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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________________
FORM 10-Q
________________________________

(Mark One) |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019 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
______________________________
Inspire Medical Systems, Inc.
(Exact name of registrant as specified in its charter)
______________________________

Delaware | 26-1377674
(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)

Registrant's telephone number, including area code: (844) 672-4357
Not Applicable
(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 class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, $0.001 par value per share |  | INSP |  | New 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 July 31, 2019, the registrant had 23,909,874 shares of common stock, $0.001 par value per share, outstanding.

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Table of Contents

|  |  | Page
PART I. | FINANCIAL INFORMATION |  | 5
Item 1. | Financial Statements |  | 5
| Balance Sheets as of June 3 0, 2019 (unaudited) and December 31, 2018 |  | 5
| Statements of Operations and Comprehensive Loss for the Three and Six Months ended June 30, 2019 and 2018 (unaudited) |  | 6
| Statements of Stockholders' Equity for the Three and Six Months ended June 30, 2019 and 2018 (unaudited) |  | 7
| Statements of Cash Flows for the Six Months ended June 30, 2019 and 2018 (unaudited) |  | 9
| Notes to Financial Statements (unaudited) |  | 10
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 27
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |  | 37
Item 4. | Controls and Procedures |  | 37
PART II. | OTHER INFORMATION |  | 38
Item 1. | Legal Proceedings |  | 38
Item 1A. | Risk Factors |  | 38
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |  | 38
Item 3. | Defaults Upon Senior Securities |  | 38
Item 4. | Mine Safety Disclosures |  | 38
Item 5. | Other Information |  | 38
Item 6. | Exhibits |  | 39
Signatures |  |  | 40

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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, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, other insurance providers' plans to begin approving our Inspire therapy, ceasing to qualify as an emerging growth company or a smaller reporting company as of December 31, 2019, and the plans and objectives of management for future operations and future results of anticipated products are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
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;
•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;
•estimates regarding the annual total addressable market and demand for our Inspire therapy in the United States and our market opportunity outside the United States;
•our dependence on third-party suppliers and contract manufacturers;
•risks related to consolidation in the healthcare industry;
•our business model and strategic plans for our products, technologies and business, including our implementation thereof;
•our ability to accurately forecast customer demand for our Inspire system and manage our inventory;
•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 increase the number of active medical centers implanting Inspire therapy;
•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;
•our ability to successfully integrate any acquired companies;
3

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•changes in global macroeconomic conditions;
•any failure of information technology systems, processes or sites or damage to our physical facilities;
•our ability to commercialize or obtain regulatory approvals for our Inspire therapy and system, or the effect of delays in commercializing or obtaining regulatory approvals;
•any violations of anti-bribery, anti-corruption and anti-money laundering laws;
•risks related to our indebtedness;
•our ability to use our net operating losses and research and development carryforwards;
•the risk that we may be deemed to be an investment company under the Investment Company Act of 1940;
•FDA or other United States. or foreign regulatory actions affecting us or the healthcare industry generally, including healthcare reform measures in the United States and international markets;
•our ability to establish and maintain intellectual property protection for our Inspire therapy and system or avoid claims of infringement;
•risks related to our ceasing to qualify as a smaller reporting company or an emerging growth company;
•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 1A. Risk Factors," "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part I, Item 1. Business" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
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.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
INSPIRE MEDICAL SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)

|  | June 30, 2019 |  | December 31, 2018
|  | (Unaudited) |  |
Assets |  |  |  |
Current assets: |  |  |  |
Cash and cash equivalents |  | $ | 51,268 |  | $ | 97,288
Investments, short-term |  | 107,352 |  | 90,922
Accounts receivable, net |  | 9,465 |  | 6,667
Inventories |  | 3,561 |  | 2,667
Prepaid expenses and other current assets |  | 5,596 |  | 1,734
Total current assets |  | 177,242 |  | 199,278
Investments, long-term |  | 6,116 |  | —
Property and equipment, net |  | 1,826 |  | 802
Other non-current asset |  | 381 |  | —
Total assets |  | $ | 185,565 |  | $ | 200,080
Liabilities and stockholders' equity |  |  |  |
Current liabilities: |  |  |  |
Accounts payable |  | $ | 2,681 |  | $ | 3,429
Accrued expenses |  | 5,980 |  | 7,726
Total current liabilities |  | 8,661 |  | 11,155
Notes payable |  | 24,415 |  | 24,926
Total liabilities |  | 33,076 |  | 36,081
Stockholders' equity: |  |  |  |
Common Stock, $0.001 par value per share; 200,000,000 shares authorized at June 30, 2019 and December 31, 2018; 23,900,730 and 23,401,675 issued and outstanding at June 30, 2019 and December 31, 2018, respectively |  | 24 |  | 23
Additional paid-in capital |  | 315,243 |  | 310,941
Accumulated other comprehensive income (loss) |  | 51 |  | (52)
Accumulated deficit |  | (162,829) |  | (146,913)
Total stockholders' equity |  | 152,489 |  | 163,999
Total liabilities and stockholders' equity |  | $ | 185,565 |  | $ | 200,080

