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Item 7. Management’s Discussion and Analysis

2022-02-15 compared with 2021-02-24 · 156 added, 195 removed, 142 unchanged (71% of the section changed)

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Risk Factors’’ and elsewhere in this Annual Report on Form 10-K.

We are a medical technology company focused on the development and commercialization of innovative and minimally invasive solutions for patients with OSA.

We are a medical technology company focused on the development and commercialization of innovative, minimally invasive solutions for patients with OSA.

Our proprietary Inspire system is the first and only FDA-approved neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA.

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In addition, patients in the U.S.

must have been confirmed to fail or be unable to tolerate positive airway pressure treatments, such as CPAP, and be 18 years of age or older, though there are no similar requirements for patients in Europe.

and Japan must have been confirmed to fail or be unable to tolerate positive airway pressure treatments, such as CPAP, and be 18 years of age or older, though there are no similar requirements for patients in Europe.

We sell our Inspire system to hospitals and ASCs in the U.S.

and in select countries in Europe through a direct sales organization.

and in select countries in Europe through a direct sales organization and we sell our Inspire system in Japan through a distributor.

Our direct sales force engages in sales efforts and promotional activities focused on ENT physicians and sleep centers.

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

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.

As of February 15, 2022, we have secured positive coverage policies with many U.S.

commercial payors, including virtually all large national commercial insurers, covering approximately 260 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.

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

At the October 2020 American Medical Association (“AMA”) CPT Editorial Panel meeting, the AMA approved the creation of new Category I CPT codes (64582, 64583, and 64584) to separately identify hypoglossal nerve stimulator services.

A new Category I code (42975) 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 went into effect on January 1, 2022.

With these approvals, a formal survey was conducted to determine the Medicare reimbursement levels assigned to each code and in November 2021 the final 2022 reimbursement rates were announced by the Centers for Medicare and Medicaid Services (“CMS”).

The 2022 national average physician payments are approximately $888 for implantation of a hypoglossal nerve stimulator and approximately $115 for the DISE procedure.

The 2022 rates of Medicare reimbursement to our hospital customers is approximately $30,063, an increase of 2% over the 2021 rate.

The ASC reimbursement rate for 2022 is approximately $24,828, an increase of 2% over the 2021 rate.

Japan's Ministry of Health, Labour and Welfare ("MLHW") approved Inspire therapy to treat moderate to severe OSA in June 2018 and was formally added to the Japan National Health Insurance Payment Listing in June 2021.

The first implants of Inspire therapy in Japan occurred in February 2022.

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, 2021, 94.7% of our revenue was derived in the U.S.

and 8.0% was derived in Europe.

and 5.3% was derived outside of the U.S.

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.

During the second quarter of 2020, and continuing through today, 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.

In January 2021, we began airing four new TV commercials and in January 2022, we purchased our first national television advertising spots and will begin airing more new TV commercials in the first quarter.

We expect to continue to increase our digital and social media presence.

In early 2020, we started a call center concept, the Inspire Advisor Care Program ("ACP").

The primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs.

As of December 31, 2021, approximately 550 of our U.S.

centers were utilizing the ACP, up from approximately 180 centers at December 31, 2020.

We plan to continue to increase the number of our U.S.

centers using the ACP.

One of the many benefits of the ACP is the anecdotal feedback we are able to collect from patients during conversations with the ACP representatives.

An example of this is the intelligence we have gathered that leads us to believe that we are beginning to see increased patient inquiries about Inspire as a result of the Philips Respironics CPAP recall.

Following the recall announcement in July 2021, it took time for patients to learn about the recall, become educated about treatment alternatives and ultimately schedule an appointment with a healthcare provider to determine eligibility for an Inspire procedure.

While we cannot quantify the impact from the recall, the feedback from ACP, as well as prior authorizations data and the Inspire app, all indicate increased patient flow as a result of the Philips recall.

Looking ahead, we believe that there could be a sustained benefit to our business as a result of the recall.

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

Many of these suppliers are currently single source suppliers.

We have experienced and continue to experience minor supply disruptions during the COVID pandemic, but have managed to avoid any significant supply and inventory issues.

We seek to maintain higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges.

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

Shipments of products to our Japanese distributor are handled from our facility in Minnesota.

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

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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 and equity offerings of our common stock.

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.

For the year ended December 31, 2020, we generated revenue of $115.4 million with a gross margin of 84.7% and a net loss of $57.2 million, compared to revenue of $82.1 million with a gross margin of 83.4% and a net loss of $33.2 million for the year ended December 31, 2019, and revenue of $50.6 million with a gross margin of 80.1% and a net loss of $21.8 million for the year ended December 31, 2018.

