What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-10 compared with 2022-02-15 · 142 added, 131 removed, 167 unchanged (62% of the section changed)

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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.

In addition, patients in the U.S., Japan, and Singapore 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 ambulatory surgery centers ("ASCs") in the U.S.

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

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

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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.

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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.

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.

In addition, all seven Medicare Administrative Contractors provide coverage of Inspire therapy when certain coverage criteria are met.

The procedures performed to implant, revise, or explant our device are described for billing purposes in the U.S.

with Category I Current Procedural Terminology (“CPT”) codes (64582, 64583, and 64584, respectively).

A Category I code (42975) is also used for Drug-Induced Sleep Endoscopy ("DISE") to evaluate sleep disordered breathing, which is a necessary procedure to determine which patients are appropriate for Inspire therapy.

In January 2023, the final 2023 reimbursement rates were announced by the Centers for Medicare and Medicaid Services (“CMS”).

The Medicare national average 2023 payment in a hospital outpatient site of service is $29,358, a decrease of 2% from the 2022 rate.

The 2023 Medicare national average ASC reimbursement is $25,180, an increase of 1% over the 2022 rate.

The 2023 Medicare national average physician reimbursement is $873 for implantation of a hypoglossal nerve stimulator, a 2% decrease over the 2022 payment, and $97 for the DISE procedure, a 16% decrease from the 2022 amount.

Reimbursement in other countries can often be established through a combination of private (commercial insurance) and public funding sources, or at the hospital level through innovation budgets.

For the year ended December 31, 2022, 96.8% of our revenue was derived in the U.S.

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

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

During the second quarter of 2020, and continuing 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.

Our direct-to-consumer marketing includes the use of social media platforms such as Facebook, Google ad placements, and radio and television commercials.

In January 2021, we began airing television commercials and in January 2022, we purchased our first national television advertising spots and began airing new TV commercials.

We plan to begin airing new television commercials in the first quarter of 2023.

The objective of this outreach is to bring patients to our website, where they can find educational materials and videos on sleep apnea and the use and benefits of our Inspire therapy, contact information for physicians and clinical sites, and information regarding community awareness events.

Further, our team leverages the Inspire Sleep app for patient education.

We expect to continue to increase our direct-to-consumer activities.

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.

In 2022, we initiated a digital scheduling pilot program to facilitate and streamline patient access to care.

We plan to expand this scheduling capability in 2023.

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.

An example of this is the intelligence we have gathered on the impact of the Philips Respironics CPAP recall on patients interested in exploring Inspire therapy.

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.

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

Long term, we believe that there could be a sustained benefit to our business as a result of the recall although there can be no assurance of such benefit.

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 have experienced and continue to experience supply disruptions which began during the COVID pandemic, but have managed to avoid any significant supply and inventory issues or delay in implant procedures due to those 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.

For example, during the three months ended September 30, 2022, we recorded a charge of $2.8 million for obsolete inventory and component parts related to product introductions which were completed in October 2022, including the new silicone leads and the Bluetooth®-enabled patient remote.

In the U.S., our products are shipped directly to our U.S.

customers and Singapore distributor 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.

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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.

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 former 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

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

For the year ended December 31, 2022, we generated revenue of $407.9 million with a gross margin of 83.8% and a net loss of $44.9 million, compared to revenue of $233.4 million with a gross margin of 85.7% and a net loss of $42.0 million for the year ended December 31, 2021, and 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.

Our accumulated deficit as of December 31, 2022 was $324.3 million.

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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.

We have also made significant investments in clinical

studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions.

For example, in 2022, we received FDA approval for additional magnetic resonance imaging ("MRI") scan conditions for use with Inspire therapy.

This full-body MRI approval expands the Inspire use labeling that previously allowed only head, neck, and extremity MRI scans.

Also in 2022, the FDA approved new silicone-based stimulation and sensing leads, which provides improved manufacturability, easier system implantation, increased long-term performance, and enhanced reliability.

In 2021, we received FDA approvals for our Bluetooth®-enabled patient remote control, 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.

We received CE Mark approval in Europe for the two-incision implant procedure in 2021.