The accompanying notes are an integral part of these unaudited financial statements.
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INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
(in thousands, except share and per share amounts)

|  | Three Months Ended June 30, |  |  |  | Six Months Ended June 30, |  |
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Revenue |  | $ | 18,032 |  | $ | 10,938 |  | $ | 34,282 |  | $ | 20,980
Cost of goods sold |  | 3,094 |  | 2,102 |  | 5,948 |  | 4,396
Gross profit |  | 14,938 |  | 8,836 |  | 28,334 |  | 16,584
Operating expenses: |  |  |  |  |  |  |  |
Research and development |  | 2,846 |  | 1,735 |  | 5,449 |  | 3,465
Selling, general and administrative |  | 20,268 |  | 12,738 |  | 39,838 |  | 23,951
Total operating expenses |  | 23,114 |  | 14,473 |  | 45,287 |  | 27,416
Operating loss |  | (8,176) |  | (5,637) |  | (16,953) |  | (10,832)
Other (income) expense: |  |  |  |  |  |  |  |
Interest income |  | (1,036) |  | (348) |  | (2,122) |  | (408)
Interest expense |  | 523 |  | 550 |  | 1,060 |  | 1,935
Other (income) expense, net |  | (13) |  | 17 |  | 25 |  | (2)
Total other (income) expense |  | (526) |  | 219 |  | (1,037) |  | 1,525
Loss before income taxes |  | (7,650) |  | (5,856) |  | (15,916) |  | (12,357)
Income taxes |  | — |  | — |  | — |  | —
Net loss |  | (7,650) |  | (5,856) |  | (15,916) |  | (12,357)
Other comprehensive loss: |  |  |  |  |  |  |  |
Unrealized gain on investments |  | 35 |  | — |  | 103 |  | —
Total comprehensive loss |  | $ | (7,615) |  | $ | (5,856) |  | $ | (15,813) |  | $ | (12,357)
Net loss per share, basic and diluted |  | $ | (0.32) |  | $ | (0.43) |  | $ | (0.67) |  | $ | (1.66)
Weighted average common shares used to compute net loss per share, basic and diluted |  | 23,753,647 |  | 13,543,558 |  | 23,598,466 |  | 7,448,955

The accompanying notes are an integral part of these unaudited financial statements.
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INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
(in thousands, except share amounts)

| Three Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  |  |  |  |  |  | Accumulated Other Comprehensive Income |  | Accumulated Deficit |  | Total Stockholders' Equity
Balance at March 31, 2019 | 23,503,010 |  | $ | 24 |  | $ | 312,555 |  |  |  |  |  |  | $ | 16 |  | $ | (155,179) |  | $ | 157,416
Stock options exercised | 378,490 |  | — |  | 604 |  |  |  |  |  |  | — |  | — |  | 604
Issuance of common stock | 1,043 |  | — |  | 58 |  |  |  |  |  |  | — |  | — |  | 58
Issuance of common stock for employee stock purchase plan | 18,187 |  | — |  | 637 |  |  |  |  |  |  | — |  | — |  | 637
Stock-based compensation expense | — |  | — |  | 1,389 |  |  |  |  |  |  | — |  | — |  | 1,389
Other comprehensive income | — |  | — |  | — |  |  |  |  |  |  | 35 |  | — |  | 35
Net loss | — |  | — |  | — |  |  |  |  |  |  | — |  | (7,650) |  | (7,650)
Balance at June 30, 2019 | 23,900,730 |  | $ | 24 |  | $ | 315,243 |  |  |  |  |  |  | $ | 51 |  | $ | (162,829) |  | $ | 152,489

