InspireMD, Inc. 10-K

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 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 MicroNet™ stent platform technology for the treatment of complex vascular and coronary disease. A stent is an expandable “scaffold-like” device, usually constructed of a metallic material, that is inserted into an artery to expand the inside passage and improve blood flow. MicroNet, a micron mesh sleeve, is wrapped over a stent to provide embolic protection in stenting procedures. Our CGuard™ carotid embolic prevention system (“CGuard EPS”) combines MicroNet and a self-expandable nitinol stent in a single device for use in carotid artery applications. Our CGuard EPS originally received CE mark approval in the European Union in March 2013 and was fully launched in Europe in September 2015. Subsequently, we launched CGuard EPS in Russia and certain countries in Latin America and Asia, including India. In September 2020, we launched CGuard EPS in Brazil after receiving regulatory approval in July 2020 and on February 3, 2021, we executed a distribution agreement with Chinese partners for the purpose of expanding our presence in China. Currently, we are seeking strategic partners for a potential launch of CGuard EPS in Japan and other Asian countries. Our CE mark for CGuard EPS under the MDD expired on November 12, 2022, and we are in the final stages of technical documentation review by the Notified Body auditor to meet the MDR requirements for recertification. In the meantime, on February 14, 2023, we received a derogation per Article 97 paragraph 1 of Regulation 2017/745 from the Agency for Medicines and Health Products (FAMHP) allowing us to continue marketing CGuard EPS in the EU until August 15, 2023, subject to certain procedural requirements. Subsequently, on March 20, 2023, Regulation (EU) 2023/607 was published allowing us to continue marketing CGuard EPS in EU countries under the MDD directive until December 31, 2027. As a result of the foregoing, we may market and sell CGuard EPS in the EU and certain other jurisdictions subject to certain procedural requirements while our MDR CE recertification is pending. We continue to expedite the review process for recertification under the MDR. - 54 - On September 8, 2020, we received approval from the U.S. Food and Drug Administration (“FDA”) of our Investigation Device Exemption (“IDE”), thereby allowing us to proceed with a pivotal study of our CGuard™ Carotid Stent System, C-Guardians, for prevention of stroke in patients in the United States. C-Guardians is a prospective, multicenter, single-arm, pivotal study to evaluate the safety and efficacy of the CGuard™ Carotid Stent System when used to treat symptomatic and asymptomatic carotid artery stenosis in patients undergoing carotid artery stenting. The trial was designed to enroll approximately 315 subjects in a maximum of 40 study sites located in the United States and Europe. Study sites in Europe may contribute a maximum of approximately 50% of the total enrollees. The primary endpoint of the study will be the composite of incidence of death (all-cause mortality), all stroke, and myocardial infarction (DSMI) through 30-days post-index procedure, based on the clinical events committee (CEC) adjudication and ipsilateral stroke from 31-365 day follow-up, based on Clinical Events Committee (CEC) adjudication. The composite index will be compared to a performance goal based on the observed rate of the two components of the primary endpoint from previous pivotal stent trials which are considered industry standard. The performance goal will be considered met if the upper bound of the two-sided 95% confidence interval calculated from the observed primary endpoint rate is < 11.6% and the p-value is less than 0.025. On July 23, 2021, we announced the initiation of enrollment and successful completion of the first cases of our C-Guardian trial of CGuard EPS. The first patients, who were under the care of principal investigator, Chris Metzger, M.D., system chair of clinical research at Ballard Health System in Eastern Tennessee, were successfully implanted with the CGuard EPS stent device. These are the first of 315 patients who are expected to be enrolled in the trial and receive CGuard EPS in the treatment of carotid artery stenosis in symptomatic and asymptomatic patients undergoing carotid artery stenting. We are currently continuing with the enrollment phase. In April 2022, we completed our first European recruitment. Additionally, we intend to continue to invest in current and future potential product and manufacturing enhancements for CGuard EPS that are expected to reduce cost of goods and/or provide the best-in-class performing delivery system, CGuard Prime. In furtherance of our strategy that focuses on establishing CGuard EPS as a viable alternative to vascular surgery, we are exploring adding new delivery systems and accessory solutions for procedural protection to our portfolio such as SwitchGuard. We consider the current addressable market for our CGuard EPS to be individuals with diagnosed, symptomatic high-grade carotid artery stenosis (HGCS, ≥70% occlusion) for whom intervention is preferable to medical (drug) therapy. This group includes not only carotid artery stenting patients but also individuals