Docoh
Loading...

INSP Inspire Medical Systems

Filed: 4 May 21, 4:14pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________________
FORM 10-Q
________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to                              
Commission File Number: 001-38468
______________________________
insp-20210331_g1.jpg
Inspire Medical Systems, Inc.
(Exact name of registrant as specified in its charter)
______________________________

Delaware26-1377674
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
5500 Wayzata Blvd., Suite 1600
Golden Valley, MN
55416
(Address of principal executive offices)(Zip Code)
(844) 672-4357
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareINSPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒Accelerated filer ☐Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
As of April 27, 2021, the registrant had 27,213,528 shares of common stock, $0.001 par value per share, outstanding.


Table of Contents

2

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements, including statements regarding our future results of operations and financial position, business strategy, the impact of the ongoing and global COVID-19 pandemic on our business, financial results and financial position ,prospective products, product approvals, our expectations regarding the new American Medical Association reimbursement codes, research and development costs, timing and likelihood of success, other insurance providers' plans to begin approving our Inspire therapy, and the plans and objectives of management for future operations.
In some cases, you can identify forward-looking statements by terms such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘expect,’’ ‘‘plan,’’ ‘‘anticipate,’’ ‘‘could,’’ ‘‘intend,’’ ‘‘target,’’ ‘‘project,’’ ‘‘contemplate,’’ ‘‘believe,’’ ‘‘estimate,’’ ‘‘predict,’’ ‘‘potential’’ or ‘‘continue’’ or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties and assumptions, including, but not limited to:
our history of operating losses and dependency on our Inspire system for revenues;
commercial success and market acceptance of our Inspire therapy;
our ability to achieve and maintain adequate levels of coverage or reimbursement for our Inspire system or any future products we may seek to commercialize;
competitive companies and technologies in our industry;
the impact on our business, financial condition, and results of operation from the ongoing and global COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease;
our ability to expand our indications and develop and commercialize additional products and enhancements to our Inspire system;
future results of operations, financial position, research and development costs, capital requirements, and our needs for additional financing;
our ability to forecast customer demand for our Inspire system and manage our inventory;
our dependence on third-party suppliers and contract manufacturers;
risks related to consolidation in the healthcare industry;
our ability to expand, manage, and maintain our direct sales and marketing organization, and to market and sell our Inspire system in markets outside of the United States;
our ability to manage our growth;
our ability to hire and retain our senior management and other highly qualified personnel;
risks related to product liability claims and warranty claims;
our ability to address quality issues that may arise with our Inspire system;
3

our ability to successfully integrate any acquired business, products or technologies;
changes in global macroeconomic conditions;
any failure of key information technology systems, processes or sites or damage to or inability to access our physical facilities;
our ability to commercialize or obtain regulatory approvals for our Inspire therapy and system, or the effect of delays in commercializing or obtaining regulatory approvals;
any violations of anti-bribery, anti-corruption, and anti-money laundering laws;
risks related to our indebtedness;
our ability to use our net operating losses and research and development carryforwards;
the risk that we may be deemed to be an investment company under the Investment Company Act of 1940;
U.S. Food and Drug Administration ("FDA") or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including healthcare reform measures in the United States and international markets;
our ability to establish and maintain intellectual property protection for our Inspire therapy and system or avoid claims of infringement;
risks related to our common stock; and
other important factors that could cause actual results, performance or achievements to differ materially from those contemplated that are found in "Part I, Item 1. Business," "Part I, Item 1A. Risk Factors," and "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as updated by “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q.
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Unless the context requires otherwise, references to “Inspire,” the “Company,” “we,” “us,” and “our,” refer to Inspire Medical Systems, Inc.
4

PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements.
INSPIRE MEDICAL SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31,
2021
December 31, 2020
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$182,348 $190,518 
Investments, short-term43,796 43,844 
Accounts receivable, net of allowance for credit losses of
    $35 and $42, respectively
21,646 25,063 
Inventories11,385 8,479 
Prepaid expenses and other current assets1,609 1,965 
Total current assets260,784 269,869 
Property and equipment, net6,791 5,311 
Operating lease right-of-use asset5,634 5,805 
Other non-current assets204 204 
Total assets$273,413 $281,189 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$9,057 $7,209 
Accrued expenses10,365 13,516 
Total current liabilities19,422 20,725 
Notes payable24,804 24,746 
Operating lease liability, non-current portion5,959 5,886 
Other non-current liability97 85 
Total liabilities50,282 51,442 
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized; 0 shares
     issued and outstanding at March 31, 2021 and December 31, 2020
Common Stock, $0.001 par value per share; 200,000,000 shares authorized; 27,203,073 and 27,069,276 issued and outstanding at March 31, 2021 and December 31, 2020, respectively27 27 
Additional paid-in capital476,658 467,038 
Accumulated other comprehensive income29 
Accumulated deficit(253,563)(237,347)
Total stockholders' equity223,131 229,747 
Total liabilities and stockholders' equity$273,413 $281,189 

The accompanying notes are an integral part of these unaudited financial statements.
5

INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
(in thousands, except share and per share amounts)

Three Months Ended
March 31,
20212020
Revenue$40,352 $21,347 
Cost of goods sold5,981 3,297 
Gross profit34,371 18,050 
Operating expenses:
Research and development8,154 5,438 
Selling, general and administrative41,906 29,052 
Total operating expenses50,060 34,490 
Operating loss(15,689)(16,440)
Other expense (income):
Interest income(57)(642)
Interest expense523 525 
Other expense (income), net38 (78)
Total other expense (income)504 (195)
Loss before income taxes(16,193)(16,245)
Income taxes23 
Net loss(16,216)(16,245)
Other comprehensive loss:
Unrealized (loss) gain on investments(20)193 
Total comprehensive loss$(16,236)$(16,052)
Net loss per share, basic and diluted$(0.60)$(0.67)
Weighted average common shares used to compute net loss per share,
   basic and diluted
27,144,361 24,165,875 

The accompanying notes are an integral part of these unaudited financial statements.
6

INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(in thousands, except share amounts)

Three Months Ended March 31, 2021
Common Stock
SharesAmountAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders'
Equity
Balance at December 31, 202027,069,276 $27 $467,038 $29 $(237,347)$229,747 
Stock options exercised133,421 — 3,550 — — 3,550 
Issuance of common stock376 — 73 — — 73 
Stock-based compensation expense— — 5,997 — — 5,997 
Other comprehensive loss— — — (20)— (20)
Net loss— — — — (16,216)(16,216)
Balance at March 31, 202127,203,073 $27 $476,658 $$(253,563)$223,131 



Three Months Ended March 31, 2020
Common Stock
SharesAmountAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders'
Equity
Balance at December 31, 201924,107,350 $24 $319,865 $102 $(180,156)$139,835 
Stock options exercised254,142 787 — — 787 
Issuance of common stock897 — 72 — — 72 
Stock-based compensation expense— — 2,749 — — 2,749 
Other comprehensive income— — — 193 — 193 
Adoption of ASU 2016-13, Financial Instruments - Credit Losses
— — — — 12 12 
Net loss— — — — (16,245)(16,245)
Balance at March 31, 202024,362,389 $24 $323,473 $295 $(196,389)$127,403 

The accompanying notes are an integral part of these unaudited financial statements.
7

INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 Three Months Ended
March 31,
 20212020
Operating activities  
Net loss$(16,216)$(16,245)
Adjustments to reconcile net loss:  
Depreciation and amortization234 187 
Amortization (accretion) of investment premium (discount)30 (80)
Accretion of debt discount58 54 
Non-cash lease expense171 243 
Stock-based compensation expense5,997 2,749 
Non-cash stock issuance for services rendered73 72 
Other, net(8)(89)
Changes in operating assets and liabilities:  
Accounts receivable3,381 2,092 
Inventories(2,905)(1,411)
Prepaid expenses and other current assets356 775 
Accounts payable1,477 1,372 
Accrued expenses and other liabilities(3,049)(4,494)
Net cash used in operating activities(10,401)(14,775)
Investing activities  
Purchases of property and equipment(1,321)(255)
Purchases of investments(14,907)
Proceeds from sales or maturities of investments82,403 
Net cash (used in) provided by investing activities(1,321)67,241 
Financing activities  
Proceeds from the exercise of stock options3,550 787 
Net cash provided by financing activities3,550 787 
Effect of exchange rate on cash
(Decrease) increase in cash and cash equivalents(8,170)53,257 
Cash and cash equivalents at beginning of period190,518 22,860 
Cash and cash equivalents at end of period$182,348 $76,117 
Supplemental cash flow information  
Cash paid for interest$466 $471 
Purchases of property and equipment in accounts payable1,209 

The accompanying notes are an integral part of these unaudited financial statements.
8

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)

1. Organization
Description of Business
Inspire Medical Systems, Inc. is a medical technology company focused on the development and commercialization of innovative and minimally invasive solutions for patients with obstructive sleep apnea ("OSA"). Our proprietary Inspire system is the first and only United States ("U.S.") Food and Drug Administration ("FDA") approved neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA. Inspire therapy received premarket approval ("PMA") from the FDA in April 2014 and has been commercially available in certain European markets since November 2011. Japan's Ministry of Health, Labour and Welfare ("MLHW") approved Inspire therapy to treat moderate to severe OSA in June 2018 and completed reimbursement review in April 2021. In August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement coverage in Australia.

2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements may not include all disclosures required by U.S. generally accepted accounting principles ("U.S. GAAP"); however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Follow-On Public Offering
On April 16, 2020, we completed a follow-on offering that included our offer and sale of 2,300,000 shares of common stock at a public offering price of $58.00 per share. We received net proceeds of approximately $124.7 million after deducting underwriting discounts and commissions and offering expenses.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. We use significant judgment when making estimates related to the allowance for credit losses, inventory reserves, warranty reserves, and stock-based awards. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid securities, readily convertible to cash, that mature within 90 days or less from the date of purchase to be cash equivalents. The carrying amount reported in the balance sheets for cash is cost, which approximates fair value.
9

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
Foreign Currency
Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year. Foreign currency transaction gains and losses are included in other expense (income), net in the statements of operations and comprehensive loss. Assets and liabilities of foreign operations are remeasured at period-end exchange rates with the impacts of foreign currency remeasurement recognized in other expense (income), net in the statements of operations and comprehensive loss.
Investments
At March 31, 2021 and December 31, 2020, our short-term investments consisted of commercial paper, corporate bonds, and U.S. government securities, which are classified as available-for-sale and had maturities less than one year. Investments are reported at their estimated fair market values which are based on quoted, active or inactive market prices when available. Any unrealized gains and losses due to interest rate fluctuations and other external factors are reported as a separate component of accumulated other comprehensive income. We had less than $0.1 million of unrecognized income in accumulated other comprehensive income at both March 31, 2021 and December 31, 2020. Any realized gains and losses are calculated on the specific identification method and reported net in other expense (income) in the statements of operations and comprehensive loss. For the three months ended March 31, 2021 and 2020, we recognized $0.0 million and $0.1 million of realized gains, net, respectively.
We recognize expected credit losses on investments in accordance with Accounting Standards Update ("ASU"), ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which we adopted effective January 1, 2020 using the modified retrospective approach. The adoption of ASU 2016-13 did not have a material impact on the amount and timing of credit losses recognized in our financial statements.
We reassess our estimated credit losses on investments each reporting period. U.S. government securities and cash equivalents are under a "zero-loss exception" for credit losses, meaning no credit loss risk calculation is necessary on those instruments due to the exceptionally low rate of default, which continues to decrease as the securities approach maturity, which for us is no longer than one year. For non-U.S. government securities, we use a discounted cash flow approach to calculate expected credit losses using estimated default rates based upon historical loss data, current conditions, as well as expectations of future economic conditions. We record changes in the allowance for credit losses for available-for-sale debt securities with a corresponding adjustment in credit loss expense on the statement of operations and comprehensive loss. No reversal of a previously recorded allowance for credit losses may be made to an amount below zero. The total allowance for credit losses was $0 at both March 31, 2021 and December 31, 2020.
Fair Value of Financial Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and investments. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1—Observable inputs, such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign exchange rates, and credit ratings.
10

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
Level 3—Unobservable inputs that are supported by little or no market activities, which would require us to develop our own assumptions.
We use the methods and assumptions described below in determining the fair value of our financial instruments.
Money market funds: Fair values of money market funds are based on quoted market prices in active markets. These are included as Level 1 measurements in the tables below.
Commercial paper: Short-term, highly liquid investments are included as a Level 2 measurement in the tables below.
Corporate bonds: Consists of short- and long-term notes and bonds with various yields. These are included as a Level 2 measurement in the tables below.
U.S. government securities: Consists of U.S. government Treasury bills and notes with original maturities of less than one year. These are included as a Level 1 measurement in the tables below.
The following tables sets forth by level within the fair value hierarchy our assets that are measured on a recurring basis and reported at fair value as of March 31, 2021 and December 31, 2020. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Fair Value Measurements as of
March 31, 2021
Estimated
Fair Value
Level 1Level 2Level 3
Cash equivalents:
Money market funds$170,391 $170,391 $$
Total cash equivalents170,391 170,391 
Investments:
Commercial paper$13,286 $$13,286 $
Corporate bonds6,506 6,506 
U.S. government securities24,004 24,004 
Total investments43,796 24,004 19,792 
Total cash equivalents and investments$214,187 $194,395 $19,792 $

Fair Value Measurements as of
December 31, 2020
Estimated
Fair Value
Level 1Level 2Level 3
Cash equivalents:
Money market funds$179,389 $179,389 $$
Total cash equivalents179,389 179,389 
Investments:
Commercial paper$13,275 $$13,275 $
Corporate bonds6,540 6,540 
U.S. government securities24,029 24,029 
Total investments43,844 24,029 19,815 
Total cash equivalents and investments$223,233 $203,418 $19,815 $

11

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
There were 0 transfers between levels during the periods ended March 31, 2021 and December 31, 2020.
Concentration of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash equivalents, investments, and accounts receivable.
Our investment policy limits investments to certain types of debt securities issued by the U.S. government and its agencies, corporations with investment-grade credit ratings, or commercial paper and money market funds issued by the highest quality financial and non-financial companies. We place restrictions on maturities and concentration by type and issuer. We are exposed to credit risk in the event of a default by the issuers of these securities to the extent recorded on the balance sheets. However, as of March 31, 2021 and December 31, 2020, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy.
We believe that the credit risk in our accounts receivable is mitigated by our credit evaluation process, relatively short collection terms, and dispersion of our customer base. We generally do not require collateral, and losses on accounts receivable have historically been within management's expectations.
Accounts Receivable and Allowance for Expected Credit Losses
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Customer credit terms are established prior to shipment with the general standard being net 30 days. Collateral or any other security to support payment of these receivables generally is not required.
We recognize expected credit losses on accounts receivable in accordance with Accounting Standards Update ("ASU"), ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which we adopted effective January 1, 2020 using the modified retrospective approach through a cumulative-effect adjustment to retained earnings. The adoption of ASU 2016-13 did not have a material impact on the amount and timing of credit losses recognized in our financial statements.
Each reporting period, we estimate the credit loss related to accounts receivable based on a migration analysis of accounts grouped by individual receivables delinquency status, and apply our historic loss rate adjusted for management's assumption of future market conditions. Any change in the allowance subsequent to the effective date of January 1, 2020 from new receivables acquired, or changes due to credit deterioration on previously existing receivables, is recorded in selling, general and administrative expenses. Write-offs of receivables considered uncollectible, and any related subsequent recoveries of previously written off receivables, are deducted from the allowance. Specific accounts receivable are written-off once a determination is made that the amount is uncollectible. The write-off is recorded in the period in which the account receivable is deemed uncollectible. Recoveries are recognized when received and as a direct credit to earnings or as a reduction to the allowance for credit losses (which would indirectly reduce the loss by decreasing bad debt expense).
Inventories
Inventories are valued at the lower of cost or net realizable value, computed on a first-in, first-out basis and consisted of the following:
March 31, 2021December 31, 2020
Raw materials$1,419 $892 
Finished goods9,966 7,587 
Total inventories, net of reserves$11,385 $8,479 
We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for
12