| Six Months Ended June 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Common Stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  |  |  |  |  |  | Accumulated Other Comprehensive Income (Loss) |  | Accumulated Deficit |  | Total Stockholders' Equity
Balance at December 31, 2018 | 23,401,675 |  | $ | 23 |  | $ | 310,941 |  |  |  |  |  |  | $ | (52) |  | $ | (146,913) |  | $ | 163,999
Stock options exercised | 478,579 |  | 1 |  | 769 |  |  |  |  |  |  | — |  | — |  | 770
Issuance of common stock | 2,289 |  | — |  | 116 |  |  |  |  |  |  | — |  | — |  | 116
Issuance of common stock for employee stock purchase plan | 18,187 |  | — |  | 637 |  |  |  |  |  |  | — |  | — |  | 637
Stock-based compensation expense | — |  | — |  | 2,780 |  |  |  |  |  |  | — |  | — |  | 2,780
Other comprehensive income | — |  | — |  | — |  |  |  |  |  |  | 103 |  | — |  | 103
Net loss | — |  | — |  | — |  |  |  |  |  |  | — |  | (15,916) |  | (15,916)
Balance at June 30, 2019 | 23,900,730 |  | $ | 24 |  | $ | 315,243 |  |  |  |  |  |  | $ | 51 |  | $ | (162,829) |  | $ | 152,489

The accompanying notes are an integral part of these unaudited financial statements.
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INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
(in thousands, except share amounts)

| Three Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Common Stock |  |  |  |  |  |  | Convertible Preferred Stock |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  |  | Shares |  | Amount |  |  |  | Accumulated Deficit |  | Total Stockholders' (Deficit) Equity
Balance at March 31, 2018 | 1,379,099 |  | $ | 1 |  | $ | 7,546 |  |  | 76,235,050 |  | $ | 119,106 |  |  |  | $ | (131,586) |  | $ | (4,933)
Stock options exercised | 99,665 |  | — |  | 200 |  |  | — |  | — |  |  |  | — |  | 200
Sale of common stock from initial public offering, net of offering expenses | 7,762,500 |  | 8 |  | 112,032 |  |  | — |  | — |  |  |  | — |  | 112,040
Conversion of preferred stock to common stock | 12,111,710 |  | 12 |  | 119,094 |  |  | (76,235,050) |  | (119,106) |  |  |  | — |  | —
Conversion of warrants to purchase preferred stock to warrants to purchase common stock | — |  | — |  | 855 |  |  | — |  | — |  |  |  | — |  | 855
Stock-based compensation expense | — |  | — |  | 269 |  |  | — |  | — |  |  |  | — |  | 269
Net loss | — |  | — |  | — |  |  | — |  | — |  |  |  | (5,856) |  | (5,856)
Balance at June 30, 2018 | 21,352,974 |  | $ | 21 |  | $ | 239,996 |  |  | — |  | $ | — |  |  |  | $ | (137,442) |  | $ | 102,575

| Six Months Ended June 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Common Stock |  |  |  |  |  |  | Convertible Preferred Stock |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  |  | Shares |  | Amount |  |  |  | Accumulated Deficit |  | Total Stockholders' Equity
Balance at December 31, 2017 | 1,272,360 |  | $ | 1 |  | $ | 7,305 |  |  | 76,235,050 |  | $ | 119,106 |  |  |  | $ | (125,085) |  | $ | 1,327
Stock options exercised | 206,404 |  | — |  | 386 |  |  | — |  | — |  |  |  | — |  | 386
Sale of common stock from initial public offering, net of offering expenses | 7,762,500 |  | 8 |  | 112,032 |  |  | — |  | — |  |  |  | — |  | 112,040
Conversion of preferred stock to common stock | 12,111,710 |  | 12 |  | 119,094 |  |  | (76,235,050) |  | (119,106) |  |  |  | — |  | —
Conversion of warrants to purchase preferred stock to warrants to purchase common stock | — |  | — |  | 855 |  |  | — |  | — |  |  |  | — |  | 855
Stock-based compensation expense | — |  | — |  | 324 |  |  | — |  | — |  |  |  | — |  | 324
Net loss | — |  | — |  | — |  |  | — |  | — |  |  |  | (12,357) |  | (12,357)
Balance at June 30, 2018 | 21,352,974 |  | $ | 21 |  | $ | 239,996 |  |  | — |  | $ | — |  |  |  | $ | (137,442) |  | $ | 102,575