undergoing carotid endarterectomy, as the two approaches compete for the same patient population. Assuming full penetration of the intervention caseload by CGuard EPS, we estimate that the addressable market for CGuard EPS will be approximately $666 million in 2022 (source: Health Research International Personal Medical Systems, Inc. September 13, 2021 Results of Update Report on Global Carotid Stenting Procedures and Markets by Major Geography and Addressable Markets). According to this same report, assuming full penetration of the caseload for all individuals diagnosed with high-grade carotid artery stenosis, we estimate that the total available market for CGuard EPS in 2022 will be approximately $5 billion. Our MGuard™ Prime™ embolic protection system (“MGuard Prime EPS”) was marketed for use in patients with acute coronary syndromes, notably acute myocardial infarction (heart attack) and saphenous vein graft coronary interventions, or bypass surgery. MGuard Prime EPS combines MicroNet with a bare-metal cobalt-chromium based stent. MGuard Prime EPS received CE mark approval in the European Union in October 2010 for improving luminal diameter and providing embolic protection. Over the past years there has been a shift in industry preferences away from bare-metal stents, such as MGuard Prime EPS in ST-Elevation Myocardial Infarction (“STEMI”) patients. As a result of declining sales of the MGuard Prime EPS, which we believe this is largely driven by the predominant industry preferences favoring drug-eluting, or drug-coated, stents, during the second quarter of 2022 we ceased sales of our MGuard Prime EPS following a phase out period. We also intend to develop a pipeline of other products and additional applications by leveraging our MicroNet technology to improve peripheral procedures such as the treatment of the superficial femoral artery disease and vascular disease below the knee as well as neurovascular procedures, such as the treatment of acute stroke. - 55 - Presently, none of our products may be sold or marketed in the United States, but we do derive revenues from the use of our products in the currently ongoing trials. We were organized in the State of Delaware on February 29, 2008. Critical Accounting Policies We prepared our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). U.S. GAAP represents a comprehensive set of accounting and disclosure rules and requirements, and applying these rules and requirements requires management judgments and estimates including, in certain circumstances, choices between acceptable U.S. GAAP alternatives. The following is a discussion of our most critical accounting policies, judgments and uncertainties that are inherent in our application of U.S. GAAP. 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, the 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 valuations and assessing the likelihood of exercise of options to extend the lease term. 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 and cash equivalents, which are deposited in major financially sound institutions in the United States, Israel and Germany, and trade accounts receivable. Our trade accounts receivable is 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 customers. We also have a credit insurance policy for some 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 management reasonably believes will be collected, which is netted against “Accounts receivable — Trade”. Inventory Inventories are stated at the lower of cost (cost is determined on a “first-in, first-out” basis) or net realizable 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, based on such evaluation, factors indicate that impairment has occurred, we impair the inventories’ carrying value. In addition, we write-off fails in production based on actual and estimated. Leases Operating leases are included in operating lease right-of-use (“ROU”) assets, Accounts payable and accruals - Other, and operating lease liabilities. ROU assets represent Company’s right to use an underlying asset for the lease term and lease liabilities represent obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the incremental borrowing rate based on the information available at the lease commencement date as the rate implicit in the lease is not readily determinable. The determination of the incremental borrowing rate requires management judgment based on information available at lease commencement. The lease terms may include periods covered by options to extend the lease when it is reasonably certain that we will exercise such options, and periods covered by options to terminate the lease when it is reasonably certain that we will not exercise such options. Operating lease cost is recognized on a straight-line basis over the lease term. Lease agreements that include lease and non-lease components are accounted for as a single lease component. The Company elected the short-term lease recognition exemption for leases with a lease term of 12 months or less. Our Israeli subsidiary had a lease agreement for a facility in Israel, which expired on December 31, 2022, with an option to extend the agreement for two additional years until December 31, 2024. On May 25, 2022 the Company amended the agreement mentioned above and extended it until December 31, 2026 as well as