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions. The reserve for excess and obsolete inventory was $0.1 million as of both March 31, 2021 and December 31, 2020.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization and consisted of the following:
March 31, 2021December 31, 2020
Computer equipment and software$1,294 $1,305 
Manufacturing equipment3,137 2,285 
Other equipment249 249 
Leasehold improvements264 192 
Construction in process3,915 3,125 
Property and equipment, cost8,859 7,156 
Less: accumulated depreciation and amortization(2,068)(1,845)
Property and equipment, net$6,791 $5,311 
Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Depreciation and amortization expense was $0.2 million for both of the three months ended March 31, 2021 and 2020.
Impairment of Long-lived Assets
Long-lived assets consist primarily of property and equipment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require that an asset be tested for possible impairment, we compare the undiscounted cash flows expected to be generated by the asset to the carrying amount of the asset. If the carrying amount of the asset is not recoverable on an undiscounted cash flow basis, we determine the fair value of the asset and recognize an impairment loss to the extent the carrying amount of the asset exceeds its fair value. We determine fair value using the income approach based on the present value of expected future cash flows or other appropriate measures of estimated fair value. Our cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors. We did not record any impairment charges on long-lived assets during either of the three months ended March 31, 2021 or 2020.
Accrued Expenses
Accrued expenses consisted of the following:
March 31, 2021December 31, 2020
Payroll related$8,301 $11,965 
Interest160 160 
Other accrued expenses1,904 1,391 
Total accrued expenses$10,365 $13,516 
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). Revenues from product sales are recognized when the customer obtains
13

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
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 standard shipping terms are free on board shipping point, unless the customer requests that control and title to the inventory transfer upon delivery. In those cases where shipping and handling costs are billed to customers, we classify the amounts billed as a component of cost of goods sold.
Revenue is measured as the amount of consideration we expect to receive, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, which is based on the invoiced price, in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. The majority of our contracts have a single performance obligation and are short term in nature.
Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Variable consideration related to certain customer sales incentives is estimated based on the amounts expected to be paid based on the agreement with the customer using probability assessments.
We offer customers a limited right of return for our product in case of non-conformity or performance issues. We estimate the amount of our product sales that may be returned by our customers based on historical sales and returns. As our historical product returns to date have been immaterial, we have not recorded a reduction in revenue related to variable consideration for product returns.
See Note 9 for disaggregated revenue by geographic area.
Cost of Goods Sold
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.
Research and Development
Research and development expenses consist primarily of product development, clinical and regulatory affairs, quality assurance, consulting services, and other costs associated with products and technologies in development. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Clinical expenses include clinical trial design, clinical site reimbursement, data management, travel expenses, and the cost of manufacturing products for clinical trials.
Stock-Based Compensation
We maintain an equity incentive plan to provide long-term incentives for eligible employees, consultants, and members of the board of directors. The plan allows for the issuance of restricted stock units ("RSUs") and non-statutory and incentive stock options to employees and RSUs and non-statutory stock options to consultants and directors. We also offer an employee stock purchase plan which allows participating employees to purchase shares of our common stock at a discount through payroll deductions.
We recognize equity-based compensation expense for awards of equity instruments to employees and directors based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation ("ASC 718"). ASC 718 requires all equity-based compensation awards to employees and directors, including grants of RSUs and stock options, to be recognized as expense in the statements of operations and comprehensive loss
14

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
based on their grant date fair values. We estimate the fair value of stock options using the Black-Scholes option pricing model and the fair value of RSUs is equal to the closing price of our common stock on the grant date. The fair value of each purchase under the employee stock purchase plan is estimated at the beginning of the offering period using the Black-Scholes option pricing model. We have not granted any stock-based awards to our consultants.
The Black-Scholes option pricing model requires the input of certain subjective assumptions, including (i) the expected share price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividend yield. Due to our limited operating history and a lack of company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a peer group of public companies for the calculation of volatility. The group of peer companies have characteristics similar to us, including stage of product development and focus on the life science industry. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. We use the simplified method, which is the average of the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees and directors as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a U.S. government Treasury instrument whose term is consistent with the expected term of the stock options. We use an assumed dividend yield of 0 as we have never paid dividends and have no current plans to pay any dividends on our common stock.
We expense the fair value of our equity-based compensation awards granted to employees and directors on a straight-line basis over the associated service period, which is generally the period in which the related services are received. We account for award forfeitures as they occur.
Advertising Expenses
We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $9.0 million and $6.4 million during the three months ended March 31, 2021 and 2020, respectively.
Leases
Operating leases are included in operating lease right-of-use ("ROU") asset, accrued expenses, and operating lease liability – non-current portion in our balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date as the rate implicit in the lease is not readily determinable. The determination of our incremental borrowing rate requires management judgment based on information available at lease commencement. The operating lease ROU assets also include adjustments for prepayments, accrued lease payments and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on our balance sheets.
Income Taxes
We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Valuation allowances against deferred tax assets are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than
15

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
minimal state taxes and an accrual for uncertain tax benefits. Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the statements of operations and comprehensive loss.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in unrealized gains and losses due to interest rate fluctuations and other external factors on investments classified as available-for-sale. Accumulated other comprehensive income is presented in the accompanying balance sheets as a component of stockholders' equity.
Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because we have reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share as all potentially dilutive shares consisting of outstanding stock options, unvested RSUs, and shares issuable under our employee stock purchase plan were antidilutive in those periods.
Recent Accounting Pronouncements
We have reviewed and considered all recent accounting pronouncements that have not yet been adopted and believe there are none that could potentially have a material impact on our business practices, financial condition, results of operations, or disclosures.

3. Investments
Our investments are classified as available-for-sale and consist of the following:
March 31, 2021
AmortizedUnrealized GrossAggregate
CostGainsLossesFair Value
Commercial paper$13,286 $$$13,286 
Corporate bonds6,509 (3)6,506 
U.S. government securities23,992 12 24,004 
Short-term investments$43,787 $12 $(3)$43,796 

December 31, 2020
AmortizedUnrealized GrossAggregate
CostGainsLossesFair Value
Commercial paper$13,275 $$$13,275 
Corporate bonds6,543 (3)6,540 
U.S. government securities23,997 32 24,029 
Short-term investments$43,815 $32 $(3)$43,844 
As of March 31, 2021 and December 31, 2020, we had 0 investments with a contractual maturity of greater than one year. Currently, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. We do not consider those investments to be other-than-temporarily impaired as of March 31, 2021. At the end of each reporting period,
16

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
we evaluate potential credit impairment on available-for-sale securities in an unrealized loss position, based on the expected cash flows to be collected and the yield-to-maturity on those securities. Securities with a valuation allowance for expected credit losses and deemed uncollectible are permanently written-down, and a reversal out of the valuation allowance occurs.