The accompanying notes are an integral part of these unaudited financial statements.
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INSPIRE MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

|  | Six Months Ended June 30, |  |
|  | 2019 |  | 2018
Operating activities |  |  |  |
Net loss |  | $ | (15,916) |  | $ | (12,357)
Adjustments to reconcile net loss: |  |  |  |
Depreciation and amortization |  | 209 |  | 188
Accretion of investment discount |  | (609) |  | —
Accretion of debt discount |  | 161 |  | 339
Stock-based compensation expense |  | 2,780 |  | 324
Non-cash stock issuance for services rendered |  | 116 |  | —
Change in the fair value of preferred stock warrants |  | — |  | 595
Other, net |  | (141) |  | —
Changes in operating assets and liabilities: |  |  |  |
Accounts receivable |  | (2,801) |  | (630)
Inventories |  | (894) |  | 122
Prepaid expenses and other current assets |  | (4,241) |  | (607)
Accounts payable |  | (745) |  | (753)
Accrued expenses |  | (1,745) |  | 227
Net cash used in operating activities |  | (23,826) |  | (12,552)
Investing activities |  |  |  |
Purchases of property and equipment, net of disposals |  | (1,233) |  | (59)
Purchases of investments |  | (101,037) |  | (5,138)
Proceeds from sales or maturities of investments |  | 79,204 |  | 10,220
Net cash (used in) provided by investing activities |  | (23,066) |  | 5,023
Financing activities |  |  |  |
Proceeds from issuance of notes payable |  | — |  | 8,000
Proceeds from the exercise of stock options |  | 769 |  | 386
Proceeds from sale of common stock |  | — |  | 112,041
Proceeds from issuance of common stock from employee stock purchase plan |  | 637 |  | —
Payment of debt fees |  | (531) |  | —
Net cash provided by financing activities |  | 875 |  | 120,427
Effect of exchange rate on cash |  | (3) |  | —
(Decrease) increase in cash and cash equivalents |  | (46,020) |  | 112,898
Cash and cash equivalents at beginning of period |  | 97,288 |  | 8,955
Cash and cash equivalents at end of period |  | $ | 51,268 |  | $ | 121,853
Supplemental cash flow information |  |  |  |
Cash paid for interest |  | $ | 1,087 |  | $ | 893
Issuance of preferred stock warrants |  | — |  | 103

The accompanying notes are an integral part of these unaudited financial statements.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
1. Organization
Description of Business
Inspire Medical Systems, Inc. is a medical technology company focused on the development and commercialization of innovative and minimally invasive solutions for patients with obstructive sleep apnea ("OSA"). Our proprietary Inspire system is the first and only 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 received premarket approval ("PMA") from the United States ("U.S.") Food and Drug Administration ("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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements may not include all disclosures required by U.S. generally accepted accounting principles ("U.S. GAAP"); however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications had no material effect on the reported results of operations.
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 and commissions and offering expenses payable by us. In connection with the IPO, our outstanding shares of convertible preferred stock were automatically converted into an aggregate of 12,111,710 shares of common stock, and our outstanding warrants to purchase shares of convertible preferred stock were automatically converted into warrants to purchase up to an aggregate of 100,558 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock warrant liability of $0.9 million to additional paid-in capital ("APIC").
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
Follow-On Public Offering
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 discounts and commissions and offering expenses. We received no proceeds from the sale of our common stock by the selling stockholders.
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 doubtful accounts, inventory reserves, warranty reserves, and the valuations of our common stock prior to our IPO, share-based awards, and certain of our previously outstanding preferred stock warrants. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
JOBS Act Accounting Election
As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to take advantage of the extended transition period for adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.
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 June 30, 2019 and December 31, 2018, our short-term investments consisted of commercial paper, corporate bonds, asset-backed securities, and U.S. government securities which are classified as available-for-sale debt securities and had maturities less than one year. Our long-term investments consisted of corporate bonds and asset-backed securities. Investments are reported at their estimated fair market value which approximates cost. Any unrealized gains and losses are reported as a separate component of accumulated other comprehensive income (loss). We had $0.1 million of unrecognized income and $0.1 million of unrecognized loss in accumulated other comprehensive income (loss) balance at June 30, 2019 and December 31, 2018, respectively. Any realized gains and losses are calculated on the specific identification method and reported net in other (income) expense, net. For the three and six months ended June 30, 2019 and 2018, we recognized $0 of gains, net.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
We review our investment portfolio periodically to assess for other-than-temporary impairment. Should we determine that any unrealized losses on the investments are other-than-temporary, the amount of that impairment to be recognized in earnings will depend on whether we intend to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss.
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 and repurchase agreements: Short-term, highly liquid investments are included as a Level 2 measurement in the tables below.
Corporate bonds: Consists of notes and bonds with original maturities of less than one year and 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 tables below.
U.S. government securities: Consists of U.S. government Treasury bills with original maturities of less than one year. These are included as a Level 1 measurement in the table below.
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 June 30, 2019 and December 31, 2018. 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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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)

|  | Fair Value Measurements as of |  |  |  |  |  |
|  | June 30, 2019 |  |  |  |  |  |
|  | Estimated Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Cash equivalents: |  |  |  |  |  |  |  |
Money market funds |  | $ | 24,801 |  | $ | 24,801 |  | $ | — |  | $ | —
Repurchase agreements |  | 25,000 |  | — |  | 25,000 |  | —
Total cash equivalents |  | 49,801 |  | 24,801 |  | 25,000 |  | —
Investments: |  |  |  |  |  |  |  |
Commercial paper |  | $ | 17,384 |  | $ | — |  | $ | 17,384 |  | $ | —
Corporate bonds |  | 23,242 |  | — |  | 23,242 |  | —
Asset-backed securities |  | 15,534 |  | — |  | 15,534 |  | —
U.S. government securities |  | 57,308 |  | 57,308 |  | — |  | —
Total investments |  | 113,468 |  | 57,308 |  | 56,160 |  | —
Total cash equivalents and investments |  | $ | 163,269 |  | $ | 82,109 |  | $ | 81,160 |  | $ | —

|  | Fair Value Measurements as of |  |  |  |  |  |
|  | December 31, 2018 |  |  |  |  |  |
|  | Estimated Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Cash equivalents: |  |  |  |  |  |  |  |
Money market funds |  | $ | 94,700 |  | $ | 94,700 |  | $ | — |  | $ | —
Total cash equivalents |  | 94,700 |  | 94,700 |  | — |  | —
Investments: |  |  |  |  |  |  |  |
Commercial paper |  | $ | 27,898 |  | $ | — |  | $ | 27,898 |  | $ | —
Corporate bonds |  | 28,012 |  | — |  | 28,012 |  | —
Asset-backed securities |  | 17,055 |  | — |  | 17,055 |  | —
U.S. government securities |  | 17,957 |  | 17,957 |  | — |  | —
Total investments |  | 90,922 |  | 17,957 |  | 72,965 |  | —
Total cash equivalents and investments |  | $ | 185,622 |  | $ | 112,657 |  | $ | 72,965 |  | $ | —

There were no transfers between levels during the periods ended June 30, 2019 and December 31, 2018.
The recurring Level 3 fair value measurements of our preferred stock warrant liabilities used the Black-Scholes option pricing model and value of the respective class of our convertible preferred stock (see Note 8), which was unobservable. All other assumptions included in the model are observable Level 1 inputs.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
The following table provides a reconciliation of the beginning and ending balances of our preferred stock warrant liabilities:

|  | Three Months Ended |  |  |  | Six Months Ended |  |
|  | June 30, |  |  |  | June 30, |  |
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Balance at beginning of period |  | $ | — |  | $ | 978 |  | $ | — |  | $ | 157
Initial fair value of preferred stock warrants issued |  | — |  | — |  | — |  | 103
Reclassified to equity |  | — |  | (855) |  | — |  | (855)
Change in fair value of preferred stock warrants |  | — |  | (123) |  | — |  | 595
Balance at end of period |  | $ | — |  | $ | — |  | $ | — |  | $ | —

Changes in the fair value of the preferred stock warrant liability were recorded in interest expense on the statements of operations and comprehensive loss. In connection with the closing of the IPO in May 2018, warrants to purchase shares of preferred stock automatically converted into warrants to purchase shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liability to APIC.
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 June 30, 2019 and December 31, 2018, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy.
We believe that the credit risk in our accounts receivable is mitigated by our credit evaluation process, relatively short collection terms, and dispersion of our customer base. We generally do not require collateral, and losses on accounts receivable have historically been within management's expectations.
Accounts Receivable and Allowance for Doubtful Accounts
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 record an allowance for doubtful accounts for accounts receivable deemed uncollectible. We evaluate the collectability of our accounts receivable based on known collection risks and historical experience. In circumstances where we are aware of a specific customer's inability to meet its financial obligations to us (e.g., bankruptcy filings or substantial downgrading of credit ratings), we record a specific allowance for bad debts against amounts due to reduce the carrying amount of accounts receivable to the amount we reasonably believe will be collected. Specific accounts receivable are written-off once a determination is made that the account is uncollectible. The allowance for doubtful accounts was less than $0.1 million as of each of June 30, 2019 and December 31, 2018.
Inventories
Inventories are valued at the lower of cost or net realizable value, computed on a first-in, first-out basis. 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. Our review of inventory for excess and obsolete quantities is based primarily on the estimated forecast of future product demand, product life cycles, including
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
expiration of inventory prior to sale, and introduction of new products. The reserve for excess and obsolete inventory was $0.9 million as of June 30, 2019 and $0.8 million at December 31, 2018.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. 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.
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 either of the six months ended June 30, 2019 and 2018.
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.
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 its 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.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
See Note 11 for disaggregated revenue by geographic area.
Cost of Goods Sold
Cost of goods sold consists primarily of manufacturing overhead costs, material costs, and direct labor. Overhead costs include the cost of material procurement, inventory control, facilities, equipment, and operations supervision and management, including employee compensation, stock-based compensation, supplies, and travel. Cost of goods sold also includes depreciation expense for production equipment, warranty replacement costs, and certain direct costs such as shipping costs.
Research and Development
Research and development expenses consist primarily of product development, clinical and regulatory affairs, consulting services, and other costs associated with products and technologies in development. These expenses include employee compensation, stock-based compensation, supplies, travel, and facility costs. Clinical expenses include clinical trial design, clinical site reimbursement, data management, travel expenses, and the cost of manufacturing products for clinical trials.
Common Stock Valuation and 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 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. We have not granted any restricted shares. We have not granted any share-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.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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 $4.4 million and $2.5 million during the three months ended June 30, 2019 and 2018, respectively, and $7.9 million and $4.7 million during the six months ended June 30, 2019 and 2018, respectively.
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. Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the statements of operations and comprehensive loss.
Comprehensive Loss
Comprehensive loss consists of net loss and changes in unrealized gains and losses on investments classified as available-for-sale. Accumulated other comprehensive income (loss) is presented in the accompanying balance sheets as a component of stockholders' equity.
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 preferred stock, stock options and warrants were antidilutive in those periods.
Recent Accounting Pronouncements
We currently are an emerging growth company as defined by the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the "Securities Act"), for complying with new or revised accounting standards. Accordingly, an emerging growth company can selectively delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to avail ourselves of this exemption and, as a result, our financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. Section 107 of the JOBS Act provides that we can elect to opt out of the extended transition period at any time, which election is irrevocable. However, we will no longer qualify as an emerging growth company as of December 31, 2019 and will no longer be able to take advantage of the extended transition period. Therefore, as of December 31, 2019, we will be required to adopt new or revised accounting standards when they are applicable to public companies that are not emerging growth companies.
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02"), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases with lease terms greater than 12 months. Lessor accounting remains largely unchanged. We currently are an emerging growth company as defined by the JOBS Act and previously disclosed that these amendments would become effective for us for interim and annual periods beginning after December 15, 2019. However, this ASU will instead become effective for us on December 31, 2019 when we no longer qualify for that status. ASU 2016-02 requires a modified retrospective approach for all
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
leases existing at, or entered into after, the date of initial adoption, with an option to elect to use certain transition relief. We are working to determine the anticipated impact of the adoption of this ASU on our financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, to require the measurement of expected credit losses for financial instruments held at the reporting date to be based on historical experience, current conditions and reasonable forecasts. The ASU will become effective for us for interim and annual periods beginning January 1, 2020. We are currently evaluating the impact of this ASU on our financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in the standard apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. ASU 2018-13 removes, modifies, and adds certain disclosure requirements in ASC 820, Fair Value Measurement. The standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of this ASU on our financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15") which clarifies and aligns the accounting for implementation costs for hosting arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact of this ASU on our financial statements and related disclosures.
We have reviewed and considered all other recent accounting pronouncements and believe there are none that could potentially have a material impact on our business practices, financial condition, results of operations, or disclosures.
3. Composition of Certain Financial Statement Items
Inventories

