INSPIRE MEDICAL SYSTEMS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited financial statements and the related notes thereto, and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, such as information with respect to our plans and strategy for our business and the impact of the ongoing and global COVID-19 pandemic on our business, financial results and financial condition on our business, financial results and financial condition includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , our actual results could differ materially from the results described in, or implied by, these forward-looking statements.
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 theU.S. ,Japan , andSingapore 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 inEurope . We sell our Inspire system to hospitals and ambulatory surgery centers ("ASCs") in theU.S. and in select countries inEurope through a direct sales organization and we sell our Inspire system inJapan andSingapore 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 underU.S. government contract for patients who are treated by theVeterans Health Administration . As ofNovember 1, 2022 , we have secured positive coverage policies with manyU.S. commercial payors, including virtually all large national commercial insurers, covering approximately 260 million lives in theU.S. In addition, all seven Medicare Administrative Contractors published final policies in 2020 that provide coverage of Inspire therapy when certain coverage criteria are met. The procedure performed to implant our device was previously described for billing purposes using a Category I Current Procedural Terminology ("CPT") code (64568), which was used in conjunction with a temporary Category III CPT code (+0466T). At theOctober 2020 American Medical Association ("AMA")CPT Editorial Panel meeting, the AMA approved the creation of new Category I CPT codes (64582, 64583, and 64584) to separately identify hypoglossal nerve stimulator services. A new Category I code (42975) was also approved for Drug-Induced Sleep Endoscopy ("DISE"), which is the final procedure to determine which patients are appropriate for Inspire therapy. These new codes went into effect onJanuary 1, 2022 . With these approvals, a formal survey was conducted to 24
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determine the Medicare reimbursement levels assigned to each code and inNovember 2021 the final 2022 reimbursement rates were announced by theCenters for Medicare and Medicaid Services ("CMS"). The 2022 national average physician payments are approximately$888 for implantation of a hypoglossal nerve stimulator and approximately$115 for the DISE procedure. The 2022 rates of Medicare reimbursement to our hospital customers is approximately$30,063 , an increase of 2% over the 2021 rate. The ASC reimbursement rate for 2022 is approximately$24,828 , an increase of 2% over the 2021 rate. InJuly 2022 , the 2023 proposed Medicare reimbursement payments were announced. The 2023 proposed rate to our hospital customers is$29,932 , a decrease of less than 1% from the 2022 rate. The proposed ASC reimbursement for 2023 is$25,744 , an increase of 4% over the 2022 rate. The 2023 national average physician payments are proposed to be$858 for implantation of a hypoglossal nerve stimulator, a 3% decrease over the 2022 payment, and$95 for the DISE procedure, a 17% decrease from the 2022 amount. These reimbursement decisions will be reviewed by the CMS in conjunction with the annual Medicare Physician Fee Schedule rulemaking cycle with final decisions expected inNovember 2022 .Japan's Ministry of Health, Labour and Welfare ("MLHW") approved Inspire therapy to treat moderate to severe OSA in 2018 and was formally added to theJapan National Health Insurance Payment Listing in 2021. The first implant of Inspire therapy inJapan occurred inFebruary 2022 . Reimbursement inSingapore is handled through hospital innovation budgets or private health insurance sources. The first implants of Inspire therapy inSingapore occurred inMay 2022 . In 2020, theAustralian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement inAustralia .