4. Leases
In September 2018, we entered into a non-cancelable operating lease agreement to sublease approximately 45,000 square feet of office space for our corporate headquarters, which included real estate taxes and operating expenses in the base rent. This lease commenced January 15, 2019 and expired November 30, 2020.
In May 2019, we entered into a new, non-cancelable operating lease agreement for the same space directly with the landlord. The initial lease term commenced on December 1, 2020 and expires May 31, 2028 with an option to renew for 1 additional period of five years at the then-prevailing market rate. The exercise of the lease renewal option is at our sole discretion and was not included in the lease term for the calculation of the ROU asset and lease liability when the lease commenced on December 1, 2020 as it is not reasonably certain of exercise.
Beginning December 1, 2020, in addition to base rent, we also pay our proportionate share of the operating expenses, as defined in the lease. These payments are made monthly and adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes and insurance. In conjunction with this lease, the landlord agreed to provide a $0.6 million rent abatement and a refurbishment allowance in the amount of the cost of any leasehold improvements, not to exceed approximately $1.1 million upon Inspire providing the necessary documentation evidencing the costs of the leasehold improvements that are completed by May 31, 2022. However, the lease allows us to allocate the refurbishment allowance against base rent instead of taking a tenant improvement reimbursement. At this time, we intend to allocate the full amount of the refurbishment allowance against base rent. The total minimum lease payments related to this lease are $7.4 million.
The following table presents the lease balances within the balance sheets:
March 31, 2021December 31, 2020
Right-of-use assets:
Operating lease right-of-use asset$5,634 $5,805 
Operating lease liabilities:
Operating lease liability, non-current portion$5,959 $5,886 

As of March 31, 2021, the remaining lease term was 7.2 years and the discount rate was 5.2%. The operating cash outflows from our operating leases were less than $0.1 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively.

5. Long-Term Debt
In August 2015, we entered into a loan and security agreement that initially provided for a term A loan facility in the amount of $15.5 million, which was fully funded on the closing date, and a term B loan facility in an amount between $3.5 million and $10.0 million, subject to our achievement of certain revenue milestones. We refer to our term A loan facility and our term loan B facility together as our credit facility.
In February 2017, we amended the loan and security agreement to, among other things, increase borrowings under the term A loan facility by $1.0 million, for a total of $16.5 million outstanding under the credit facility, and reduced borrowings available under the term B loan facility to $9.0 million.
17

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
In February 2018, we borrowed an additional $8.0 million under the term B loan facility portion of the credit facility for a total of $24.5 million outstanding under the credit facility.
On March 27, 2019, we amended the loan and security agreement. The amendment modified the terms of the loan and security agreement to: (1) extend the interest-only date from March 1, 2020 to April 1, 2022 and extend the maturity date from February 1, 2022 to March 1, 2024; (2) reduce the final payment percentage from 5.50% to 3.50%; (3) modify the basic rate to be a per annum rate of interest (based on a year of 360 days) equal to the sum of (i) the greater of (A) the 30 day U.S. LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (B) 2.50%, plus (ii) 5.10%; provided, however, under no circumstances will the basic rate be less than 7.60%; (4) provide a mechanism for determining an alternative interest rate to replace the U.S. LIBOR rate upon the occurrence of certain circumstances; and (5) revise the prepayment fee to be between 1.00% and 3.00% of the principal amount, depending on the timing of any prepayment. Upon closing the amendment to the loan and security agreement, payment of the previously accrued final payment under the credit facility was required.
In addition to the principal and interest payments, under the credit facility, we are required to pay a final payment fee of 3.50% on all amounts outstanding, which is being accreted using the effective interest rate method over the term of the loan and security agreement and shall be due at the earlier of maturity or prepayment. Borrowings are prepayable at our option in whole, but not in part, together with all accrued and unpaid interest thereon and, if not previously made, the final payment, subject to a prepayment fee of 1.00%.
The credit facility includes affirmative and restrictive covenants and events of default, including the following events of default: payment defaults, breaches of covenants, judgment defaults, cross defaults to certain other contracts, certain events with respect to governmental approvals if such events could cause a material adverse change, a material impairment in the perfection or priority of the lender's security interest or in the value of the collateral, a material adverse change in the business, operations, or condition of us or any of our subsidiaries, and a material impairment of the prospect of repayment of the loans. Upon the occurrence of an event of default, a default increase in the interest rate of an additional 5.00% could be applied to the outstanding loan balance and the lender could declare all outstanding obligations immediately due and payable and take such other actions as set forth in the loan and security agreement.
Our obligations under the credit facility are secured by a first priority security interest in substantially all of our assets, other than our intellectual property. There are no financial covenants contained in the loan and security agreement. We were in compliance with the affirmative and restrictive covenants as of March 31, 2021.
Expected future principal payments for the credit facility are as follows:
Year ending December 31:
2021 (remaining)$
20229,188 
202312,250 
20243,062 
Total expected future principal payments$24,500 

6. Employee Retirement Plan
We sponsor an employee retirement plan covering all of our full-time employees. The plan allows for eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations. We may elect to make a voluntary contribution to the plan. We have not made contributions since inception.

18

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
7. Stockholders' Equity
Stock-Based Compensation
We adopted the 2007 Stock Incentive Plan (the "2007 Plan") in November 2007, which terminated in accordance with its terms on November 28, 2017; however, the outstanding stock options may continue to be exercised in accordance with their terms. Immediately following the termination of the 2007 Plan, we adopted the 2017 Stock Incentive Plan (the "2017 Plan"), which contains substantially similar terms and conditions as the 2007 Plan. Upon the IPO, no further grants were made under the 2017 Plan and we adopted the 2018 Stock Incentive Plan (the "2018 Plan").
The purpose of the 2018 Plan is to promote the interest of our company and our stockholders by aiding in attracting and retaining employees, officers, consultants, independent contractors, and directors capable of assuring the future success of our business and to afford such persons an opportunity to acquire a proprietary interest in our company. The board of directors may amend, alter, suspend, discontinue, or terminate the 2018 Plan at any time with the approval of our stockholders. A total of 1,386,809 shares of common stock were initially reserved for issuance under the 2018 Plan, and this share reserve will automatically be supplemented each January 1, commencing on January 1, 2019 and ending on and including January 1, 2028, by an amount of shares equal to the lesser of: a) 739,631 shares, b) 4% of the shares outstanding on the final day of the immediately preceding fiscal year and c) such smaller number of shares as determined by the board of directors. As of March 31, 2021, there were 3,381,983 shares reserved for issuance under the 2018 Plan, of which 1,358,694 shares were available for issuance.
The following table presents the components and classification of stock-based compensation expense recognized for stock options, RSUs, and the ESPP:
Three Months Ended
March 31,
20212020
Stock options$5,657 $2,575 
Restricted stock units19 
Employee stock purchase plan321 174 
Total stock-based compensation expense$5,997 $2,749 
Cost of goods sold$79 $53 
Research and development1,040 345 
Selling, general and administrative4,878 2,351 
Total stock-based compensation expense$5,997 $2,749 

Stock Options
Prior to the IPO, the exercise price of stock options represented fair value of the common stock at the time of issuance and was determined by the board of directors with the assistance of a third-party valuation specialist. Post-IPO, options are granted at the exercise price, which is equal to the closing price of our stock on the date of grant. The stock options granted to employees include a four-year service period and 25% vest after the first year of service and the remainder vest in equal installments over the next 36 months of service. The stock options granted to the board of directors vest in one or three equal annual installments, in each case, subject to the director's continuous service through the applicable vesting date. The stock options have a contractual life of ten years.
19

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)

