Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Part I. "Item 1A. Risk Factors’’ and elsewhere in this Annual Report on Form 10-K.

Overview

We are a medical technology company focused on the development and commercialization of innovative 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 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. We increased the number of employees in our sales, marketing, and reimbursement organizations from 40 as of December 31, 2015 to 252 as of December 31, 2020.

Although our sales and marketing efforts are directed at patients and physicians because they are the primary users of our technology, we consider the hospitals and ASCs where the procedure is performed to be our customers, as they are the purchasing agents of our Inspire system. Our customers are reimbursed the cost required to treat each patient through various third-party payors, such as commercial payors and government agencies. Our Inspire system is currently reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial payors, under Local Coverage Determinations for patients covered by Medicare, and under U.S. government contract for patients who are treated by the Veterans Health Administration. As of February 23, 2021, we have secured positive coverage policies with 63 U.S. commercial payors, covering approximately 220 million lives in the U.S. In addition, all seven Medicare Administrative Contractors ("MACs") published final policies in 2020 that provide coverage of Inspire therapy when certain coverage criteria are met.

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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. In June 2018, Japan’s Ministry of Health, Labour and Welfare approved our Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement 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 in Australia. For the year ended December 31, 2020, 92.0% of our revenue was derived in the U.S. and 8.0% was derived in Europe. No single customer accounted for more than 10% of our revenue.

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 in the third quarter of 2020, 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.

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 equity 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 year ended December 31, 2020, we generated revenue of $115.4 million with a gross margin of 84.7% and a net loss of $57.2 million, compared to revenue of $82.1 million with a gross margin of 83.4% and a net loss of $33.2 million for the year ended December 31, 2019, and revenue of $50.6 million with a gross margin of 80.1% and a net loss of $21.8 million for the year ended December 31, 2018. Our accumulated deficit as of December 31, 2020 was $237.3 million.

We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions. 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. During 2020, we activated 141 centers bringing the total to 425 U.S. medical centers implanting Inspire therapy as of December 31, 2020. Driven by the more favorable reimbursement environment, we have increased our focus on adding ASCs. At the end of 2020, ASCs made up just over 15% of our total U.S. implanting centers, up from nearly 10% at the end of 2019. Additionally, we created

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34 new territories during 2020, bringing the total to 107 U.S. territories as of December 31, 2020. 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 April 2020, we received FDA approval for an expanded age-range for Inspire therapy to include 18 to 21 year old patients, and in August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA. 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 has largely been eliminated. The resurgence of COVID-19 in various U.S. regions has, 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 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 new Inspire Sleep app, 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 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 year ended December 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

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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. By the end of the third quarter of 2020, most implanting centers had resumed procedures. A portion of the second, third and fourth quarter 2020 procedures performed were rescheduled from the first half of 2020, and, as a result of which, the backlog of postponed cases has largely been eliminated.

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 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 secure 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.

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

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compensation expense with grants of restricted stock or 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. Other items have included fair value adjustments related to convertible preferred stock warrants, which were accounted for as a liability and marked-to-market at each reporting period. Immediately prior to the closing of our IPO, our outstanding convertible preferred stock warrants automatically converted into warrants to purchase shares of our common stock.

Results of Operations

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Year Ended December 31, Change

(in thousands, except percentages)

Operating expenses:

Revenue

Revenue increased $33.3 million, or 40.6%, to $115.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was attributable to an increase in sales of our Inspire system of $32.4 million in the U.S. and an increase of $0.9 million in Europe, primarily in Germany. Beginning in 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 second quarter, 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 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.

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Revenue information by region is summarized as follows:

Year Ended December 31,

Amount % of Revenue Amount % of Revenue $ %

(in thousands, except percentages)

Revenue generated in the U.S. was $106.1 million for the year ended December 31, 2020, an increase of $32.4 million, or 44.1%, over the year ended December 31, 2019. 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, a greater number of prior authorization approvals, additional positive coverage policies and, to a lesser extent, an increase in our average selling price as a result of the introduction of the new sensing lead on the Inspire system to the U.S. market in February 2019. As noted above, U.S. revenue for the year ended December 31, 2020 was negatively impacted by the COVID-19 pandemic.

