What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-25 · 152 added, 217 removed, 613 unchanged (38% of the section changed)

4 unchanged sentences

We have audited the accompanying balance sheets of Inspire Medical Systems, Inc.

(the Company) as of December 31, 2019 and 2018, the related statements of operations and comprehensive loss, stockholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements").

(the Company) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Inventory valuation reserves

1 unchanged sentence

As explained in Note 2 to the financial statements, the determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions.

Auditing management’s estimate for excess and obsolete inventory involved subjective auditor judgment because the estimates and judgments used to calculate the inventory reserve, especially considering the timing of the introduction of new products and current market conditions.

Auditing management’s estimate for excess and obsolete inventory involved subjective auditor judgment because of the assumptions and judgments used to calculate the inventory valuation reserve, including consideration of the timing of the introduction of new products and current market conditions.

In particular, the excess and obsolete inventory calculations are sensitive to significant assumptions, including forecasted customer demand, technological and/or market obsolescence, and possible alternative uses.

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This included controls over the Company’s review of the significant assumptions underlying the reserve estimate.

To test the adequacy of the Company's inventory valuation reserve, we performed substantive audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the estimation calculations and evaluating significant assumptions (e.g., forecasted customer demand, technological and/or market obsolescence, and possible alternative uses) and the underlying data used in management's excess and obsolete inventory valuation assessment.

We evaluated management’s ability to accurately estimate the excess and obsolete inventory by comparing actual write-off activity in recent years to the inventory valuation reserve estimated by the Company in prior years.

To test the adequacy of the Company's inventory valuation reserve, we performed audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the estimation calculations and evaluating significant assumptions, specifically forecasted customer demand, technological and/or market obsolescence, and possible alternative uses.

We evaluated management’s ability to accurately estimate the amount of excess and obsolete inventory by comparing actual inventory write-off activity in recent years to management’s prior estimates of the inventory valuation reserve.

We also audited management’s calculation of the inventory valuation reserve by testing the mathematical accuracy of the Company’s reserve calculation.

9 unchanged sentences

Investments, short-term 43,844 126,605

Accounts receivable, net 13,131 6,667

Accounts receivable, net of allowance for credit losses of $ 42 and $ 48 , respectively

25,063 13,131

Inventories 8,479 5,834

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Operating lease right-of-use asset 5,805 915

Other non-current asset 381 —

Other non-current assets 204 381

Total assets $ 281,189 $ 181,253

5 unchanged sentences

Notes payable 24,746 24,522

Operating lease liability, non-current portion 5,886 —

Other non-current liability 85 40

Total non-current liabilities 30,717 24,562

Total liabilities 51,442 41,418

Stockholders' equity

Preferred Stock, $ 0.001 par value, 10,000,000 shares authorized;

no shares issued and outstanding

Common Stock, $ 0.001 par value, 200,000,000 shares authorized at December 31, 2020 and 2019;

1 unchanged sentence

Additional paid-in capital 467,038 319,865

Accumulated other comprehensive income (loss) 102 ( 52 )

Accumulated other comprehensive income 29 102

Accumulated deficit ( 237,347 ) ( 180,156 )

15 unchanged sentences

Operating loss ( 56,208 ) ( 34,897 ) ( 20,378 )

Other (income) expense:

Other expense (income):

Interest income ( 1,092 ) ( 3,801 ) ( 1,870 )

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Other (income) expense, net ( 145 ) ( 12 ) 16

Total other (income) expense ( 1,694 ) 1,450 1,508

Total other expense (income) 880 ( 1,694 ) 1,450

Loss before income taxes ( 57,088 ) ( 33,203 ) ( 21,828 )

2 unchanged sentences

Other comprehensive loss:

Unrealized gain (loss) on investments 154 ( 52 ) —

Unrealized (loss) gain on investments ( 73 ) 154 ( 52 )

Total comprehensive loss $ ( 57,276 ) $ ( 33,089 ) $ ( 21,880 )

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INSPIRE MEDICAL SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY

STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

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Comprehensive

Loss (Income)

Stockholders'

Balance at December 31, 2017 1,272,360 $ 1 $ 7,305 76,235,050 $ 119,106 $ — $ ( 125,085 ) $ 1,327

Stock options exercised 127,122 — 235 — — — — 235

Sale of Series F convertible preferred stock, net issuance costs of $32 — — — 18,248,177 24,968 — — 24,968

Stock-based compensation expense — — 243 — — — — 243

Net loss — — — — — — ( 17,511 ) ( 17,511 )

Balance at December 31, 2017 1,272,360 1 7,305 76,235,050 119,106 — ( 125,085 ) 1,327

Stock options and warrants exercised 377,820 — 558 — — — — 558

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Balance at December 31, 2019 24,107,350 24 319,865 — — 102 ( 180,156 ) 139,835

Stock options exercised 624,315 — 7,050 — — — — 7,050

Issuance of common stock 3,378 — 294 — — — — 294

Sale of common stock from follow-on public offering, net of offering expenses 2,300,000 3 124,651 — — — — 124,654

Issuance of common stock for employee stock purchase plan 34,233 — 2,361 — — — — 2,361

Stock-based compensation expense — — 12,817 — — — — 12,817

Other comprehensive loss — — — — — ( 73 ) — ( 73 )

Adoption of ASU 2016-13 , Financial Instruments - Credit Losses

— — — — — — 12 12

Net loss — — — — — — ( 57,203 ) ( 57,203 )

Balance at December 31, 2020 27,069,276 $ 27 $ 467,038 — $ — $ 29 $ ( 237,347 ) $ 229,747

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

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Proceeds from sales or maturities of investments 141,803 137,254 32,342

Net cash used in investing activities ( 43,559 ) ( 83,389 ) ( 7,600 )

Net cash provided by (used in) investing activities 86,627 ( 43,559 ) ( 83,389 )

Financing activities

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Proceeds from the issuance of common stock from employee stock purchase plan 2,361 1,355 —

Proceeds from sale of preferred stock — — 24,968

Net cash provided by financing activities 134,065 1,964 190,383

Effect of exchange rate on cash 11 13 33

(Decrease) increase in cash and cash equivalents ( 74,428 ) 88,333 2,270

Increase (decrease) in cash and cash equivalents 167,658 ( 74,428 ) 88,333

Cash and cash equivalents at beginning of year 22,860 97,288 8,955

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Cash paid for interest $ 1,893 $ 2,033 $ 2,019

Purchases of property and equipment in accounts payable 816 — —

Issuance of preferred stock warrants — — 103

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In June 2018, Japan's Ministry of Health, Labour and Welfare approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement coverage in Japan.

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.

Summary of Significant Accounting Policies

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Initial Public Offering

On May 7, 2018, we completed our IPO by issuing 7,762,500 shares of common stock, at an offering price of $ 16.00 per share, for net proceeds of approximately $ 112.0 million after deducting underwriting discounts and commissions and offering expenses payable by us.

In connection with the IPO, our outstanding shares of convertible preferred stock were automatically converted into an aggregate of 12,111,710 shares of common stock, and our outstanding warrants to purchase shares of convertible preferred stock were automatically converted into warrants to purchase up to an aggregate of 100,558 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock warrant liability of $ 0.9 million to additional paid-in capital ("APIC").

Follow-On Public Offering

Follow-On Public Offerings

On December 11, 2018, we completed a follow-on offering that included our offer and sale of 1,875,000 shares of common stock and the selling stockholders’ offer and sale of 1,000,000 shares of common stock, at a public offering price of $ 40.00 per share.

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(Table amounts in thousands, except share and per share amounts)

discounts and commissions and offering expenses.

discounts, commissions, and offering expenses.

We received no proceeds from the sale of our common stock by the selling stockholders.

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

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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 doubtful accounts, inventory reserves, warranty reserves, and the valuations of our common stock prior to our IPO, stock-based awards, and certain of our previously outstanding preferred stock warrants.

