10-Q 1 insp-20220930.htm 10-Q insp-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to                              
Commission File Number: 001-38468
______________________________
insp-20220930_g1.jpg
Inspire Medical Systems, Inc.
(Exact name of registrant as specified in its charter)
______________________________
Delaware26-1377674
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
5500 Wayzata Blvd., Suite 1600
Golden Valley, MN
55416
(Address of principal executive offices)(Zip Code)
(844672-4357
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareINSPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer ☐Non-accelerated filer ☐
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 
As of October 25, 2022, the registrant had 28,892,388 shares of common stock, $0.001 par value per share, outstanding.


Table of Contents
   Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

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

our ability to successfully integrate any acquired business, products or technologies;
changes in global macroeconomic conditions;
any failure of key information technology systems, processes or sites or damage to or inability to access our physical facilities;
our ability to commercialize or obtain regulatory approvals or certifications for our Inspire therapy and system, or the effect of delays in commercializing or obtaining regulatory approvals or certifications;
any violations of anti-bribery, anti-corruption, and anti-money laundering laws;
risks related to our indebtedness;
our ability to use our net operating losses and research and development carryforwards;
the risk that we may be deemed to be an investment company under the Investment Company Act of 1940;
United States Food and Drug Administration or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including healthcare reform measures in the United States and international markets;
our ability to establish and maintain intellectual property protection for our Inspire therapy and system or avoid claims of infringement;
risks related to our common stock; and
other important factors that could cause actual results, performance or achievements to differ materially from those contemplated that are found in "Part I, Item 1. Business," "Part I, Item 1A. Risk Factors," and "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q.
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Unless the context requires otherwise, references to “Inspire,” the “Company,” “we,” “us,” and “our,” refer to Inspire Medical Systems, Inc.
4

PART I—FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements.
Inspire Medical Systems, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
September 30,
2022
December 31, 2021
(unaudited)
Assets
Current assets:
Cash and cash equivalents$417,808 $214,467 
Investments, short-term9,741  
Accounts receivable, net of allowance for credit losses of
    $34 and $99, respectively
48,498 34,179 
Inventories15,146 17,231 
Prepaid expenses and other current assets4,351 2,660 
Total current assets495,544 268,537 
Investments, long-term 9,938 
Property and equipment, net14,134 8,486 
Operating lease right-of-use assets7,141 7,919 
Other non-current assets10,704 204 
Total assets$527,523 $295,084 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$20,305 $11,665 
Accrued expenses28,986 20,454 
Notes payable, current portion 9,188 
Total current liabilities49,291 41,307 
Notes payable, non-current portion 15,799 
Operating lease liabilities, non-current portion7,882 8,796 
Other non-current liabilities146 134 
Total liabilities57,319 66,036 
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized; no shares
     issued and outstanding
  
Common Stock, $0.001 par value per share; 200,000,000 shares authorized; 28,820,680 and 27,416,106 issued and outstanding at September 30, 2022 and December 31, 2021, respectively
29 27 
Additional paid-in capital797,958 508,465 
Accumulated other comprehensive loss(363)(55)
Accumulated deficit(327,420)(279,389)
Total stockholders' equity470,204 229,048 
Total liabilities and stockholders' equity$527,523 $295,084 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5

Inspire Medical Systems, Inc.
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except share and per share amounts)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenue$109,188 $61,685 $269,956 $154,996 
Cost of goods sold19,786 8,624 43,963 22,123 
Gross profit89,402 53,061 225,993 132,873 
Operating expenses:
Research and development20,993 9,614 47,397 27,056 
Selling, general and administrative85,603 53,243 225,853 143,846 
Total operating expenses106,596 62,857 273,250 170,902 
Operating loss(17,194)(9,796)(47,257)(38,029)
Other expense (income):
Interest and dividend income(1,350)(22)(1,681)(110)
Interest expense656 537 1,677 1,590 
Other expense, net101 33 290 90 
Total other (income) expense(593)548 286 1,570 
Loss before income taxes(16,601)(10,344)(47,543)(39,599)
Income taxes246 3 488 52 
Net loss(16,847)(10,347)(48,031)(39,651)
Other comprehensive loss:
Foreign currency translation loss(148) (106) 
Unrealized (loss) gain on investments(14)3 (202)(38)
Total comprehensive loss$(17,009)$(10,344)$(48,339)$(39,689)
Net loss per share, basic and diluted$(0.60)$(0.38)$(1.73)$(1.46)
Weighted average common shares used to
   compute net loss per share, basic and diluted
28,226,345 27,300,377 27,782,093 27,225,499 