leasing of additional space in the facility, the additional space amendment was taken in consideration when calculating the operating lease right of use assets and liabilities. The amendment period added approximately $835,000 to the leasing liability. - 56 - Revenue recognition A contract with a customer exists only when: 1) the parties to the contract have approved it and are committed to perform their respective obligations, 2) we can identify each party’s rights regarding the distinct goods or services to be transferred (“Performance Obligations”), 3) we can determine the transaction price for the goods or services to be transferred, 4) the contract has commercial substance and 5) it is probable that we will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Revenues are recorded in the amount of consideration to which we expect to be entitled in exchange for Performance Obligations upon transfer of control to the customer, excluding sales taxes. Revenue from sales of goods, including sales to distributors, is recognized when the customer obtains control of the product, once we have a present right to payment, legal title, and risk and rewards of ownership are obtained by the customer. This occurs when products are shipped. We recognize the incremental costs of obtaining contracts as an expense since the amortization period of the assets that we otherwise would have recognized is one year or less. The costs are recorded under selling and marketing expenses. We recognize revenue net of value added tax (VAT). 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 and expensed over the requisite service period, net of estimated forfeitures. We elected to account for forfeitures as they occur. We elected to recognize compensation expenses for awards with only service conditions that have graded vesting schedules using the accelerated multiple option approach. Results of Operations Twelve months ended December 31, 2022 compared to the twelve months ended December 31, 2021 Revenues . For the twelve months ended December 31, 2022, revenue increased by $676,000, or 15%, to $5,171,000, from $4,495,000 during the twelve months ended December 31, 2021. This increase was predominantly driven by a 18.9% increase in sales volume of CGuard EPS, from $4,309,000 during the twelve months ended December 31, 2021, to $5,123,000 during the twelve months ended December 31, 2022. This sales increase was mainly due to growth in existing and new markets and sales in the United States related to stents used in our C-Guardians FDA study as enrolment accelerated. With respect to regions, the increase in revenue was primarily attributable to a $269,000 increase in Latin America, a $112,000 increase in Asia, a $94,000 increase in Europe and a $50,000 increase in other geographies. This growth was mainly due to growth in existing and new markets. In addition, there was a $151,000 increase in revenue from North America due to sales in the United States related to stents used in our C-Guardians FDA study. Gross Profit . For the twelve months ended December 31, 2022, gross profit (revenue less cost of revenues) increased by 48.1%, or $363,000, to $1,117,000, compared to a gross profit of $754,000 for the same period in 2021. This increase in gross profit resulted from a $186,000 increase in revenues (as mentioned above) less the associated related material and labor costs and a decrease of $177,000 in miscellaneous expenses. Gross margin (gross profits as a percentage of revenue) increased to 21.6% during the twelve months ended December 31, 2022 from 16.8% during the twelve months ended December 31, 2021, driven by the reasons mentioned above. - 57 - Research and Development Expenses . For the twelve months ended December 31, 2022, research and development expenses increased by 51.4%, or $2,652,000, to $7,810,000, from $5,158,000 during the twelve months ended December 31, 2021. This increase resulted primarily from an increase of $2,431,000 in expenses related to the enrollment in the C-Guardians FDA study which commenced in the second half of 2021 and an increase of $221,000 in miscellaneous expenses. Selling and Marketing Expenses . For the twelve months ended December 31, 2022, selling and marketing expenses increased by 26.0%, or $757,000, to $3,664,000, from $2,907,000 during the twelve months ended December 31, 2021. This increase resulted primarily from an increase in salary expenses of $297,000, an increase in tradeshows and travel expenses of $288,000 in light of resumed marketing activities following the lifting of restrictions related to COVID-19, and an increase in share-based compensation expenses of $157,000 due to the expense recognition of grants made during the fourth quarter of 2021. General and Administrative Expenses . For the twelve months ended December 31, 2022, general and administrative expenses increased by 12.8%, or $951,000, to $8,356,000, from $7,405,000 during the twelve months ended December 31, 2021. This increase resulted primarily from an increase in share-based compensation-related expenses of $372,000, mainly due to the expense recognition of grants made during the fourth quarter of 2021, an increase in regulatory expenses of $214,000 related to the implementation of the new European Medical Device Regulation, an increase in patent