A summary of stock option activity and related information is as follows:
OptionsWeighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(years)
Aggregate Intrinsic
Value
(in thousands)
Outstanding at December 31, 20202,857,564 $66.09 7.9$351,626
Granted68,802 $207.15 
Exercised(133,421)$26.61 $24,567
Forfeited(42,570)$111.03 
Outstanding at March 31, 20212,750,375 $70.84 7.7$374,706
Exercisable at March 31, 20211,221,474 $24.27 6.3$223,188

The aggregate intrinsic value of options exercised is the difference between the estimated fair market value of our common stock at the date of exercise and the exercise price for those options. The aggregate intrinsic value of outstanding options is the difference between the closing price as of the date outstanding and the exercise price of the underlying stock options.
As of March 31, 2021, the amount of unearned stock-based compensation to be expensed from now through the year 2025 related to unvested employee and non-employee director stock options is $72.4 million, which we expect to recognize over a weighted average period of 2.8 years. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase, or cancel any remaining unearned stock compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock-based awards.
We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model using the fair market value of our common stock on the date of grant and a number of other assumptions. These assumptions include estimates regarding the expected term of the awards, estimates of the stock volatility over a duration that approximates the expected term of the awards, estimates of the risk-free rate, and estimates of expected dividend rates.
The fair value of options granted to employees and non-employee directors was estimated as of the grant date using the Black-Scholes option pricing model using the following assumptions:
Three Months Ended
March 31,
20212020
Expected term (years)6.256.25
Expected volatility55.2 - 55.7%42.3 - 48.2%
Risk-free interest rate0.79 - 1.4%0.55 - 1.42%
Expected dividend yield0.0%0.0%
Weighted average fair value$109.27$31.48

Expected Term — Due to our limited amount of historical exercise, forfeiture, and expiration activity, we have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting terms and the original contractual term of the option. We will continue to analyze our expected term assumption as more historical data becomes available.
Expected Volatility — Due to our limited operating history and a lack of company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a group of similar companies
20

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
that are publicly traded for the calculation of volatility. When selecting this peer group of public companies on which we have based our expected stock price volatility, we generally selected companies with comparable characteristics to it, including enterprise value, stages of clinical development, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available.
Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. government Treasury instruments with maturities similar to the expected term of our stock options.
Expected Dividend Yield — The expected dividend assumption is based on our history of not paying dividends and our expectation that we will not declare dividends for the foreseeable future.
The amount of stock-based compensation expense is recognized on a straight-line basis over the vesting term and is reduced by actual forfeitures as they occur.
Restricted Stock Units
RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. The RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s employment terminates prior to the release of the vesting restrictions. The RSUs include a four-year service period and vest in equal installments on each of the first four anniversaries of the date of grant, provided the employee remains continuously employed with the Company. The fair value of the RSUs is equal to the closing price of our common stock on the grant date.
A summary of RSUs and related information is as follows:
Restricted Stock UnitsWeighted Average
Grant Date Fair Value
Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 2020$$
Granted2,275 $201.51 
Unvested at March 31, 20212,275 $201.51 $471 
There were no RSUs granted prior to 2021. The aggregate intrinsic value of RSUs outstanding was based on our closing stock price on the last trading day of the period. As of March 31, 2021, there was $0.4 million of unrecognized stock-based compensation expense related to RSUs to be recognized over a period of 3.8 years.
Employee Stock Purchase Plan
Our employee stock purchase plan (“ESPP”) allows participating employees to purchase shares of our common stock at a discount through payroll deductions. The plan is available to all of our U.S.-based full-time employees. Participating employees may purchase common stock, on a voluntary after-tax basis, at a price equal to 85% of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. The plan provides for six-month purchase periods, beginning on January 1 and July 1 of each calendar year.
A total of 277,362 shares of common stock were initially reserved for issuance under the ESPP, and this share reserve will automatically be supplemented each January 1, commencing on January 1, 2019 and ending on and including January 1, 2028, by an amount of shares equal to the lesser of: a) 184,908 shares, b) 1% of the shares outstanding on the final day of the immediately preceding calendar year and c) such smaller number of shares as the board of directors may determine. As of March 31, 2021, 766,103 shares were available for future issuance under the ESPP. The current purchase period under the ESPP began on January 1, 2021 and ends June 30, 2021.

21

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
8. Income Taxes
At both March 31, 2021 and 2020, a valuation allowance was recorded against all deferred tax assets due to our cumulative net loss position. We recorded income tax expense of less than $0.1 million in the three months ended March 31, 2021, compared to $0 in the three months ended March 31, 2020. Income tax expense in the three months ended March 31, 2021 reflects minimal state income tax expense and an accrual for uncertain tax benefits.

As of December 31, 2020, our gross federal net operating loss carryforward of $234.9 million will expire at various dates beginning in 2028. In addition, net operating loss carryforwards for state income tax purposes of $145.6 million that include net operating losses will begin to expire in 2028. We also have gross research and development credit carryforwards of $4.0 million as of December 31, 2020, which will expire at various dates beginning in 2033.
Utilization of the net operating loss carryforwards may be subject to an annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986 and similar state provisions. We have not performed a detailed analysis to determine whether an ownership change has occurred. Such a change of ownership would limit our utilization of the net operating losses and could be triggered by subsequent sales of securities by us or our stockholders.
Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence and cumulative losses, we believe it is more likely than not that the deferred tax assets are not recognizable and will not be recognizable until we have sufficient taxable income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.
We had less than $0.1 million of gross unrecognized tax benefits as of March 31, 2021 and December 31, 2020.
We file income tax returns in the applicable jurisdictions. The 2017 to 2019 tax years remain open to examination by the major taxing authorities to which we are subject. We do not expect a significant change to our unrecognized tax benefits over the next 12 months.

9. Segment Reporting and Revenue Disaggregation
We operate our business as 1 reporting segment. An operating segment is defined as a component of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.
We sell our Inspire system to hospitals and ambulatory surgery centers in the U.S. and in select countries in Europe through a direct sales organization. Revenue by geographic region is as follows:
Three Months Ended
March 31,
20212020
United States$37,769 $19,274 
Europe2,583 2,073 
Total revenue$40,352 $21,347 
All of our long-lived assets are located in the U.S.

22

INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
10. Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because we have reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share as all of the following potentially dilutive shares were antidilutive in those periods:
March 31,
20212020
Common stock options2,750,375 2,625,789 
Restricted stock units2,275 
Employee stock purchase plan5,785 
Total2,758,435 2,625,789 

23

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this 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 ended December 31, 2020. 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" sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and this Quarterly Report on Form 10-Q, 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 and minimally invasive solutions for patients with OSA. Our proprietary Inspire system is the first and only FDA-approved neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA. We have developed a novel, closed-loop solution that continuously monitors a patient’s breathing and delivers mild hypoglossal nerve stimulation to maintain an open airway. Inspire therapy is indicated for patients with moderate to severe OSA who do not have significant central sleep apnea and do not have a complete concentric collapse of the airway at the soft palate level. In addition, patients in the U.S. must have been confirmed to fail or be unable to tolerate positive airway pressure treatments, such as CPAP, and be 18 years of age or older, though there are no similar requirements for patients in Europe.
We sell our Inspire system to hospitals and ASCs in the U.S. and in select countries in Europe through a direct sales organization. Our direct sales force engages in sales efforts and promotional activities focused on ear, nose and throat ("ENT") physicians and sleep centers. In addition, we highlight our compelling clinical data and value proposition to increase awareness and adoption amongst referring physicians. We build upon this top-down approach with strong direct-to-consumer marketing initiatives to create awareness of the benefits of our Inspire system and drive interest through patient empowerment. This outreach helps to educate thousands of patients on our Inspire therapy.
Although our sales and marketing efforts are directed at patients and physicians because they are the primary users of our technology, we consider the hospitals and ASCs where the procedure is performed to be our customers, as they are the purchasing agents of our Inspire system. Our customers are reimbursed the cost required to treat each patient through various third-party payors, such as commercial payors and government agencies. Our Inspire system is currently reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial payors, under Local Coverage Determinations for patients covered by Medicare, and under U.S. government contract for patients who are treated by the Veterans Health Administration. We have secured positive coverage policies with most large national commercial insurers and we estimate that the majority of patients who meet the FDA indication for Inspire therapy are covered by commercial insurance companies or Medicare.
The procedure performed to implant our device is currently described for billing purposes using a Category I Current Procedural Terminology (“CPT”) code (64568), which is used in conjunction with a temporary Category III CPT code (0466T). At the October 2020 AMA CPT Editorial Panel meeting, the AMA approved the creation of new Category I CPT codes to separately identify hypoglossal nerve stimulator services. A Category I code was also approved for Drug-Induced Sleep Endoscopy, which is the final procedure to determine which patients are appropriate for Inspire therapy. These new codes are scheduled to go into effect beginning January 1, 2022. With these approvals, a formal survey will be conducted to determine the Medicare reimbursement levels assigned to each code. The results of this survey are expected to be announced in July 2021 and reviewed by the Centers for Medicare and Medicaid Services (“CMS”) in conjunction with the annual Medicare Physician Fee Schedule rulemaking cycle.
24

