reserve against the inventories' carrying value. Our determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires us to utilize significant judgment. Although we make every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of our inventories and reported operating results. To date, inventory adjustments have not been material. With respect to inventory on consignment, see "Revenue recognition" below.

Revenue recognition

Revenue is recognized when delivery has occurred, evidence of an arrangement exists, title and risks and rewards for the products are transferred to the customer, collection is reasonably assured and when product returns can be reliably estimated. When product returns can be reliably estimated a provision is recorded, based on historical experience, and deducted from revenues. The provision for sales returns and related costs are included in "Accounts payable and accruals - Other" under "current liabilities" and "Inventory on consignment," respectively.

When returns cannot be reliably estimated, both related revenues and costs are deferred, and presented under "Deferred revenues" and "Inventory on consignment," respectively.

As of June 30, 2013, there were no deferred revenues related to sales in the balance sheet for which the rate of return could not be reliably estimated.

Our arrangements with distributors may contain the right to receive free products upon the achievement of sales targets. Each period, we estimate the amount of free products to which these distributors will be entitled based upon the expected achievement of sales targets and defer a portion of revenues accordingly.

We recognize revenue net of value added tax.

Research and development costs

Research and development costs are charged to the statement of operations as incurred.

Share-based compensation

Employee option awards are classified as equity awards and accounted for using the grant-date fair value method. The fair value of share-based awards is estimated using the Black-Scholes valuation model, which is expensed over the requisite service period, net of estimated forfeitures. We estimate forfeitures based on historical experience and anticipated future conditions.

We elected to recognize compensation expensed for awards with only service conditions that have graded vesting schedules using the accelerated multiple option approach.

We account for equity instruments issued to third party service providers (non-employees) by recording the fair value of the options granted using an option pricing model, at each reporting period, until rewards are vested in full. The expense is recognized over the vesting period using the accelerated multiple option approach.

In addition, certain of our share-based awards are performance based, i.e., the vesting of these awards depends upon achieving certain goals. We estimate the expected pre-vesting award probability, i.e., the expected likelihood that the performance conditions will be achieved, and only recognize expense for those shares expected to vest.

Uncertain tax and value added tax positions

We follow a two-step approach to recognizing and measuring uncertain tax and value added tax positions. The first step is to evaluate the tax and value added tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit. The second step is to measure the tax and value added tax benefit as the largest amount that is more than 50% and 75%, respectively, likely of being realized upon ultimate settlement. Such liabilities are classified as long-term, unless the liability is expected to be resolved within twelve months from the balance sheet date. Our policy is to include interest related to unrecognized tax benefits within financial expenses.

Results of Operations

Twelve months ended June 30, 2013 compared to twelve months ended June 30, 2012

Revenues. For the twelve months ended June 30, 2013, revenue decreased by approximately $0.5 million, or 8.9%, to approximately $4.9 million from approximately $5.3 million during the same period in 2012. This decrease was predominantly driven by a decrease in sales volume of approximately $0.5 million, or approximately 9.6%, partially offset by price increases to our repeat distributors of approximately $36,000, or approximately 0.7%. The $0.5 million decrease in sales volume was due largely to the fact that we are in the process of replacing certain third party distributors with direct sales channels in key countries where end user average selling prices, along with other limiting factors, continue to impair sales. While we believe that this transition to direct selling will ultimately lead to greater sales in these markets, the transition away from certain distributors adversely impacted revenue for the twelve months ended June 30, 2013, as we had fewer parties selling our products.

With respect to regions, the decrease in revenue was mainly attributable to a decrease of approximately $0.6 million in revenue from our distributors in Latin America and a decrease of approximately $0.2 million in revenue from our distributors throughout the rest of the world. These decreases were partially offset by an increase of approximately $0.3 million in revenue from our distributors in Asia.

