Inspire(INSP) - 2023 Q2 - Quarterly Report

Forward-Looking Statements This section details the nature of forward-looking statements, their inherent uncertainties, and key risks Overview of Forward-Looking Statements This section outlines forward-looking statements as predictions based on current expectations, subject to various risks - Forward-looking statements cover future operations, financial position, business strategy, COVID-19 impact, product approvals, reimbursement levels, R&D costs, and management objectives[8] - Identified by terms such as "anticipate," "believe," "expect," and "plan," these statements are predictions based on current expectations and projections[9] Key Risks and Uncertainties The company highlights numerous risks that could cause actual results to differ from forward-looking statements - Risks include a history of operating losses, dependency on the Inspire system, commercial success and market acceptance, and ability to achieve adequate reimbursement levels[10] - Other risks involve competitive technologies, COVID-19 impact, ability to expand indications and develop new products, and dependence on third-party suppliers[10] - Regulatory actions (FDA), intellectual property protection, changes in tax laws, and risks related to common stock are also significant factors[15] PART I. FINANCIAL INFORMATION This part presents consolidated financial statements, management's analysis of performance, market risks, and internal controls Consolidated Financial Statements This section presents unaudited consolidated financial statements, including balance sheets, income, equity, cash flows, and detailed notes Consolidated Balance Sheets As of June 30, 2023, total assets increased to $618.2 million, driven by cash, inventories, and property, with total liabilities also rising Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 (unaudited) | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------------------ | :---------------- | :--------- | :--------- | | Cash and cash equivalents | $467,051 | $441,592 | $25,459 | 5.76% | | Total current assets | $560,076 | $530,032 | $30,044 | 5.67% | | Total assets | $618,246 | $564,876 | $53,370 | 9.45% | | Total current liabilities | $66,687 | $61,186 | $5,501 | 8.99% | | Total liabilities | $88,887 | $68,868 | $20,019 | 29.07% | | Total stockholders' equity | $529,359 | $496,008 | $33,351 | 6.72% | Consolidated Statements of Operations and Comprehensive Loss Q2 2023 revenue increased by 65.3% to $151.1 million, with net loss decreasing by 17.5% to $12.0 million Consolidated Statements of Operations and Comprehensive Loss Highlights (in thousands, except per share) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Revenue | $151,092 | $91,386 | $59,706 | 65.3% | $278,989 | $160,768 | $118,221 | 73.5% | | Gross profit | $126,840 | $77,213 | $49,627 | 64.3% | $234,849 | $136,591 | $98,258 | 71.9% | | Gross margin | 83.9% | 84.5% | -0.6% | -0.71% | 84.2% | 85.0% | -0.8% | -0.94% | | Operating loss | $(16,599) | $(14,007) | $(2,592) | 18.5% | $(36,097) | $(30,063) | $(6,034) | 20.1% | | Net loss | $(11,952) | $(14,490) | $2,538 | -17.5% | $(27,376) | $(31,184) | $3,808 | -12.2% | | Net loss per share, basic and diluted | $(0.41) | $(0.53) | $0.12 | -22.6% | $(0.94) | $(1.13) | $0.19 | -16.8% | Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $529.4 million by June 30, 2023, primarily due to paid-in capital from stock options and compensation Stockholders' Equity Changes (Six Months Ended June 30, 2023) (in thousands) | Item | Amount | | :------------------------------------ | :------- | | Balance at December 31, 2022 | $496,008 | | Stock options exercised | $7,377 (Q1), $13,113 (Q2) | | Stock-based compensation expense | $18,225 (Q1), $21,567 (Q2) | | Net loss | $(15,424) (Q1), $(11,952) (Q2) | | Balance at June 30, 2023 | $529,359 | Consolidated Statements of Cash Flows H1 2023 operating activities generated $3.7 million cash, a significant improvement, with investing and financing also providing cash Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | | :------------------------------------ | :----------------------------- | :----------------------------- | :--------- | | Net cash provided by (used in) operating activities | $3,748 | $(18,702) | $22,450 | | Net cash provided by (used in) investing activities | $1,142 | $(12,884) | $14,026 | | Net cash provided by financing activities | $20,565 | $3,663 | $16,902 | | Net increase (decrease) in cash and cash equivalents | $25,459 | $(27,897) | $53,356 | | Cash and cash equivalents at end of period | $467,051 | $186,570 | $280,481 | Notes to Consolidated Financial Statements This section details significant accounting policies, financial instrument specifics, lease obligations, and segment reporting - Inspire Medical Systems, Inc. is a medical technology company focused on minimally invasive solutions for obstructive sleep apnea (OSA) with its FDA-approved Inspire system[31] - Investments primarily consist of U.S. government securities and money market funds, measured at fair value using Level 1 inputs[40][47] - A full valuation allowance is recorded against deferred tax assets due to cumulative net loss, with federal net operating loss carryforwards of $257.4 million as of December 31, 2022[108][109] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, including revenue, expenses, liquidity, capital resources, and critical accounting policies Overview Inspire Medical Systems commercializes the FDA-approved Inspire system for OSA, focusing on direct sales, marketing, and recent expanded indications - Inspire system is the first and only FDA-approved neurostimulation technology for moderate to severe OSA[119] - As of August 1, 2023, the 2024 proposed Medicare reimbursement rate for hospital implantation is $30,355 (3% increase) and for ASCs is $25,470 (1% increase)[122] - Recent FDA approvals include expanded indication for AHI up to 100 and BMI up to 40 (June 2023), pediatric patients with Down syndrome (March 2023), and full-body MRI compatibility (2022)[127] Macroeconomic Environment & COVID-19 Update The company faces inflationary pressures on costs and supply chain constraints, while COVID-19 impacts eased by Q1 2022 - Operations are impacted by inflationary pressures primarily related to labor, raw materials, and component parts[134] - Supply chain constraints eased somewhat in the first half of 2023, but inventory on-hand has been constrained[134] - COVID-19 resurgences impacted Q1 2022 revenue slightly, but surgical volumes returned to pre-pandemic levels by the end of Q1 2022[135] Components of Our Results of Operations This section details revenue from Inspire system sales, cost of goods, gross margin, increasing R&D and SG&A expenses, and other income - Revenue is primarily from Inspire system sales to hospitals and ASCs, recognized upon customer control of the product[136] - R&D expenses are expected to increase in the future as the company develops next-generation Inspire systems and expands clinical studies and new markets[143] - SG&A expenses are expected to continue to increase as the company expands its commercial infrastructure, headcount, and direct-to-consumer marketing efforts[145] Results of Operations (Q2 2023 vs. Q2 2022) Q2 2023 revenue surged by 65.3% to $151.1 million, with increased R&D and SG&A expenses, and improved net income Q2 2023 vs. Q2 2022 Financial Performance (in thousands, except percentages) | Metric | Q2 2023 | Q2 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Revenue | $151,092 | $91,386 | $59,706 | 65.3% | | U.S. Revenue | $144,749 | $87,876 | $56,873 | 64.7% | | International Revenue | $6,343 | $3,510 | $2,833 | 80.7% | | Gross margin | 83.9% | 84.5% | -0.6% | -0.71% | | Research and development expenses | $30,821 | $14,534 | $16,287 | 112.1% | | Selling, general and administrative expenses | $112,618 | $76,686 | $35,932 | 46.9% | | Other (income) expense, net | $(4,861) | $341 | $(5,202) | -1525.5% | | Net loss | $(11,952) | $(14,490) | $2,538 | -17.5% | Results of Operations (H1 2023 vs. H1 2022) H1 2023 total revenue increased by 73.5% to $279.0 million, with higher R&D and SG&A expenses, and improved other income H1 2023 vs. H1 2022 Financial Performance (in thousands, except percentages) | Metric | H1 2023 | H1 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Revenue | $278,989 | $160,768 | $118,221 | 73.5% | | U.S. Revenue | $269,234 | $154,302 | $114,932 | 74.5% | | All other countries Revenue | $9,755 | $6,466 | $3,289 | 50.9% | | Gross margin | 84.2% | 85.0% | -0.8% | -0.94% | | Research and development expenses | $56,340 | $26,404 | $29,936 | 113.4% | | Selling, general and administrative expenses | $214,606 | $140,250 | $74,356 | 53.0% | | Other (income) expense, net | $(9,151) | $879 | $(10,030) | -1141.1% | | Net loss | $(27,376) | $(31,184) | $3,808 | -12.2% | Liquidity and Capital Resources Cash and equivalents increased to $467.1 million, with sufficient liquidity for the next 12 months, dependent on market acceptance Liquidity and Capital