Japan's Ministry of Health, Labour and Welfare ("MLHW") approved Inspire therapy to treat moderate to severe OSA in June 2018 and completed reimbursement review in April 2021. We expect the formal listing of Inspire therapy in the Japan National Health Insurance Payment Listing in June 2021. In August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement in Australia.
For the three months ended March 31, 2021, 93.6% of our revenue was derived in the U.S. and 6.4% was derived in Europe. No single customer accounted for more than 10% of our revenue during the three months ended March 31, 2021.
Our marketing efforts during the first half of 2020 included refocused direct-to-consumer marketing strategies, which initially included a shift from radio and TV in our larger markets that were affected by COVID-19 towards more digital and TV in smaller markets. During the second quarter of 2020, and continuing through today, we resumed radio and TV initiatives in our larger markets as the impact of COVID-19 lessened in those areas. We continue to monitor the impacts of COVID-19 in each advertising market and may again change our advertising strategy on a market-by-market basis if needed. Further, our team has leveraged virtual tools, such as the new Inspire Sleep app released during the second quarter of 2020, to continue physician training and patient education.
In early 2020, we started a call center concept, the Inspire Advisor Care Program ("ACP"). The primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs. As of May 4, 2021, approximately 280 of our U.S. centers were utilizing the ACP, up from approximately 180 centers at December 31, 2020. We plan to continue to significantly increase the number of our U.S. implanting centers using the ACP during 2021.
We rely on third-party suppliers to manufacture our Inspire system and its components. Many of these suppliers are currently single source suppliers. We seek to maintain higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. In the U.S., our products are shipped directly to our customers on a purchase order basis, primarily by a third-party vendor with a facility in Tennessee, although we do ship some products from our facility in Minnesota. Warehousing and shipping operations for our European customers are handled by a third-party vendor with a facility located in the Netherlands. Customers do not have the right to return non-defective product, nor do we place product on consignment. Our sales representatives do not maintain trunk stock.
Since our inception in 2007, we have financed our operations primarily through sales of our Inspire system, private placements of our convertible preferred securities, amounts borrowed under our credit facility and registered offerings of our common stock. In April 2020, we sold 2,300,000 shares of common stock at a public offering price of $58.00 per share and received net proceeds of approximately $124.7 million after deducting underwriting discounts, commissions, and offering expenses. 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 ended March 31, 2021, we generated revenue of $40.4 million with a gross margin of 85.2% and had a net loss of $16.2 million compared to revenue of $21.3 million with a gross margin of 84.6% and a net loss of $16.2 million for the three months ended March 31, 2020. Our accumulated deficit as of March 31, 2021 was $253.6 million.
We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions. We continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as Europe, Japan, and Australia. For example, in March 2021, we received FDA approvals for both a new Inspire physician programmer platform and an improved surgical implant procedure that eliminates one incision with a revised placement of the pressure sensing lead. In May 2021, we received CE Mark approval in Europe for the two-incision implant procedure. In April 2020, we received FDA approval for an expanded age-range for Inspire therapy to include 18 to 21 year old patients. Japan's MLHW approved Inspire therapy to treat moderate to severe OSA in
25

June 2018 and completed reimbursement review in April 2021, and in August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA .
We also continue to make significant investments building our sales and marketing organization by increasing the number of U.S. sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets throughout the U.S. and in Europe. In the three months ended March 31, 2021, we activated 47 centers bringing the total to 472 U.S. medical centers implanting Inspire therapy as of March 31, 2021. Driven by the more favorable reimbursement environment, we have increased our focus on adding ASCs. At March 31, 2021, ASCs made up over 15% of our total U.S. implanting centers, up from less than 10% at March 31, 2020. Additionally, we created 10 new territories during the three months ended March 31, 2021, bringing the total to 117 U.S. territories as of March 31, 2021.
Because of these and other factors, we expect to continue to incur net losses for the next several years, and we expect to require substantial additional funding, which may include future equity and debt financings.
Outlook
We expect the COVID-19 pandemic to continue to adversely impact our revenue due to decreases and delays in the number of Inspire therapy procedures performed and patients screened for eligibility for Inspire therapy. Beginning in the second week of March 2020, substantially all of the scheduled Inspire therapy procedures were postponed and numerous other authorized cases were unable to be scheduled. During April 2020, the widespread shutdown in elective surgical procedures continued. Beginning in May 2020, surgical volumes began increasing steadily, with most implanting centers performing procedures by October 2020. A portion of the remaining 2020 procedures performed were those rescheduled from the first half of 2020, and, as a result of which, the initial backlog of postponed cases was largely eliminated. Resurgences of COVID-19 in various U.S. and European regions have, and will likely continue to, adversely impact our procedure volumes.
In response to the spread of COVID-19 and in line with recommendations from federal and local government and healthcare agencies, we transitioned employees, except for those deemed essential to key aspects of our business, to a remote work environment. Beginning in May 2020, our corporate office re-opened with strict sanitation and physical distancing protocols, although many corporate employees continue to work remotely as a heightened precautionary measure. Additionally, our field staff continues to primarily work remotely and must adhere to applicable COVID-19 protocols when visiting hospitals and ASCs. During the period in which surgical procedures were significantly limited, we identified and implemented innovative solutions to support patients who have Inspire therapy, as well as continued to educate patients who may be struggling with their sleep apnea. Patients continue to reach out to learn more about the therapy and get connected to a healthcare provider, and we are supporting this interaction through the use of several virtual tools, including the Inspire Sleep app that was released in 2020, and other online tools. We are also continuing with our planned expansion in recruiting Territory Managers and sales support roles.
To date, we have not experienced 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.
We believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. For additional information, see “— Liquidity and Capital Resources.”