For the nine months ended
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 during the COVID pandemic, but have managed to avoid any significant supply and inventory issues. We seek to maintain higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. During the three months endedSeptember 30, 2022 , we recorded a charge of$2.8 million for obsolete inventory and component parts related to product introductions which were completed inOctober 2022 , including the new silicone leads and the Bluetooth®-enabled patient remote. In theU.S. andSingapore , our products are shipped directly to our customers on a purchase order basis, primarily by a third-party vendor with a facility inTennessee , although we do ship some products from our facility inMinnesota . Warehousing and shipping operations for our European customers are handled by a third-party vendor with a facility located inthe Netherlands . Shipments of products to our Japanese distributor are handled from our facility inMinnesota . 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 three months endedSeptember 30, 2022 , we generated revenue of$109.2 million with a gross margin of 81.9% and had a net loss of$16.8 million compared to revenue of$61.7 million with a gross margin of 86.0% and a net loss of$10.3 million for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , we generated revenue of$270.0 million with a gross margin of 83.7% and had a net loss of$48.0 million compared to revenue of$155.0 million with a gross margin of 85.7% and a net loss of$39.7 million for the nine months endedSeptember 30, 2021 . Our accumulated deficit as ofSeptember 30, 2022 was$327.4 million . 25
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We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions. We continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as additional European countries and theAsia Pacific region. For example, inJuly 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. InDecember 2021 , we received FDA approval for our Bluetooth-enabled patient remote control. In the first quarter of 2021, we received FDA approvals for both a new Inspire physician programmer platform and an improved two-incision surgical implant procedure that eliminates one incision with a revised placement of the pressure sensing lead. InMay 2021 , we received CE Mark approval inEurope for the two-incision implant procedure.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. Our direct-to-consumer marketing includes the use of social media platforms such as Facebook, Google ad placements, and radio and television commercials. InJanuary 2021 , we began airing television commercials and inJanuary 2022 , we purchased our first national television advertising spots and began airing new TV commercials. 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. 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 inJuly 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 also continue to make significant investments to build our sales and marketing organization by increasing the number ofU.S. and European sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets throughout theU.S. and inEurope . During the three months endedSeptember 30, 2022 , we created 18 newU.S. sales territories, bringing the total to 209 U.S. territories as ofSeptember 30, 2022 . During that same period, we activated 59 new centers, bringing the total to 844 U.S. medical centers implanting Inspire therapy as ofSeptember 30, 2022 . AtSeptember 30, 2022 , ASCs made up 23% of our totalU.S. implanting centers, up from 22% atDecember 31, 2021 . Because of these and other factors, we may continue to incur net losses for the next several years, and we may require substantial additional funding, which may include future equity and debt financings.
COVID-19 Pandemic Update
Our business, operations, and financial condition and results have been and may continue to be impacted by the COVID-19 pandemic. In 2020, we experienced significant reduction in revenue and product sales, as our customers were negatively impacted by the decline in the volume of elective procedures that resulted from the global healthcare system's response to COVID-19. During the quarter endedMarch 31, 2021 , resurgences of COVID-19 in variousU.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 the nine months 26
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endedSeptember 30, 2022 , resurgences of COVID-19 in variousU.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 quarters endedJune 30, 2022 andSeptember 30, 2022 was less significant. We believe there continues to be some adverse impact on our revenues. However, the extent to which the COVID-19 pandemic continues to impact our results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of COVID-19 and its variants, the resurgence of COVID-19 in regions that have begun to recover from the initial impact of the pandemic, the impact of COVID-19 on economic activity, and the actions to contain its impact on public health and the global economy. To date, we have not experienced significant disruptions to our supply chain network as a result of the COVID-19 pandemic. We have also not reduced our capital expenditures and are continuing to invest in research and development, however, we may determine to allocate resources differently due to impacts of the COVID-19 pandemic.
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 theU.S. , select countries inEurope ,Japan , andSingapore . We recognize revenues from sales of our Inspire system when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms. Our revenue has fluctuated, and may continue to fluctuate, from quarter to quarter due to a variety of factors. For example, we have historically experienced seasonality in our first and fourth quarters and have experienced adverse impacts on our revenue due to the COVID-19 pandemic 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 theU.S. and countries outside of theU.S. , as our average selling price in theU.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 the third quarter 2022 was lower than in previous periods primarily due to inventory obsolescence charges associated with product introductions, as well as higher costs of certain component parts. We expect our gross margin for the fourth quarter of 2022 will be higher than in the third quarter of 2022, although 27
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still impacted by higher costs of certain component parts. Longer term, we expect gross margins to return to previous levels.
Research and Development Expenses
Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services and other costs associated with the next generation versions of the Inspire system. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Additionally, these expenses include clinical trial management, payments to clinical investigators, data management and travel expenses for our various clinical trials. We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and continue to expand our clinical studies to further expand positive coverage policies from private commercial payors in theU.S. and enter into new markets including additional European countries and theAsia Pacific region. We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of
compensation for personnel, including base salaries, stock-based compensation
expense and commissions related to our sales organization, finance, information
technology, and human resource functions, as well as spending related to
marketing, sales operations, and training and reimbursement personnel. Other
SG&A expenses include training physicians, travel expenses, advertising,
direct-to-consumer promotional programs, conferences, trade shows and consulting
services, professional services fees, audit fees, insurance costs and general
corporate expenses, including facilities-related expenses.