related expenses of $155,000, an increase in travel expenses of $139,000 in light of resumed activities following governments lifting restrictions related to COVID-19, an increase in directors’ and officers’ liability insurance expenses of $107,000, due to increased premiums caused by recent trends in the overall insurance industry and an increase of $154,000 in miscellaneous expenses offset, in part, by a decrease in shareholder related expenses of $190,000 mainly due to a special shareholders meeting (which occurred in 2021, but not in 2022) and also due to higher costs of our annual stockholder meeting in 2021 compared to our annual stockholder meeting in 2022. Financial Income (Expenses) . For the twelve months ended December 31, 2022, financial income increased by $407,000, to $250,000 of financial income, from $157,000 of financial expense during the twelve months ended December 31, 2021. The increase in financial income primarily resulted from a $229,000 increase in interest income from short-term bank deposits and an increase of $181,000 in financial income related to changes in exchange rates. Tax Expenses . For the twelve months ended December 31, 2022, tax decreased by $17,000 compared to the twelve months ended December 31, 2021. Our expenses for income taxes reflect primarily the tax liability due to potential tax exposure. Net Loss . Our net loss increased by $3,573,000, or 24.0%, to $18,491,000, for the twelve months ended December 31, 2021, from $14,918,000 during the twelve months ended December 31, 2021. The increase in net loss resulted primarily from an increase of $4,360,000 in operating expenses partially offset by an increase of $407,000 in financial income and an increase of $363,000 in gross profit. Liquidity and Capital Resources We had an accumulated deficit as of December 31, 2022 of $201 million, as well as a net loss of $18,491,000 and negative operating cash flows. We expect to continue incurring losses and negative cash flows from operations until our product, CGuard EPS, reach commercial profitability. As a result of these expected losses and negative cash flows from operations, along with our current cash position, we believe we have sufficient resources to fund operations until the end of September 2023. Therefore, there is substantial doubt about our ability to continue as a going concern. Equity Financings On July 28, 2020, we entered into a Sales Agreement with A.G.P. in connection with the ATM Facility. Any shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to the Company’s Registration Statement on Form S-3 (File No. 333-223130), filed with the Securities and Exchange Commission (“SEC”) on February 21, 2018 and the prospectus supplement thereto filed with the SEC on July 28, 2020, by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended, or if specified by us, by any other method permitted by law. On January 11, 2021, we increased the aggregate amount of our shares of common stock that may be sold under the Sales Agreement from $9,300,000 to $10,382,954, and, as a result, utilized and sold the maximum amount allowable under the ATM Facility, which resulted in an aggregate amount of $10,381,958. - 58 - On February 8, 2021, we closed an underwritten public offering of 1,935,484 units, with each such unit being comprised of one share of our common stock, par value $0.0001 per share, and one Series G Warrant to purchase one-half of one share of common stock. The offering price to the public was $9.30 per unit. The Series G Warrants were immediately exercisable at a price of $10.23 per share, subject to adjustment in certain circumstances, and expire five years from the date of issuance. We also granted the underwriter of the offering an option to purchase an additional 290,322 shares of common stock and Series G Warrants to purchase 145,161 shares of common stock, which the underwriter exercised in full. In connection with the offering, we granted to the underwriter a compensation warrant to purchase up to 111,290 shares of common stock with an exercise price of $10.23 per share and which are exercisable for five years from February 3, 2021, the date of effectiveness of the registration statement filed in connection with the offering. Our net proceeds from the offering, after giving effect to the exercise of the underwriter’s over-allotment option, were approximately $18.9 million, after deducting underwriting discounts and commissions and payment of other estimated expenses associated with the offering, but excluding the proceeds, if any, from the exercise of Series G Warrants sold in the offering. On February 3, 2021, we entered into a Distribution Agreement with three China-based partners and on the same day, we entered into an investment transaction with QIDI, which included (i) an SPA, pursuant to which QIDI agreed to invest $900,000 in exchange for shares of our common stock at a purchase price of $10.062 per share, and (ii) an IRA, whereby QIDI was provided certain customary registration rights, including a commitment by us to file a registration statement with the SEC on Form S-1 or Form S-3 and have such registration statement become effective not later than 150 days following the closing of the transactions under the SPA. The transaction closed on February 5, 2021. Twelve months ended December 