What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-25 · 127 added, 94 removed, 210 unchanged (51% of the section changed)

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In addition, we highlight our compelling clinical data and value proposition to increase awareness and adoption amongst referring physicians.

We build upon this top-down approach with strong direct-to-patient marketing initiatives to create awareness of the benefits of our Inspire system and drive demand through patient empowerment.

This outreach helps to educate thousands of patients on our Inspire therapy and frequently results in patient leads.

We build upon this top-down approach with strong direct-to-consumer marketing initiatives to create awareness of the benefits of our Inspire system and drive interest through patient empowerment.

This outreach helps to educate thousands of patients on our Inspire therapy.

We increased the number of employees in our sales, marketing, and reimbursement organizations from 40 as of December 31, 2015 to 252 as of December 31, 2020.

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Our customers are reimbursed the cost required to treat each patient through various third-party payors, such as commercial payors and government agencies.

Our Inspire system is currently reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial payors, on a case-by-case basis for patients covered by Medicare, and under U.S.

Our Inspire system is currently reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial payors, under Local Coverage Determinations for patients covered by Medicare, and under U.S.

government contract for patients who are treated by the Veterans Health Administration.

To date, more than 430 commercial payors have prior authorized for patients’ treatment with our Inspire therapy.

We have currently secured positive coverage policies with 52 U.S.

commercial payors, including most large national commercial insurers.

In June 2018, Japan’s Ministry of Health, Labour and Welfare approved our Inspire therapy to treat

moderate to severe OSA, and we are currently seeking reimbursement coverage in Japan.

As of February 23, 2021, we have secured positive coverage policies with 63 U.S.

commercial payors, covering approximately 220 million lives in the U.S.

In addition, all seven Medicare Administrative Contractors ("MACs") published final policies in 2020 that provide coverage of Inspire therapy when certain coverage criteria are met.

The procedure performed to implant our device is currently described for billing purposes using a Category I Current Procedural Terminology (“CPT”) code (64568), which is used in conjunction with a temporary Category III CPT code (0466T).

At the October 2020 AMA CPT Editorial Panel meeting, the AMA approved the creation of new Category I CPT codes to separately identify hypoglossal nerve stimulator services.

A Category I code was also approved for Drug-Induced Sleep Endoscopy, which is the final procedure to determine which patients are appropriate for Inspire therapy.

These new codes are scheduled to go into effect beginning January 1, 2022.

With these approvals, a formal survey will be conducted to determine the Medicare reimbursement levels assigned to each code.

The results of this survey are expected to be announced in July 2021 and reviewed by the Centers for Medicare and Medicaid Services (“CMS”) in conjunction with the annual Medicare Physician Fee Schedule rulemaking cycle.

In June 2018, Japan’s Ministry of Health, Labour and Welfare approved our Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement in Japan.

In August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement in Australia.

For the year ended December 31, 2020, 92.0% of our revenue was derived in the U.S.

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No single customer accounted for more than 10% of our revenue.

Our marketing efforts during the first half of 2020 included refocused direct-to-consumer marketing strategies, which initially included a shift from radio and TV in our larger markets that were affected by COVID-19 towards more digital and TV in smaller markets.

During the second quarter of 2020, and continuing in the third quarter of 2020, we resumed radio and TV initiatives in our larger markets as the impact of COVID-19 lessened in those areas.

We continue to monitor the impacts of COVID-19 in each advertising market and may again change our advertising strategy on a market-by-market basis if needed.

Further, our team has leveraged virtual tools, such as the new Inspire Sleep app released during the second quarter of 2020, to continue physician training and patient education.

We rely on third-party suppliers to manufacture our Inspire system and its components.

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In the U.S., our products are shipped directly to our customers on a purchase order basis, primarily by a third-party vendor with a facility in Tennessee, although we do ship some products from our facility in Minnesota.

Warehousing and shipping operations for our European customers are handled by a third-party vendor with facilities located in the Netherlands.

