What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-09 compared with 2023-02-10 · 140 added, 131 removed, 178 unchanged (60% 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., 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.

In addition, patients in the U.S., Japan, Singapore, and Hong Kong 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.

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

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

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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 provide coverage of Inspire therapy when certain coverage criteria are met.

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

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.

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.

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

The Medicare national average 2024 payment to implant our device in a hospital outpatient site of service is $29,586, an increase of 1% from the 2023 rate.

The 2024 Medicare national average ASC reimbursement is $24,847, a decrease of 1% from the 2023 rate.

The 2024 Medicare national average physician reimbursement is $823 for implantation of a hypoglossal nerve stimulator, a 6% decrease over the 2023 payment.

The reimbursement for the DISE procedure in the hospital setting is $1,617, an 803% increase over the prior year amount.

In the ASC setting, the reimbursement for the DISE procedure is $757, a 714% increase from the 2023

The 2024 Medicare national average physician reimbursement for the DISE procedure is $95, a 2% decrease over the prior year 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.

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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.

We have experienced and continue to experience supply disruptions that began during the COVID-19 pandemic, but to date we have managed to avoid major delays in implant procedures due to those issues.

During the third quarter of 2023, we also began experiencing an inventory supply issue related to our polyurethane-based stimulation leads, one component of the Inspire system currently used only in the European market.

In 2022, the FDA approved our silicone-based stimulation and sensing leads in the U.S., which replaced the polyurethane versions of the leads, and we stopped manufacturing polyurethane leads.

We applied for European Union ("EU") Medical Devices Regulation ("MDR") approval in December 2021, which we expect to obtain in the second quarter of 2024, following delays in the process.

In the interim, we received derogation approval from the Dutch, German, Swiss, and Belgian national competent authorities allowing us to place the silicone-based leads on the market in those countries until various dates in 2024 or until we receive certification under the EU MDR, whichever occurs first.

We are also pursuing derogation in other European states, however, we cannot be certain that other national competent authorities will grant a derogation similar to the above-mentioned authorities.

Until we obtain certification under the EU MDR, silicone leads may only be sold in the EU members states that have granted derogation.

Polyurethane-based leads are the only leads that may be sold in the EU members states that have not granted derogation, and the polyurethane stimulation lead is in low supply.

During the fourth quarter of 2023 and extending into early 2024, the delay in certification and the shortage of polyurethane-based stimulation leads caused delays to implant procedures which adversely affected our business in the EU, including a reduction in our European revenue, and thereby our consolidated revenue.

We estimate the impact on our revenue during the fourth quarter of 2023 was approximately $4 million.

We continue to expect delays to implant procedures, and therefore reductions to our revenue, however, to a lesser extent than in prior year periods as a result of the derogations received thus far, and we believe would be further improved if we receive certification under the EU MDR.

We typically 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 2022, we recorded a charge of $2.8 million for obsolete inventory and component parts related to product introductions, 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.

customers and to our Singapore and Hong Kong distributors 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, and warehousing and shipping operations for our Japanese customers are handled by a third-party with a facility in Japan.

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

Our sales representatives do not maintain trunk stock.

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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 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 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.

For example, in June 2023, we submitted a premarket approval ("PMA") supplement to the FDA for our next generation Inspire system.

Also in June 2023, we received approval from the FDA on an expanded indication which includes an increase on the upper limit of the Apnea Hypopnea Index to 100 events per hour from 65, and raises the Body Mass Index ("BMI") warning in the labeling to 40 from 32, and we also received FDA approval of our new physician programmer, called the SleepSync™ programmer, which we expect to formally launch in the U.S.

in early 2024.

In March 2023, we received FDA approval to offer Inspire therapy to certain pediatric patients with Down syndrome, and 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.

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

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 2022, we purchased our first national television advertising spots and began airing new TV commercials, and in March 2023, we began airing additional new television commercials.

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

We plan to continue to refine our approach to direct-to-consumer outreach, including increasing attention to digital advertising directed towards qualified patients.

We expect to maintain our level of direct-to-consumer activities.

We have a call center which we refer to as 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 continue to enhance this scheduling capability during 2024.

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

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medical centers implanting Inspire therapy as of December 31, 2023.