We expect SG&A expenses to continue to increase as we expand our commercial
infrastructure to both drive and support our planned growth in revenue and as we
increase our headcount and expand administrative personnel to support our growth
and operations as a public company including finance personnel and information
technology services. Additionally, we anticipate an increase in our stock-based
compensation expense with grants of stock options, restricted stock units,
performance stock units, and shares of our common stock purchased pursuant to
our employee stock purchase plan.
Other Expense
Other expense consists primarily of interest expense payable under our former credit facility, realized losses on foreign currency, and interest and dividend income. Seasonality Historically, we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. In theU.S. , we have experienced, and may in the future experience, higher sales in the fourth quarter as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs. Alternatively, in the first quarter, manyU.S. patients' insurance deductibles reset, requiring more out-of-pocket costs, which negatively impacts our sales during this period. InGermany , we have experienced reduced demand for our Inspire therapy in the first quarter of each year as Neue Untersuchungs-und-Behandlungsmethoden ("NUB") coverage status is being determined and as hospitals are establishing their budgets pertaining to allocation of funds to purchase our Inspire therapy. BeginningJanuary 1, 2021 , Inspire therapy is fully integrated into the German hospital reimbursement system ("G-DRG"), and we therefore may experience less seasonal fluctuations inGermany although it may not eliminate them. 28
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Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
(in thousands, except percentages)
Revenue $ 109,188 $ 61,685 $ 47,503 77.0 % $ 269,956 $ 154,996 $ 114,960 74.2 %
Cost of goods sold 19,786 8,624 11,162 129.4 % 43,963 22,123 21,840 98.7 %
Gross profit 89,402 53,061 36,341 68.5 % 225,993 132,873 93,120 70.1 %
Gross margin 81.9% 86.0% 83.7% 85.7%
Operating expenses:
Research and
development 20,993 9,614 11,379 118.4 % 47,397 27,056 20,341 75.2 %
Selling, general and
administrative 85,603 53,243 32,360 60.8 % 225,853 143,846 82,007 57.0 %
Total operating
expenses 106,596 62,857 43,739 69.6 % 273,250 170,902 102,348 59.9 %
Operating loss (17,194) (9,796) (7,398) 75.5 % (47,257) (38,029) (9,228) 24.3 %
Other expense, net (593) 548 (1,141) (208.2) % 286 1,570 (1,284) (81.8) %
Loss before income
taxes (16,601) (10,344) (6,257) 60.5 % (47,543) (39,599) (7,944) 20.1 %
Income taxes 246 3 243 8,100.0 % 488 52 436 838.5 %
Net loss $ (16,847) $ (10,347) $ (6,500) 62.8 % $ (48,031) $ (39,651) $ (8,380) 21.1 %
Comparison of the Three Months Ended
Revenue
Revenue increased$47.5 million , or 77.0%, to$109.2 million for the three months endedSeptember 30, 2022 compared to$61.7 million for the three months endedSeptember 30, 2021 . These results reflect an increase in sales of our Inspire system of$48.0 million in theU.S. and a decrease of$0.5 million outside of theU.S. Overall revenue growth was primarily due to increased market penetration in existing territories, expansion into new territories, and increased physician and patient awareness of our Inspire system.
Revenue information by region is summarized as follows:
Three Months
Ended
2022 2021 Change
Amount % of Revenue Amount % of Revenue $ %
(in thousands, except percentages)
United States $ 106,279 97.3 % $ 58,298 94.5 % $ 47,981 82.3 %
All other countries 2,909 2.7 % 3,387 5.5 % (478) (14.1) %
Total revenue $ 109,188 100.0 % $ 61,685 100.0 % $ 47,503 77.0 %
Revenue generated in the U.S. was $106.3 million for the three months ended
September 30, 2022 , an increase of $48.0 million , or 82.3%, compared to the
three months ended September 30, 2021 . Revenue growth in the U.S. was primarily
due to increased market penetration in existing territories, expansion into new
territories, increased physician and patient awareness of our Inspire system,
and to a lesser extent, a list price increase that began to impact some U.S.
customers in May 2022 . The list price increase will be phased in for all U.S.
customers over the remainder of 2022 and through the first half of 2023.