Resources Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------ | :---------------- | :--------- | :--------- | | Cash and cash equivalents | $467,051 | $441,592 | $25,459 | 5.76% | | Working capital | $493,400 | $468,900 | $24,500 | 5.23% | - The increase in working capital was driven by a $25.5 million increase in cash, $9.0 million in inventory, and $2.3 million in accounts receivable, offset by a $9.8 million decrease in short-term investments[171][178] - The company believes existing cash, cash equivalents, and investments ($467.1 million) will provide sufficient liquidity for at least the next 12 months[177] Cash Flows H1 2023 operating activities generated $3.7 million cash, a significant improvement, with investing and financing also providing cash Summary of Cash Flows (Six Months Ended June 30) (in thousands) | Activity | 2023 | 2022 | Change ($) | | :------------------------------------ | :----- | :----- | :--------- | | Net cash provided by (used in) operating activities | $3,748 | $(18,702) | $22,450 | | Net cash provided by (used in) investing activities | $1,142 | $(12,884) | $14,026 | | Net cash provided by financing activities | $20,565 | $3,663 | $16,902 | | Net increase (decrease) in cash and cash equivalents | $25,459 | $(27,897) | $53,356 | - Operating cash flow improved due to non-cash charges (stock-based compensation) and changes in operating assets (increased inventories, accounts receivable) and liabilities (increased accounts payable, decreased accrued expenses)[180] - Financing cash flow was primarily driven by proceeds from stock option exercises and the employee stock purchase plan[184] Contractual Obligations and Commitments No material changes to contractual obligations and commitments, except for lease-related changes detailed in Note 4 - No material changes to contractual obligations and commitments, except for lease-related changes detailed in Note 4[186] Critical Accounting Policies and Estimates Critical accounting policies remain consistent, with added considerations for prelaunch inventory capitalization - No material changes to critical accounting policies, except for the addition of prelaunch inventory capitalization policy[187] - Prelaunch inventory is expensed as research and development expense in the period incurred unless regulatory approval and subsequent commercialization are probable and future economic benefits are expected[188] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate risk; other risks are unchanged, but cash balances exceed insured limits - A hypothetical 1% increase in interest rates during the six months ended June 30, 2023, would have impacted interest income on consolidated financial statements by approximately $11.2 million[190] - Cash balances were in excess of insured limits, posing a credit risk in the event of failure of any financial institutions where cash and cash equivalents are maintained[192] Controls and Procedures Disclosure controls were effective as of June 30, 2023, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2023[193] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[194] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not party to any material legal proceedings[196] Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for FY2022 - No material changes to risk factors from the Annual Report on Form 10-K for FY2022[197] Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities were reported - No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities[198] Defaults Upon Senior Securities There were no defaults upon senior securities - No defaults upon senior securities[199] Mine Safety Disclosures This item is not applicable to the company - Not applicable[200] Other Information CTO John C. Rondoni adopted a Rule 10b5-1 trading arrangement for selling up to 12,992 shares - CTO John C. Rondoni adopted a Rule 10b5-1 trading arrangement on May 19, 2023, to sell up to 12,992 shares by June 28, 2024[202] Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, agreements, and certifications - Exhibits include organizational documents (Certificate of Incorporation, Bylaws), employment agreements, certifications (CEO, CFO), and Inline XBRL documents[204] Signatures This section provides the authorized signatories and the date of the report Authorized Signatories The report is signed by Timothy P. Herbert and Richard J. Buchholz on August 1, 2023 - Report signed by Timothy P. Herbert (President, CEO, and Director) and Richard J. Buchholz (CFO) on August 1, 2023[209]