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

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

and European 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.

During 2022, we activated 246 U.S.

centers bringing the total to 905 U.S.

medical centers implanting Inspire therapy as of December 31, 2022.

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implanting centers, up from 22% at the end of 2021.

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

Additionally, we created 68 new U.S.

sales territories during 2022, bringing the total to 225 U.S.

territories as of December 31, 2022.

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.

Because of these and other factors, we may 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

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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.

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

and European regions disrupted our ability to access our clinician customers and their patients, although surgical volumes generally returned to pre-pandemic levels by the end of the quarter.

As 2021 progressed, we observed a diminishing degree of COVID-related impacts to our reported revenue.

During 2022, resurgences of COVID-19 in various U.S.

and international regions again impacted our revenue, although surgical volumes had generally returned to pre-pandemic levels by the end of the first quarter, and therefore the impact on the remainder of the year was less significant.

We believe there continues to be some adverse impact on our revenues.

We have also experienced, and continue to experience, COVID-19-related supply chain issues which has negatively impacted our inventory levels.

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

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 derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S., select countries in Europe, Japan, and Singapore.

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.

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 and foreign currency exchange rates.

Cost of Goods Sold and Gross Margin

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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.

and countries outside of the U.S., as our average selling price in the U.S.

tends to be higher than in other countries.

Our gross margin may increase slightly 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, and when we implement price increases on our products, thereby increasing our revenue.

On the other hand, our gross margin may decrease slightly to the extent our materials and labor prices increase due to supply chain issues and inflation, thereby increasing our per unit costs.

However, our gross margin may also fluctuate from quarter to quarter due to seasonality and foreign currency exchange rates.

Our gross margin for 2022 was lower than in previous periods primarily due to inventory obsolescence charges associated with product introductions, additional costs associated with the transition of manufacturing lines to produce our new silicone-based leads, and higher costs of certain component parts which were impacted by inflation and supply chain issues.

In 2023, we expect gross margins to be in the range of 83% to 85% given continued higher costs of certain component parts, somewhat offset by the price increase which began taking effect for U.S.

customers in May 2022, as well as anticipated manufacturing efficiencies.

Research and Development Expenses

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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.

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

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.

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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.

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, human resource, and legal 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.

Additionally, we anticipate an increase in our stock-based compensation expense with grants of stock options, restricted stock units, performance stock units, and shares of our common stock purchased pursuant to our employee stock purchase plan.

Other (Income) Expense, Net

Other (income) expense consists primarily of interest and dividend income, interest expense under our former credit facility, the impacts of foreign currency transactions and remeasurements, and gains and losses on investments.

Results of Operations

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Operating loss (47,592) (39,850) (7,742) 19.4 %

Other expense (income), net 2,120 880 1,240 140.9 %

Other (income) expense, net (3,324) 2,120 (5,444) (256.8) %

Loss before income taxes (44,268) (41,970) (2,298) 5.5 %

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These results reflect an increase in sales of our Inspire system of $173.9 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.

and an increase of $0.6 million outside of the U.S.

Overall revenue growth was primarily due to increased utilization, increased market penetration in existing territories, expansion into new territories, and increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some U.S.

customers in May 2022.

During both 2022 and 2021, resurgences of COVID-19 in various U.S.

and international regions disrupted our ability to access our clinician customers and their patients, although surgical volumes generally returned to pre-pandemic levels by the end of the first quarter of each year.

Revenue information by region is summarized as follows:

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United States $ 394,833 96.8 % $ 220,976 94.7 % $ 173,857 78.7 %

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

All other countries 13,023 3.2 % 12,418 5.3 % 605 4.9 %

Total revenue $ 407,856 100.0 % $ 233,394 100.0 % $ 174,462 74.7 %

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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.

was primarily due to increased utilization, increased market penetration in existing territories, the expansion into new territories, increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some U.S.

customers in May 2022.

The list price increase was substantially complete as of December 31, 2022.

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.

Revenue generated outside of the U.S.

was $13.0 million in the year ended December 31, 2022, an increase of $0.6 million, or 4.9%, over the year ended December 31, 2021.