We use significant judgment when making estimates related to the allowance for credit losses, inventory reserves, warranty reserves, the valuations of our common stock prior to our IPO, 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.

JOBS Act Accounting Election

Prior to December 31, 2019, we were an emerging growth company under the JOBS Act, and as a result we were eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies.

We elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.

However, as we satisfy the definition of a “large accelerated filer” under the definition of the Securities Exchange Act of 1934, as amended, we no longer qualify as an emerging growth company as of December 31, 2019.

Therefore we no longer are able to take advantage of the extended transition period for adopting new or revised accounting standards.

Cash and Cash Equivalents

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Assets and liabilities of foreign operations are remeasured at period-end exchange rates with the impacts of foreign currency remeasurement recognized in other (income) expense, net in the statements of operations and comprehensive loss.

At December 31, 2019 and 2018, our short-term investments consisted of commercial paper, corporate bonds, asset-backed securities, and U.S.

government securities which are classified as available-for-sale and had maturities less than one year.

Our long-term investments consisted of corporate bonds.

Investments are reported at their estimated fair market value which approximates cost.

Any unrealized gains and losses are reported as a separate component of accumulated other comprehensive income (loss).

We had $ 0.1 million of unrecognized income and $ 0.1 million of unrecognized loss in accumulated other comprehensive income (loss) balance at December 31, 2019 and 2018, respectively.

Any realized gains and losses are calculated on the specific identification method and reported net in other (income) expense.

For both the years ended December 31, 2019 and 2018, we recognized less than $ 0.1 million of gains, net.

We review our investment portfolio periodically to assess for other-than-temporary impairment.

Should we determine that any unrealized losses on the investments are other-than-temporary, the amount of that impairment to

At December 31, 2020 and 2019, our short-term investments consisted of commercial paper, corporate bonds, and U.S.

government securities, and at December 31, 2019 our short-term investments also included asset-backed securities, all of which are classified as available-for-sale and had maturities less than one year.

At December 31, 2019, our long-term investments consisted of corporate bonds.

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 $0.0 million and $ 0.1 million of unrecognized income in our accumulated other comprehensive income balance at December 31, 2020 and 2019, respectively.

Any realized gains and losses are calculated on the specific identification method and reported net in other expense (income).

For both the years ended December 31, 2020 and 2019, we recognized approximately $ 0.1 million of gains, net.

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.

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 two years.

government securities, we use a discounted cash flow approach to calculate expected credit losses using estimated default rates based upon

INSPIRE MEDICAL SYSTEMS, INC.

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(Table amounts in thousands, except share and per share amounts)

be recognized in earnings will depend on whether we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss.

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 December 31, 2020.

Fair Value of Financial Instruments

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Consists of short-term, securitized investments backed by pools of credit card receivables.

These are included as a Level 2 measurement in the tables below.

These are included as a Level 2 measurement in the table below.

government securities:

Consists of U.S.

government Treasury bills with original maturities of less than one year.

These are included as a Level 1 measurement in the table below.

government Treasury bills with original maturities of less than two years.

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 December 31, 2020 and 2019.

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Corporate bonds 6,540 — 6,540 —

Asset-backed securities 8,100 — 8,100 —

government securities 24,029 24,029 — —

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Total cash equivalents and investments $ 151,310 $ 96,511 $ 54,799 $ —

There were no transfers between Level 1, Level 2, or Level 3 during the years ended December 31, 2019 and 2018.

The recurring Level 3 fair value measurements of our preferred stock warrant liabilities used the Black-Scholes option pricing model and value of the respective class of our convertible preferred stock (see Note 7), which was unobservable.

All other assumptions included in the model are observable Level 1 inputs.

The following table provides a reconciliation of the beginning and ending balances of our preferred stock warrant liabilities:

Year Ended December 31,

2019 2018 2017

Balance at beginning of period $ — $ 157 $ 53

Initial fair value of preferred stock warrants issued — 103 4

Reclassified to equity — ( 855 ) —

Change in fair value of preferred stock warrants — 595 100

Balance at end of period $ — $ — $ 157

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

Changes in the fair value of the preferred stock warrant liability were recorded in other expenses on the statements of operations and comprehensive loss.