Warehousing and shipping operations for our European customers are handled by a third-party vendor with a facility located in the Netherlands.

Customers do not have the right to return non-defective product, nor do we place product on consignment.

Our sales representatives do not maintain trunk stock.

Since our inception in 2007, we have financed our operations primarily through sales of our Inspire system, private placements of our convertible preferred securities, amounts borrowed under our credit facility, the initial public offering of our common stock that closed in May 2018 (our "IPO"), and the offering of our common stock that closed in December 2018 (our "follow-on offering").

In April 2020, we sold 2,300,000 shares of common stock at a public offering price of $58.00 per share and received net proceeds of approximately $124.7 million after deducting underwriting discounts, commissions, and offering expenses.

We have devoted significant resources to research and development activities related to our Inspire system, including clinical and regulatory initiatives to obtain marketing approval, and sales and marketing activities.

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We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions.

We intend to make significant investments building our sales and marketing organization by increasing the number of U.S.

sales representatives and continuing our direct-to-patient marketing efforts in existing and new markets throughout the U.S.

We also continue to make significant investments building our sales and marketing organization by increasing the number of U.S.

sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets throughout the U.S.

and in Europe.

We also intend to continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as Europe, Japan, and Australia.

During 2020, we activated 141 centers bringing the total to 425 U.S.

medical centers implanting Inspire therapy as of December 31, 2020.

Driven by the more favorable reimbursement environment, we have increased our focus on adding ASCs.

At the end of 2020, ASCs made up just over 15% of our total U.S.

implanting centers, up from nearly 10% at the end of 2019.

Additionally, we created

34 new territories during 2020, bringing the total to 107 U.S.

territories as of December 31, 2020.

We continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as Europe, Japan, and Australia.

For example, in April 2020, we received FDA approval for an expanded age-range for Inspire therapy to include 18 to 21 year old patients, and in August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA.

Because of these and other factors, we expect to continue to incur net losses for the next several years, and we expect to require substantial additional funding, which may include future equity and debt financings.

On May 7, 2018, we completed our IPO by issuing 7,762,500 shares of common stock, at a public offering price of $16.00 per share, for net proceeds of approximately $112.0 million after deducting underwriting discounts and commissions and offering expenses payable by us.

On December 11, 2018, we completed the follow-on offering that included our offer and sale of 1,875,000 shares of common stock and the selling stockholders' offer and sale of 1,000,000 shares of common stock, at a public offering price of $40.00 per share.

We received net proceeds of approximately $69.8 million after deducting underwriting discounts and commissions and offering expenses.

We received no proceeds from the sale of our common stock by the selling shareholders.

We expect the COVID-19 pandemic to continue to adversely impact our revenue due to decreases and delays in the number of Inspire therapy procedures performed and patients screened for eligibility for Inspire therapy.

Beginning in the second week of March 2020, substantially all of the scheduled Inspire therapy procedures were postponed and numerous other authorized cases were unable to be scheduled.

During April 2020, the widespread shutdown in elective surgical procedures continued.

Beginning in May 2020, surgical volumes began increasing steadily, with most implanting centers performing procedures by October 2020.

A portion of the remaining 2020 procedures performed were those rescheduled from the first half of 2020, and, as a result of which, the initial backlog of postponed cases has largely been eliminated.

The resurgence of COVID-19 in various U.S.

regions has, and will likely continue to, adversely impact our procedure volumes.

In response to the spread of COVID-19 and in line with recommendations from federal and local government and healthcare agencies, we transitioned employees, except for those deemed essential to key aspects of our business, to a remote work environment.

Beginning in May 2020, our corporate office re-opened with strict sanitation and physical distancing protocols, although many corporate employees continue to work remotely as a heightened precautionary measure.

Additionally, our field staff continues to primarily work remotely and must adhere to applicable COVID-19 protocols when visiting hospitals and ASCs.

During the period which surgical procedures were significantly limited, we identified and implemented innovative solutions to support patients who have Inspire therapy, as well as continued to educate patients who may be struggling with their sleep apnea.

