Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part I. "Item 1A. Risk Factors’’ and elsewhere in this Annual Report on Form 10-K.
Overview
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. We have developed a novel, closed-loop solution that continuously monitors a patient’s breathing and delivers mild hypoglossal nerve stimulation to maintain an open airway. Inspire therapy is indicated for patients with moderate to severe OSA who do not have significant central sleep apnea and do not have a complete concentric collapse of the airway at the soft palate level. In addition, patients in the U.S. 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 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. 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-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 47 as of December 31, 2016 to 363 as of December 31, 2021.
Although our sales and marketing efforts are directed at patients and physicians because they are the primary users of our technology, we consider the hospitals and ASCs where the procedure is performed to be our customers, as they are the purchasing agents of our Inspire system. 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, 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. 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 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.
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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 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 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. 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 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. 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 and equity offerings of our common stock. 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, 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
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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.
We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. 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. sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets throughout the U.S. and in Europe. During 2021, we activated 259 centers bringing the total to 684 U.S. medical centers implanting Inspire therapy as of December 31, 2021. Driven by the more favorable reimbursement environment, we have increased our focus on adding ASCs. 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.
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
Revenue
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. 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.
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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, 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. Our gross margin has been and we expect it will continue to be affected by a variety of factors, including manufacturing costs, the average selling price of our Inspire system, the implementation of cost-reduction strategies, inventory obsolescence costs, which generally occur when new generations of our Inspire system are introduced, and to a lesser extent the sales mix between the U.S. and Europe as our average selling price in the U.S. tends to be higher than in Europe. 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.
Research and Development Expenses
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. 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 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 ("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) consists primarily of interest expense payable under our credit facility and interest income.
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Results of Operations
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Year Ended December 31, Change
2021 2020 $ %
(in thousands, except percentages)
Revenue $ 233,394 $ 115,381 $ 118,013 102.3 %
Cost of goods sold 33,279 17,623 15,656 88.8 %
Gross profit 200,115 97,758 102,357 104.7 %
Gross margin 85.7 % 84.7 %
Operating expenses:
Research and development 37,350 26,092 11,258 43.1 %
Selling, general and administrative 202,615 127,874 74,741 58.4 %
Total operating expenses 239,965 153,966 85,999 55.9 %
Operating loss (39,850) (56,208) 16,358 (29.1) %
Other expense (income), net 2,120 880 1,240 140.9 %
Loss before income taxes (41,970) (57,088) 15,118 (26.5) %
Income taxes 72 115 (43) (37.4) %
Net loss $ (42,042) $ (57,203) $ 15,161 (26.5) %
Revenue
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. 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 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. 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.
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Revenue information by region is summarized as follows:
Year Ended December 31,
2021 2020 Change
Amount % of Revenue Amount % of Revenue $ %
(in thousands, except percentages)
United States $ 220,976 94.7 % $ 106,108 92.0 % $ 114,868 108.3 %
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 %
Revenue generated in the U.S. was $221.0 million for the year ended December 31, 2021, an increase of $114.9 million, or 108.3%, over the year ended December 31, 2020. Revenue growth in the U.S. 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 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
Cost of goods sold increased $15.7 million, or 88.8%, to $33.3 million for the year ended December 31, 2021 compared to $17.6 million for the year ended December 31, 2020. The increase was primarily due to product costs associated with higher sales volume of our Inspire system.
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, 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 $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
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
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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 $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.
Income Taxes
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
For a discussion of our results of operations for the year ended December 31, 2020, including a year-to-year comparison between 2020 and 2019, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report Form 10-K for the year ended December 31, 2020.
Liquidity and Capital Resources
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.
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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 $224.4 million as of December 31, 2021, together with cash flow from operations, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for at least the next 12 months. There can be no assurance, however, that our business will continue to generate cash flows at historic levels.
Beyond fiscal 2022, our cash requirements will depend extensively on the timing of market introduction, and extent of market acceptance of, our Inspire system. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry into new markets such as Australia and Singapore, and whether we make strategic acquisitions. We cannot accurately predict our long-term cash requirements at this time. Additionally, The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition. We may seek additional sources of liquidity and capital resources through additional securities offerings or through borrowings under a new credit facility. There can be no assurance that such transactions will be available to us on favorable terms, if at all.
Below is a summary of short-term and long-term anticipated cash requirements under contractual obligations existing as of December 31, 2021.
As of December 31, 2021
($ 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.
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Cash Flows
The following table presents a summary of our cash flow for the periods indicated:
Year Ended December 31,
2021 2020
(in thousands)
Net cash provided by (used in):
Operating activities $ (20,119) $ (53,045)
Investing activities 29,139 86,627
Financing activities 14,948 134,065
Effect of exchange rate on cash (19) 11
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. 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.
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.
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").
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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 ESPP.
Critical Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the audited financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. We believe that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the audited financial statements. Actual results could differ from these estimates.
The following area requires management estimates, assumptions, and judgments:
Inventories
Inventories are valued at the lower of cost or net realizable value, computed on a first-in, first out basis. We estimate the recoverability of our inventory by reference to internal estimates of future demands and product life cycles, including expiration of inventory prior to sale. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. 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. 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
A discussion of recent accounting pronouncements is included in Note 2 to our financial statements contained in this Annual Report on Form 10-K.