Inspire(INSP) - 2023 Q3 - Quarterly Report

PART I Consolidated Financial Statements The company's consolidated financial statements for Q3 2023 demonstrate strong revenue growth, improved net loss, and a shift to positive operating cash flow, supported by a robust balance sheet Balance Sheets - Total assets grew to $639.5 million as of September 30, 2023, from $564.9 million at year-end 2022, primarily due to increases in short-term investments, property and equipment, and operating lease right-of-use assets[19] - Stockholders' equity increased to $544.2 million from $496.0 million, driven by additional paid-in capital from stock-based compensation and option exercises, which offset the accumulated deficit from net losses[19] Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $329,897 | $441,592 | | Total current assets | $569,591 | $530,032 | | Total assets | $639,494 | $564,876 | | Liabilities & Equity | | | | Total current liabilities | $69,995 | $61,186 | | Total liabilities | $95,314 | $68,868 | | Total stockholders' equity | $544,180 | $496,008 | Statements of Operations and Comprehensive Loss - Revenue for Q3 2023 increased by 40.4% year-over-year, while for the nine-month period, it grew by 60.1%[22] - Net loss for Q3 2023 significantly narrowed to $8.5 million from $16.8 million in Q3 2022, demonstrating improved profitability at a higher revenue scale[22] Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $153,302 | $109,188 | $432,291 | $269,956 | | Gross Profit | $128,920 | $89,402 | $363,769 | $225,993 | | Gross Margin | 84.1% | 81.9% | 84.1% | 83.7% | | Operating Loss | $(13,471) | $(17,194) | $(49,568) | $(47,257) | | Net Loss | $(8,540) | $(16,847) | $(35,916) | $(48,031) | | Net Loss Per Share | $(0.29) | $(0.60) | $(1.23) | $(1.73) | Statements of Stockholders' Equity - Total stockholders' equity increased from $496.0 million at the end of 2022 to $544.2 million as of September 30, 2023[24] - The increase in equity was primarily driven by $83.9 million in additional paid-in capital, mainly from stock option exercises and stock-based compensation expense, which was partially offset by a net loss of $35.9 million for the nine-month period[24] Statements of Cash Flows - Cash from operations turned positive at $7.4 million for the first nine months of 2023, compared to a use of $7.7 million in the prior-year period, primarily due to a smaller net loss and higher non-cash charges like stock-based compensation[28] - Investing activities used $143.1 million, largely for the purchase of $137.3 million in investments, a significant increase from the prior year[28] - Financing activities in 2022 included $243.8 million from a follow-on stock offering, which was not repeated in 2023. In 2023, financing cash flow was primarily from stock option exercises[28][33] Consolidated Statement of Cash Flows Summary (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7,386 | $(7,700) | | Net cash used in investing activities | $(143,099) | $(16,646) | | Net cash provided by financing activities | $24,065 | $227,788 | | (Decrease) increase in cash and cash equivalents | $(111,695) | $203,341 | Notes to Consolidated Financial Statements - The company's primary business is the development and commercialization of its Inspire system, a neurostimulation technology for treating moderate to severe Obstructive Sleep Apnea (OSA)[30] - Revenue is derived from product sales to hospitals and ambulatory surgery centers and is recognized when the customer obtains control of the product, typically upon shipment[66][67] - The company amended its corporate headquarters lease in May 2023, increasing the space and extending the term through May 2035, resulting in a non-cash increase to the right-of-use asset and lease liability of $15.1 million[87] - The company operates as a single operating segment. For the nine months ended September 30, 2023, 96.4% of revenue was generated in the United States[116][117][126] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong Q3 2023 revenue growth to market expansion and utilization, with improved gross margins despite rising operating expenses, while addressing a potential European supply issue and maintaining strong liquidity Overview - The company is focused on its proprietary Inspire system, an FDA-approved neurostimulation technology for treating moderate to severe Obstructive Sleep Apnea (OSA)[122] - As of November 7, 2023, the company has secured positive coverage policies from commercial payors covering approximately 260 million lives in the U.S., in addition to Medicare coverage[124] - A supply issue with polyurethane-based stimulation leads in Europe, pending EU MDR certification for new silicone-based leads, may cause implant delays and reduce European revenue by up to $4 million in Q4 2023[127] - The