Inspire Medical Systems, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Unless otherwise noted, amounts are in thousands of dollars. The company develops and sells its Inspire neurostimulation system for obstructive sleep apnea (OSA), its primary source of revenue.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $10,042 | $5,297 |
| Gross profit / margin | $7,748 / 77.2% | $4,101 / 77.4% |
| Operating expenses | $12,943 | $8,225 |
| Operating loss | $(5,195) | $(4,124) |
| Net loss | $(6,501) | $(4,481) |
| Net loss per share, basic and diluted | $(5.05) | $(3.90) |
| Cash used in operating activities | $(6,418) | $(5,360) |
Revenue rose 89.6% year over year. U.S. revenue was $8,744 (up 94.0%) and European revenue was $1,298 (up 64.5%). Gross margin was nearly flat, down 0.2 percentage points. The company attributed the decline mainly to excess inventory of the prior-generation system ahead of the fourth-generation system’s European launch.
Selling and marketing expense increased 71.8% to $9,868, primarily from greater commercial headcount, marketing programs and physician training. Research and development expense increased 8.6% to $1,730; general and administrative expense increased 51.7% to $1,345. Interest expense was $1,385 versus $374 a year earlier. The net loss included a $718 increase in the fair value of preferred-stock warrant liabilities.
At March 31, cash and cash equivalents were $11,147 and short-term investments were $6,756, totaling $17,903, compared with $16,143 at December 31, 2017. Total assets were $27,854; current liabilities were $7,921. Notes payable totaled approximately $24.5 million, including a $681 current portion; the debt is secured by substantially all assets other than intellectual property. The company reported stockholders’ deficit of $4,935 and accumulated deficit of $131,586.
Cash increased $2,192 during the quarter: operating cash use of $6,418 was offset by $425 of investing cash inflow and $8,185 of financing cash inflow, including $8,000 borrowed under the credit facility. The filing reports no income tax provision or benefit, reflecting a full valuation allowance on deferred tax assets.
Material changes and significant events
- In February 2018, the company borrowed an additional $8.0 million under its credit facility, bringing reported borrowings to $24.5 million, and issued 233,577 ten-year preferred-stock warrants.
- After quarter-end, on May 7, 2018, the company completed its IPO, selling 7,762,500 shares at $16.00 per share for net proceeds of approximately $112.2 million. Outstanding convertible preferred stock converted into 12,111,706 common shares, and the preferred-stock warrant liability was reclassified to additional paid-in capital.
- The fourth-generation Inspire system received European CE marking on April 3, 2018. Management said the anticipated product transition contributed to prior-generation inventory costs in Q1.
- Management reported that sales, marketing and reimbursement headcount grew from 63 at March 31, 2017 to 94 at March 31, 2018; total employee headcount increased from 86 to 121.
Outlook, risks and other disclosures
Management expects revenue growth to benefit from increased patient and physician awareness, broader sales coverage, prior-authorization approvals and additional positive payer coverage policies. It also expects continued investment in sales and marketing, research and development, and public-company infrastructure. The company expects net losses for the next several years and may require additional funding. It stated that available resources, including revenue, were expected to fund operations for at least 12 months; that statement preceded the IPO proceeds.
Debt bears interest at the greater of 7.95% or LIBOR plus 6.9%. Interest-only payments were scheduled through March 1, 2019, with possible extension to March 1, 2020 if trailing-12-month revenue reached $25 million at December 31, 2018. Principal and interest payments follow the interest-only period; a final payment fee and potential prepayment fees also apply. The company said it was covenant-compliant at quarter-end and had no financial covenants.
Key disclosed risks include dependence on a single product; uncertain payer coverage and reimbursement; adoption, clinical and regulatory risks; competition; reliance on third-party and some single-source suppliers; inventory obsolescence; quarterly seasonality; and ongoing losses and financing needs. Management noted seasonality in Q1 and Q4, including lower European demand while coverage status and hospital budgets are determined. No material legal proceedings were reported. Management concluded disclosure controls were effective at a reasonable-assurance level as of March 31, 2018, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and commercial adoption persist, and whether payer coverage and prior authorizations expand.
- Whether gross margin remains stable through the product transition and inventory write-down or obsolescence risks.
- Cash burn and post-IPO liquidity, including how the approximately $112.2 million of net proceeds are deployed.
- Debt balance, variable-rate exposure, repayment schedule, fees and the revenue threshold for extending the interest-only period.
- Supply continuity, particularly for single-source components, and progress on product development, clinical studies and regulatory expansion.