Inspire(INSP) - 2022 Q1 - Quarterly Report

Forward-Looking Statements This report contains forward-looking statements regarding future financial results, business strategy, product approvals, and R&D costs - This report contains forward-looking statements covered by safe harbor provisions, including those related to future financial results, business strategy, product approvals, reimbursement levels, R&D costs, and management objectives[10] - Key risks and uncertainties include operating losses, dependency on the Inspire system, commercial success, reimbursement levels, competition, impact of COVID-19, ability to expand indications, and supply chain reliance[12][16] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited interim financial statements, including Balance Sheets, Statements of Operations, Stockholders' Equity, and Cash Flows Balance Sheets Metric (in thousands) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :-------------------- | :------------- | :---------------- | | Total assets | $289,720 | $295,084 | | Total liabilities | $64,665 | $66,036 | | Total stockholders' equity | $225,055 | $229,048 | | Cash and cash equivalents | $203,291 | $214,467 | | Inventories | $22,198 | $17,231 | - Total assets decreased by $5.36 million from December 31, 2021, to March 31, 2022, primarily driven by a decrease in cash and cash equivalents[19] Statements of Operations and Comprehensive Loss Metric (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Revenue | $69,382 | $40,352 | $29,030 | 71.9% | | Cost of goods sold | $10,004 | $5,981 | $4,023 | 67.3% | | Gross profit | $59,378 | $34,371 | $25,007 | 72.8% | | Operating expenses | $75,434 | $50,060 | $25,374 | 50.7% | | Operating loss | $(16,056) | $(15,689) | $(367) | 2.3% | | Net loss | $(16,694) | $(16,216) | $(478) | 2.9% | | Net loss per share, basic and diluted | $(0.61) | $(0.60) | $(0.01) | 1.7% | - Revenue increased significantly by 71.9% year-over-year, reaching $69.4 million, while net loss slightly increased by 2.9% to $16.7 million[21][149] Statements of Stockholders' Equity Metric (in thousands) | Metric (in thousands) | Balance at Dec 31, 2021 | Stock options exercised | Stock-based compensation expense | Net loss | Balance at Mar 31, 2022 | | :-------------------- | :---------------------- | :---------------------- | :------------------------------- | :------- | :---------------------- | | Additional Paid-In Capital | $508,465 | $3,086 | $9,721 | — | $521,308 | | Accumulated Deficit | $(279,389) | — | — | $(16,694) | $(296,083) | | Total Stockholders' Equity | $229,048 | $3,087 | $9,721 | $(16,694) | $225,055 | - Stockholders' equity decreased from $229.0 million at December 31, 2021, to $225.1 million at March 31, 2022, primarily due to the net loss of $16.7 million, partially offset by stock-based compensation expense and stock option exercises[24] Statements of Cash Flows Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(12,748) | $(10,401) |\n| Net cash used in investing activities | $(1,465) | $(1,321) |\n| Net cash provided by financing activities | $3,044 | $3,550 |\n| Decrease in cash and cash equivalents | $(11,176) | $(8,170) |\n| Cash and cash equivalents at end of period | $203,291 | $182,348 | - The company experienced a net decrease in cash and cash equivalents of $11.2 million for the three months ended March 31, 2022, primarily driven by cash used in operating activities[26][167] Notes to Financial Statements 1. Organization - Inspire Medical Systems, Inc. is a medical technology company focused on developing and commercializing minimally invasive solutions for obstructive sleep apnea (OSA)[28] - Its proprietary Inspire system is the first and only FDA-approved neurostimulation technology for moderate to severe OSA, with commercial availability in Europe since 2011, Japan since 2021, and Australia approved in 2020 (seeking reimbursement)[28] 2. Summary of Significant Accounting Policies - Financial statements are prepared in accordance with GAAP for interim reporting, using estimates and assumptions that may differ from actual results[29] - The company measures certain financial assets and liabilities at fair value on a recurring basis, classifying them into a three-tier hierarchy (Level 1, 2, 3) based on input observability[37][38] Fair Value Measurements as of March 31, 2022 (in thousands) | Asset Type | Estimated Fair Value | Level 1 | | :----------------------- | :------------------- | :------ | | Money market funds | $189,379 | $189,379 | | U.S. government securities | $9,796 | $9,796 |\n| Total | $199,175 | $199,175 | - Revenue from product sales is recognized when the customer obtains control, typically upon shipment or receipt, adjusted for variable consideration and returns (historically immaterial)[56][57][61] - Stock-based compensation expense is recognized for equity awards (RSUs, PSUs, stock options, ESPP) based on grant date fair value, using the Black-Scholes model for options