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.

While units sold outside the U.S.

increased 17.0% over the prior year period, unfavorable exchange rates adversely impacted revenue growth.

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

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $32.8 million, or 98.7%, to $66.1 million for the year ended December 31, 2022 compared to $33.3 million for the year ended December 31, 2021.

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

The increase was primarily due to product costs associated with higher sales volume of our Inspire system, higher costs of certain component parts which were impacted by inflation and supply chain issues, $2.8 million of inventory obsolescence charges associated with recent product introductions, and additional costs associated with the transition of manufacturing lines to produce our new silicone-based leads.

Gross margin was 83.8% for the year ended December 31, 2022 compared to 85.7% for the year ended December 31, 2021.

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

Gross margin for the year ended December 31, 2022 was lower primarily due to inventory obsolescence charges and costs associated with the transition of manufacturing lines described above, as well as higher costs of certain component parts caused by inflation and supply chain issues, somewhat offset by increased sales volume and a price increase which began taking effect for some U.S.

customers in May 2022.

Research and Development Expenses

Research and development expenses increased $31.3 million, or 83.8%, to $68.6 million for the year ended December 31, 2022 compared to $37.4 million for the year ended December 31, 2021.

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.

This change was primarily due to an increase of $15.5 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, $15.5 million for incremental ongoing research and development costs, including ongoing development of the Inspire Cloud, the next generation Inspire neurostimulator and the physician programmer, and a $0.3 million increase in regulatory submissions and clinical studies expenses.

Selling, General and Administrative Expenses

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The primary driver of this change was an increase of $72.9 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 $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.

In addition, marketing expenses

increased $31.7 million, primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing in January 2022, and the expansion of our Advisor Care Program call center.

Other drivers of the change to SG&A expenses included an increase in travel expenses of $7.2 million and an increase in general corporate costs of $6.3 million primarily due to office rent expense, insurance costs, bank fees, computer equipment and software, and consulting fees.

Other (Income) Expense, Net

Other (income) expense, net changed by $5.4 million, or 256.8%, to $3.3 million of income for the year ended December 31, 2022 compared to $2.1 million of expense for the year ended December 31, 2021.

This change was primarily due to an increase of $4.9 million in interest and dividend income due to higher interest rates on our higher cash and cash equivalents balances, a decrease of $0.4 million in interest expense due to the early termination of our credit facility, and an increase of $0.1 million in foreign currency translation and remeasurement gains due to exchange rates.

We recorded a provision for income taxes of $0.6 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively.

This change was primarily due to an increase of $0.3 million in state and local taxes, as well as $0.2 million in foreign taxes.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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.

For a discussion of our results of operations for the year ended December 31, 2021, including a year-to-year comparison between 2021 and 2020, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021.

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.

As of December 31, 2022, we had cash, cash equivalents and available-for-sale securities of $451.4 million, an increase of $227.0 million from $224.4 million as of December 31, 2021.

Working capital totaled $468.8 million as of December 31, 2022, an increase of $241.6 million from December 31, 2021.

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.

The increase in working capital was primarily due the following factors:

• a $227.1 million increase in cash and cash equivalents, primarily due to proceeds from our August 2022 offering of common stock, somewhat offset by cash used to support operations, strategic investments totaling $10.5 million, and payments of $24.5 million on our former credit facility which we paid off in August 2022;

• an increase of $27.0 million in accounts receivable due to higher sales;

• the movement of $9.8 million of our long-term investments into the short-term investments category as the related maturity date is now within 12 months;

• the payoff of our credit facility of which $9.2 million was in the short-term category as of December 31, 2021 and therefore a reduction in the then-working capital balance;

• a $2.8 million increase in prepaid expense and other current assets.

The increase in working capital was offset by the following factors:

• a $15.2 million increase in accounts payable, generally due to our business volume and headcount growth from the prior year;

• an increase of $13.9 million in accrued expenses which increased primarily due to compensation and personnel-related costs;

• a decrease of $5.3 million in inventory balances which decreased due mainly to increased sales demand and supply chain issues.

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.