Gross Profit. For the twelve months ended June 30, 2013, gross profit (revenue less cost of revenues) increased 3.6%, or approximately $0.1 million, to approximately $2.6 million from approximately $2.5 million during the same period in 2012. The increase in gross profit is attributable to a decrease in cost of revenues of approximately $0.6 million, primarily attributable to a non-recurring write-off of approximately $0.4 million of slow moving inventory in the twelve months ended June 30, 2012, which did not occur in the same period in 2013, as well as a decrease of approximately $0.3 million of material and labor costs due to the decrease in sales of $0.5 million, as discussed above, partially offset by approximately $0.2 million of expenses related to the consolidation of our manufacturing facilities. The decrease of approximately $0.6 million in cost of revenues was partially offset by a decrease in revenue of approximately $0.5 million as discussed above. Gross margin increased from 46.7% in the twelve months ended June 30, 2012 to 53.2% in the twelve months ended June 30, 2013.

Royalties' Buyout Expenses. For the twelve months ended June 30, 2013, we incurred approximately $0.9 million in royalties' buyout expenses relating to the restructuring of our royalty agreement for the MGuard Prime version of our MGuard Coronary stent. In connection with the restructuring of this agreement, the licensor of the stent design used for this product agreed to reduce the royalty rate from 7% of net sales outside of the United States, 7% of the first $10.0 million of net sales in the United States and 10% of net sales in the United States above $10.0 million to 2.9% of all net sales both inside and outside the United States in exchange for (i) us waiving $85,000 in regulatory fees owed to us, (ii) us making full payment of royalties owed as of September 30, 2012 in the amount of $205,587 and (iii) $1,763,000, payable in 215,000 shares of our common stock that were valued at $8.20 per share. There was no such expense during the twelve months ended June 30, 2012. Royalties' buyout expenses as a percentage of revenue was 18.8% for the twelve months ended June 30, 2013.

Research and Development Expenses. For the twelve months ended June 30, 2013, research and development expenses increased 4.2%, or approximately $0.2 million, to approximately $4.2 million, from approximately $4.0 million during the same period in 2012. The increase in research and development expenses resulted primarily from an increase of approximately $0.1 million in salaries, an increase of approximately $0.1 million in patent expenses, an increase of approximately $0.1 million in expenditures related to the development of the MGuard Carotid product and an increase of approximately $0.2 million in miscellaneous expense. These increases were partially offset by a decrease in clinical trial expenses of approximately $0.3 million, attributable mainly to fewer expenses associated with our MASTER Trial, as we approach the trial's conclusion (decrease of approximately $0.2 million), and our U.S. Food and Drug Administration trial (decrease of approximately $0.1 million). Research and development expense as a percentage of revenue increased to 85.3% for the twelve months ended June 30, 2013 from 74.6% in the same period in 2012. However, research and development expenses related to our U.S. Food and Drug Administration Trial are expected to increase sharply, as we received an approval with conditions to commence the trial on April 19, 2013 and had the first patient enroll in July 2013.

Selling and Marketing Expenses. For the twelve months ended June 30, 2013, selling and marketing expenses increased 66.3%, or approximately $1.4 million, to approximately $3.6 million, from approximately $2.2 million during the same period in 2012. The increase in selling and marketing expenses resulted primarily from an increase of approximately $0.7 million in salaries as we expanded our sales activities worldwide, an increase of approximately $0.4 million in expenditures related to promotional activities related to the Transcatheter Cardiovascular Therapeutics (TCT) conference in Miami, Florida, where we announced our MASTER trial results, an increase of approximately $0.5 million in product promotion expenses and an increase of approximately $0.3 million in travel expenses for our increased sales force. Much of these sales initiatives were driven by our efforts to capitalize on the publication of the initial MASTER trial results, which represented our first randomized data related to our MGuard technology. These increases in sales and marketing expenses were partially offset by a decrease of approximately $0.3 million in share-based compensation expenses and a decrease of approximately $0.2 million in miscellaneous expenses. With the growth of our sales force, and associated activities, as described above, selling and marketing expenses as a percentage of revenue increased to 74.2% in the twelve months ended June 30, 2013 from 40.6% in the same period in 2012.