Revenue generated in Europe was $9.3 million in the year ended December 31, 2020, an increase of $0.9 million, or 10.5%, over the year ended December 31, 2019. 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 $4.0 million, or 29.2%, to $17.6 million for the year ended December 31, 2020 compared to $13.6 million for the year ended December 31, 2019. The increase was primarily due to product costs associated with higher sales volume of our Inspire system.

Gross margin was 84.7% for the year ended December 31, 2020 compared to 83.4% for the year ended December 31, 2019. Gross margin for the year ended December 31, 2020 was higher primarily due to manufacturing efficiencies and higher sales volume.

Research and Development Expenses

Research and development expenses increased $13.3 million, or 103.2%, to $26.1 million for the year ended December 31, 2020 compared to $12.8 million for the year ended December 31, 2019. This change was primarily due to an increase of $9.7 million for ongoing research and development costs, including ongoing development of the next generation Inspire therapy system, our Bluetooth remote, and the Inspire Cloud, $3.4 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, and $0.2 million of regulatory submissions and clinical studies expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $37.4 million, or 41.4%, to $127.9 million for the year ended December 31, 2020 compared to $90.5 million for the year ended December 31, 2019. The primary driver of this increase was an increase of $25.9 million in compensation, including salaries, commissions, and stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount, offset by a decrease of $2.5 million of travel expenses not incurred due to the COVID-19 pandemic. In addition, marketing expenses increased $9.5 million, primarily consisting of direct-to-consumer initiatives, including TV advertisements which began airing in the second half of 2019. During the year ended December 31, 2020, we initially refocused our direct-to-consumer marketing strategies by shifting from radio and TV in our larger markets

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that were affected by COVID-19 towards more digital and TV in smaller markets.During the second quarter of 2020, we resumed radio and TV initiatives in our larger markets as the impact of COVID-19 lessened in those areas. Further, our team leveraged virtual tools, including the new Inspire Sleep app released in the second quarter of 2020, and online tools to continue physician training and patient education. Other drivers of the increase to selling, general and administrative expenses included an increase of $2.0 million due to consulting fees, insurance costs, and information technology supplies and equipment.

Other Expense (Income), Net

Other expense (income), net changed by $2.6 million, or 151.9%, to $0.9 million of expense for the year ended December 31, 2020 compared to $1.7 million of income for the year ended December 31, 2019. This change was primarily due to a decrease of $2.7 million in interest income for the year ended December 31, 2020 due to lower interest rates on our cash, cash equivalents and investments balances, partially offset by a $0.1 million increase in gain on investments.

Income Taxes

We recorded a $0.1 million provision for income taxes for the year ended December 31, 2020 compared to less than $0.1 million for the year ended December 31, 2019. This increase was due to state income tax expense and an accrual for uncertain tax benefits.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

For a discussion of our results of operations for the year ended December 31, 2018, including a year-to-year comparison between 2019 and 2018, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report Form 10-K for the year ended December 31, 2019.

Liquidity and Capital Resources

As of December 31, 2020, we had cash, cash equivalents and investments of $234.4 million and an accumulated deficit of $237.3 million, compared to cash, cash equivalents and investments of $155.7 million and an accumulated deficit of $180.2 million as of December 31, 2019. As of December 31, 2020, we had $24.5 million of outstanding borrowings under our credit facility. No borrowings remain available under this credit facility.

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. As of December 31, 2020, we had raised a total of $119.1 million in net proceeds from private placements of our convertible preferred securities and $306.5 million from registered equity offerings.

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.

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Cash Flows

The following table presents a summary of our cash flow for the periods indicated:

Year Ended December 31,

(in thousands)

Net cash provided by (used in):

Effect of exchange rate on cash 11 13

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

Operating Activities

Net cash used in operating activities was $53.0 million for 2020 and consisted of a net loss of $57.2 million, an increase in net operating assets of $10.9 million, and non-cash charges of $15.0 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 accounts receivable, which increased due to higher sales, and inventories, which increased due to continued manufacturing of systems inventory as sales volumes increase. Operating liabilities includes accounts payable which increased generally due to the costs to support the growth of our operations, including compensation and personnel-related costs. Accrued expenses also increased due to the accrued compensation for annual bonuses to be paid during the first quarter of 2021.