and ESPP, and closing price for RSUs/PSUs[66] 3. Investments Long-Term Investments (Available-for-Sale) (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :----------------------- | :------------- | :---------------- | | Amortized Cost | $9,994 | $9,993 | | Unrealized Gross Losses | $(198) | $(55) |\n| Aggregate Fair Value | $9,796 | $9,938 | - All long-term investments consist of U.S. government securities with contractual maturities of less than two years, and are not considered other-than-temporarily impaired[76] 4. Leases - The company leases approximately 70,000 square feet for its corporate headquarters, with the lease expiring May 31, 2028[77] Lease Balances (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Operating lease right-of-use asset | $7,659 | $7,919 |\n| Total operating lease liabilities | $9,226 | $9,108 | - As of March 31, 2022, the remaining lease term was 6.2 years with a weighted average discount rate of 5.3%[80] 5. Long-Term Debt - As of March 31, 2022, the company had $24.5 million outstanding under its credit facility, which matures on March 1, 2024, with interest-only payments until April 1, 2022[81] - The credit facility includes affirmative and restrictive covenants, and the company was in compliance as of March 31, 2022[82][83] 6. Employee Retirement Plan - The company sponsors a defined contribution employee retirement plan and began making voluntary matching contributions of 50% of the first 6% of employee contributions (up to 3% of eligible earnings) starting January 1, 2022[84] - Discretionary contributions to the plan totaled $0.7 million for the three months ended March 31, 2022[84] 7. Stock-Based Compensation Stock-Based Compensation Expense (in thousands) | Component | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Stock options | $7,761 | $5,657 |\n| Restricted stock units | $565 | $19 |\n| Performance stock units | $1,010 | — |\n| Employee stock purchase plan | $385 | $321 |\n| Total | $9,721 | $5,997 | - Total stock-based compensation expense increased by 62.1% to $9.7 million for the three months ended March 31, 2022, driven by increases across all award types, particularly stock options and the introduction of PSUs[88] - As of March 31, 2022, unrecognized stock-based compensation expense was $94.2 million for stock options (expected over 2.5 years), $13.4 million for RSUs (expected over 2.9 years), and $23.1 million for PSUs (expected over 3.0 years)[92][99][103] 8. Income Taxes - A full valuation allowance was recorded against all deferred tax assets due to the company's cumulative net loss position[106][109] - As of December 31, 2021, the company had gross federal net operating loss carryforwards of $286.3 million and state NOLs of $198.2 million, along with $6.7 million in R&D credit carryforwards[107] 9. Segment Reporting and Revenue Disaggregation - The company operates as a single reporting segment[112] Revenue by Geographic Region (in thousands) | Region | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------- | :-------------------------------- | :-------------------------------- | | United States | $66,426 | $37,769 |\n| All other countries | $2,956 | $2,583 |\n| Total revenue | $69,382 | $40,352 | - 95.7% of revenue for the three months ended March 31, 2022, was derived from the U.S[126] 10. Loss Per Share - Basic and diluted net loss per share are identical due to the company reporting a net loss, rendering all potentially dilutive shares anti-dilutive[114] Anti-Dilutive Common Stock-Based Awards | Award Type | March 31, 2022 | March 31, 2021 | | :-------------------------- | :------------- | :------------- | | Common stock options outstanding | 2,763,215 | 2,750,375 |\n| Unvested restricted stock units | 60,785 | 2,275 |\n| Unvested performance stock units | 78,351 | — |\n| Shares issuable under the ESPP | 5,435 | 5,785 |\n| Total | 2,907,786 | 2,758,435 | 11. Subsequent Event - On April 27, 2022, Inspire invested $10.0 million in a minority interest of EnsoData, Inc. to advance its digital health platform[117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, business developments, COVID-19 impact, revenue, expenses, liquidity, and capital resources Overview - Inspire Medical Systems commercializes the Inspire system, an FDA-approved neurostimulation technology for moderate to severe OSA, sold to hospitals and ASCs in the U.S., Europe, and Japan[120][121] - The company has secured positive coverage policies with U.S. commercial payors (covering ~260 million lives) and all seven Medicare Administrative Contractors (MACs)[122] - New Category I CPT codes for hypoglossal nerve stimulator services (64582, 64583, 64584) and Drug-Induced Sleep Endoscopy (42975) went into effect January 1, 2022, with 2022 Medicare reimbursement rates of approximately $30,063 for hospitals and $24,828 for ASCs[123][124] - For Q1 2022, revenue was $69.4 million (85.6% gross margin) with a net loss of $16.7 million, compared to Q1 