Patients continue to reach out to learn more about the therapy and get connected to a healthcare provider, and we are supporting this interaction through the use of several virtual tools, including the new Inspire Sleep app, and other online tools.

We are also continuing with our planned expansion in recruiting Territory Managers and sales support roles.

To date, we have not experienced disruptions to our supply chain network as a result of the COVID-19 pandemic.

We have also not reduced our capital expenditures and are continuing to invest in research and development, however, we may determine to allocate resources differently due to impacts of the COVID-19 pandemic.

We believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.

For additional information, see “Liquidity and Capital Resources.”

Components of Our Results of Operations

We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ambulatory service centers in the U.S.

We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S.

and select countries in Europe.

Recent revenue growth has been driven by, and we expect continued growth as a result of, increased patient and physician awareness of the Inspire system, additional sales representatives, an increase in approvals of prior authorization submissions, and additional positive coverage policies.

Any reversal in these recent trends, however, could have a negative impact on our future revenue.

In addition, we have expanded our sales and marketing organization to help us drive and support revenue growth and intend to continue this expansion.

Moreover, we expect that our revenue growth will be positively impacted by, and to the extent we obtain, additional positive coverage policies.

Our revenue has fluctuated, and we expect

our revenue to continue to fluctuate, from quarter to quarter due to a variety of factors.

For example, we have historically experienced seasonality in our first and fourth quarters.

We recognize revenues from sales of our Inspire system when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms.

Our revenue has fluctuated, and may continue to fluctuate, from quarter to quarter due to a variety of factors.

For example, we have historically experienced seasonality in our first and fourth quarters and have experienced adverse impacts on our revenue due to the COVID-19 pandemic.

Revenue for the year ended December 31, 2020 was negatively impacted due to the global pandemic associated with COVID-19.

Specifically, in March 2020, healthcare facilities and clinics began restricting access to their

clinicians, reducing patient consultations and treatments or temporarily closing their facilities.

As a result, beginning in the second week of March 2020, substantially all of our then-scheduled Inspire therapy procedures were postponed, and numerous other cases with prior authorization could not be scheduled and were, therefore, also postponed.

During April 2020, the widespread shutdown in elective surgical procedures continued, but surgical volumes began increasing in May and even further in June, though still remaining below pre-COVID-19 levels.

By the end of the third quarter of 2020, most implanting centers had resumed procedures.

A portion of the second, third and fourth quarter 2020 procedures performed were rescheduled from the first half of 2020, and, as a result of which, the backlog of postponed cases has largely been eliminated.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap, and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs, net of costs charged to customers.

The overhead costs include the cost of material procurement, depreciation expense for production equipment, warranty replacement costs, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel.

We expect overhead costs as a percentage of revenue to continue to decrease as our sales volume increases.

We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows.

Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap, and inventory obsolescence, warranty replacement costs, as well as distribution-related expenses such as logistics and shipping costs, net of shipping costs charged to customers.

The overhead costs include the cost of material procurement, depreciation expense for production equipment, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel.

We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.

We calculate gross margin as gross profit divided by revenue.

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Research and Development Expenses

Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, testing, consulting services and other costs associated with the next generation versions of the Inspire system.

Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services and other costs associated with the next generation versions of the Inspire system.

These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs.

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Selling, general and administrative expenses consist primarily of compensation for personnel, including base salaries, stock-based compensation expense and commissions related to our sales organization, finance, information technology, and human resource functions, as well as spending related to marketing, sales operations, and training and reimbursement personnel.

Other selling, general and administrative expenses include training physicians, travel expenses, advertising, direct-to-patient promotional programs, conferences, trade shows and consulting services, professional services fees, audit fees, insurance costs and general corporate expenses, including facilities-related expenses.

Other selling, general and administrative expenses include training physicians, travel expenses, advertising, direct-to-consumer promotional programs, conferences, trade shows and consulting services, professional services fees, audit fees, insurance costs and general corporate expenses, including facilities-related expenses.