General and Administrative Expenses. For the twelve months ended June 30, 2013, general and administrative expenses decreased 35.4%, or approximately $4.9 million, to approximately $9.0 million from approximately $13.9 million during the same period in 2012. The decrease in general and administrative expenses resulted primarily from a decrease in share-based compensation of $6.1 million (which predominantly pertained to director's compensation paid in 2012) and a decrease of approximately $0.3 million in expenses related to consultants. This decrease was partially offset by an increase in salaries of approximately $0.6 million (which predominately relates to the hiring of our new chief executive officer), an increase of approximately $0.5 million in legal expenses largely associated with our previous financing efforts, an increase of approximately $0.1 million in bad debt expense, an increase of approximately $0.1 million in audit fees, and an increase of approximately $0.2 million in miscellaneous expenses. General and administrative expenses as a percentage of revenue decreased to 184.1% in the twelve months ended June 30, 2013 from 259.5% in the same period in 2012.

Financial Expenses. For the twelve months ended June 30, 2013, financial expenses increased to approximately $14.1 million from approximately $38,000 during the same period in 2012. The increase in financial expenses resulted primarily from approximately $9.9 million in non-recurring, non-cash effects of the debt inducement related to the adjustment of the conversion ratio of our convertible debentures upon their retirement in April 2013, $4.3 million of amortization expense pertaining to our convertible debentures and their related issuance costs (of which approximately $3.6 million represented the non-recurring, non-cash amortization of the discount of the convertible debentures and their related issuance costs). In addition to these non-recurring, non-cash expenses, we also incurred approximately $1.5 million of expense pertaining to our obligation to issue shares of common stock without new consideration to the investors in our March 2011 private placement due to certain anti-dilution rights held by such stockholders. These expenses were partially offset by approximately $1.4 million of financial income pertaining to the revaluation of certain of our warrants due to our stock price decreasing to $2.21 on June 30, 2013, from $4.24 on June 30, 2012 and approximately $0.1 million for the favorable impact of exchange rate differences for the twelve months ended June 30, 2013. Financial expense as a percentage of revenue increased from 0.7% in the twelve months ended June 30, 2012, to 290.9% in the same period in 2013. If the non-recurring, non-cash effects of the debt inducement and amortization expense are removed, financial expenses for the twelve months ended June 30, 2013 would have totaled approximately $0.7 million, an increase of approximately $0.7 million from the same period in 2012.

Tax Expenses. For the twelve months ended June 30, 2013, tax expenses decreased approximately $6,000 to approximately $8,000 for the twelve months ended June 30, 2013, from approximately $14,000 during the same period in 2012.

Net Loss. Our net loss increased by approximately $11.7 million, or 66.3%, to approximately $29.3 million for the twelve months ended June 30, 2013 from approximately $17.6 million during the same period in 2012. The increase in net loss resulted primarily from an increase of approximately $14.2 million in financial expenses, of which, approximately $13.5 million were non-recurring, non-cash (see above for explanation), partially offset by a decrease of approximately $2.4 million in operating expenses (see above for explanation) and an increase of approximately $0.1 million in gross profit (see above for explanation). If the non-recurring, non-cash effects of the debt inducement and amortization expense are removed, our net loss would be approximately $15.8 million for the twelve months ended June 30, 2013, as compared to a net loss of approximately $17.6 million for the same period in 2012, an improvement of approximately $1.8 million, or 10%.

Liquidity and Capital Resources

Twelve months ended June 30, 2013 compared to twelve months ended June 30, 2012

Due to the underwritten public offering of our common stock in April 2013, pursuant to which we received net proceeds of approximately $22.6 million, and the exchange and amendment agreement pursuant to which, as described below, we fully satisfied our obligations under our senior secured convertible debentures due April 15, 2014 in the prior principal amount of $11.7 million, we believe that we have sufficient cash to continue our operations into 2015. However, depending on the operating results in 2014, we may need to raise additional funds in 2015 to continue financing our operations.

General. At June 30, 2013, we had cash and cash equivalents of approximately $14.8 million, as compared to $10.3 million as of June 30, 2012. We have historically met our cash needs through a combination of issuing new shares, borrowing activities and sales. Our cash requirements are generally for clinical trials, marketing and sales activities, finance and administrative cost, capital expenditures and general working capital.