For the year ended December 31, 2021, we generated revenue of $233.4 million with a gross margin of 85.7% and a net loss of $42.0 million, compared to revenue of $115.4 million with a gross margin of 84.7% and a net loss of $57.2 million for the year ended December 31, 2020, and revenue of $82.1 million with

a gross margin of 83.4% and a net loss of $33.2 million for the year ended December 31, 2019.

Our accumulated deficit as of December 31, 2021 was $279.4 million.

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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 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 December 2021, we received FDA approval for our Bluetooth-enabled patient remote control.

In the first quarter of 2021, we received FDA approvals for both a new Inspire physician programmer platform and an improved two-incision surgical implant procedure that eliminates one incision with a revised placement of the pressure sensing lead.

In May 2021, we received CE Mark approval in Europe for the two-incision implant procedure.

In April 2020, we received FDA approval for an expanded age-range for Inspire therapy to include 18 to 21 year old patients.

Japan's MLHW approved Inspire therapy to treat moderate to severe OSA in June 2018 and was formally added to the Japan National Health Insurance Payment Listing in June 2021.

In August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA.

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

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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.

At the end of 2021, ASCs made up 22% of our total U.S.

implanting centers, up from 16% at the end of 2020.

Additionally, we created 50 new sales territories during 2021, bringing the total to 157 U.S.

territories as of December 31, 2021.

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.

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.”

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

COVID-19 Pandemic Update

Our business, operations and financial condition and results have been and may continue to be impacted by the COVID-19 pandemic.

In 2020, we experienced significant reduction in revenue and product sales, as our customers were negatively impacted by the decline in the volume of elective procedures that resulted from the global healthcare system’s response to COVID-19.

As 2021 progressed, we observed a diminishing degree of COVID-related impacts to our reported revenue, although we believe there continues to be some adverse impact on our revenues.

However, the extent to which the COVID-19 pandemic continues to impact our results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of COVID-19 and its variants, the resurgence of COVID-19 in regions that have begun to recover from the initial impact of the pandemic, the impact of COVID-19 on economic activity, and the actions to contain its impact on public health and the global economy.

For further information, refer to “Risk Factors” in Part II, Item 1A of this Annual Report on Form 10-K.

Components of Our Results of Operations

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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

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tends to be higher than in Europe.

Our gross margin may increase over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs.

Our gross margin may increase slightly over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs.

However, our gross margin may fluctuate from quarter to quarter due to seasonality.

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Additionally, these expenses include clinical trial management, payments to clinical investigators, data management and travel expenses for our various clinical trials.

We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and continue to expand our clinical studies to secure positive coverage policies from private commercial payors in the U.S.

and enter into new markets including additional European countries, Japan, and Australia.

We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and continue to expand our clinical studies to further expand positive coverage policies from private commercial payors in the U.S.

and enter into new markets including additional European countries and the Asia Pacific region.

We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities.

Selling, General and Administrative Expenses

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-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 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.

Selling, general and administrative ("SG&A") 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 SG&A 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 SG&A 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 an increase in our stock-based compensation expense with grants of restricted stock units, stock 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.

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

Results of Operations

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Revenue increased $118.0 million, or 102.3%, to $233.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was attributable to an increase in sales of our Inspire system of $32.4 million in the U.S.

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

These results reflect an increase in sales of our Inspire system of $114.9 million in the U.S.

and an increase of $3.1 million outside of the U.S., primarily in Germany.

Revenue growth was primarily due to increased market penetration in existing territories, expansion into new territories, increased physician and patient awareness of our Inspire system, as well as the impact of the COVID-19 pandemic, which, as discussed below, hindered our performance during fiscal 2020.

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.

and Europe was 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.

Beginning in May 2020, surgical volumes began to increase steadily through the remainder of 2020, with most implanting centers performing procedures by October 2020.

During the year ended December 31, 2021, resurgences of COVID-19 in various U.S.

and European regions, as well as Japan, disrupted our ability to access our clinician customers and their patients, although to a lesser extent than in the same prior year period as surgical volumes generally returned to pre-pandemic levels by the end of the first quarter of 2021.