In connection with the closing of the IPO in May 2018, warrants to purchase shares of preferred stock automatically converted into warrants to purchase shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liability to APIC.

There were no transfers between levels during the years ended December 31, 2020 and 2019.

Concentration of Credit Risk

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We generally do not require collateral, and losses on accounts receivable have historically been within management's expectations.

Accounts Receivable and Allowance for Doubtful Accounts

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

Accounts Receivable and Allowance for Expected Credit Losses

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.

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Collateral or any other security to support payment of these receivables generally is not required.

We record an allowance for doubtful accounts for accounts receivable deemed uncollectible.

We evaluate the collectability of our accounts receivable based on known collection risks and historical experience.

In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filings or substantial downgrading of credit ratings), we record a specific allowance for bad debts against amounts due to reduce the carrying amount of accounts receivable to the amount we reasonably believe will be collected.

Specific accounts receivable are written-off once a determination is made that the account is uncollectible.

The allowance for doubtful accounts was less than $ 0.1 million as of each of December 31, 2019 and 2018.

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 are valued at the lower of cost or net realizable value, computed on a first-in, first-out basis, and consisted of the following:

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We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value.

The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions The reserve for excess and obsolete inventory was less than $ 0.1 million and $ 0.8 million as of December 31, 2019 and 2018, respectively.

The reserve for excess and obsolete inventory was $ 0.1 million as of both December 31, 2020 and 2019.

INSPIRE MEDICAL SYSTEMS, INC.

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Our cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors.

We did not record any material impairment charges on long-lived assets during the years ended December 31, 2019 and 2018.

We did not record any material impairment charges on long-lived assets during the years ended December 31, 2020, 2019, or 2018.

Accrued Expenses

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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, as well as distribution-related expenses such as logistics and shipping costs, net of costs charged to customers.

The overhead costs include the cost of material procurement, depreciation expense for production equipment, warranty replacement costs, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel.

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, consulting services, and other costs associated with products and technologies in development.

These expenses include employee compensation, stock-based compensation, supplies, travel, and facility costs.

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.

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Advertising expenses were $ 26.4 million, $ 18.0 million, and $ 9.3 million during the years ended December 31, 2020, 2019, and 2018, respectively.

Operating leases are included in operating lease right-of-use ("ROU") assets and current operating lease liabilities in our balance sheets.

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.

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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.

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

INSPIRE MEDICAL SYSTEMS, INC.

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(Table amounts in thousands, except share and per share amounts)

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 the accrual for uncertain tax benefits.

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.

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 on investments classified as available-for-sale.

Accumulated other comprehensive income (loss) is presented in the accompanying balance sheets as a component of stockholders' equity.

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

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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 for those periods as all potentially dilutive shares consisting of convertible preferred stock, stock options and warrants were antidilutive in those periods.

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 for those periods as all potentially dilutive shares consisting of stock options and warrants were antidilutive in those periods.

Purchase Commitments

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Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"), which supersedes the existing guidance for lease accounting, Leases (Topic 840).

ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases with lease terms greater than 12 months.

Lessor accounting remains largely unchanged.

The original guidance required application on a modified retrospective basis with the earliest period presented in the financial statements.

In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842 , which includes an option to not restate comparative periods in transition and instead to elect to use the effective date of ASC 842, Leases , as the date of initial application of transition.

We used the effective date of this standard as the date of initial application, which is January 1, 2019, with no retrospective adjustments to prior comparative periods.

For leases that commenced before the effective date of ASC 842, we elected the transition package of three practical expedients permitted within ASC 842, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and initial direct costs.

Until December 31, 2019, we were an emerging growth company as defined by the JOBS Act and previously disclosed that these amendments would become effective for us for interim and annual periods beginning after December 15, 2019.