Components of Our Results of Operations
Revenue
We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S. and select countries in Europe. We recognize revenues from sales of our Inspire system when the customer obtains
26

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.
Revenue for the three months ended March 31, 2020 was negatively impacted due to the global pandemic associated with COVID-19. Specifically, in March 2020, healthcare facilities and clinics began restricting access to their clinicians, reducing patient consultations and treatments or temporarily closing their facilities. As a result, beginning in the second week of March 2020, substantially all of our then-scheduled Inspire therapy procedures were postponed, and numerous other cases with prior authorization could not be scheduled and were, therefore, also postponed. During April 2020, the widespread shutdown in elective surgical procedures continued, but surgical volumes began increasing in May and even further in June, though still remaining below pre-COVID-19 levels. During the third and fourth quarters of 2020, surgical volumes increased steadily, but remained negatively impacted by the COVID-19 pandemic, and the backlog of cases from the first half of 2020 was largely eliminated.
Revenue for the three months ended March 31, 2021 was also impacted due to COVID-19. Specifically, resurgences of COVID-19 in various U.S. and European regions have negatively impacted our procedure volumes as some healthcare facilities and clinics have shutdown elective surgical procedures.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap, and inventory obsolescence, warranty replacement costs, as well as distribution-related expenses such as logistics and shipping costs, net of shipping costs charged to customers. The overhead costs include the cost of material procurement, depreciation expense for production equipment, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel. We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.
We calculate gross margin as gross profit divided by revenue. Our gross margin has been and we expect it will continue to be affected by a variety of factors, including manufacturing costs, the average selling price of our Inspire system, the implementation of cost-reduction strategies, inventory obsolescence costs, which generally occur when new generations of our Inspire system are introduced, and to a lesser extent the sales mix between the U.S. and Europe as our average selling price in the U.S. tends to be higher than in Europe. Our gross margin may increase slightly over the long term to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs. However, our gross margin may fluctuate from quarter to quarter due to seasonality.
Research and Development Expenses
Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services and other costs associated with the next generation versions of the Inspire system. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Additionally, these expenses include clinical trial management, payments to clinical investigators, data management and travel expenses for our various clinical trials.
We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and continue to expand our clinical studies to further expand positive coverage policies from private commercial payors in the U.S. and enter into new markets including additional European countries, Japan, and Australia. 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.
27

Selling, General and Administrative Expenses
Selling, general and administrative 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 selling, general and administrative 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 selling, general and administrative expenses to continue to increase as we expand our commercial infrastructure to both drive and support our planned growth in revenue and as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance personnel and information technology services. Additionally, we anticipate an increase in our stock-based compensation expense with grants of restricted stock units, stock options, and shares of our common stock purchased pursuant to our employee stock purchase plan.
Other Expense (Income), Net
Other expense (income), net consists primarily of interest expense payable under our credit facility and interest income.
Seasonality
Historically, we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. In the U.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. Historically, in the first quarter of each year in Germany, we have experienced reduced demand for our Inspire therapy 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. Beginning January 1, 2021, Inspire therapy became fully integrated into the German hospital reimbursement system (“G-DRG”), and we therefore may experience less seasonal fluctuations in Germany.

28

Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
Three Months Ended
March 31,
20212020$ Change% Change
(in thousands, except percentages)
Revenue$40,352 $21,347 $19,005 89.0 %
Cost of goods sold5,981 3,297 2,684 81.4 %
Gross profit34,371 18,050 16,321 90.4 %
Gross margin85.2%84.6%
Operating expenses:
Research and development8,154 5,438 2,716 49.9 %
Selling, general and administrative41,906 29,052 12,854 44.2 %
Total operating expenses50,060 34,490 15,570 45.1 %
Operating loss(15,689)(16,440)751 (4.6)%
Other expense (income), net504 (195)699 (358.5)%
Loss before income taxes(16,193)(16,245)52 (0.3)%
Income taxes23 — 23 n/a
Net loss$(16,216)$(16,245)$29 (0.2)%

Revenue
Revenue increased $19.1 million, or 89.0%, to $40.4 million for the three months ended March 31, 2021 compared to $21.3 million for the three months ended March 31, 2020. The increase was attributable to a $18.5 million increase in sales of our Inspire system in the U.S. and an increase of $0.5 million in Europe, primarily in Germany. Since March 2020, our revenue growth in the U.S. and Europe has been impacted by the COVID-19 pandemic, which disrupted our ability to access our clinician customers and their patients. Specifically, we saw healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations and treatments, or closing temporarily due to COVID-19. As a result, beginning in the second week of March 2020, substantially all of our Inspire therapy procedures were postponed and numerous other cases, which had received prior authorization, were not able to be scheduled and, therefore were also postponed. During the first quarter of 2021, resurgences of COVID-19 in various U.S. and European regions disrupted our ability to access our clinician customers and their patients. Specifically, we saw some healthcare facilities and clinics restricting access to their clinicians, reducing patient consultations and treatments, or closing temporarily due to COVID-19.
Revenue information by region is summarized as follows:
Three Months Ended March 31,
20212020Change
Amount% of RevenueAmount% of Revenue$%
(in thousands, except percentages)
United States$37,769 93.6 %$19,274 90.3 %$18,495 96.0 %
Europe2,583 6.4 %2,073 9.7 %510 24.6 %
Total revenue$40,352 100.0 %$21,347 100.0 %$19,005 89.0 %
29

Revenue generated in the U.S. was $37.8 million for the three months ended March 31, 2021, an increase of $18.5 million, or 96.0%, compared to the three months ended March 31, 2020. Revenue growth in the U.S. was due to increased market penetration in existing territories, the expansion into new territories, increased physician and patient awareness of our Inspire system, and additional positive coverage policies. As noted above, U.S. revenue in both periods was negatively impacted by the COVID-19 pandemic.
Revenue generated in Europe was $2.6 million in the three months ended March 31, 2021, an increase of $0.5 million, or 24.6%, compared to the three months ended March 31, 2020. Revenue growth in Europe was primarily due to increased market penetration in existing territories, the expansion of our European sales representatives into new territories, and increased physician and patient awareness of our Inspire system. The remainder of our revenue from Europe increase was due to favorable exchange rates. The overall growth was partially offset by impacts from the COVID-19 pandemic.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $2.7 million, or 81.4%, to $6.0 million for the three months ended March 31, 2021 compared to $3.3 million for the three months ended March 31, 2020. The increase was primarily due to product costs associated with higher sales volume of our Inspire system.
Gross margin increased to 85.2% for the three months ended March 31, 2021 compared to 84.6% for the three months ended March 31, 2020. Gross margin for the three months ended March 31, 2021 was higher primarily due to manufacturing efficiencies and increased sales volume.
Research and Development Expenses
Research and development expenses increased $2.8 million, or 49.9%, to $8.2 million for the three months ended March 31, 2021 compared to $5.4 million for the three months ended March 31, 2020. This change was primarily due to an increase of $1.3 million for ongoing research and development costs, including ongoing development of the next generation Inspire system, our Bluetooth remote, and the Inspire Cloud, and $1.6 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, partially offset by a decrease of $0.1 million in regulatory submissions and clinical studies expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $12.8 million, or 44.2%, to $41.9 million for the three months ended March 31, 2021 compared to $29.1 million for the three months ended March 31, 2020. The primary driver of this increase was an increase of $9.6 million in compensation, including salaries, commissions, and stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount, partially offset by a decrease of $0.7 million of travel expenses not incurred due to the COVID-19 pandemic. In addition, marketing expenses increased $3.2 million, primarily consisting of direct-to-consumer initiatives, including new TV advertisements which began airing in January 2021 and the expansion of our Advisor Care Program call center. Other drivers of the increase to selling, general and administrative expenses included an increase of $0.7 million due to consulting fees, insurance costs, and information technology supplies and equipment.
Other Expense (Income), Net
Other expense (income), net changed by $0.7 million, or 358.5%, to $0.5 million of expense, net for the three months ended March 31, 2021 compared to $0.2 million of income for the three months ended March 31, 2020. This change was primarily due to a decrease in interest income of $0.6 million earned on our cash, cash equivalents and investments balances due to lower interest rates and a $0.1 million decrease in gain on investments.
30

Income Taxes
We recorded a provision for incomes taxes of less than $0.1 million for the three months ended March 31, 2021 compared to $0.0 million for the three months ended March 31, 2020. This increase was due to state income tax expense and an accrual for uncertain tax benefits.

Liquidity and Capital Resources
As of March 31, 2021, we had cash, cash equivalents and investments of $226.1 million and an accumulated deficit of $253.6 million, compared to cash, cash equivalents and investments of $234.4 million and an accumulated deficit of $237.3 million as of December 31, 2020.
Our sources of capital have historically been from private placements of our convertible preferred securities, sales of our Inspire system, borrowings under credit facilities and registered offerings of our common stock. In April 2020, we completed a follow-on offering that included our offer and sale of 2,300,000 shares of common stock at a public offering price of $58.00 per share. We received net proceeds of approximately $124.7 million after deducting underwriting discounts, commissions, and offering expenses.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition. However, we believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. We may also seek liquidity through additional securities offerings or through borrowings under a new credit facility. We cannot ensure investors that we will be able to obtain such financing on commercially reasonable terms if at all.
Cash Flows
The following table presents a summary of our cash flow for the periods indicated:
Three Months Ended
March 31,
20212020
(in thousands)
Net cash provided by (used in):
Operating activities$(10,401)$(14,775)
Investing activities(1,321)67,241 
Financing activities3,550 787 
Effect of exchange rate on cash
Net (decrease) increase in cash and cash equivalents$(8,170)$53,257 
Operating Activities
The net cash used in operating activities was $10.4 million for the three months ended March 31, 2021 and consisted of a net loss of $16.2 million, an increase in net operating assets of $0.7 million and non-cash charges of $6.6 million. The non-cash charges consisted of stock-based compensation, depreciation and amortization, non-cash lease expense, stock issued for services rendered, accretion of the debt discount, and amortization of the investment premium, offset by other, net. Operating assets includes inventories, which increased due to manufacturing of systems inventory to meet increased sales, accounts receivable which decreased due to lower sales in the quarter ended March 31, 2021 compared to the quarter ended December 31, 2020, and prepaid expenses and other current assets which decreased primarily due to prepaid insurance. Operating liabilities includes accrued expenses, which decreased primarily due to the payment of accrued compensation as annual
31

bonuses were paid, 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, including compensation and personnel-related costs.
The net cash used in operating activities was $14.8 million for the three months ended March 31, 2020 and consisted of a net loss of $16.2 million, an increase in net operating assets of $1.7 million and non-cash charges of $3.1 million. The non-cash charges consisted of stock-based compensation, non-cash lease expense, depreciation and amortization, stock issued for services rendered, and accretion of the debt discount, offset by the non-cash income related to the accretion of the investment discount, and other, net. Operating assets includes inventories, which increased due to continued manufacturing of systems inventory while sales decreased due to the COVID-19 pandemic. Operating assets also include accounts receivable and prepaid expenses and other current assets which decreased due to decreased sales in March 2020 due to the COVID-19 pandemic. Operating liabilities, which includes accrued expenses, which decreased primarily due to the payment of accrued compensation as annual bonuses were paid 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, including compensation and personnel-related costs.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2021 was $1.3 million and consisted entirely of purchases of property and equipment.
Net cash provided by investing activities for the three months ended March 31, 2020 was $67.2 million and consisted primarily of proceeds from sales or maturities of investments of $82.4 million, partially offset by purchases of investments of $14.9 million and purchases of property and equipment of $0.3 million.
Financing Activities
Net cash provided by financing activities was $3.6 million for the three months ended March 31, 2021 and consisted entirely of proceeds from the exercise of stock options.
Net cash provided by financing activities was $0.8 million for the three months ended March 31, 2020 and consisted entirely of proceeds from the exercise of stock options.
Indebtedness
In August 2015, we entered into a loan and security agreement with Oxford Finance, as lender and collateral agent. The loan and security agreement initially provided for a term A loan facility in the amount of $15.5 million, which was fully funded on the closing date, and a term B loan facility in an amount of at least $3.5 million but no more than $10.0 million, to be available in the future subject to our achievement of certain revenue milestones. We refer to our term A loan facility and our term loan B facility together as our credit facility. In February 2017, we amended the loan and security agreement to, among other things, increase borrowings under the term A loan facility by $1.0 million, increase the minimum amount of the term B loan facility to $5.0 million and reduce the maximum amount of the term B loan facility to $9.0 million. In February 2018, we borrowed an additional $8.0 million under the term B loan facility portion of the credit facility. As of March 31, 2021, we had $24.5 million of outstanding borrowings under our credit facility. No borrowings remain available under this credit facility.
In March 2019, we amended the loan and security agreement. Following such amendment, outstanding borrowings under the credit facility bear interest at an annual rate equal to the sum of (i) the greater of (A) the 30 day U.S. LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (B) 2.50%, plus (ii) 5.10%; provided, however, under no circumstances will the basic rate be less than 7.60%. We are required to make monthly payments of interest only through April 1, 2022. Following the interest-only period, we will be required to make monthly payments of interest and principal in 24 consecutive monthly installments. Outstanding borrowings under the credit facility mature on March 1, 2024. On the maturity date, in addition to our regular monthly payments of principal and accrued interest, we will be required to
32

make a payment of 3.50% of the total amount borrowed under the credit facility, which we refer to as the Final Payment, unless we have already made such payment in connection with an acceleration or prepayment of borrowings under the credit facility.
Borrowings under the facility are pre-payable at our option in whole, but not in part, together with all accrued and unpaid interest thereon and, if not previously made, the Final Payment (as defined in the loan and security agreement), subject to a prepayment fee of 1.0%. We are also required to prepay the amounts outstanding under the credit facility upon the occurrence of certain customary events of default, as well as the occurrence of certain material adverse events. The credit facility also includes certain customary affirmative and negative covenants, but does not include any financial covenants. The credit facility is secured by substantially all of our personal property other than our intellectual property. We were in compliance with all covenants under the credit facility as of March 31, 2021.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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 December 31, 2020.
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 ended December 31, 2020. 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 months ended March 31, 2021.
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that such standards will not have a significant impact on our financial statements or do not otherwise apply to our operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The risk associated with fluctuating interest rates is primarily limited to our cash equivalents which are carried at quoted market prices and our short-term investments. We do not currently use or plan to use financial derivatives in our investment portfolio. The interest rate for our outstanding debt is variable. A hypothetical 1% change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements.
Credit Risk, Foreign Currency Risk, and Inflation Risk
For market risks related to changes in credit, foreign currency and inflation, reference is made to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2020. Our exposure to these risks has not materially changed from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
33


Item 4.    Controls and Procedures.
Evaluation of disclosure controls and procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.
From time to time we may be involved in claims and proceedings arising in the course of our business. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. We are not party to any material legal proceedings.

Item 1A.    Risk Factors.
For a discussion of our potential risks and uncertainties, see the information in Part I, "Part I, Item IA. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
None.

Item 3.    Defaults Upon Senior Securities.
None.

34

Item 4.    Mine Safety Disclosures.
Not applicable.

Item 5.    Other Information.
None.
35

Item 6.    Exhibits.

Exhibit
Number
DescriptionFormFile No.ExhibitFiling
Date
Filed/
Furnished
Herewith
3.1 8-K001-384683.15/7/2018
3.2 8-K001-384683.25/7/2018
31.1 *
31.2 *
32.1 **
32.2 **
101.INSInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCHInline XBRL Taxonomy Extension Schema Document*
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document*
101.LABInline XBRL Taxonomy Extension Label Linkbase Document*
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document*
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*
_______________________________________________________________________________
*    Filed herewith.
**    Furnished herewith.

36

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Inspire Medical Systems, Inc.
Date:May 4, 2021By:/s/ TIMOTHY P. HERBERT
Timothy P. Herbert
President, Chief Executive Officer and Director
(principal executive officer)
Date:May 4, 2021By:/s/ RICHARD J. BUCHHOLZ
Richard J. Buchholz
Chief Financial Officer
(principal financial officer and principal accounting officer)

37