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

Inspire Medical Systems, Inc.
Consolidated Statements of Stockholders' Equity (unaudited)
(in thousands, except share amounts)

Nine Months Ended September 30, 2022
Common Stock
SharesAmountAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders'
Equity
Balance at December 31, 202127,416,106 $27 $508,465 $(55)$(279,389)$229,048 
Stock options exercised151,186 1 3,086 — — 3,087 
Vesting of restricted stock units569 — — — — — 
Withholding taxes on net share settlement of restricted stock units(205)— (43)— — (43)
Issuance of common stock348 — 79 — — 79 
Stock-based compensation expense— — 9,721 — — 9,721 
Other comprehensive loss— — — (143)— (143)
Net loss— — — — (16,694)(16,694)
Balance at March 31, 202227,568,004 28 521,308 (198)(296,083)225,055 
Stock options exercised52,383 — 1,549 — — 1,549 
Issuance of common stock314 — 80 — — 80 
Issuance of common stock for employee stock purchase plan13,743 — 2,134 — — 2,134 
Stock-based compensation expense— — 12,659 — — 12,659 
Other comprehensive loss— — — (3)— (3)
Net loss— — — — (14,490)(14,490)
Balance at June 30, 202227,634,444 28 537,730 (201)(310,573)226,984 
Stock options exercised35,826 — 1,760 — — 1,760 
Issuance of common stock410 — 79 — — 79 
Sale of common stock from follow-on public offering, net of offering expenses1,150,000 1 243,800 — — 243,801 
Stock-based compensation expense— — 14,589 — — 14,589 
Other comprehensive loss— — — (162)— (162)
Net loss— — — — (16,847)(16,847)
Balance at September 30, 202228,820,680 $29 $797,958 $(363)$(327,420)$470,204 

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


7

Inspire Medical Systems, Inc.
Consolidated Statements of Stockholders' Equity (unaudited)
(in thousands, except share amounts)

Nine Months Ended September 30, 2021
Common Stock
SharesAmountAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders'
Equity
Balance at December 31, 202027,069,276 $27 $467,038 $29 $(237,347)$229,747 
Stock options exercised133,421 — 3,550 — — 3,550 
Issuance of common stock376 — 73 — — 73 
Stock-based compensation expense— — 5,997 — — 5,997 
Other comprehensive loss— — — (20)— (20)
Net loss— — — — (16,216)(16,216)
Balance at March 31, 202127,203,073 27 476,658 9 (253,563)223,131 
Stock options exercised49,318 — 1,719 — — 1,719 
Issuance of common stock329 — 72 — — 72 
Issuance of common stock for employee stock purchase plan11,351 — 1,760 — — 1,760 
Stock-based compensation expense— — 6,341 — — 6,341 
Other comprehensive loss— — — (21)— (21)
Net loss— — — — (13,088)(13,088)
Balance at June 30, 202127,264,071 27 486,550 (12)(266,651)219,914 
Stock options exercised86,473 — 3,843 — — 3,843 
Issuance of common stock415 — 77 — — 77 
Stock-based compensation expense— — 6,810 — — 6,810 
Other comprehensive income— — — 3 — 3 
Net loss— — — — (10,347)(10,347)
Balance at September 30, 202127,350,959 $27 $497,280 $(9)$(276,998)$220,300 

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

Inspire Medical Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 Nine Months Ended
September 30,
 20222021
Operating activities  
Net loss$(48,031)$(39,651)
Adjustments to reconcile net loss:  
Depreciation and amortization1,289 874 
Non-cash lease expense778 509 
Stock-based compensation expense36,969 19,148 
Non-cash stock issuance for services rendered238 222 
Other, net(553)246 
Changes in operating assets and liabilities:  
Accounts receivable(14,395)(1,743)
Inventories2,086 (7,095)
Prepaid expenses and other current assets(1,712)(1,081)
Accounts payable8,601 3,490 
Accrued expenses and other liabilities7,030 4,228 
Net cash used in operating activities(7,700)(20,853)
Investing activities  
Purchases of property and equipment(6,146)(4,135)
Purchases of investments (9,993)
Proceeds from sales or maturities of investments 43,800 
Purchases of strategic investments(10,500) 
Net cash (used in) provided by investing activities(16,646)29,672 
Financing activities  
Payments on long-term debt obligation(24,500) 
Proceeds from sale of common stock243,801  
Proceeds from the exercise of stock options6,396 9,112 
Taxes paid on net share settlement of restricted stock units(43) 
Proceeds from issuance of common stock from employee stock purchase plan2,134 1,760 
Net cash provided by financing activities227,788 10,872 
Effect of exchange rate on cash(101)(9)
Increase in cash and cash equivalents203,341 19,682 
Cash and cash equivalents at beginning of period214,467 190,518 
Cash and cash equivalents at end of period$417,808 $210,200 
Supplemental cash flow information  
Cash paid for interest$2,321 $1,417 
Property and equipment included in accounts payable and accrued expenses1,332 657 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
9

Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (Unaudited) 
(Table amounts in thousands, except share and per share amounts)

1. Organization
Description of Business
Inspire Medical Systems, Inc. is a medical technology company focused on the development and commercialization of innovative, 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 2014 and has been commercially available in certain European markets since 2011. Japan's Ministry of Health, Labour and Welfare ("MLHW") approved Inspire therapy to treat moderate to severe OSA in 2018 and was formally added to the Japan National Health Insurance Payment Listing in 2021. In 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement coverage in Australia.

2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial reporting and as required by the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, the results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. All intercompany accounts and transactions have been eliminated in consolidation.
For a complete discussion of our significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Follow-On Public Offering
On August 15, 2022, we completed a follow-on offering that included our offer and sale of 1,150,000 shares of common stock at a public offering price of $215.00 per share. We received net proceeds of $243.8 million after deducting underwriting discounts, commissions, and offering expenses.
Cash and Cash Equivalents
We consider all highly liquid securities, readily convertible to cash, that have original maturities of 90 days or less from the date of purchase to be cash equivalents. The carrying amount reported in the consolidated 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 expense, net, in the consolidated statements of operations and comprehensive loss. Assets and liabilities of foreign operations are remeasured at period-end exchange rates with the impacts of foreign currency remeasurement recognized in other expense, net in the consolidated statements of operations and comprehensive loss. Any unrealized gains and
10

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
losses due to translation adjustments are included in other accumulated other comprehensive loss within stockholders' equity.
Investments
At both September 30, 2022 and December 31, 2021, our investments consisted of U.S. government securities. 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 included in other accumulated other comprehensive loss within stockholders' equity. Any realized gains and losses are calculated on the specific identification method and reported net in other expense, net in the consolidated statements of operations and comprehensive loss. For both of the nine months ended September 30, 2022 and 2021, we recognized $0 of realized gains, net.
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. 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 consolidated statement of operations and comprehensive loss. No reversal of a previously recorded allowance for credit losses may be made to an amount below zero. The total allowance for credit losses was $0 at both September 30, 2022 and December 31, 2021.
Fair Value of Financial Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and investments. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1: Observable inputs, such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability.
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.
U.S. government securities: Consists of U.S. government Treasury bills with original maturities of less than two years. These are included as Level 1 measurements in the tables below.
The following tables set forth by level within the fair value hierarchy our assets that are measured on a recurring basis and reported at fair value as of September 30, 2022 and December 31, 2021. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
11

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Fair Value Measurements as of
September 30, 2022
Estimated
Fair Value
Level 1Level 2Level 3
Cash equivalents:
Money market funds$387,519 $387,519 $ $ 
Total cash equivalents387,519 387,519   
Investments:
U.S. government securities9,741 9,741   
Total investments9,741 9,741   
Total cash equivalents and investments$397,260 $397,260 $ $ 
Fair Value Measurements as of
December 31, 2021
Estimated
Fair Value
Level 1Level 2Level 3
Cash equivalents:
Money market funds$189,369 $189,369 $ $ 
Total cash equivalents189,369 189,369   
Investments:
U.S. government securities9,938 9,938   
Total investments9,938 9,938   
Total cash equivalents and investments$199,307 $199,307 $ $ 
There were no transfers between levels during the periods ended September 30, 2022 and December 31, 2021.
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 consolidated balance sheets. However, as of September 30, 2022 and December 31, 2021, 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 not been significant.
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.
12

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
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 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 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:
September 30, 2022December 31, 2021
Raw materials$5,679 $3,119 
Finished goods9,467 14,112 
Total inventories, net of reserves$15,146 $17,231 
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. During the three months ended September 30, 2022, we recorded a $1.8 million inventory reserve related to product introductions which were completed in October 2022, including the new silicone leads and the Bluetooth®-enabled patient remote. The reserve for excess and obsolete inventory was $2.4 million and $0.3 million as of September 30, 2022 and December 31, 2021, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization and consisted of the following:
September 30, 2022December 31, 2021
Computer equipment and software$1,500 $1,397 
Manufacturing equipment5,642 4,436 
Other equipment397 249 
Leasehold improvements2,042 281 
Construction in process8,894 5,175 
Property and equipment, cost18,475 11,538 
Less: accumulated depreciation and amortization(4,341)(3,052)
Property and equipment, net$14,134 $8,486 
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 $0.5 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively, and $1.3 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively.
13

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Strategic Investments
For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These securities are presented within other non-current assets on the consolidated balance sheets. The balance of equity securities without readily determinable fair values was $10.5 million and $0 as of September 30, 2022 and December 31, 2021, respectively. There were no adjustments to the carrying amount during the nine months ended September 30, 2022.
Impairment of Long-lived Assets
Long-lived assets consist primarily of property and equipment and operating lease right-of-use asset and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require that an asset be tested for possible impairment, we compare the undiscounted cash flows expected to be generated by the asset to the carrying amount of the asset. If the carrying amount of the asset is not recoverable on an undiscounted cash flow basis, we determine the fair value of the asset and recognize an impairment loss to the extent the carrying amount of the asset exceeds its fair value. We determine fair value using the income approach based on the present value of expected future cash flows or other appropriate measures of estimated fair value. Our cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors. We did not record any impairment charges on long-lived assets during either of the nine months ended September 30, 2022 or 2021.
Accrued Expenses
Accrued expenses consisted of the following:
September 30, 2022December 31, 2021
Payroll related$21,229 $17,655 
Interest 160 
Product warranty liability628 468 
Operating lease liabilities, current portion1,249 312 
Obsolete inventory component parts990  
Other accrued expenses4,890 1,859 
Total accrued expenses$28,986 $20,454 
During the three months ended September 30, 2022, we recorded a $1.0 million accrual for obsolete inventory component parts related to product introductions which were completed in October 2022, including the new silicone leads and the Bluetooth®-enabled patient remote.
The following table shows the changes in our estimated product warranty liability accrual, included in accrued liabilities:
Three Months Ended
September 30, 2022
Nine Months Ended
September 30, 2022
2022202120222021
Balance at beginning of period$488 $283 $468 $159 
Accruals of warranties issued201 328 322 576 
Settlements of warranty claims(61)(143)(162)(267)
Balance at the end of the period$628 $468 $628 $468 
14

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Revenue Recognition
We derive our revenue from sales of our products in the U.S. and internationally. Customers are primarily comprised of hospitals and ambulatory surgery centers, with distributors being used in certain international locations where we do not have a direct commercial presence.
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.
Variable consideration related to certain customer sales incentives is estimated based on the amounts expected to be paid based on the agreement with the customer using probability assessments.
We offer customers a limited right of return for our product in case of non-conformity or performance issues. We estimate the amount of our product sales that may be returned by our customers based on historical sales and returns. As our historical product returns to date have been immaterial, we have not recorded a reduction in revenue related to variable consideration for product returns.
See Note 9 for disaggregated revenue by geographic area.
Cost of Goods Sold
Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap and inventory obsolescence, warranty replacement costs, as well as distribution-related expenses such as logistics and shipping costs, net of shipping costs charged to customers. The overhead costs include the cost of material procurement, depreciation expense for production equipment, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel.
Research and Development
Research and development expenses consist primarily of product development, clinical and regulatory affairs, quality assurance, consulting services, and other costs associated with products and technologies in development. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Clinical expenses include clinical trial design, clinical site reimbursement, data management, travel expenses, and the cost of manufacturing products for clinical trials.
Stock-Based Compensation
We maintain an equity incentive plan to provide long-term incentives for eligible employees, consultants, and members of the board of directors. The plan allows for the issuance of restricted stock units ("RSUs"), performance stock units ("PSUs"), and non-statutory and incentive stock options to employees, and RSUs, PSUs, and non-
15

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
statutory stock options to consultants and directors. We also offer an employee stock purchase plan ("ESPP") 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 based on the grant date fair value of those awards as expense in the consolidated statements of operations and comprehensive loss. We estimate the fair value of stock options using the Black-Scholes option pricing model and the fair value of RSUs and PSUs is equal to the closing price of our common stock on the grant date. The fair value of each purchase under the employee stock purchase plan is estimated at the beginning of the offering period using the Black-Scholes option pricing model.
Stock-based compensation expense is recognized on a straight-line basis over the vesting term for stock options and RSUs, and over the vesting and performance period based on the probability of achieving the performance objectives for PSUs. We account for award forfeitures as they occur.
Advertising Expenses
We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $20.1 million and $13.4 million during the three months ended September 30, 2022 and 2021, respectively, and $53.6 million and $34.0 million for the nine months ended September 30, 2022 and 2021, 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 consolidated 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 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 consolidated balance sheets.
Income Taxes
We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Valuation allowances against deferred tax assets are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than 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 consolidated 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, and foreign currency
16

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
translation adjustments. Accumulated other comprehensive loss is presented in the accompanying consolidated balance sheets as a component of stockholders' equity.
Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because we have reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share as all potentially dilutive shares consisting of outstanding stock options, unvested RSUs and PSUs, and shares issuable under our employee stock purchase plan were antidilutive in those periods.
Recent Accounting Pronouncements
We have reviewed and considered all recent accounting pronouncements that have not yet been adopted and believe there are none that could potentially have a material impact on our business practices, financial condition, results of operations, or disclosures.

3. Investments
Our investments are classified as available-for-sale and consist of the following:
September 30, 2022
AmortizedUnrealized GrossAggregate
CostGainsLossesFair Value
Short-Term:
U.S. government securities$9,998 $ $(257)$9,741 
Short-term investments$9,998 $ $(257)$9,741 
December 31, 2021
AmortizedUnrealized GrossAggregate
CostGainsLossesFair Value
Long-Term:
U.S. government securities$9,993 $ $(55)$9,938 
Long-term investments$9,993 $ $(55)$9,938 
As of September 30, 2022 and December 31, 2021, 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 September 30, 2022. 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
We lease approximately 70,000 square feet of office space for our corporate headquarters under non-cancelable operating leases. The leases expire May 31, 2028 with options to renew for one additional period of five years at the
17

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
then-prevailing market rate. The exercises of the lease renewal options are at our sole discretion and were not included in the lease term for the calculation of the ROU assets and lease liabilities when the leases commenced as they were not reasonably certain of exercise.
In addition to base rent, we also pay our proportionate share of the operating expenses, as defined in the leases. These payments are made monthly and adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes, and insurance. In conjunction with the leases, the landlord agreed to provide total rent abatement of $2.3 million.
The following table presents the lease balances within the consolidated balance sheets:
September 30, 2022December 31, 2021
Right-of-use assets:
Operating lease right-of-use assets$7,141 $7,919 
Operating lease liabilities:
Accrued expenses1,249 312 
Operating lease liabilities, non-current portion7,882 8,796 
Total operating lease liabilities$9,131 $9,108 
As of September 30, 2022, the remaining lease term was 5.7 years and the weighted average discount rate was 5.3%. The operating cash outflows from our operating leases were $0.2 million and $0.1 million for the three-month periods ended September 30, 2022 and 2021, respectively, and $0.3 million and $0.1 million for the nine-month periods ended September 30, 2022 and 2021, respectively.

5. Long-Term Debt
In March 2019 we amended our $24.5 million term loan and security agreement, which we refer to as our credit facility. The debt was interest only until April 1, 2022 and was scheduled to mature on March 1, 2024. The basic interest rate was the 30-day U.S. LIBOR rate, subject to a floor of 7.60%. In addition to the principal and interest payments, we were required to pay a final payment fee of 3.50% on all amounts outstanding, which was being accreted using the effective interest rate method over the term of the credit facility and was to be due at the earlier of maturity or prepayment. Borrowings were prepayable in whole at our option, subject to a prepayment fee of 1.00%.
In August 2022, we prepaid the outstanding principal balance of $19.4 million, the final payment fee of $0.9 million, and the prepayment fee of $0.2 million. As of September 30, 2022, we had no remaining amounts outstanding under our credit facility.

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. Beginning January 1, 2022, we elected to begin making voluntary matching contributions to the plan. We match 50% of the first 6% of each participating employee's contribution, up to 3% of eligible earnings. Our match contributions are made to funds designated by the participant, none of which are based on Inspire common stock. Discretionary contributions to the plan totaled $0.6 million and $1.9 million for the three and nine months ended September 30, 2022, respectively.

18

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
7. Stock-Based Compensation
As of September 30, 2022, there were 3,901,372 shares reserved for issuance under our equity incentive plan, of which 1,442,551 shares were available for issuance.
Stock-based compensation expense is recognized on a straight-line basis over the vesting term for stock options and RSUs, and over the performance period based on the probability of achieving the performance objectives for PSUs, and is reduced by actual forfeitures as they occur. 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.
Stock Options
Options are granted at the exercise price, which is equal to the closing price of our stock on the date of grant. The stock options granted to employees include a four-year service period and 25% vest after the first year of service and the remainder vest in equal installments over the next 36 months of service. The stock options granted to the board of directors vest in one or three equal annual installments, in each case, subject to the director's continuous service through the applicable vesting date. The stock options have a contractual life of ten years.
A summary of stock option activity and related information is as follows:
OptionsWeighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(years)
Aggregate Intrinsic
Value
(in thousands)
Outstanding at December 31, 20212,646,235 $80.41 7.1$397,015
Granted437,204 $215.17 
Exercised(239,395)$26.74 $44,916
Forfeited/expired(55,738)$158.14 
Outstanding at September 30, 20222,788,306 $104.60 7.0$234,024
Exercisable at September 30, 20221,696,492 $60.11 6.1$204,074
The aggregate intrinsic value of options exercised is the difference between the estimated fair market value of our common stock at the date of exercise and the exercise price for those options. The aggregate intrinsic value of outstanding options is the difference between the closing price as of the date outstanding and the exercise price of the underlying stock options.
As of September 30, 2022, the amount of unearned stock-based compensation to be expensed from now through the year 2026 related to unvested employee and non-employee director stock options is $89.6 million, which we expect to recognize over a weighted average period of 2.4 years.
The fair value of options was estimated as of the grant date using the Black-Scholes option pricing model using the following assumptions:
19

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Nine Months Ended
September 30,
20222021
Expected term (years)
5.50 - 6.25
5.50 - 6.25
Expected volatility
56.2 - 57.0%
55.0 - 55.9%
Risk-free interest rate
1.75 - 4.06%
0.79 - 1.40%
Expected dividend yield0.0%0.0%
Weighted average fair value$119.23$109.81

Expected Term — Due to our limited amount of historical exercise, forfeiture, and expiration activity, we have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting terms and the original contractual term of the option. We will continue to analyze our expected term assumption as more historical data becomes available.
Expected Volatility — Due to our limited operating history and a lack of company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a group of similar companies that are publicly traded for the calculation of volatility. When selecting this peer group of public companies on which we have based our expected stock price volatility, we generally selected companies with comparable characteristics to it, including enterprise value, stages of clinical development, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available.
Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. government Treasury instruments with maturities similar to the expected term of our stock options.
Expected Dividend Yield — The expected dividend assumption is based on our history of not paying dividends and our expectation that we will not declare dividends for the foreseeable future.
Restricted Stock Units
RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. The RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s employment terminates prior to the release of the vesting restrictions. The RSUs generally include a three-year service period and vest in equal installments on each anniversary of the date of grant, provided the employee remains continuously employed with the Company.
A summary of RSUs and related information is as follows:
Restricted Stock UnitsWeighted Average
Grant Date Fair Value
Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 20212,275 $201.51 $524 
Granted110,191 $211.21 
Vested(569)$201.51 $118 
Forfeited(3,967)$222.02 
Unvested at September 30, 2022107,930 $210.66 $19,144 
The fair value of the RSUs is equal to the closing price of our common stock on the grant date. The aggregate intrinsic value of RSUs outstanding was based on our closing stock price on the last trading day of the period. As of
20

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
September 30, 2022, there was $19.3 million of unrecognized stock-based compensation expense related to RSUs that is expected to be recognized over a weighted average period of 2.6 years.
Performance Stock Units
During the quarter ended March 31, 2022, the Company granted PSUs to officers and key employees. The number of PSUs that will ultimately be earned is based on our performance relative to a pre-established goal for the three-year period ending December 31, 2024. The expense is recorded on a straight-line basis over the requisite service period based on an estimate of the number of PSUs expected to vest. Management expectations related to the achievement of the performance goal associated with PSU grants is assessed each reporting period. The number of shares earned at the end of the three-year period will vary based on actual performance, from 0% to 200% of the number of PSUs granted. If the performance condition is not met or not expected to be met, any compensation expense recognized associated with the grant will be reversed.
A summary of PSUs and related information is as follows:
Performance Stock UnitsWeighted Average
Grant Date Fair Value
Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 2021 $ $ 
Granted78,351 $227.53 
Forfeited(879)$227.53 
Unvested at September 30, 202277,472 $227.53 $13,741 
There were no PSUs granted prior to 2022. The fair value of the PSUs is equal to the closing price of our common stock on the grant date. As of September 30, 2022, there was $25.3 million of unrecognized stock-based compensation expense related to outstanding PSUs that is expected to be recognized over a period of approximately 2.5 years.
Employee Stock Purchase Plan
Employees may participate in our ESPP provided they meet certain eligibility requirements. The purchase price for our common stock under the terms of the ESPP is defined as 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. On June 30, 2022, 13,743 shares were purchased under the ESPP using employee contributions.

8. Income Taxes
At both September 30, 2022 and December 31, 2021, a valuation allowance was recorded against all deferred tax assets due to our cumulative net loss position. We recorded income tax expense of $0.2 million and $0.0 million in the three months ended September 30, 2022 and 2021, respectively, and $0.5 million and $0.1 million in the nine months ended September 30, 2022 and 2021, respectively. The nominal income tax expense in those periods reflects minimal state income tax expense and an accrual for uncertain tax benefits.
As of December 31, 2021, our gross federal net operating loss carryforward was $286.6 million, which will expire at various dates beginning in 2028. In addition, net operating loss carryforwards for state income tax purposes of $198.2 million that include net operating losses will begin to expire in 2023. We also have gross research and development credit carryforwards of $7.0 million as of December 31, 2021, 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
21

Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
have not performed a detailed analysis to determine whether an ownership change has occurred. Such a change of ownership would limit our utilization of the net operating losses and could be triggered by subsequent sales of securities by us or our stockholders.
Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence and cumulative losses, we believe it is more likely than not that the deferred tax assets are not recognizable and will not be recognizable until we have sufficient taxable income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.
We had $0.1 million of gross unrecognized tax benefits as of each of September 30, 2022 and December 31, 2021.
We file income tax returns in the applicable jurisdictions. The 2018 to 2021 tax years remain open to examination by the IRS, while the 2018 to 2020 tax years remain open to examination by all other major taxing authorities to which we are subject. We do not expect a significant change to our unrecognized tax benefits over the next 12 months.

9. Segment Reporting and Revenue Disaggregation
We operate our business as one reporting segment. An operating segment is defined as a component of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.
We sell our Inspire system to hospitals and ambulatory surgery centers in the U.S. and in select countries in Europe through a direct sales organization, and in Japan and Singapore through distributors. Revenue by geographic region is as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2022202120222021
United States$106,279 $58,298 $260,581 $145,420 
All other countries2,909 3,387 9,375 9,576 
Total revenue$109,188 $61,685 $269,956 $154,996 
All of our long-lived assets are located in the U.S.

10. Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because we have reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share as all of the following potentially dilutive shares were antidilutive in those periods.