2021 revenue of $40.4 million (85.2% gross margin) and a net loss of $16.2 million[128] - The company continues to invest in R&D for next-generation Inspire systems and expanded indications, including recent FDA approval for a Bluetooth-enabled remote and a two-incision surgical implant procedure[129] - Direct-to-consumer marketing, including national TV advertising (started Jan 2022), and the Inspire Advisor Care Program (ACP), which serves ~600 U.S. centers, are key growth drivers[130][131][132] - The Philips Respironics CPAP recall is believed to be increasing patient inquiries and flow for Inspire therapy, though the impact is not yet quantifiable[133] - The company expanded to 174 U.S. sales territories and 733 U.S. implanting medical centers (22% ASCs) as of March 31, 2022[134] COVID-19 Pandemic Update - COVID-19 resurgences in Q1 2022, similar to Q1 2021, impacted revenue and clinician/patient access, though surgical volumes generally returned to pre-pandemic levels by quarter-end[136] - The company has not experienced significant supply chain disruptions or reduced capital expenditures due to the pandemic[137] Components of Our Results of Operations Revenue - Revenue is primarily derived from selling the Inspire system to hospitals and ASCs in the U.S., Europe, and Japan, recognized when customers gain control of the product[138] - Revenue fluctuates quarterly due to factors like seasonality (higher in Q4, lower in Q1) and the impact of the COVID-19 pandemic[139] Cost of Goods Sold and Gross Margin - Cost of goods sold includes acquisition costs for components, overhead, scrap, inventory obsolescence, warranty, and distribution expenses[140] - Gross margin is influenced by manufacturing costs, average selling price, cost-reduction strategies, inventory obsolescence, sales mix (U.S. vs. international), and potential increases in material/labor prices due to supply chain issues and inflation[141] Research and Development Expenses - R&D expenses cover product development, engineering, clinical studies, regulatory affairs, quality assurance, and personnel costs[142] - R&D expenses are expected to increase with the development of next-generation Inspire systems and expansion of clinical studies into new markets[143] Selling, General and Administrative Expenses - SG&A expenses primarily consist of compensation for sales, finance, IT, and HR personnel, marketing, advertising, training, and general corporate costs[144][145] - SG&A expenses are anticipated to continue increasing due to commercial infrastructure expansion, headcount growth, and higher stock-based compensation[146] Other Expense - Other expense primarily includes interest expense from the credit facility, realized foreign currency losses, and interest income[147] Seasonality - The company historically experiences seasonality, with higher sales in Q4 (due to met insurance deductibles) and lower sales in Q1 (due to deductible resets) in the U.S[148] - German sales previously saw Q1 reductions due to NUB coverage determination, but full integration into the G-DRG system since January 2021 may reduce these fluctuations[148] Results of Operations Comparison of the Three Months Ended March 31, 2022 and 2021 Financial Performance Comparison (in thousands, except percentages) | Metric | March 31, 2022 | March 31, 2021 | $ Change | % Change | | :-------------------------- | :------------- | :------------- | :------- | :------- | | Revenue | $69,382 | $40,352 | $29,030 | 71.9% |\n| Cost of goods sold | $10,004 | $5,981 | $4,023 | 67.3% |\n| Gross profit | $59,378 | $34,371 | $25,007 | 72.8% |\n| Gross margin | 85.6% | 85.2% | | |\n| Total operating expenses | $75,434 | $50,060 | $25,374 | 50.7% |\n| Operating loss | $(16,056) | $(15,689) | $(367) | 2.3% |\n| Net loss | $(16,694) | $(16,216) | $(478) | 2.9% | Revenue - Total revenue increased by $29.0 million (71.9%) to $69.4 million for Q1 2022, driven by increased market penetration, new territory expansion, and greater awareness of the Inspire system[150] Revenue by Region (in thousands, except percentages) | Region | 2022 Amount | 2022 % of Revenue | 2021 Amount | 2021 % of Revenue | $ Change | % Change | | :------------- | :---------- | :---------------- | :---------- | :---------------- | :------- | :------- | | United States | $66,426 | 95.7% | $37,769 | 93.6% | $28,657 | 75.9% |\n| All other countries | $2,956 | 4.3% | $2,583 | 6.4% | $373 | 14.4% |\n| Total revenue | $69,382 | 100.0% | $40,352 | 100.0% | $29,030 | 71.9% | - U.S. revenue grew by 75.9% to $66.4 million, while international revenue increased by 14.4% to $3.0 million, primarily in Germany and Japan, despite unfavorable exchange rates[151][152] Cost of Goods Sold and Gross Margin - Cost of goods sold increased by $4.0 million (67.3%) to $10.0 million, primarily due to higher sales volume[153] - Gross margin improved slightly to 85.6% from 85.2%, attributed to increased sales volume and manufacturing