31, 2022 compared to the twelve months ended December 31, 2021 General. At December 31, 2022, we had cash and cash equivalents of $4,632,000 and Short-term bank deposits of $13,171,000 as compared to $12,004,000 of cash and cash equivalents and $22,036,000 Short-term bank deposits as of December 31, 2021. We have historically met our cash needs through a combination of issuing new shares, borrowing activities and product sales. Our cash requirements are generally for research and development, marketing and sales activities, finance and administrative cost, capital expenditures and general working capital. For the twelve months ended December 31, 2022, net cash used in our operating activities increased by $2,332,000 to $15,542,000, from $13,210,000 during the same period in 2021. The primary reason for the increase in cash used in our operating activities was an increase of $3,148,000 in payments for third party related expenses and for professional services (primarily due to payments related to our ongoing FDA trial, and production related payments), an increase of $802,000 in salary and bonus payments from $7,756,000 in the twelve months ended December 31, 2021 to $8,558,000 during the same period in 2022 offset, in part, by an increase of $1,618,000 in payments received from customers to $5,333,000 during the twelve months ended December 31, 2022, from $3,715,000 during the same period in 2021. Cash provided by our investing activities was $8,441,000 during the twelve months ended December 31, 2022, compared to cash used of $22,457,000 during the twelve months ended December 31, 2021. The primary reasons for the increase in cash provided by our investing activities was withdrawal of short-term deposits, net of investments of $9,000,000 during the twelve months ended December 31,2022 , compared to investment in short-term deposits, net of withdrawals of $22,000,000 during the twelve months ended December 31,2021, and due to a decrease in employee funds to $86,000 during the twelve months ended December 31, 2022, compared to employee funds of $113,000 during the same period in 2021, offset, in part, by an increase of $129,000 in net payments made for purchase of property, plant and equipment to $473,000 during the twelve months ended December 31, 2022, from $344,000 during the same period in 2021. Cash Used by financing activities for the twelve months December 31, 2022, was $140,000, compared to cash provided of $35,034,000 during the same period in 2021. The principal sources of the cash used by financing activities during the twelve months ended December 31, 2022 were due to issuance costs associated with a shelf registration statement on Form S-3 filed with the SEC on June 3, 2022. The principal sources of the cash provided by financing activities during the twelve months ended December 31, 2021 were our February 2021 public offering of common stock and warrants, exercise of Series F and Series G warrants, proceeds from an At-the-market offering as well as proceeds from the issuance of shares to Chinese distributor that resulted in approximately $35,034,000 of aggregate net proceeds. - 59 - As of December 31, 2022, our current assets exceeded our current liabilities by a multiple of 4.2. Current assets decreased by $15,768,000 during the period and current liabilities increased by $723,000 during the period. As a result, our working capital decreased by $16,491,000 to $16,256,000 as of December 31, 2022. Off Balance Sheet Arrangements We have no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments. This guidance replaces the current incurred loss impairment methodology. Under the new guidance, on initial recognition and at each reporting period, an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience, current conditions and reasonable and supportable forecasts. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies had an effective date of December 15, 2019, including interim periods within those fiscal years. +All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. Under the current SEC definitions, we meet the definition of an SRC and are adopting the deferral period for ASU 2016-13. The guidance requires a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements. In November 2021, the FASB issued ASU 2021-10 “Government Assistance (Topic 832)”, which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2021. However, it is not expected to have a material impact on the consolidated financial results of operations, financial position or cash flows. Factors That May Affect Future Operations We believe that our future operating results will continue to be subject to quarterly variations based upon a wide variety of factors, including the cyclical nature of the ordering patterns of our distributors, timing of regulatory approvals, the implementation of various phases of our clinical trials and manufacturing efficiencies due to the learning curve of utilizing new materials and equipment. Our operating results could also be impacted by a weakening of the Euro and strengthening of the NIS, both against the U.S. dollar. Lastly, other economic conditions we cannot foresee may affect customer demand, such as individual country reimbursement policies pertaining to our products. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.