However, this ASU instead became effective for us in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as we no longer qualify as an emerging growth company as of December 31, 2019.

The adoption of this standard resulted in an increase of $ 0.9 million in the assets and $ 0.8 million in the liabilities recorded on our December 31, 2019 Balance Sheet.

The adoption of this standard did not have a material impact on the Statements of Operations and Comprehensive Loss nor the Statements of Cash Flows.

See Note 4 for further discussion of the adoption of ASC 842 and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), to require the measurement of expected credit losses for financial instruments held at the reporting date to be based on historical experience, current conditions, and reasonable forecasts.

The ASU will become effective for us for interim and annual periods beginning January 1, 2020, and we will expand our financial statement disclosures in order to

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

comply with the guidance.

We have determined that the adoption of ASU 2016-13 will not have a material impact on our results of operations, cash flows, or financial position.

We have reviewed and considered all other 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.

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.

Our investments are classified as available-for-sale and consist of the following:

4 unchanged sentences

Corporate bonds 6,543 — ( 3 ) 6,540

Asset-backed securities 8,097 5 ( 1 ) 8,101

government securities 23,997 32 — 24,029

Short-term investments $ 43,815 $ 32 $ ( 3 ) $ 43,844

Corporate bonds 6,258 18 — 6,276

Long-term investments $ 6,258 $ 18 $ — $ 6,276

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

December 31, 2019

6 unchanged sentences

Short-term investments 126,522 86 ( 3 ) 126,605

Corporate bonds 6,258 18 — 6,276

Long-term investments $ 6,258 $ 18 $ — $ 6,276

As of December 31, 2020 and 2019, we had no investments with a contractual maturity of greater than two years.

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 at December 31, 2019.

We do not consider those investments to be other-than-temporarily impaired as of December 31, 2020.

At the end of each reporting period, 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.

Adoption of ASC Topic 842, Leases

On December 31, 2019, Inspire adopted the new accounting standard ASC 842, Leases , which requires lessees to recognize a lease liability and a ROU asset for all leases with lease terms greater than 12 months.

On December 31, 2019, we adopted the new accounting standard ASC 842, Leases , which requires lessees to recognize a lease liability and a ROU asset for all leases with lease terms greater than 12 months.

We used the effective date of this standard as the date of initial application, with no retrospective adjustments to prior comparative periods.

We were an emerging growth company as defined by the JOBS Act until December 31, 2019

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

and therefore this guidance became effective for us in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as we no longer qualify as an emerging growth company as of that date.

The impact of the adoption of ASC 842 on our balance sheet as of January 1, 2019 was as follows:

December 31, 2018 Adjustments due to the adoption of ASC 842 January 1, 2019

Prepaid expenses and other assets (1)

$ 1,734 $ ( 8 ) $ 1,726

Total current assets 199,278 ( 8 ) 199,270

Operating lease right-of-use assets (1)

Total assets $ 200,080 $ 14 $ 200,094

Liabilities and Stockholders' Equity

Current liabilities:

Accrued expenses (2)

$ 7,726 $ 14 $ 7,740

Total current liabilities 11,155 14 11,169

Total liabilities 36,081 14 36,095

Total liabilities and stockholders' equity $ 200,080 $ 14 $ 200,094

(1) Upon the adoption of ASC 842, prepaid rent is included in the operating lease ROU assets

(2) Upon the adoption of ASC 842, deferred rent is included in the operating lease liabilities which is presented within accrued expenses on our balance sheets

We were an emerging growth company as defined by the JOBS Act until December 31, 2019 and therefore this guidance became effective for us on the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Leases Overview

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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 expires November 30, 2020.

We recognized an additional ROU asset and lease liability of $ 1.8 million each on January 15, 2019.

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 commences on December 1, 2020 and expires May 31, 2028 with an option to renew for one additional period of five years at the then-prevailing market rate.

The exercise of the lease renewal option is at our sole discretion and is not expected to be included in the lease term for the calculation of the ROU asset and lease liability when the lease commences on December 1, 2020 as it is not reasonably certain of exercise.