Revenue information by region is summarized as follows:

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United States $ 220,976 94.7 % $ 106,108 92.0 % $ 114,868 108.3 %

Europe 9,273 8.0 % 8,390 10.2 % 883 10.5 %

Rest of world 12,418 5.3 % 9,273 8.0 % 3,145 33.9 %

Total revenue $ 233,394 100.0 % $ 115,381 100.0 % $ 118,013 102.3 %

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Revenue growth in the U.S.

was due to increased market penetration in existing territories, the expansion into new territories, increased physician and patient awareness of our Inspire system, a greater number of prior authorization approvals, additional positive coverage policies and, to a lesser extent, an increase in our average selling price as a result of the introduction of the new sensing lead on the Inspire system to the U.S.

market in February 2019.

was primarily due to increased market penetration in existing territories, expansion into new territories, increased physician and patient awareness of our Inspire system, as well as the widespread shutdown of elective surgical procedures in 2020.

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 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.

revenue during both periods was negatively impacted by the COVID-19 pandemic.

Revenue generated in outside of the U.S.

was $12.4 million in the year ended December 31, 2021, an increase of $3.1 million, or 33.9%, over the year ended December 31, 2020.

Revenue growth was primarily due to increased market penetration in existing territories, the expansion of our European sales representatives into new territories, our first sales to our Japanese distributor, and increased physician and patient awareness of our Inspire system during the year ended December 31, 2021, as well as the widespread shutdown of elective surgical procedures in 2020.

The remainder of our increased revenue was due to favorable exchange rates.

As noted above, European revenue during both periods was negatively impacted by the COVID-19 pandemic.

Cost of Goods Sold and Gross Margin

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Gross margin was 85.7% for the year ended December 31, 2021 compared to 84.7% for the year ended December 31, 2020.

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

Gross margin for the year ended December 31, 2021 was higher primarily due to higher sales volumes and manufacturing efficiencies.

Research and Development Expenses

Research and development expenses increased $11.3 million, or 43.1%, to $37.4 million for the year ended December 31, 2021 compared to $26.1 million for the year ended December 31, 2020.

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.

This change was primarily due to an increase of $5.9 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, $5.9 million for ongoing research and development costs, including ongoing development of the Inspire Cloud and the next generation Inspire system, somewhat offset by a $0.5 million decrease in 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 $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.

SG&A expenses increased $74.7 million, or 58.4%, to $202.6 million for the year ended December 31, 2021 compared to $127.9 million for the year ended December 31, 2020.

The primary driver of this change was an increase of $46.4 million in compensation, including salaries, commissions, stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount.

In addition, marketing expenses increased $24.6 million, primarily consisting of direct-to-consumer initiatives, including new TV advertisements, which began airing in January 2021 and the expansion of our Advisor Care Program call center.

During the first part of 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 telemedicine to continue physician training and patient education.

Other drivers of the change to SG&A expenses included an increase of $3.7 million primarily due to office rent, insurance costs, consulting fees and banking fees.

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.

Other expense (income), net changed by $1.2 million, or 140.9%, to $2.1 million of expense for the year ended December 31, 2021 compared to $0.9 million of expense for the year ended December 31, 2020.

This change was primarily due to a decrease of $1.0 million in interest income due to lower interest rates on our cash, cash equivalents and investments balances and a $0.3 million decrease in gains on investments and foreign currency translation.

We recorded a $0.1 million provision for income taxes for the both of the years ended December 31, 2021 and 2020.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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Liquidity and Capital Resources

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.

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.

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

As of December 31, 2021, we had cash, cash equivalents and investments of $224.4 million, a decrease of $10.0 million from $234.4 million as of December 31, 2020.

Working capital totaled $227.2 million as of December 31, 2021, a decrease of $21.9 million from December 31, 2020.

We define working capital as current assets less current liabilities.

The decrease in working capital was primarily due to a $19.9 million decrease in cash, cash equivalents and short term investments, $9.9 million of which was used to support operations, and $10.0 million of which was moved into long term investments.

Working capital also decreased with the movement of $9.2 million of our long-term debt into current liabilities, as the first principal payments become due in April 2022, as well as a $6.9 million increase in accrued expenses primarily due to accrued compensation, and a $4.5 million increase in accounts payable, generally due to our increased business volume year-over-year, increased headcount from the prior year and the costs to support the growth of our operations.

The decrease in working capital was partially offset by an increase of $9.1 million in accounts receivable due to higher sales, an increase of $8.8 million in inventory balances which increased to meet increased sales and to establish safety stock to avoid inventory shortages in the event of COVID-related production or supply issues, and a $0.7 million increase in prepaid expense and other current assets.

We proactively manage our access to capital to support liquidity and continued growth.

Our sources of capital include sales of our Inspire system, borrowings under credit facilities and registered offerings of our common stock.

At December 31, 2021, we had $24.5 million of outstanding borrowings under our credit facility and no borrowings remain available under this credit facility.

We will begin paying principal payments on the borrowings in April 2022, and the scheduled maturity date of the facility is March 2024.