We expect selling, general and administrative expenses to continue to increase as we expand our commercial infrastructure to both drive and support our planned growth in revenue and as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance personnel and information technology services.

Additionally, we anticipate increased expenses related to audit, legal, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company.

We also expect to see an increase in our stock-based compensation expense with grants of restricted stock or options and shares of our common stock purchased pursuant to our employee stock purchase plan.

Other (Income) Expense, Net

Other (income) expense, net consists primarily of interest expense payable under our credit facility and interest income.

Other items include fair value adjustments related to convertible preferred stock warrants, which were accounted for as a liability and marked-to-market at each reporting period.

Additionally, we anticipate an increase in our stock-based

compensation expense with grants of restricted stock or options and shares of our common stock purchased pursuant to our employee stock purchase plan.

Other Expense (Income), Net

Other expense (income), net consists primarily of interest expense payable under our credit facility and interest income.

Other items have included fair value adjustments related to convertible preferred stock warrants, which were accounted for as a liability and marked-to-market at each reporting period.

Immediately prior to the closing of our IPO, our outstanding convertible preferred stock warrants automatically converted into warrants to purchase shares of our common stock.

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Operating loss (56,208) (34,897) (21,311) 61.1 %

Other (income) expense, net (1,694) 1,450 (3,144) (216.8) %

Other expense (income), net 880 (1,694) 2,574 (151.9) %

Loss before income taxes (57,088) (33,203) (23,885) 71.9 %

Income taxes 40 — 40 n/a

Income taxes 115 40 75 187.5 %

Net loss $ (57,203) $ (33,243) $ (23,960) 72.1 %

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and an increase of $0.9 million in Europe, primarily in Germany.

Beginning in March 2020, our revenue growth in the U.S.

and Europe has been impacted by the COVID-19 pandemic, which disrupted our ability to access our clinician customers and their patients.

Specifically, we saw healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations and treatments, or closing temporarily due to COVID-19.

As a result, beginning in the second week of March 2020, substantially all of our Inspire therapy procedures were postponed and numerous other cases, which had received prior authorization, were not able to be scheduled and, therefore were also postponed.

During the second quarter, the widespread shutdown in elective surgical procedures continued, but surgical volumes began increasing in May and even further in June, though still remaining below pre-COVID-19 levels.

During the third and fourth quarters 2020, surgical volumes increased steadily, but remained negatively impacted by the COVID-19 pandemic, and the backlog of cases from the first half of 2020 was largely eliminated.

Revenue information by region is summarized as follows:

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market in February 2019.

As noted above, U.S.

revenue for the year ended December 31, 2020 was negatively impacted by the COVID-19 pandemic.

Revenue generated in Europe was $9.3 million in the year ended December 31, 2020, an increase of $0.9 million, or 10.5%, over the year ended December 31, 2019.

Revenue growth in Europe was primarily due to increased market penetration in existing territories, the expansion into new territories, and increased physician and patient awareness of our Inspire system.

Revenue growth in Europe was primarily due to increased market penetration in existing territories, the expansion of our European sales representatives into new territories, and increased physician and patient awareness of our Inspire system.

The remainder of our revenue from Europe increase was due to favorable exchange rates.

The overall growth was partially offset by impacts from the COVID-19 pandemic.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $4.0 million, or 29.2%, to $17.6 million for the year ended December 31, 2020 compared to $13.6 million for the year ended December 31, 2019.

The increase was primarily due to increased purchases of manufactured products due to higher sales volume of our Inspire system.

The increase was primarily due to product costs associated with higher sales volume of our Inspire system.

Gross margin was 84.7% for the year ended December 31, 2020 compared to 83.4% for the year ended December 31, 2019.

Gross margin for the year ended December 31, 2019 was higher primarily due to the introduction of the new sensing lead on the Inspire system in the U.S.

in February 2019 which has a higher gross margin than the previous sensor, as well as manufacturing efficiencies.