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 62 new U.S.

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territories as of December 31, 2023.

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.

During 2023, glucagon-like peptide 1 ("GLP-1s"), a class of drug indicated for diabetes and obesity, continued to gain popularity as a weight-loss drug.

OSA is a multifactorial disease with many independent factors including age, gender, weight, and neck circumference.

Inspire is designed to address anteroposterior airway collapse, also known as tongue-based collapse.

Additionally, patients with a higher BMI are subject to a larger neck circumference and present predominantly with lateral-wall collapse.

A combination of tongue-based collapse and lateral-wall collapse is identified as a complete concentric collapse of the upper airway.

Inspire is contraindicated for complete concentric collapse.

While weight loss may help reduce a patient’s Apnea-Hypopnea Index and other OSA symptoms, we have seen from numerous studies that weight loss alone will not resolve OSA for the vast majority of patients.

We expect GLP-1s may help patients address their lateral wall collapse, making them a potential candidate for Inspire therapy to the extent they also have tongue-based collapse.

Based on our ongoing ADHERE patient registry, the average BMI of patients treated with Inspire therapy is 29 and the American Academy of Sleep Medicine guidelines recommend weight loss prior to surgery for patients with BMI over 35 and nonsurgical solutions for patients with BMI over 40.

Therefore, we do not believe there is not a significant overlap between the Inspire patient population and the patient population being treated with GLP-1s today.

While we cannot quantify the impact, we believe that there could be a benefit to our business as a result of GLP-1s, although there can be no assurance of such benefit.

If GLP-1s are successful in treating OSA in an indication for which Inspire therapy is approved, demand for our Inspire system could be reduced.

Macroeconomic Environment

The global economy continues to experience increased inflationary pressures which we anticipate will continue.

Higher interest rates and capital costs, higher shipping costs, increased costs of labor, international conflicts and terrorism, and weakening foreign currency exchange rates are creating additional economic challenges.

These conditions may cause our customers to decrease or delay orders for our products.

Our inventory on-hand has been constrained by the continuing supply chain challenges and component shortages, although the supply chain constraints eased somewhat throughout 2023.

As mentioned above, not having received EU MDR approval of our silicone-based leads which resulted in shortages of polyurethane-based leads, we have experienced and may continue experience to cause delays to implant procedures and a reduction in our European revenue.

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., select countries in Europe, Japan, and Singapore.

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, Singapore, and Hong Kong.

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.

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

In addition, in the three months ended September 30, 2023, we believe our revenue growth was adversely impacted by certain changes to the assistance that we provide to patients in connection with their seeking prior authorization approval prior to treatment, as well as lack of ENT surgeon capacity.

While we believe the impact caused by the changes to the assistance that we provide in connection with prior authorizations has improved, ENT surgeon capacity challenges remain.

If such impacts continue, our revenue growth may be further adversely impacted.

Our business has grown rapidly in recent years, resulting in substantially increased revenues, and we expect that our business will continue to grow.

However, our revenue growth rate has generally declined in recent periods, and it may continue to do so as a result of the difficulty of maintaining growth rates as our revenues increase to higher levels.

Cost of Goods Sold and Gross Margin

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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.

implement price increases on our products, thereby increasing our revenue.

On the other hand, our gross margin may decrease slightly to the extent our yields decrease, or 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.

Our gross margin in the second half of 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 supply chain issues.

In 2024, we expect gross margins to be in the range of 83% to 85%.

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.

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, prelaunch inventory, and other costs associated with the next generation versions of the Inspire system and SleepSync™, a cloud-based patient management 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.

We expense prelaunch inventory as research and development expense in the period incurred unless objective and persuasive evidence exists that regulatory approval and subsequent commercialization of a product candidate is probable and we also expect future economic benefit from the sales of the product candidate to be realized.

We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and SleepSync™ 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.

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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.

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.

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.

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Operating loss (40,271) (47,592) 7,321 (15.4) %

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

Other income, net (20,365) (3,324) (17,041) 512.7 %

Loss before income taxes (19,906) (44,268) 24,362 (55.0) %

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and an increase of $5.6 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.