We were in compliance with all covenants under the credit facility as of December 31, 2021.

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

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk or decreasing availability.

To achieve these objectives, our investment policy allows us to maintain a portfolio of certain types of debt securities issued by the U.S.

government and its agencies, corporations with investment-grade credit ratings, or commercial paper and money market funds issued by the highest quality financial and non-financial companies.

At December 31, 2021, we had $9.9 million of investments in U.S.

government securities, and no investments with a contractual maturity over two years.

In 2021, our SG&A expenditures increased significantly over 2020 levels, and we anticipate further increases in 2022.

Our SG&A expenditures, primarily for increasing headcount and advertising, may exceed any associated increases in revenues, and therefore would reduce our cash flow from operations.

We also anticipate R&D expenses will continue to be significant in fiscal 2022, primarily related to the ongoing development of the Inspire Cloud and the next generation Inspire system.

We spent $4.7 million on purchases of property and equipment in 2021, mainly on testing systems, production equipment, and tooling.

We anticipate further capital expenditures in 2022, primarily for additional equipment and tooling.

We believe that our existing cash and cash equivalents and investments, which totaled $224.4 million as of December 31, 2021, together with cash flow from operations, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for at least the next 12 months.

There can be no assurance, however, that our business will continue to generate cash flows at historic levels.

Beyond fiscal 2022, our cash requirements will depend extensively on the timing of market introduction, and extent of market acceptance of, our Inspire system.

Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry into new markets such as Australia and Singapore, and whether we make strategic acquisitions.

We cannot accurately predict our long-term cash requirements at this time.

Additionally, 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.

We may seek additional sources of liquidity and capital resources through additional securities offerings or through borrowings under a new credit facility.

There can be no assurance that such transactions will be available to us on favorable terms, if at all.

Below is a summary of short-term and long-term anticipated cash requirements under contractual obligations existing as of December 31, 2021.

As of December 31, 2021

($ in thousands) Total Fiscal 2022 After Fiscal 2022

Recorded contractual obligations:

Long-term debt principal payments (1)

$ 24,500 $ 9,188 $ 15,312

Operating leases (2)

10,999 725 10,274

Unrecorded contractual obligations:

Long-term debt interest and final payment fee payments (3)

3,295 1,651 1,644

Purchase obligations (4)

114,632 70,427 44,205

Total $ 153,426 $ 81,991 $ 71,435

(1) Represents principal payments only.

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

(2) See Note 4 to our audited financial statements.

(3) Variable interest is assumed at December 31, 2021 rates.

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 included in the table above assuming the final payment is made at debt maturity in March 2024.

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

(4) Primarily purchase obligations to suppliers for inventory.

As of December 31, 2021, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

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

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Effect of exchange rate on cash (19) 11

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

Increase in cash and cash equivalents $ 23,949 $ 167,658

Operating Activities

Net cash used in operating activities was $20.1 million for 2021 and consisted of a net loss of $42.0 million, non-cash charges of $28.8 million, and increase in net operating assets of $6.9 million.

The non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more stock options to employees at a higher fair market value.

The remainder of the non-cash charges included depreciation and amortization, non-cash lease expense, stock issued for services rendered, accretion of the debt discount, and amortization of the investment premium, and other, net.

Operating assets includes inventories, which increased due to manufacturing of systems inventory to meet increased sales and to establish safety stock to avoid inventory shortages in the event of COVID-related production or supply issues.

Operating assets also includes accounts receivable which increased due to higher sales, and prepaid expenses and other current assets which increased primarily due to prepaid insurance.

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

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.

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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.

Operating assets, which includes accounts receivable, inventories, and prepaid expenses and other current assets, increased generally due to increased revenues year-over-year.

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.

Investing Activities

Net cash provided by investing activities for 2021 was $29.1 million and consisted primarily of proceeds from sales or maturities of investments of $43.8 million, partially offset by purchases of investments of $10.0 million.

Purchases of property and equipment of $4.7 million, mainly for manufacturing test systems, production equipment, and tooling, comprised the remainder of the 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.

Financing Activities

Net cash provided by financing activities was $14.9 million for 2021 and consisted of $11.5 million in proceeds from the exercise of stock options and $3.5 million in proceeds from the issuance of common stock from our employee stock purchase plan ("ESPP").

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.

We refer to our term A loan facility and our term loan B facility together as our credit facility.

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 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.

Following such amendment, outstanding borrowings under the credit facility bear interest at an annual rate equal to the sum of (i) the greater of (A) the 30 day U.S.

LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (B) 2.50%, plus (ii) 5.10%;

provided, however, under no circumstances will the basic rate be less than 7.60%.

We are required to make monthly payments of interest only through April 1, 2022.

Following the interest-only period, we will be required to make monthly payments of interest and principal in 24 consecutive monthly installments.

Outstanding borrowings under the credit facility mature on March 1, 2024.

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 (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.

The credit facility also includes certain customary affirmative and negative covenants, but does not include any financial covenants.

The credit facility is secured by substantially all of our personal property other than our intellectual property.

We were in compliance with all covenants under the credit facility as of December 31, 2020.

In August 2015, we issued to Oxford Finance warrants to purchase 12,404 and 17,176 shares of our Series E convertible preferred stock, having an exercise price of $2.62 per share.

In February 2017 and February 2018, we issued warrants to Oxford Finance to purchase 29,197 and 233,577 shares, respectively, of our Series F convertible preferred stock, having an exercise price of $1.37 per share.

Each of the warrants described above has a term of 10 years.

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 the remaining 6,595 shares of common stock were exercised during 2019.

No warrants remain outstanding at December 31, 2020.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of December 31, 2020 are summarized in the table below:

Payments Due by Year

($ in thousands) Total Less than

1 - 3 years 3 - 5 years More than

Recorded contractual obligations:

Long-term debt (1)

$ 24,500 $ — $ 21,438 $ 3,062 $ —

Operating lease liabilities 7,423 17 1,805 2,449 3,152

Unrecorded contractual obligations:

Interest payments on long-term debt (2)

4,325 1,887 2,398 40 —

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

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 additional information.

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

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.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S.

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Actual results could differ from these estimates.

Significant areas requiring management estimates or judgments include the following key financial areas:

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"), which we adopted effective January 1, 2019 using the modified retrospective approach.

The adoption of ASC 606 did not have a material impact on the amount and timing of revenue recognized in our financial statements.

Revenues from product sales are recognized 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 standard shipping terms are free on board shipping point, unless the customer requests that control and title to the inventory transfer upon delivery.

In those cases where shipping and handling costs are billed to customers, we classify the amounts billed as a component of cost of goods sold.

Revenue is measured as the amount of consideration we expect to receive, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, which is based on the invoiced price, in exchange for transferring products.

All revenue is recognized when we satisfy our performance obligations under the contract.

The majority of our contracts have a single performance obligation and are short term in nature.

Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.

Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

Variable consideration related to certain customer sales incentives is estimated based on the amounts expected to be paid based on the agreement with the customer using probability assessments.

We offer customers a limited right of return for our product in case of non-conformity or performance issues.

We estimate the amount of our product sales that may be returned by our customers based on historical sales and returns.

As our historical product returns to date have been immaterial, we have not recorded a reduction in revenue related to variable consideration for product returns.

Stock-Based Compensation

We maintain an equity incentive plan to provide long-term incentives for eligible employees, consultants, and members of the board of directors.

The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and directors.

We also offer an employee stock purchase plan which allows participating employees to purchase shares of our common stock at a discount through payroll deductions.

We recognize equity-based compensation expense for awards of equity instruments to employees and directors based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation ("ASC 718").

ASC 718 requires all equity-based compensation awards to employees and directors, including grants of restricted shares and stock options, to be recognized as expense in the statements of operations and comprehensive loss based on their grant date fair values.

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.

We have not granted any restricted shares.

We have not granted any stock-based awards to our consultants.

The Black-Scholes option pricing model requires the input of certain subjective assumptions, including (i) the expected share price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividend yield.

Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

The historical volatility is calculated based on a period of time commensurate with the expected term assumption.

The group of representative companies have characteristics similar to us, including stage of product development and focus on the life science industry.

We use the simplified method, which is the average of the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees and directors as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

The risk-free interest rate is based on a U.S.

government Treasury instrument whose term is consistent with the expected term of the stock options.

We use an assumed dividend yield of zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

We expense the fair value of our equity-based compensation awards granted to employees and directors on a straight-line basis over the associated service period, which is generally the period in which the related services are received.

We account for award forfeitures as they occur.

The following area requires management estimates, assumptions, and judgments:

Inventories are valued at the lower of cost or net realizable value, computed on a first-in, first out basis.

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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 $0.1 million as of both December 31, 2020 and 2019.

We account for income taxes using the liability method.

Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse.

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 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.

Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results.

The net inventory balance was $17.2 million and $8.5 million as of December 31, 2021 and 2020, respectively.

The reserve for excess and obsolete inventory was $0.3 million and $0.1 million as of December 31, 2021 and 2020, respectively.

Recent Accounting Pronouncements

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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