Gross margin for the year ended December 31, 2020 was higher primarily due to manufacturing efficiencies and higher sales volume.

Research and Development Expenses

Research and development expenses increased $13.3 million, or 103.2%, to $26.1 million for the year ended December 31, 2020 compared to $12.8 million for the year ended December 31, 2019.

This change was primarily due to an increase of $3.4 million for ongoing research and development costs, including initial development of the next generation Inspire therapy system and $2.0 million of compensation and employee-related expenses, mainly as a result of increased headcount.

This change was primarily due to an increase of $9.7 million for ongoing research and development costs, including ongoing development of the next generation Inspire therapy system, our Bluetooth remote, and the Inspire Cloud, $3.4 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, and $0.2 million of regulatory submissions and clinical studies expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $37.4 million, or 41.4%, to $127.9 million for the year ended December 31, 2020 compared to $90.5 million for the year ended December 31, 2019.

The primary driver of this increase was an increase of $22.5 million in compensation, including salaries, commissions, and stock-based compensation, travel and other employee-related expenses, mainly as a result of increased headcount.

In addition, selling, general and administrative expenses increased by $3.9 million due to legal fees, financial audit fees, insurance costs, and other corporate costs which increased primarily as a result of being a public company during the entire year ended December 31, 2019 compared to being a public company during only part of the same prior year period, as well as out-sourced information technology services and facilities costs.

Other drivers included an increase of $9.0 million of marketing, primarily consisting of direct-to-patient initiatives, and an increase of $1.6 million of regulatory and reimbursement costs, which increased primarily due to market access consulting services used to obtain positive coverage policies.

Other (Income) Expense, Net

Other (income) expense, net changed by $3.2 million, or 216.8%, to $1.7 million of income for the year ended December 31, 2019 compared to $1.5 million of expense for the year ended December 31, 2018.

Interest income increased $1.9 million due to our higher cash, cash equivalents and investments balances.

Interest expense decreased $1.2 million, primarily due to the lack of the $0.6 million fair value adjustment taken during the year ended December 31, 2018 on our previously outstanding convertible preferred stock warrants.

The primary driver of this increase was an increase of $25.9 million in compensation, including salaries, commissions, and stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount, offset by a decrease of $2.5 million of travel expenses not incurred due to the COVID-19 pandemic.

In addition, marketing expenses increased $9.5 million, primarily consisting of direct-to-consumer initiatives, including TV advertisements which began airing in the second half of 2019.

During the year ended December 31, 2020, we initially refocused our direct-to-consumer marketing strategies by shifting from radio and TV in our larger markets

that were affected by COVID-19 towards more digital and TV in smaller markets.

During the second quarter of 2020, we resumed radio and TV initiatives in our larger markets as the impact of COVID-19 lessened in those areas.

Further, our team leveraged virtual tools, including the new Inspire Sleep app released in the second quarter of 2020, and online tools to continue physician training and patient education.

Other drivers of the increase to selling, general and administrative expenses included an increase of $2.0 million due to consulting fees, insurance costs, and information technology supplies and equipment.

Other Expense (Income), Net

Other expense (income), net changed by $2.6 million, or 151.9%, to $0.9 million of expense for the year ended December 31, 2020 compared to $1.7 million of income for the year ended December 31, 2019.

This change was primarily due to a decrease of $2.7 million in interest income for the year ended December 31, 2020 due to lower interest rates on our cash, cash equivalents and investments balances, partially offset by a $0.1 million increase in gain on investments.

We recorded a $0.1 million provision for income taxes for the year ended December 31, 2020 compared to less than $0.1 million for the year ended December 31, 2019.

This increase was due to state income tax expense and an accrual for uncertain tax benefits.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

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Liquidity and Capital Resources

As of December 31, 2019, we had cash, cash equivalents and investments of $155.7 million and an accumulated deficit of $180.2 million, compared to cash, cash equivalents and investments of $188.2 million and an

accumulated deficit of $146.9 million as of December 31, 2018.