Beginning December 1, 2020, in addition to base rent, we will also pay our proportionate share of the operating expenses, as defined in the lease.

The initial lease term commenced on December 1, 2020 and expires May 31, 2028 with an option to renew for one 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 will be made monthly, and will be adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes and insurance.

In conjunction with this new lease, the landlord agreed to provide Inspire with 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 forward-starting lease is $ 7.4 million.

INSPIRE MEDICAL SYSTEMS, INC.

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conjunction with this lease, the landlord agreed to provide Inspire with 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 is $ 7.4 million.

The following table presents the lease balances within the balance sheets:

Leases Classification December 31, 2019

Operating Operating lease right-of-use asset $ 915

Operating Accrued liabilities $ 828

The cost components of our operating lease were as follows for the year ended December 31, 2019:

Right-of-use assets:

Operating lease right-of-use asset $ 5,805 $ 915

Operating lease liabilities:

Accrued liabilities $ — $ 828

Operating lease liability, non-current portion 5,886 —

Total operating lease liabilities $ 5,886 $ 828

The cost components of our operating leases were as follows:

Year Ended December 31,

Operating lease cost $ 1,035 $ 1,021

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Total lease cost $ 1,107 $ 1,050

Variable lease costs consist primarily of taxes, insurance and common area maintenance costs on our prior corporate office lease, which expired March 31, 2019.

Variable lease costs consist primarily of taxes, insurance and common area maintenance costs on our current corporate office lease, which commenced December 1, 2020, and our prior corporate office lease, which expired March 31, 2019.

Prior to January 1, 2019, we recorded operating lease rent expense under ASC 840 on a straight-line basis over the period of the lease.

Rent expense was $ 0.2 million during both of the years ended December 31, 2018 and 2017.

Rent expense was $ 0.2 million for the year ended December 31, 2018.

Maturities of our lease liability for our operating lease are as follows as of December 31, 2020:

Thereafter 3,152

Total undiscounted lease payments 7,423

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Present value of lease liability $ 5,886

(1) Excludes $ 7,425 of legally binding minimum lease payments for leases signed but not yet commenced

As of December 31, 2020, the remaining lease term was 7.4 years and the discount rate was 5.2 %.

For the year ended December 31, 2019, the operating cash outflows from our operating leases were $ 1.0 million.

Long-Term Debt

Credit Facility

In August 2015, we entered into a loan and security agreement, which provided for a term A loan facility in the amount of $ 15.5 million, the proceeds of which were used to refinance the $ 12.0 million of borrowings outstanding under our original credit facility, 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.

Amounts outstanding under the credit facility bore interest at a fixed rate of 7.95 % per annum.

In February 2017, we amended the loan and security agreement.

Under the loan and security agreement, as amended, and subject to the limitation noted below, amounts outstanding under the credit facility bear interest at a floating interest rate equal to the greater of 7.95 % or LIBOR plus 6.9 % per annum.

Upon execution of the amendment, we borrowed an additional $ 1.0 million under the term A loan portion of the credit facility, receiving net proceeds of $ 0.5 million, net of expenses, 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.

In connection with the execution of the amendment to the loan and security agreement, we issued 29,197 ten -year warrants to purchase Series F preferred shares of stock at an exercise price of $ 1.37 per share.

In February 2018, we borrowed an additional $ 8.0 million under the term B loan facility portion of the credit facility.

After receipt of the $ 8.0 million, we had a total of $ 24.5 million outstanding under the credit facility, which bore

The operating cash outflows from our operating leases were $ 1.0 million for each of the years ended December 31, 2020 and 2019.

INSPIRE MEDICAL SYSTEMS, INC.

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interest at a floating interest rate equal to the greater of 7.95 % or LIBOR plus 6.9 % per annum.

All amounts borrowed under the credit facility were interest-only through March 1, 2020, after which monthly payments of principal and interest were due through February 1, 2022.

In connection with this borrowing, we issued 233,577 ten -year warrants to purchase Series F preferred shares of stock at an exercise price of $ 1.37 per share.