company expanded its commercial presence, ending Q3 2023 with 274 U.S. sales territories and 1,107 U.S. medical centers implanting Inspire therapy[135] Results of Operations - Q3 2023 revenue growth of 40.4% was driven by increased utilization, market penetration in existing territories, and expansion into new territories. U.S. revenue grew 38.8% while revenue outside the U.S. grew 99.0%[157][158][160][161] - Gross margin for Q3 2023 increased to 84.1% from 81.9% in Q3 2022, primarily because the prior-year period included a $2.8 million charge for inventory obsolescence related to new product introductions[163] - The 32.3% increase in SG&A expenses was primarily due to a $16.3 million rise in compensation-related costs from increased headcount and a $7.0 million increase in marketing expenses for direct-to-consumer initiatives[165][166] Comparison of Results of Operations (in thousands) | Metric | Q3 2023 | Q3 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $153,302 | $109,188 | $44,114 | 40.4% | | Gross Profit | $128,920 | $89,402 | $39,518 | 44.2% | | R&D Expenses | $29,144 | $20,993 | $8,151 | 38.8% | | SG&A Expenses | $113,247 | $85,603 | $27,644 | 32.3% | | Net Loss | $(8,540) | $(16,847) | $8,307 | (49.3)% | Liquidity and Capital Resources - As of September 30, 2023, the company had $467.2 million in cash, cash equivalents, and available-for-sale debt securities[179] - Working capital increased by $30.8 million from year-end 2022 to $499.6 million, driven by higher short-term investments and inventories, partially offset by a decrease in cash used to purchase those investments[179] - The company believes its existing cash, investments, and cash flow from operations will be sufficient to meet its cash needs and fund operations for at least the next 12 months[185] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk associated with its cash equivalents and short-term investments, with a hypothetical 1% increase in rates impacting interest income by approximately $16.2 million for the nine months ended September 30, 2023 - The primary market risk is from fluctuating interest rates on cash equivalents and short-term investments. A hypothetical 1% increase in interest rates would have impacted interest income by approximately $16.2 million in the first nine months of 2023[200] - There have been no material changes to the company's exposure to credit risk, foreign currency risk, or inflation risk since its 2022 year-end report[201] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of September 30, 2023, with no material changes in internal control over financial reporting during the third quarter - Based on an evaluation as of the end of the quarter, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[203][204] - No changes occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[205] PART II. OTHER INFORMATION Legal Proceedings The company reports that it is not currently a party to any material legal proceedings - The company is not party to any material legal proceedings[207] Risk Factors The company faces risks from delayed regulatory approvals, specifically a current EU supply issue for stimulation leads that may impact Q4 2023 European revenue - A key risk is the potential failure to receive necessary and timely regulatory approvals or certifications for future products and expanded indications, which could adversely affect business growth[208] - A delay in EU certification for new silicone-based leads has created an inventory shortage of the current polyurethane-based stimulation leads used in the European market[214][215] - This supply issue is expected to cause delays to implant procedures and may adversely affect business in the EU, including a potential reduction in European revenue during Q4 2023 and possibly early 2024[215] Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company reported no unregistered sales of equity securities, no specific use of proceeds from such sales, and no issuer purchases of equity securities during the period - None[216] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[217] Mine Safety Disclosures This item is not applicable to the company - Not applicable[218] Other Information During the third quarter of 2023, several company executives and a director adopted Rule 10b5-1 trading arrangements for the future sale of company common stock - In August 2023, several executives and directors, including the CEO Timothy P. Herbert and CFO Richard J. Buchholz, adopted Rule 10b5-1 trading plans for the pre-arranged sale of company stock[219][222][224] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer, and XBRL data files - The report includes a list of exhibits filed, such as an employment agreement, CEO/CFO certifications (Sections 302 and 906), and Inline XBRL documents[226]