Inmode Ltd. annual report, Q4 FY2021

Business context and reporting period

InMode Ltd. filed an audited Form 20-F for the fiscal year ended December 31, 2021. The company designs and sells energy-based medical aesthetic devices and related consumables, including minimally invasive, non-invasive and hands-free platforms. Its products primarily use radio-frequency technology. The filing also presents unaudited quarterly results, including the three months ended December 31, 2021. All amounts below are U.S. dollars.

Financial performance and liquidity

Revenue grew 74% year over year; net income more than doubled. U.S. revenue was $237.3 million, up 59%; international revenue was $120.3 million, up 112%, and represented 34% of total revenue. Minimally invasive platforms generated 72% of revenue, hands-free platforms 20%, and non-invasive platforms 8%. Consumables and extended warranties contributed approximately 11% of annual revenue; that revenue increased 84% from 2020.

Fourth quarter: Revenue was $110.5 million, versus $75.2 million in Q4 2020, an increase of approximately 47%. Net income was $52.7 million, versus $36.1 million. Gross profit was $93.7 million, or about 85% of revenue. The filing’s quarterly results are unaudited.

At year-end, working capital was $418.3 million. Cash and cash equivalents, marketable securities and short-term bank deposits totaled $415.9 million; current assets were $470.1 million and current liabilities $51.9 million. The company reported no outstanding borrowings or bank debt. Operating cash flow rose to $174.9 million. Investing cash outflow was $160.1 million, primarily reflecting purchases of marketable securities and short-term deposits; financing cash outflow was $15.0 million, including $35.4 million of share repurchases partly offset by option-exercise proceeds.

Material changes versus the prior comparable period

• Revenue increased $151.5 million, driven by higher sales of minimally invasive platforms, product launches and growth in both U.S. and international markets.
• Gross margin held at 85%. Operating margin improved from 35% to 47%, as revenue growth outpaced operating expense growth, despite higher sales and marketing costs.
• Sales and marketing expense increased 38% to $119.4 million; research and development expense was broadly unchanged at $9.5 million.
• The company repurchased 693,734 shares in 2021 for $35.4 million. Cumulative repurchases under the program were 1,480,616 shares for $52.6 million as of year-end.
• International revenue rose from 27% to 34% of total revenue. The global installed base increased by approximately 4,350 platforms during the year, reaching about 11,600.

Outlook, commentary, risks and unusual items

Management expects continued growth through expanded sales coverage, deeper sales to existing customers, recurring consumables and service revenue, and new products. It forecast 2022 capital expenditures of up to $1.0 million, funded from existing cash. No specific revenue or earnings guidance was provided. The company expected to introduce an ophthalmology platform in 2022; a proposed dry-eye and periorbital-wrinkle handpiece was in clinical trials. Other concepts for ENT and urology applications were at early development stages.

The Israeli Benefited Enterprise tax-exemption period ended in 2021. Management said the corporate tax rate was expected to be 7.5%–10% under the applicable technology-enterprise regime from 2022. The company was also reviewing a one-time tax election: a payment of up to approximately $14 million could permit distribution or other use of about $195 million of previously exempt income without additional corporate tax. Without that election, the filing describes potential tax of up to approximately $35 million on 2012–2020 retained earnings and up to $24.8 million related to 2021 if all relevant retained earnings were distributed. The filing does not say the election had been made.

Key risks include dependence on elective procedures and practitioner adoption; competition and rapid technological change; reliance on a small number of Israeli contract manufacturers and suppliers; regulatory clearance and marketing-compliance requirements; product liability and intellectual-property disputes; COVID-19 and other disruptions; foreign-exchange exposure; cybersecurity and privacy obligations; and political, security and logistics risks in Israel. Nearly all manufacturing is outsourced, with substantial dependence on two subcontractors. The company said it completed 2021 regulatory audits, including audits of key subcontractors. Prior patent matters were settled, including the 2021 ITC matter with ILOODA; the company disclosed no significant changes since year-end and noted that future litigation could still affect results.

The independent auditor issued an unqualified opinion on the financial statements and found internal control over financial reporting effective. Uncertain tax positions were identified as a critical audit matter; the year-end liability was $4.8 million. The company reported effective disclosure controls and no material changes in internal control during 2021.

Important facts for investors to verify

• Whether Q4 revenue and earnings momentum continued, and whether annual growth relied disproportionately on platform sales rather than recurring consumables and service revenue.
• Cash, marketable securities, investment maturities and credit quality, as well as the impact of interest-rate movements on the portfolio.
• The actual 2022 tax rate and whether the company elected the Israeli tax treatment for accumulated exempt income by the applicable deadline.
• Manufacturing capacity and continuity at the key subcontractors, and any supply-chain, shipping or Israel-related disruption.
• Regulatory status and cleared indications for marketed products and pipeline launches, particularly women’s-health claims and planned new specialties.
• Share repurchases, option exercises, equity compensation and resulting changes in shares outstanding; year-end outstanding shares were 82.98 million, excluding 897,790 treasury shares.
• Terms and governance of related-party arrangements, including the February 2022 purchase of Home Skinovations’ spa-segment assets and an exclusive IP license for $497,000.