As of December 31, 2020, we had cash, cash equivalents and investments of $234.4 million and an accumulated deficit of $237.3 million, compared to cash, cash equivalents and investments of $155.7 million and an accumulated deficit of $180.2 million as of December 31, 2019.

As of December 31, 2020, we had $24.5 million of outstanding borrowings under our credit facility.

No borrowings remain available under this credit facility.

We received net proceeds of approximately $69.8 million after deducting underwriting discounts and commissions and offering expenses.

We received no proceeds from the sale of our common stock by the selling shareholders.

Our sources of capital have historically been from private placements of our convertible preferred securities, sales of our Inspire system, borrowings under credit facilities and registered offerings of our common stock.

In April 2020, we completed a follow-on offering that included our offer and sale of 2,300,000 shares of common stock at a public offering price of $58.00 per share.

We received net proceeds of approximately $124.7 million after deducting underwriting discounts, commissions, and offering expenses.

As of December 31, 2020, we had raised a total of $119.1 million in net proceeds from private placements of our convertible preferred securities and $306.5 million from registered equity offerings.

We believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets.

An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.

However, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months.

We may also seek liquidity through additional securities offerings or through borrowings under a new credit facility.

We cannot ensure investors that we will be able to obtain such financing on commercially reasonable terms if at all.

The following table presents a summary of our cash flow for the periods indicated:

Year Ended December 31,

2019 2018 2017

(in thousands)

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Effect of exchange rate on cash 11 13

(Decrease) increase in cash and cash equivalents $ (74,428) $ 88,333 $ 2,270

Increase (decrease) in cash and cash equivalents $ 167,658 $ (74,428)

Operating Activities

Net cash used in operating activities was $53.0 million for 2020 and consisted of a net loss of $57.2 million, an increase in net operating assets of $10.9 million, and non-cash charges of $15.0 million.

The non-cash charges consisted of stock-based compensation, non-cash lease expense, depreciation and amortization, stock issued for services rendered, and accretion of the debt discount, offset by the non-cash income related to the accretion of the investment discount, and other, net.

Operating assets includes accounts receivable, which increased due to higher sales, and inventories, which increased due to continued manufacturing of systems inventory as sales volumes increase.

Operating liabilities includes accounts payable which increased generally due to the costs to support the growth of our operations, including compensation and personnel-related costs.

Accrued expenses also increased due to the accrued compensation for annual bonuses to be paid during the first quarter of 2021.

Net cash used in operating activities was $32.8 million for 2019 and consisted of a net loss of $33.2 million, an increase in net operating assets of $6.6 million, and non-cash charges of $7.0 million.

The non-cash charges consisted of stock-based compensation, accretion of the debt discount, non-cash lease expense, stock issued for services rendered, and depreciation and amortization, offset by the non-cash income related to the accretion of the investment discount, and other, net.

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Operating liabilities, which includes accrued expenses and accounts payable, increased generally due to our increased business volume year-over-year and the costs to support the growth of our operations, including compensation and personnel-related costs.

Net cash used in operating activities was $18.7 million for 2018 and consisted of a net loss of $21.8 million, an increase in net operating assets of $0.9 million and non-cash charges of $2.3 million.

Net operating assets consisted primarily of accrued expenses, accounts payable, accounts receivable, and prepaid expenses and other assets to support the growth of our operations.

Non-cash charges consisted primarily of stock-based compensation, the change in fair value of preferred stock warrants, accretion of debt discount, and depreciation, offset by the non-cash income related to the accretion of the investment discount.

Net cash used in operating activities was $15.8 million in 2017 and consisted of a net loss of $17.5 million, a decrease in net operating assets of $0.8 million and non-cash charges of $0.9 million.

Net operating assets

consisted primarily of accounts receivable and inventory to support the growth of our operations and accrued compensation as annual bonuses were paid.

Non-cash charges consisted primarily of depreciation and stock-based compensation.