Overall revenue growth was primarily due to increased market penetration in existing territories, expansion into new territories, and, we believe, increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some customers in May 2022, partially offset by ENT surgeon capacity constraints and reduced procedures as a result of the polyurethane-based lead shortage in Europe and the factors described under "Components of our Results of Operations - Revenue" above.

Revenue information by region is summarized as follows:

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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.

was primarily due to increased market penetration in existing territories, the expansion into new territories, and, we believe, 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 $18.6 million in the year ended December 31, 2023, an increase of $5.6 million, or 43.0%, over the year ended December 31, 2022.

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.

Revenue growth was primarily due to increased market penetration in existing territories, the expansion of our European sales representatives into new territories,

increased sales in the Asia Pacific region, and, we believe, increased physician and patient awareness of our Inspire system.

As noted above, during the fourth quarter of 2023, not having received EU MDR certification of our silicone-based stimulation lead and the resulting shortage of polyurethane-based stimulation leads had an estimated adverse impact on European revenue of approximately $4 million.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $30.5 million, or 46.1%, to $96.6 million for the year ended December 31, 2023 compared to $66.1 million for the year ended December 31, 2022.

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.

The increase was primarily due to product costs associated with higher sales volume of our Inspire system, additional manufacturing costs of sensors and lower yields prior to process enhancements, additional costs associated with an isolated production issue at a supplier, and higher costs of certain component parts.

Gross margin was 84.5% for the year ended December 31, 2023 compared to 83.8% for the year ended December 31, 2022.

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.

Gross margin for the year ended December 31, 2023 was higher than the previous year primarily due to $2.8 million of inventory obsolescence charges taken during 2022 associated with new product introductions, which lowered the gross margin during that period.

Gross margin for the year ended December 31, 2023 was negatively impacted by additional manufacturing costs of sensors and lower yields prior to process enhancements, additional costs associated with an isolated production issue at a supplier, and higher costs of certain component parts, partially offset by the price increase that began taking effect for some U.S.

customers in May 2022.

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Research and development expenses increased $47.9 million, or 69.8%, to $116.5 million for the year ended December 31, 2023 compared to $68.6 million for the year ended December 31, 2022.

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.

This change was primarily due to an increase of $21.7 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense and $20.8 million of incremental ongoing research and development costs, including ongoing development of the SleepSync™ platform and the next generation Inspire neurostimulator and physician programmer.

The change also includes an increase of $5.2 million of prelaunch inventory expense related to our next generation Inspire neurostimulator, and an increase of $0.2 million in clinical studies expenses and quality compliance audit fees.

Selling, General and Administrative Expenses

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The primary driver of this change was an increase of $75.7 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 $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.

In addition, marketing expenses increased $36.3 million, primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing in March 2023, 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 $7.8 million and an increase in general corporate costs of $11.5 million primarily due to consulting fees, computer equipment and software, legal fees, bank fees, bad debt expense, and office rent expense.

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.

Other (income) expense, net changed by $17.1 million, or 512.7%, to $20.4 million of income for the year ended December 31, 2023 compared to $3.3 million of income for the year ended December 31, 2022.

This change was due to an increase of $15.5 million in interest and dividend income due to higher interest rates on our higher cash, cash equivalents, and investment balances, and a decrease of $1.7 million in interest expense due to the early termination of our credit facility, partially offset by a $0.1 million change in foreign currency translation and remeasurement gains due to exchange rates.

We recorded a provision for income taxes of $1.2 million and $0.6 million for the years ended December 31, 2023 and 2022, respectively.

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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.

As of December 31, 2023, we had cash, cash equivalents and available-for-sale debt securities of $469.5 million, an increase of $18.1 million from $451.4 million as of December 31, 2022.

Working capital totaled $515.6 million as of December 31, 2023, an increase of $46.8 million from December 31, 2022.

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;

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

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

• an increase of $9.0 million in cash and cash equivalents and short-term available for sale investments due primarily to sales of the Inspire system, proceeds from the exercise of stock options, and interest and dividend income;

• an increase of $28.7 million in accounts receivable due to higher sales which occurred during the fourth quarter of 2023;

• an increase of $22.0 million in inventory balances which increased as supply chain issues ease;

• an increase of $4.1 million in prepaid expense and other current assets which increased primarily due to miscellaneous prepaid expenses and interest income receivable.

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 $12.0 million in accounts payable, generally due to our business volume and headcount growth from the prior year;

• an increase of $4.9 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 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.

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

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.

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

See Note 4 to our audited financial statements for additional information on our previous credit facility.

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

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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.

At December 31, 2023, we had $146.2 million in money market funds, $243.6 million in U.S.

government securities, and $40.4 million in corporate debt securities, certificates of deposit, commercial paper, and asset-asset-backed securities.

See Note 2 to our audited financial statements for additional information on our investments.

In 2023, our R&D and SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases during 2024.

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 2024, primarily related to the ongoing development of the SleepSync™ platform and next generation products.

We spent $23.6 million on purchases of property and equipment in 2023, mainly on testing systems and production equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware and software, and leasehold improvements.

We anticipate further capital expenditures in 2024, primarily for additional production equipment and our SleepSync™ platform, computer hardware and software, and leasehold improvements on our corporate office buildings.

We believe that our existing cash and cash equivalents and available for sale investments, which totaled $469.5 million as of December 31, 2023, together with cash flows 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 the same levels achieved in prior periods.

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.

Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry and expansion 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.

We may seek additional sources of liquidity and capital resources through equity or debt financings, such as 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.

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Effect of exchange rate on cash 164 75

Increase in cash and cash equivalents $ 227,125 $ 23,949

(Decrease) increase in cash and cash equivalents $ (256,055) $ 227,125

Operating Activities

Net cash provided by operating activities was $24.7 million for 2023 and consisted of a net loss of $21.2 million, non-cash charges of $86.6 million, and a decrease in net operating assets of $40.8 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 non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more stock options, restricted stock units, and performance stock units to a greater number of employees at a higher fair market value.

The remainder of the non-cash charges included depreciation and amortization expense which increased with additional purchases of property and equipment, accretion of investment discount due to higher investment balances, non-cash lease expense, stock issued for services rendered, and other, net.

Operating assets include inventories, which increased as supply chain constraints eased, and accounts receivable, which increased due to higher sales volume.

Operating assets also include prepaid expenses and other current assets, which increased primarily due to various prepaid expenses and interest income receivable.

Operating liabilities include 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 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 units 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.

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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.

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 used in investing activities for 2023 was $294.8 million and consisted primarily of the purchase of investments of $281.2 million, partially offset by $10.2 million of proceeds from sales or maturities of investments.

Investing activities also included purchases of property and equipment of $23.6 million, mainly for testing systems and production equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware and software, and leasehold improvements, as well as the purchase of strategic investments of $0.3 million.

Net cash used in 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.

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.

Net cash provided by financing activities was $14.0 million for 2023 and consisted primarily of proceeds from the exercise of stock options of $25.8 million and proceeds from the issuance of common stock from our employee stock purchase plan of $5.3 million, partially offset by $17.2 million of taxes paid on net share settlement of equity awards.

Net cash provided by financing activities was $235.1 million for 2022 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 equity awards.

Critical Accounting Estimates

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Actual results could differ from these estimates.

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

The following areas require management estimates, assumptions, and judgments:

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

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 estimate the recoverability of our inventory by reference to internal estimates of future demands, introduction of new products, 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.

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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.

Likewise, the timing of FDA approval of a next generation product, if granted, could have a significant impact on the carrying value of the inventory of our previous generation product, and therefore our reported operating results.

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

The net inventory balance was $33.9 million and $11.9 million as of December 31, 2023 and 2022, respectively.

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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.

The plan allows for the issuance of performance stock units ("PSUs"), and d uring 2022 and 2023, we granted PSUs to officers and key employees.

The number of PSUs that will ultimately be earned is based on our performance relative to pre-established goals for the three-year periods ending December 31, 2024 and 2025, respectively.

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

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

If the performance goals are not met, no shares will be earned.

If 200% of the PSUs outstanding as of December 31, 2023 are ultimately earned, the total stock-based compensation expense recognized over the three-year period ending December 31, 2024 will be $83.9 million.

If the performance conditions are 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