Net cash used in operating activities was $32.8 million for 2019 and consisted of a net loss of $33.2 million, an increase in net operating assets of $6.6 million, and non-cash charges of $7.0 million. The non-cash charges consisted of stock-based compensation, accretion of the debt discount, non-cash lease expense, stock issued for services rendered, and depreciation and amortization, offset by the non-cash income related to the accretion of the investment discount, and other, net. Operating assets, which includes accounts receivable, inventories, and prepaid expenses and other current assets, increased generally due to increased revenues year-over-year. Operating liabilities, which includes accrued expenses and accounts payable, 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 provided by investing activities for 2020 was $86.6 million and consisted primarily of proceeds from sales or maturities of investments of $141.8 million, partially offset by purchases of investments of $52.7 million and purchases of property and equipment of $2.5 million.

Net cash used in investing activities for 2019 was $43.6 million and consisted primarily of purchases of investments of $178.1 million, partially offset by proceeds from sales or maturities of investments of $137.3 million. Purchases of property and equipment were $2.7 million.

Financing Activities

Net cash provided by financing activities was $134.1 million for 2020 and consisted primarily of $124.7 million in proceeds from our follow-on offering in April 2020. The remainder of the cash provided by financing activities resulted from $7.1 million in proceeds from the exercise of stock options and $2.4 million in proceeds from the issuance of common stock from our employee stock purchase plan ("ESPP").

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Net cash provided by financing activities was $2.0 million for 2019 and consisted of $1.4 million in proceeds from the issuance of common stock from our ESPP and $1.1 million in proceeds from the exercise of stock options and warrants, partially offset by a $0.5 million final payment fee due upon the amendment of our credit facility.

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 December 31, 2020, 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 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 2.0% if such borrowings are prepaid prior to March 27, 2021 and 1.0% if such borrowings are on or after March 27, 2021 and prior to maturity. 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 December 31, 2020.

In August 2015, we issued to Oxford Finance warrants to purchase 12,404 and 17,176 shares of our Series E convertible preferred stock, having an exercise price of $2.62 per share. In February 2017 and February 2018, we issued warrants to Oxford Finance to purchase 29,197 and 233,577 shares, respectively, of our Series F convertible preferred stock, having an exercise price of $1.37 per share. Each of the warrants described above has a term of 10 years.

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 a weighted average exercise price of $9.38 per share. Warrants to purchase 93,963 shares of common stock were exercised during 2018, and the warrants to purchase the remaining 6,595 shares of common stock were exercised during 2019. No warrants remain outstanding at December 31, 2020.

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.

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Contractual Obligations and Commitments

Our contractual obligations and commitments as of December 31, 2020 are summarized in the table below:

Payments Due by Year

($ in thousands) Total Less than1 year 1 - 3 years 3 - 5 years More than5 years

Recorded contractual obligations:

Unrecorded contractual obligations:

(1) Represents principal payments only. See Note 5 to our audited financial statements for additional information.

(2) Variable interest is assumed at December 31, 2020 rates. Under the terms of the loan and security agreement, a final payment fee of 3.50% is due at the earlier of maturity or prepayment. This amount is not included in the table above.

Critical Accounting Policies and Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the audited financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. We believe that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the audited financial statements. Actual results could differ from these estimates.

Significant areas requiring management estimates or judgments include the following key financial areas:

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"), which we adopted effective January 1, 2019 using the modified retrospective approach. The adoption of ASC 606 did not have a material impact on the amount and timing of revenue recognized in our financial statements.

Revenues from product sales are recognized when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms. Our 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.

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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.

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 non-statutory and incentive stock options to employees 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 restricted shares and stock options, to be recognized as expense in the statements of operations and comprehensive loss based on their grant date fair values. We estimate the fair value of stock options using the Black-Scholes option pricing model. 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 restricted shares. 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 the lack of a public market for the trading of our common stock 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. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group of representative companies have characteristics similar to us, including stage of product development and focus on the life science industry. 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 zero 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.

Inventories

Inventories are valued at the lower of cost or net realizable value, computed on a first-in, first out basis. We estimate the recoverability of our inventory by reference to internal estimates of future demands and product life cycles, including expiration of inventory prior to sale. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions. The reserve for excess and obsolete inventory was $0.1 million as of both December 31, 2020 and 2019.