Investing Activities

Net cash provided by investing activities for 2020 was $86.6 million and consisted primarily of proceeds from sales or maturities of investments of $141.8 million, partially offset by purchases of investments of $52.7 million and purchases of property and equipment of $2.5 million.

Net cash used in investing activities for 2019 was $43.6 million and consisted primarily of purchases of investments of $178.1 million, partially offset by proceeds from sales or maturities of investments of $137.3 million.

Purchases of property and equipment were $2.7 million.

Net cash used in investing activities for 2018 was $83.4 million and consisted primarily of purchases of investments of $115.5 million, offset by proceeds from sales or maturities of investments of $32.3 million.

Purchases of property and equipment were $0.2 million.

Net cash used in investing activities for 2017 was $7.6 million and consisted primarily of purchases of investments of $9.0 million, offset by proceeds from sales or maturities of investments of $1.8 million.

Purchases of property and equipment were $0.4 million.

Financing Activities

Net cash provided by financing activities was $2.0 million for 2019 and consisted of $1.4 million in proceeds from the issuance of common stock from the employee stock purchase plan and $1.1 million in proceeds from the exercise of stock options and warrants, partially offset by a $0.5 million final payment fee due upon the amendment of our credit facility.

Net cash provided by financing activities was $190.4 million for 2018 and consisted primarily of $181.8 million of net proceeds from public offerings of our common stock and borrowings of $8.0 million under our credit facility.

Net cash provided by financing activities was $25.7 million in 2017 and consisted primarily of $25.0 million of net proceeds from the issuance of Series F convertible preferred stock, borrowings of $1.0 million under our credit facility less $0.5 million of expenses and $0.2 million in proceeds from the exercise of stock options.

In August 2015, we entered into a loan and security agreement with Oxford Finance LLC ("Oxford Finance"), as lender and collateral agent.

Net cash provided by financing activities was $134.1 million for 2020 and consisted primarily of $124.7 million in proceeds from our follow-on offering in April 2020.

The remainder of the cash provided by financing activities resulted from $7.1 million in proceeds from the exercise of stock options and $2.4 million in proceeds from the issuance of common stock from our employee stock purchase plan ("ESPP").

Net cash provided by financing activities was $2.0 million for 2019 and consisted of $1.4 million in proceeds from the issuance of common stock from our ESPP and $1.1 million in proceeds from the exercise of stock options and warrants, partially offset by a $0.5 million final payment fee due upon the amendment of our credit facility.

In August 2015, we entered into a loan and security agreement with Oxford Finance, as lender and collateral agent.

The loan and security agreement initially provided for a term A loan facility in the amount of $15.5 million, which was fully funded on the closing date, and a term B loan facility in an amount of at least $3.5 million but no more than $10.0 million, to be available in the future subject to our achievement of certain revenue milestones.

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In February 2017, we amended the loan and security agreement to, among other things, increase borrowings under the term A loan facility by $1.0 million, increase the minimum amount of the term B loan facility to $5.0 million and reduce the maximum amount of the term B loan facility to $9.0 million.

In February 2018, we borrowed $8.0 million under the term B loan facility.

In February 2018, we borrowed an additional $8.0 million under the term B loan facility portion of the credit facility.

As of December 31, 2020, we had $24.5 million of outstanding borrowings under our credit facility.

No borrowings remain available under this credit facility.

In March 2019, we amended the loan and security agreement.

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On the maturity date, in addition to our regular monthly payments of principal and accrued interest, we will be required to make a payment of 3.50% of the total amount borrowed under the credit facility, which we refer to as the Final Payment, unless we have already made such payment in connection with an acceleration or prepayment of borrowings under the credit facility.

Borrowings under the facility are pre-payable at our option in whole, but not in part, together with all accrued and unpaid interest thereon and, if not previously made, the Final Payment, subject to a prepayment fee of 3.0% if such borrowings are prepaid prior to March 27, 2020, 2.0% if such borrowings are prepaid on or after March 27, 2020 but prior to March 27, 2021 and 1.0% if such borrowings are on or after March 27, 2021 and prior to maturity.