Our sources of capital include sales of our Inspire system and registered offerings of our common stock.

During the quarter ended September 30, 2022, we repaid all amounts outstanding under our former credit facility.

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

In August 2022, we completed a follow-on offering that included our offer and sale of 1,150,000 shares of common stock at a public offering price of $215.00 per share.

We received net proceeds of approximately $243.8 million after deducting underwriting discounts, commissions, and offering expenses.

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.

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At December 31, 2022, we had $9.8 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.

government securities, and no investments with a contractual maturity over one year.

In 2022, our SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases in 2023.

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.

We also anticipate R&D expenses will continue to be significant in 2023, primarily related to the ongoing development of the next generation Inspire neurostimulator and the SleepSync™ platform.

We spent $10.6 million on purchases of property and equipment in 2022, mainly on testing systems, production equipment, and leasehold improvements on our corporate office.

We anticipate further capital expenditures in 2023, primarily for additional production equipment and to a lesser extent, leasehold improvements.

We believe that our existing cash and cash equivalents and available-for-sale securities, which totaled $451.4 million as of December 31, 2022, 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.

Beyond the next 12 months, 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 Hong Kong and Australia, whether we make strategic acquisitions, and competition.

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

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Recorded contractual obligations:

Long-term debt principal payments (1)

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

Operating leases (1)

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Unrecorded contractual obligations:

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

3,295 1,651 1,644

Purchase obligations (2)

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Total $ 167,686 $ 132,117 $ 35,569

(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.

(1) See Note 4 to our audited consolidated financial statements.

(2) Primarily purchase obligations to suppliers for inventory.

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Operating Activities

Net cash provided by operating activities was $11.6 million for 2022 and consisted of a net loss of $44.9 million, non-cash charges of $54.6 million, and a decrease in net operating assets of $1.8 million.

The non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more stock options and restricted stock to more employees at a higher fair market value, as well as the introduction of performance stock unit grants.

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

Operating assets includes accounts receivable which increased due to higher sales, and to a lesser extent prepaid expenses and other current assets.

Operating assets also includes inventories, which decreased primarily due to increased sales demand and supply chain constraints.

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

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.

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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 2022 was $19.6 million and consisted of the purchase of strategic investments of $10.5 million and the purchases of property and equipment, net of $9.1 million, mainly for testing systems, production equipment, and leasehold improvements on our corporate office.

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").

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.

Net cash provided by financing activities was $235.1 million for 2022 and consisted and consisted primarily of proceeds from the offering of common stock of $243.8 million, as well as proceeds from the exercise of stock options of $12.1 million, and proceeds from the issuance of common stock from our employee stock purchase plan of $3.7 million, partially offset by $24.5 million in payments on our long-term debt obligation, which we prepaid in August 2022, and less than $0.1 million of taxes paid on net share settlement of RSUs.

Critical Accounting Estimates

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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.

During 2022, we recorded a $1.8 million inventory reserve related to product introductions which were completed in October 2022, including the new silicone leads and the Bluetooth®-enabled patient remote.

The net inventory balance was $11.9 million and $17.2 million as of December 31, 2022 and 2021, respectively.

The reserve for excess and obsolete inventory was $2.7 million and $0.3 million as of December 31, 2022 and 2021, respectively.

Stock-Based Compensation

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

The plan allows for the issuance of performance stock units ("PSUs"), and d uring 2022, we granted PSUs to officers and key employees.

The number of PSUs that will ultimately be earned is based on our performance relative to a pre-established goal for the three-year period ending December 31, 2024.

Management expectations related to the achievement of the performance goal associated with PSU grants is assessed each reporting period, which determines the amount of stock-based compensation recorded during the period.

The number of shares earned at the end of the three-year period will vary based on actual performance, from 0% to 200% of the number of PSUs granted.

If the performance goal is not met, no shares will be earned.

If 200% of the PSUs outstanding as of December 31, 2022 are ultimately earned, the total stock-based compensation recognized over the three-year period ending December 31, 2024 will be $35.3 million.

If the performance condition is not met or not expected to be met, any compensation expense previously recognized associated with the grant will be reversed which will impact our operating results.

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