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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 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.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2 to our financial statements contained in this Annual Report on Form 10-K.

Item 7A. 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

As of December 31, 2020 and 2019, our cash, cash equivalents, and investments were maintained with two financial institutions in the U.S. We believe these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us, however our cash balances were in excess of insured limits.

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk or availability. To achieve these objectives, our investment policy allows us to maintain a portfolio of certain types of debt securities issued by the U.S. government and its agencies, corporations with investment-grade credit ratings, or commercial paper and money market funds issued by the highest quality financial and non-financial companies. 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. See Note 2 to our financial statements contained in this Annual Report on Form 10-K for additional information on our cash equivalents and available-for-sale marketable securities.

Our accounts receivable primarily relate to revenue from the sale of our Inspire system to hospitals in the U.S. and Europe, primarily in Germany. No single customer represented more than 10% of our accounts receivable as of December 31, 2020 or 2019.

Foreign Currency Risk

The majority of our business is currently conducted in U.S. dollars. Any transactions that may be conducted in foreign currencies are not expected to have a material effect on our results of operations, financial position or cash flows.

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Inflation Risk

Inflationary factors, such as increases in our cost of goods sold and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and selling and marketing and operating expenses as a percentage of our revenue if the selling prices of our products do not increase as much as or more than these increased costs.

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Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Inspire Medical Systems, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Inspire Medical Systems, Inc. (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. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

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 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.

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Inventory valuation reserves

/s/Ernst & Young LLP

We have served as the Company's auditor since 2015.

Minneapolis, Minnesota

February 23, 2021

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INSPIRE MEDICAL SYSTEMS, INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

December 31,

Assets

Current assets:

Prepaid expenses and other current assets 1,965 2,206

Investments, long-term — 6,276

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

Other non-current assets 204 381

Liabilities and stockholders' equity

Current liabilities:

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

Other non-current liability 85 40

Stockholders' equity

Accumulated other comprehensive income 29 102

Total liabilities and stockholders' equity $ 281,189 $ 181,253

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

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INSPIRE MEDICAL SYSTEMS, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses:

Other expense (income):

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

Other comprehensive loss:

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

Net loss per share, basic and diluted $ (2.19) $ (1.40) $ (1.50)

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

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INSPIRE MEDICAL SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

Common Stock ConvertiblePreferred Stock

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

Issuance of common stock 2,285 — 95 — — — — 95

Stock-based compensation expense — — 1,219 — — — — 1,219

Other comprehensive loss — — — — — (52) — (52)

Stock-based compensation expense — — 6,197 — — — — 6,197

Other comprehensive income — — — — — 154 — 154

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

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

Adoption of ASU 2016-13, Financial Instruments - Credit Losses — — — — — — 12 12

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

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INSPIRE MEDICAL SYSTEMS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Operating activities

Adjustments to reconcile net loss:

Accretion of investment discount (22) (983) (648)

Non-cash lease expense 972 904 —

Non-cash stock issuance for services rendered 294 233 95

Change in the fair value of preferred stock warrants — — 595

Changes in operating assets and liabilities:

Prepaid expenses and other assets 416 (905) (1,326)

Investing activities

Purchases of property and equipment (2,455) (2,739) (250)

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

Financing activities

Proceeds from issuance of notes payable — — 8,000

Payment of debt fees — (531) —

Proceeds from the exercise of stock options and warrants 7,050 1,140 558

Effect of exchange rate on cash 11 13 33

Supplemental cash flow information

Purchases of property and equipment in accounts payable 816 — —

Issuance of preferred stock warrants — — 103

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

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INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(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. 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.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").

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 have been made. The results of operations for the year ended December 31, 2020 are not necessarily indicative of the operating results for any future periods.

Reverse Stock Split

In connection with our initial public offering of common stock ("IPO"), our board of directors and stockholders approved a 1-for-6.650 reverse stock split of our common stock. The reverse stock split became effective on April 20, 2018. The par value of the common stock was not adjusted as a result of the reverse stock split. Adjustments corresponding to the reverse stock split were made to the ratio at which the convertible preferred stock converted into common stock immediately prior to the closing of the IPO. Accordingly, all share and per-share amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split and adjustment of the conversion ratio of the convertible preferred stock.