Borrowings under the facility are pre-payable at our option in whole, but not in part, together with all accrued and unpaid interest thereon and, if not previously made, the Final Payment (as defined in the loan and security agreement), subject to a prepayment fee of 2.0% if such borrowings are prepaid prior to March 27, 2021 and 1.0% if such borrowings are on or after March 27, 2021 and prior to maturity.

We are also required to prepay the amounts outstanding under the credit facility upon the occurrence of certain customary events of default, as well as the occurrence of certain material adverse events.

6 unchanged sentences

Upon the closing of the IPO, the warrants to purchase 630,372 shares of preferred stock at a weighted average exercise price of $1.46 per share became exercisable to purchase 100,558 shares of common stock at a weighted average exercise price of $9.38 per share.

Warrants to purchase 93,963 shares of common stock were exercised during 2018, and the warrants to purchase 6,595 shares of common stock were exercised during 2019.

Warrants to purchase 93,963 shares of common stock were exercised during 2018, and the warrants to purchase the remaining 6,595 shares of common stock were exercised during 2019.

No warrants remain outstanding at December 31, 2020.

14 unchanged sentences

Purchase obligations 72,704 50,517 22,187 — —

Real estate obligation (3)

7,425 1 651 2,379 4,394

Total contractual obligations $ 108,952 $ 52,421 $ 47,828 $ 5,551 $ 3,152

(1) Represents principal payments only.

See Note 5 to our audited financial statements for more information.

See Note 5 to our audited financial statements for additional information.

(2) Variable interest is assumed at December 31, 2020 rates.

Under the terms of the credit facility, a final payment fee of 3.50% is due at the earlier of maturity or prepayment.

Under the terms of the loan and security agreement, a final payment fee of 3.50% is due at the earlier of maturity or prepayment.

This amount is not included in the table above.

(3) Real estate obligation represents the legally binding minimum lease payments for a lease signed but not yet commenced.

See Note 4 to our audited financial statements for more information.

Critical Accounting Policies and Estimates

26 unchanged sentences

We estimate the fair value of stock options using the Black-Scholes option pricing model.

The fair value of each purchase under the employee stock purchase plan is

estimated at the beginning of the offering period using the Black-Scholes option pricing model.

The fair value of each purchase under the employee stock purchase plan is estimated at the beginning of the offering period using the Black-Scholes option pricing model.

We have not granted any restricted shares.

14 unchanged sentences

The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions.

The reserve for excess and obsolete inventory was less than $0.1 million and $0.8 million as of December 31, 2019 and 2018, respectively.

The reserve for excess and obsolete inventory was $0.1 million as of both December 31, 2020 and 2019.

We account for income taxes using the liability method.

1 unchanged sentence

Valuation allowances against deferred tax assets are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than the accrual for uncertain tax benefits recorded during the year ended December 31, 2019.

As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than minimal state taxes and an accrual for uncertain tax benefits.

Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the statements of operations and comprehensive loss.

1 unchanged sentence

A discussion of recent accounting pronouncements is included in Note 2 to our financial statements contained in this Annual Report on Form 10-K.

Prior to December 31, 2019, we were an “emerging growth company” as defined by the JOBS Act.

The JOBS Act provides that an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards.

This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We elected to avail ourselves of this exemption prior to December 31, 2019, and as a result, our financial statements prior to

that date may not have been comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

Subject to certain conditions, as an emerging growth company we also were able to rely on certain of the exemptions and reduced reporting requirements of the JOBS Act, including without limitation, from providing an auditor's attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 and from complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis.

Because we no longer qualify as an emerging growth company, we are no longer able to take advantage of the extended transition period for the adoption of certain accounting standards or of the reduced disclosure and other benefits available to emerging growth companies, including our exemption from providing our auditor’s attestation on our system of internal control over financial reporting, which is included in this Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis