Inspire Medical Systems, Inc. 10-K

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., 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. 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. 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 10, 2023, 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 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. 74 Table of Contents For the year ended December 31, 2022, 96.8% of our revenue was derived in the U.S. and 3.2% was derived outside of the U.S. No single customer accounted for more than 10% of our revenue. 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. 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 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 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 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. 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. 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 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, 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. 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 75 Table of Contents 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 additional European countries and the Asia Pacific region. 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 2022, we activated 246 U.S. centers bringing the total to 905 U.S. medical centers implanting Inspire therapy as of December 31, 2022. Driven by the more favorable reimbursement environment, we have increased our focus on adding ASCs. At the end of 2022, ASCs made up 23% of our total U.S. implanting centers, up from 22% at the end of 2021. 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 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 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. 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 Revenue 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. 76 Table of Contents 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 and foreign currency exchange rates. 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 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 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 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. 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, 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 77 Table of Contents 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 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 Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Year Ended December 31, Change 2022 2021 $ % (in thousands, except percentages) Revenue $ 407,856 $ 233,394 $ 174,462 74.7 % Cost of goods sold 66,115 33,279 32,836 98.7 % Gross profit 341,741 200,115 141,626 70.8 % Gross margin 83.8 % 85.7 % Operating expenses: Research and development 68,645 37,350 31,295 83.8 % Selling, general and administrative 320,688 202,615 118,073 58.3 % Total operating expenses 389,333 239,965 149,368 62.2 % Operating loss (47,592) (39,850) (7,742) 19.4 % Other (income) expense, net (3,324) 2,120 (5,444) (256.8) % Loss before income taxes (44,268) (41,970) (2,298) 5.5 % Income taxes 613 72 541 751.4 % Net loss $ (44,881) $ (42,042) $ (2,839) 6.8 % Revenue Revenue increased $174.5 million, or 74.7%, to $407.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. These results reflect an increase in sales of our Inspire system of $173.9 million in the U.S. 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. 78 Table of Contents Revenue information by region is summarized as follows: Year Ended December 31, 2022 2021 Change Amount % of Revenue Amount % of Revenue $ % (in thousands, except percentages) United States $ 394,833 96.8 % $ 220,976 94.7 % $ 173,857 78.7 % 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 % Revenue generated in the U.S. was $394.8 million for the year ended December 31, 2022, an increase of $173.9 million, or 78.7%, over the year ended December 31, 2021. Revenue growth in the U.S. 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 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. 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, 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, 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 $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 SG&A expenses increased $118.1 million, or 58.3%, to $320.7 million for the year ended December 31, 2022 compared to $202.6 million for the year ended December 31, 2021. 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 79 Table of Contents 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. Income Taxes 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, 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, 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 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; and • 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; and • a decrease of $5.3 million in inventory balances which decreased due mainly to increased sales demand and supply chain issues. 80 Table of Contents We proactively manage our access to capital to support liquidity and continued growth. 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. 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, 2022, we had $9.8 million of investments in U.S. 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 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 $451.4 million as of December 31, 2022, together with cash flow from operations, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for at least the next 12 months. There can be no assurance, however, that our business will continue to generate cash flows at historic levels. Beyond the next 12 months, our cash requirements will depend extensively on the timing of market introduction, and extent of market acceptance of, our Inspire system. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry into new markets such as Hong Kong and Australia, whether we make strategic acquisitions, and competition. We cannot accurately predict our long-term cash requirements at this time. Additionally, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity, and financial condition. We may seek additional sources of liquidity and capital resources through additional securities offerings or through borrowings under a new credit facility. There can be no assurance that such transactions will be available to us on favorable terms, if at all. Below is a summary of short-term and long-term anticipated cash requirements under contractual obligations existing as of December 31, 2022. As of December 31, 2022 ($ in thousands) Total Fiscal 2023 After Fiscal 2023 Recorded contractual obligations: Operating leases (1) $ 10,274 $ 1,777 $ 8,497 Unrecorded contractual obligations: Purchase obligations (2) 157,412 130,340 27,072 Total $ 167,686 $ 132,117 $ 35,569 (1) See Note 4 to our audited consolidated financial statements. 81 Table of Contents (2) Primarily purchase obligations to suppliers for inventory. As of December 31, 2022, 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. Cash Flows The following table presents a summary of our cash flow for the periods indicated: Year Ended December 31, 2022 2021 (in thousands) Net cash provided by (used in): Operating activities $ 11,569 $ (20,119) Investing activities (19,596) 29,139 Financing activities 235,077 14,948 Effect of exchange rate on cash 75 (19) Increase in cash and cash equivalents $ 227,125 $ 23,949 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. 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. 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. 82 Table of Contents 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. Financing Activities 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. 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 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. 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. 83 Table of Contents 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.