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, commissions, and offering expenses. 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 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. We received net proceeds of approximately $69.8 million after deducting underwriting

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NOTES TO FINANCIAL STATEMENTS

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

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

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, 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.

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.

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 (income) expense, 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 (income) expense, net in the statements of operations and comprehensive loss.

Investments

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. 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 two years. For non-U.S. government securities, we use a discounted cash flow approach to calculate expected credit losses using estimated default rates based upon

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NOTES TO FINANCIAL STATEMENTS

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

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

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, investments, and our previously outstanding preferred stock warrants. 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.

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.

Asset-backed securities: Consists of short-term, securitized investments backed by pools of credit card receivables. These are included as a Level 2 measurement in the table below.

U.S. government securities: Consists of U.S. 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. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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NOTES TO FINANCIAL STATEMENTS

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

Fair Value Measurements as of

EstimatedFair Value Level 1 Level 2 Level 3

Cash equivalents:

Investments:

Fair Value Measurements as of

EstimatedFair Value Level 1 Level 2 Level 3

Cash equivalents:

Investments:

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

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 December 31, 2020 and 2019, 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.

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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. 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:

December 31,

Total inventories, net of reserves $ 8,479 $ 5,834

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 $0.1 million as of both December 31, 2020 and 2019.

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NOTES TO FINANCIAL STATEMENTS

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

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization and consisted of the following:

December 31,

Computer equipment and software $ 1,305 $ 790

Less: accumulated depreciation and amortization (1,845) (1,005)

Property and equipment, net $ 5,311 $ 3,045

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 $0.8 million, $0.5 million and $0.4 million during the years ended December 31, 2020, 2019 and 2018, respectively.

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 material impairment charges on long-lived assets during the years ended December 31, 2020, 2019, or 2018.

Accrued Expenses

Accrued expenses consisted of the following:

December 31,

Current operating lease liability — 828

Revenue Recognition

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

retrospective approach. The adoption of ASC 606 did not have a material impact on the amount and timing of revenue recognized in our financial statements.

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.

See Note 10 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

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NOTES TO FINANCIAL STATEMENTS

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

Advertising Expenses

We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $26.4 million, $18.0 million, and $9.3 million during the years ended December 31, 2020, 2019, and 2018, 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

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NOTES TO FINANCIAL STATEMENTS

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

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

Purchase Commitments

As of December 31, 2020, we had purchase commitments to suppliers for purchases totaling $72.7 million.

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:

Amortized Unrealized Gross Aggregate

Cost Gains Losses Fair Value

Short-Term:

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NOTES TO FINANCIAL STATEMENTS

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

Amortized Unrealized Gross Aggregate

Cost Gains Losses Fair Value

Short-Term:

Long-Term:

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 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.

4. Leases

Adoption of ASC Topic 842, Leases

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 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

We previously rented approximately 9,500 square feet of office space under an operating lease that expired on March 31, 2019. 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 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

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NOTES TO FINANCIAL STATEMENTS

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

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:

December 31,

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,

Variable lease cost 72 29

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 for the year ended December 31, 2018.

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

Total undiscounted lease payments 7,423

Less: imputed interest (1,537)

Present value of lease liability $ 5,886

As of December 31, 2020, the remaining lease term was 7.4 years and the discount rate was 5.2%. The operating cash outflows from our operating leases were $1.0 million for each of the years ended December 31, 2020 and 2019.

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NOTES TO FINANCIAL STATEMENTS

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

5. 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. 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 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: 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 December 31, 2020.

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NOTES TO FINANCIAL STATEMENTS

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

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

Year ending December 31:

Total expected future principal payments $ 24,500

6. Employee Retirement Plan

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. We may elect to make a voluntary contribution to the plan. We have not made contributions since inception.

7. Stockholders' Equity

Preferred Stock

As of December 31, 2019 and 2020, no preferred stock had been issued.

Preferred Stock Warrants and Common Stock Warrants

In connection with the borrowing completed in February 2018 (see Note 5), we issued 233,577ten-year warrants to purchase Series F preferred shares of stock at an exercise price of $1.37 per share. 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. The warrants were exercised during 2018 and 2019 and are no longer outstanding.