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Revenue generated outside of theU.S. was$2.9 million in the three months endedSeptember 30, 2022 , a decrease of$0.5 million , or 14.1%, compared to the three months endedSeptember 30, 2021 . Of the decrease in revenue, 12.0% was due to unfavorable exchange rates and 2.1% was due to a reduction in sales volume.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased$11.2 million , or 129.4%, to$19.8 million for the three months endedSeptember 30, 2022 compared to$8.6 million for the three months endedSeptember 30, 2021 . The increase was primarily due to product costs associated with higher sales volume of our Inspire system,$2.8 million of inventory obsolescence charges associated with recent product introductions, as well as higher costs of certain component parts which was impacted by inflation and COVID-related supply chain issues. Gross margin decreased to 81.9% for the three months endedSeptember 30, 2022 compared to 86.0% for the three months endedSeptember 30, 2021 . Gross margin for the three months endedSeptember 30, 2022 was lower primarily due to the inventory obsolescence charges described above and higher costs of certain component parts, somewhat offset by increased sales volume and manufacturing efficiencies and a price increase which began taking effect for someU.S. customers inMay 2022 .
Research and Development Expenses
Research and development expenses increased$11.4 million , or 118.4%, to$21.0 million for the three months endedSeptember 30, 2022 compared to$9.6 million for the three months endedSeptember 30, 2021 . This change was primarily due to an increase of$4.9 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, an increase of$6.1 million for ongoing research and development costs, including ongoing development of the Inspire Cloud and the next generation Inspire neurostimulator, and a$0.4 million increase in regulatory submissions and clinical studies expenses.
Selling, General and Administrative Expenses
SG&A expenses increased$32.4 million , or 60.8%, to$85.6 million for the three months endedSeptember 30, 2022 compared to$53.2 million for the three months endedSeptember 30, 2021 . The primary driver of this change was an increase of$19.6 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$8.6 million , primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing inJanuary 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$2.2 million and an increase in general corporate costs of$2.0 million primarily due to office rent expense, insurance costs, computer equipment and software, and consulting fees.
Other (Income) Expense
Other (income) expense decreased$1.1 million , or 208.2%, to$0.6 million of income, net for the three months endedSeptember 30, 2022 compared to$0.5 million of expense, net for the three months endedSeptember 30, 2021 . The change was primarily due to an increase of$1.3 million in interest and dividend income due to higher interest rates on higher cash, cash equivalents and investment balances, somewhat offset by an increase of$0.1 million in foreign currency translation losses due to exchange rates and an increase of$0.1 million in interest expense due to the early termination of our credit facility.
Income Taxes
We recorded a provision for incomes taxes of approximately
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Comparison of the Nine Months Ended
Revenue
Revenue increased
During both of the nine-month periods endedSeptember 30, 2022 and 2021, resurgences of COVID-19 in variousU.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 respective year.
Revenue information by region is summarized as follows:
Nine Months Ended September 30,
2022 2021 Change
Amount % of Revenue Amount % of Revenue $ %
(in thousands, except percentages)
United States $ 260,581 96.5 % $ 145,420 93.8 % $ 115,161 79.2 %
All other countries 9,375 3.5 % 9,576 6.2 % (201) (2.1) %
Total revenue $ 269,956 100.0 % $ 154,996 100.0 % $ 114,960 74.2 %
Revenue generated in the U.S. was $260.6 million for the nine months ended
September 30, 2022 , an increase of $115.2 million , or 79.2%, compared to the
nine months ended September 30, 2021 . Revenue growth in the U.S. was primarily
due to 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 will be phased in for all
U.S. customers over the remainder of 2022 and through the first half of 2023. 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 $9.4 million for the nine months ended
September 30, 2022 , a decrease of $0.2 million , or 2.1%, compared to the nine
months ended September 30, 2021 . While units sold outside the U.S. increased
8.7% over the prior year period, unfavorable exchange rates resulted in a
decrease in revenue of 2.1% from the nine months ended 2021. 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$21.8 million , or 98.7%, to$44.0 million for the nine months endedSeptember 30, 2022 compared to$22.1 million for the nine months endedSeptember 30, 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 was impacted by inflation and COVID-related supply chain issues, as well as$2.8 million of inventory obsolescence charges associated with recent product introductions. Gross margin decreased to 83.7% for the nine months endedSeptember 30, 2022 compared to 85.7% for the nine months endedSeptember 30, 2021 . Gross margin for the nine months endedSeptember 30, 2022 was lower primarily due to higher costs of certain component parts as well as the inventory obsolescence charges described above, somewhat offset by increased sales volume and manufacturing efficiencies and a price increase which began taking effect for someU.S. customers inMay 2022 . 31
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Research and Development Expenses
Research and development expenses increased$20.3 million , or 75.2%, to$47.4 million for the nine months endedSeptember 30, 2022 compared to$27.1 million for the nine months endedSeptember 30, 2021 . This change was primarily due to an increase of$9.6 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense,$10.5 million for ongoing research and development costs, including ongoing development of the Inspire Cloud and the next generation Inspire neurostimulator, and a$0.2 million increase in regulatory submissions and clinical studies expenses.
Selling, General and Administrative Expenses
SG&A expenses increased$82.0 million , or 57.0%, to$225.9 million for the nine months endedSeptember 30, 2022 compared to$143.8 million for the nine months endedSeptember 30, 2021 . The primary driver of this change was an increase of$48.7 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$23.4 million , primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing inJanuary 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$5.4 million and an increase in general corporate costs of$4.6 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 decreased by$1.3 million , or 81.8%, to$0.3 million of expense, net for the nine months endedSeptember 30, 2022 compared to$1.6 million of expense for the nine months endedSeptember 30, 2021 . This change was primarily due to an increase of$1.6 million in interest and dividend income due to higher interest rates on our higher cash, cash equivalents and investment balances, somewhat offset by an increase of$0.2 million in foreign currency translation losses due to exchange rates and an increase of$0.1 million in interest expense due to the early termination of our credit facility.
Income Taxes
We recorded a provision for income taxes of
Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had cash, cash equivalents and available-for-sale securities of$427.5 million , an increase of$203.1 million from$224.4 million as ofDecember 31, 2021 . Working capital totaled$446.3 million as ofSeptember 30, 2022 , an increase of$219.0 million fromDecember 31, 2021 . We define working capital as current assets less current liabilities. The increase in working capital was primarily due the following factors: •a$203.3 million increase in cash and cash equivalents, primarily due to proceeds from ourAugust 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 credit facility which we paid off inAugust 2022 ;
•an increase of
•the movement of
•the payoff of our credit facility of which$9.2 million was in the short-term category as ofDecember 31, 2021 and therefore a reduction in the then working capital balance; and
•a
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The increase in working capital was offset by the following factors:
•a
•an increase of
•a decrease of
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 endedSeptember 30, 2022 , we repaid all amounts outstanding under our credit facility. The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk or decreasing availability. To achieve these objectives, our investment policy allows us to maintain a portfolio of certain types of debt securities issued by theU.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. AtSeptember 30, 2022 , we had$387.5 million in money market funds and$9.7 million of investments inU.S. government securities, and no investments with a contractual maturity over one year. In the nine months endedSeptember 30, 2022 , our SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases in the remainder of 2022 and fiscal 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 the remainder of 2022 and fiscal 2023, primarily related to the ongoing development of the Inspire Cloud and the next generation Inspire neurostimulator. We spent$6.1 million on purchases of property and equipment in nine months endedSeptember 30, 2022 , mainly on testing systems, production equipment, and leasehold improvements on our corporate office. We anticipate further capital expenditures in 2022 and 2023, primarily for additional equipment. As ofSeptember 30, 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. We believe that our existing cash and cash equivalents and investments, which totaled$427.5 million as ofSeptember 30, 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 asSingapore ,Hong Kong , andAustralia , 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. 33
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Cash Flows
The following table presents a summary of our cash flow for the periods
indicated:
Nine Months Ended
September 30,
2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities $ (7,700) $ (20,853)
Investing activities (16,646) 29,672
Financing activities 227,788 10,872
Effect of exchange rate on cash (101) (9)
Net decrease in cash and cash equivalents
Operating Activities
The net cash used in operating activities was$7.7 million for the nine months endedSeptember 30, 2022 and consisted of a net loss of$48.0 million , non-cash charges of$38.7 million , and a decrease in net operating assets of$1.6 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 prepaid expenses and other current assets which increased primarily due to prepaid insurance. Operating assets also includes inventories, which decreased primarily due to sales demand. 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 and the accrual of R&D- and inventory related costs. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2022 was$16.6 million and consisted of purchases of property and equipment of$6.1 million and the purchase of strategic investments of$10.5 million .
Financing Activities
Net cash provided by financing activities was$227.8 million for the nine months endedSeptember 30, 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$6.4 million , and proceeds from the issuance of common stock from our ESPP of$2.1 million , partially offset by$24.5 million in payments on our long-term debt obligation, which we prepaid inAugust 2022 , and less than$0.1 million of taxes paid to net share settlement of RSUs.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and
commitments from those described in our Annual Report on Form 10-K for the
fiscal year ended
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three and nine months endedSeptember 30, 2022 .
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that such standards will not have a significant impact on our consolidated financial statements or do not otherwise apply to our operations.
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