Long-Term Debt

Credit Facility

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.

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.

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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 3.00 % if such borrowings are prepaid prior to March 27, 2020, 2.00 % on or after March 27, 2020 but prior to March 27, 2021, and 1.00 % if such borrowings are prepaid on or after March 27, 2021.

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 2.00 % if such borrowings are prepaid prior to March 27, 2021 and 1.00 % if such borrowings are prepaid on or after March 27, 2021.

The credit facility includes affirmative and restrictive covenants and events of default, including the following events of default:

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We were in compliance with the affirmative and restrictive covenants as of December 31, 2020.

Expected future principal payments for the credit facility are as follows:

Year ending December 31 :

Total expected future principal payments $ 24,500

INSPIRE MEDICAL SYSTEMS, INC.

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Expected future principal payments for the credit facility are as follows:

Year ending December 31 :

Total expected future principal payments $ 24,500

Employee Retirement Plan

We sponsor an employee retirement plan covering all of our full-time employees.

We sponsor a defined contribution 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.

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In connection with the borrowing completed in February 2018 (see Note 5), we issued 233,577 ten -year warrants to purchase Series F preferred shares of stock at an exercise price of $ 1.37 per share.

Based on the Black-Scholes option pricing model, the value of each warrant was determined to be $ 0.44 , for a total value of $ 0.1 million at the date of issuance and was fully expensed during the year ended December 31, 2018.

The preferred stock warrants issued in connection with the execution of the original credit facility and its subsequent amendments required re-measurement of the value of the preferred stock warrants each period, with changes in fair value recognized within other expenses on the statements of operations and comprehensive loss.

The fair value of the preferred stock warrants was determined using the Black-Scholes option pricing model.

As of May 7, 2018, the date of the closing of our IPO, the following preferred stock warrants issued under the original credit facility and subsequent amendments were outstanding and exercisable:

Issuance Expiration Series Exercise

Outstanding at

Fair Value at

February 8, 2018 February 8, 2028 F $ 1.37 233,577 $ 103 $ 320

February 24, 2017 February 24, 2027 F $ 1.37 29,197 $ 4 $ 40

August 7, 2015 August 7, 2025 E $ 2.62 29,580 $ 33 $ 41

June 27, 2014 June 27, 2024 E $ 2.62 76,334 $ 85 $ 174

August 5, 2013 August 5, 2023 C $ 1.07 74,768 $ 39 $ 80

November 16, 2012 November 16, 2022 C $ 1.07 186,916 $ 96 $ 200

Total 630,372 $ 855

In connection with the closing of the IPO in May 2018, the warrants to purchase shares of preferred stock automatically converted into warrants to purchase shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liability of $ 0.9 million to APIC.

Upon the closing of the IPO, the warrants to purchase 630,372 shares of preferred stock at a weighted average exercise price of $ 1.46 per share became exercisable to purchase 100,558 shares of common stock at weighted average exercise price of $ 9.38 per share.

During 2018, warrants for 93,963 shares were exercised through cashless exercises, resulting in the issuance of a net 76,762 shares of our common stock.

During 2019, warrants for 6,595 shares were exercised through cashless exercises, resulting in the issuance of a net 5,102 shares of our common stock.

Warrants to purchase shares of our common stock are summarized below:

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

Common Stock Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years)

Outstanding at December 31, 2017 — $ — 0

Preferred stock warrants converted to common stock warrants at IPO 100,558 $ 9.38

Exercised ( 93,963 ) $ 8.70

Outstanding at December 31, 2018 6,595 $ 15.16 5.5

Exercised ( 6,595 ) $ 15.16

Outstanding at December 31, 2019 — $ — 0

The warrants were exercised during 2018 and 2019 and are no longer outstanding.

Stock-Based Compensation

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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 total of 1,386,809 shares of common stock were initially reserved for issuance under the 2018 Plan,

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

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.