efficiencies[154] Research and Development Expenses - R&D expenses rose by $3.7 million (45.6%) to $11.9 million, mainly due to increased compensation and employee-related expenses ($1.9 million) and ongoing development costs for Inspire Cloud and next-generation systems ($1.8 million)[155] Selling, General and Administrative Expenses - SG&A expenses increased significantly by $21.7 million (51.7%) to $63.6 million[156] - Key drivers include a $12.5 million increase in compensation (salaries, commissions, stock-based compensation) due to headcount growth, and a $7.1 million rise in marketing expenses for direct-to-consumer initiatives and national TV ads[156] Other Expense - Other expense remained stable at $0.5 million for both Q1 2022 and Q1 2021[157] Income Taxes - The company recorded a nominal income tax provision of approximately $0.1 million for both Q1 2022 and Q1 2021[158] Liquidity and Capital Resources Liquidity Metrics (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Cash, cash equivalents and available-for-sale securities | $213,100 | $224,400 |\n| Working capital | $219,300 | $227,200 | - Working capital decreased by $7.9 million, primarily due to an $11.2 million decrease in cash and cash equivalents used for operations, a $5.4 million increase in accounts payable, and a $3.1 million reclassification of long-term debt to current liabilities[159][160] - The company had $24.5 million outstanding under its credit facility as of March 31, 2022, with no further borrowings available, and began principal payments in April 2022[161] - Existing cash, cash equivalents, and investments of $213.1 million are believed to be sufficient to meet cash needs and fund operations for at least the next 12 months, though long-term requirements are uncertain and may necessitate additional funding[165][166] Cash Flows Summary of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(12,748) | $(10,401) |\n| Net cash used in investing activities | $(1,465) | $(1,321) |\n| Net cash provided by financing activities | $3,044 | $3,550 | - Operating activities used $12.7 million in cash, primarily due to a net loss of $16.7 million, partially offset by non-cash charges of $10.5 million (e.g., stock-based compensation)[168] - Investing activities used $1.5 million, mainly for purchases of property and equipment ($1.2 million) and other investments ($0.3 million)[169] - Financing activities provided $3.0 million, primarily from stock option exercises ($3.1 million)[170] Contractual Obligations and Commitments - There have been no material changes to contractual obligations and commitments since the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[171] Critical Accounting Policies and Estimates - The critical accounting policies and estimates remain unchanged from those described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[172][173] Recent Accounting Pronouncements - Recently issued accounting pronouncements are not expected to have a significant impact on the company's financial statements or operations[174] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including interest rate, credit, foreign currency, and inflation risks - Interest rate risk is primarily limited to cash equivalents and short-term investments; a hypothetical 1% change in interest rates would not materially impact financial statements[175] - There have been no material changes to market risks related to credit, foreign currency, and inflation since the Annual Report on Form 10-K for the year ended December 31, 2021[176] Item 4. Controls and Procedures This section details the evaluation of disclosure controls and procedures and reports on internal control changes Evaluation of disclosure controls and procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022[177] Changes in internal control over financial reporting - There were no material changes in internal control over financial reporting during the quarter ended March 31, 2022[178] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings - The company is not party to any material legal proceedings[180] Item 1A. Risk Factors This section refers to previously disclosed risk factors and confirms no material changes - There have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[181] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - None[182] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities - None[183] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Not applicable[184] Item 5. Other Information There is no other information to report - None[185] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications and XBRL documents - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[186] Signatures This section contains official signatures of the President, CEO, and CFO, certifying the report - The report is signed by Timothy P. Herbert, President, Chief Executive Officer and Director, and Richard J. Buchholz, Chief Financial Officer, on May 3, 2022[190]