8. Stock-Based Compensation

Stock Options

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,

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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.

As of December 31, 2020, there were 2,708,953 shares reserved for issuance under the 2018 Plan, of which 647,614 shares were available for issuance. 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 monthly installments over the next 36 months of service. The stock options granted to the board of directors vest in one, two, or three equal annual installments, in each case subject to the director's continuous services through the applicable vesting date. The stock options have a contractual life of ten years.

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

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. The total grant date fair value of options vested during the year was $11.1 million, $5.1 million and $0.2 million for the years ended December 31, 2020, 2019 and 2018.

Total stock compensation recognized, before taxes, was as follows:

Year Ended December 31,

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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. 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, 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 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. When selecting these 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. The historical volatility data was computed using the weekly closing prices for the selected companies' shares over historical periods that approximate calculated expected term of our stock-based awards. We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available.

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.

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.

The fair value of options granted to employees and directors during the years ended December 31, 2020, 2019, and 2018 was estimated as of the grant date using the Black-Scholes option pricing model using the following assumptions:

Year Ended December 31,

Dividend yield —% —% —%

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NOTES TO FINANCIAL STATEMENTS

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

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. During the year ended December 31, 2020, 34,233 shares were purchased under the ESPP, utilizing $2.4 million of employee contributions. 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 $1.0 million, $0.5 million, and $0 for the years ended December 31, 2020, 2019, and 2018, respectively.

9. Income Taxes

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.

The components of our provision for income taxes are as follows:

December 31,

Current

Federal and state $ 70 $ — $ —

Total provision for income taxes $ 115 $ 40 $ —

The reconciliation of taxes at the federal statutory rate to our provision for income taxes are as follows:

Year Ended December 31,

Tax at federal statutory rate 21.0 % 21.0 % 21.0 %

State, net of federal benefit 3.6 4.3 4.0

Stock-based compensation 8.0 3.9 1.4

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

Change in valuation allowance (34.1) (29.7) (26.3)

Total (0.2) % (0.1) % — %

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NOTES TO FINANCIAL STATEMENTS

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

Significant components of net deferred tax assets and liabilities were as follows:

Year Ended December 31,

Deferred tax assets:

Interest expense carryforward 252 — 638

Other comprehensive loss — — 16

Deferred tax liabilities:

Other comprehensive income (7) (25) —

$ — $ — $ —

Deferred income taxes reflect the tax effects of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

As of December 31, 2020, our gross federal net operating loss carryforwards 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 that will begin to expire in 2028. We also have gross R&D credit carryforwards of $4.0 million as of December 31, 2020 of 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. 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.

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NOTES TO FINANCIAL STATEMENTS

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

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

Year Ended December 31,

Balance beginning of the year $ 40 $ — $ —

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

Our policy is to record interest related to uncertain tax positions as interest expense and any penalties as other expense in our statements of operations and comprehensive loss. There was no interest or penalties accrued at December 31, 2020 and 2019.

10. Segment Reporting and Revenue Disaggregation

We operate our business as one operating 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:

Year Ended December 31,

All of our long-lived assets are located in the U.S.

11. 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 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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NOTES TO FINANCIAL STATEMENTS

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

Year Ended December 31,

Convertible common stock warrants — — 6,595

12. Quarterly Financial Information (Unaudited)

The following table provides selected quarterly financial data for the years ended December 31, 2020 and 2019.

Three Months Ended

(1) The summation of quarterly per share amounts may not equal the calculation for the full year, as each quarterly calculation is performed discretely.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company 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. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s 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 December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. It includes those policies and procedures that:

•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2020, our internal control over financial reporting was effective.

Ernst & Young LLP, our independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an audit report on our internal control over financial reporting. See Report of Independent Registered Public Accounting Firm below.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Inspire Medical Systems, Inc.

Opinion on Internal Control Over Financial Reporting

We have audited Inspire Medical Systems, Inc.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Inspire Medical Systems, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

INSP US Equity

INSP · 10-K · period ended 2020-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

INSP US Equity☆

INSP · 10-K · period ended 2020-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

INSP US Equity