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A summary of stock option activity and related information is as follows:

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

Options Weighted Average

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Total stock-based compensation $ 12,817 $ 6,197 $ 1,219

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

As of December 31, 2020, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2024 related to unvested employee and non-employee director stock-based awards is $ 72.7 million and the weighted average period over which the unearned stock-based compensation is expected to be recognized is 2.9 years.

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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 complex and subjective assumptions.

These assumptions include, but are not limited to, 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.

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

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

expected term assumption as more historical data becomes available.

We will continue to analyze our expected term assumption as more historical data becomes available.

Due to our limited operating history and a lack of company specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

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Weighted average fair value $ 73.93 $ 30.69 $ 16.20

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

Employee Stock Purchase Plan

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As of December 31, 2020, 581,195 shares were available for future issuance under the ESPP.

We recognized stock-based compensation expense associated with the ESPP of $ 0.5 million, $ 0 , and $ 0 for the years ended December 31, 2019, 2018, and 2017, respectively.

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Table amounts in thousands, except share and per share amounts)

We recognized stock-based compensation expense associated with the ESPP of $ 1.0 million, $ 0.5 million, and $ 0 for the years ended December 31, 2020, 2019, and 2018, respectively.

Due to our cumulative net loss position, a valuation allowance has been required to be established for all deferred tax assets as of December 31, 2020, 2019, and 2018.

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Research and development ("R&D") tax credit 1.4 1.0 1.3

Federal tax rate change — — ( 92.6 )

Other ( 0.1 ) ( 0.6 ) ( 1.4 )

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Total ( 0.2 ) % ( 0.1 ) % — %

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("the Act") was signed into law making significant changes to the Internal Revenue Code.

Among other things, the Act reduced the corporate tax rate from 35% to 21% effective for tax years beginning after December 31, 2017.

We accounted for the impact of the Act in our 2017 income tax provision, the period in which the legislation was enacted.

The amount recorded related to the remeasurement of our deferred tax assets and liabilities, based on the lower tax rates at which they are expected to reverse in the future, was $ 16.2 million of expense.

This tax expense was entirely offset by an income tax benefit related to the reduction of our deferred tax asset valuation allowance of the same amount, resulting in no net impact to tax expense or benefit.

The amounts reported in 2017 were based on provisional estimates based on our understanding of the Act and guidance available as of the date of filing.

In 2018, the accounting impact was finalized and no changes were required to adjust the provisional amounts recorded.

INSPIRE MEDICAL SYSTEMS, INC.

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Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

The valuation allowance increased by $ 9.8 million, increased by $ 5.8 million, and decreased by $ 9.4 million during the years ended December 31, 2019, 2018 and 2017, respectively.

The valuation allowance increased by $ 19.5 million, $ 9.8 million, and $ 5.8 million during the years ended December 31, 2020, 2019 and 2018, respectively.

INSPIRE MEDICAL SYSTEMS, INC.

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The changes to our gross unrecognized tax benefits were as follows during the year ended December 31, 2019:

Balance at December 31, 2018 $ —

The changes to our gross unrecognized tax benefits were as follows:

Year Ended December 31,

2020 2019 2018

Balance beginning of the year $ 40 $ — $ —

Increase in balances related to current year tax positions — 40 —

Balance at December 31, 2019 $ 40

Increase in balances related to prior year tax positions 45 — —

Balance end of the year $ 85 $ 40 $ —

We file income tax returns in the applicable jurisdictions.

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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 for those periods as all potentially dilutive shares consisting of convertible preferred stock, convertible preferred stock warrants, convertible common stock warrants and common stock options were antidilutive in those periods.

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 for those periods as all potentially dilutive shares consisting of convertible common stock warrants and common stock options were antidilutive in those periods.

The following potentially dilutive securities outstanding at the end of the periods presented have been excluded from the computations of diluted shares outstanding because such securities have an antidilutive impact due to losses reported:

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2020 2019 2018

Convertible preferred stock outstanding — — 12,111,706

Convertible preferred stock warrants — — 423,784

Convertible common stock warrants — — 6,595

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data