Cash used in our operating activities was approximately $10.3 million for the twelve months ended June 30, 2013 and $8.6 million for the same period in 2012. The principal reasons for the usage of cash in our operating activities for the twelve months ended June 30, 2013 include a net loss of approximately $29.3 million, offset by approximately $13.5 million in non-cash financial expenses, approximately $3.8 million in non-cash share-based compensation that was largely paid to our directors, approximately $0.9 million in a non-cash royalties buyout related to the restructuring of our royalty agreement for the MGuard Prime version of our MGuard Coronary stent, as discussed above, a decrease in working capital of approximately $0.4 million, approximately $0.2 million in depreciation and amortization expenses and approximately $0.2 million of miscellaneous expenditures.

Cash used in our investing activities was approximately $376,000 during the twelve months ended June 30, 2013, compared to approximately $43,000 during the same period in 2012. The principal reason for the increase in cash used in investing activities during 2013 was the purchase of property, plant and equipment of approximately $202,000 (primarily new manufacturing equipment and leasehold improvements for our production facilities), an increase in restricted cash of approximately $56,000 and the funding of employee retirement funds of approximately $118,000.

Cash generated by financing activities was approximately $15.1 million for the twelve months ended June 30, 2013, compared to $11.1 million generated during the same period in 2012. The principal source of cash from financing activities during the twelve months ended June 30, 2013 was funds received from the issuance of shares in connection with the underwritten public offering of our common stock of approximately $22.9 million, as well as approximately $1.0 million from the exercise of options and warrants, partially offset by the partial satisfaction of our convertible debentures for approximately $8.8 million as described below. In contrast, during the twelve months ended June 30, 2012, we received approximately $9.9 million from the initial issuance of these convertible debentures and associated warrants and approximately $1.5 million from the exercise of options, partially offset by a repayment of a long term loan of approximately $0.3 million.

As of June 30, 2013, our current assets exceeded our current liabilities by a multiple of 4.68. Current assets increased approximately $4.6 million during the twelve months period, mainly due to cash received from financing activities, and current liabilities increased by approximately $0.5 million during the same period. As a result, our working capital surplus increased by approximately $4.1 million to approximately $14.9 million at June 30, 2013.

Convertible Debentures

On April 5, 2012, we issued senior secured convertible debentures due April 5, 2014 in the original aggregate principal amount of $11,702,128 and five-year warrants to purchase an aggregate of 835,866 shares of our common stock at an exercise price of $7.20 per share in exchange for aggregate gross proceeds of $11.0 million, with corresponding net proceeds of approximately $9.9 million. The convertible debentures were issued with a 6% original issuance discount, bore interest at an annual rate of 8% and were convertible at any time into shares of common stock at an initial conversion price of $7.00 per share. Upon conversion of the convertible debentures, investors were entitled to receive a conversion premium equal to 8%, per annum, with a limit of 12% for the term of the convertible debentures, of the principal amount being converted. In addition, the investors had the right to require us to redeem the convertible debentures at any time after October 5, 2013 (18 months after the date of issuance) for 112% of the then outstanding principal amount, plus all accrued interest, and we had the right to prepay the convertible debentures after six months for 112% of the then outstanding principal amount, plus all accrued interest. In connection with this financing, we paid placement agent fees of $848,750 and issued placement agents warrants to purchase 78,078 shares of common stock, with terms identical to the warrants issued to the investors.

On April 9, 2013, we entered into an exchange and amendment agreement with the holders of these convertible debentures, pursuant to which, simultaneously with the closing of our underwritten public offering on April 16, 2013, and in full satisfaction of our obligations under the convertible debentures, we:

repaid $8,787,234 in cash;
issued 2,159,574 shares of common stock to the holders of the convertible debentures, reflecting a conversion price of $2.00 per share for the remaining unpaid portion of the convertible debentures;
issued five year warrants to the holders of these convertible debentures to purchase an aggregate of 659,091 shares of common stock for $3.00 per share;
amended the securities purchase agreement pursuant to which the convertible debentures were originally issued to prohibit us from issuing securities containing anti-dilution protective provisions; and

amended the warrants issued in connection with the convertible debentures to
(i) eliminate the automatic incorporation of the terms of any securities that are superior to those of such warrants, except with respect to exercise price . . .

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