|  | June 30, 2019 |  | December 31, 2018
Raw materials |  | $ | 1,026 |  | $ | 802
Finished goods |  | 2,535 |  | 1,865
Total inventories, net of reserves |  | $ | 3,561 |  | $ | 2,667

Property and Equipment

|  | June 30, 2019 |  | December 31, 2018
Computer equipment and software |  | $ | 698 |  | $ | 333
Furniture and office equipment |  | — |  | 4
Manufacturing equipment |  | 1,604 |  | 1,049
Research and development equipment |  | 52 |  | 30
Leasehold improvements |  | 192 |  | 185
Property and equipment, cost |  | 2,546 |  | 1,601
Less: accumulated depreciation and amortization |  | (720) |  | (799)
Property and equipment, net |  | 1,826 |  | $ | 802

Depreciation and amortization expense was $0.1 million for both the three months ended June 30, 2019 and 2018, and $0.2 million for both the six months ended June 30, 2019 and 2018.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
Accrued Expenses

|  | June 30, 2019 |  | December 31, 2018
Payroll and commissions payable |  | $ | 5,095 |  | $ | 6,490
Interest |  | 155 |  | 195
Other accrued expenses |  | 730 |  | 1,041
Total accrued expenses |  | $ | 5,980 |  | $ | 7,726

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

|  | June 30, 2019 |  |  |  |  |  |
|  |  |  | Unrealized |  |  |  |
|  | Cost |  | Gains |  | Losses |  | Fair Value
Short-Term: |  |  |  |  |  |  |  |
Commercial paper |  | $ | 17,384 |  | $ | — |  | $ | — |  | $ | 17,384
Corporate bonds |  | 20,208 |  | 14 |  | (5) |  | 20,217
Asset-backed securities |  | 12,438 |  | 5 |  | — |  | 12,443
U.S. government securities |  | 57,277 |  | 31 |  | — |  | 57,308
Short-term investments |  | $ | 107,307 |  | $ | 50 |  | $ | (5) |  | $ | 107,352
Long-Term: |  |  |  |  |  |  |  |
Corporate bonds |  | $ | 3,019 |  | $ | 6 |  | $ | — |  | $ | 3,025
Asset-backed securities |  | 3,091 |  | — |  | — |  | 3,091
Long-term investments |  | $ | 6,110 |  | $ | 6 |  | $ | — |  | $ | 6,116

|  | December 31, 2018 |  |  |  |  |  |
|  |  |  | Unrealized |  |  |  |
|  | Cost |  | Gains |  | Losses |  | Fair Value
Short-Term: |  |  |  |  |  |  |  |
Commercial paper |  | $ | 27,898 |  | $ | — |  | $ | — |  | $ | 27,898
Corporate bonds |  | 28,043 |  | — |  | (31) |  | 28,012
Asset-backed securities |  | 17,074 |  | — |  | (19) |  | 17,055
U.S. government securities |  | 17,959 |  | — |  | (2) |  | 17,957
Short-term investments |  | $ | 90,974 |  | $ | — |  | $ | (52) |  | $ | 90,922

As of June 30, 2019 and December 31, 2018, we had no investments with a contractual maturity of greater than two years. Currently, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. We do not consider those investments to be other-than-temporarily impaired at June 30, 2019.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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, which provided for a term A loan facility in the amount of $15.5 million, the proceeds of which were used to refinance the $12.0 million of borrowings outstanding under our original credit facility, and a term B loan facility in an amount between $3.5 million and $10.0 million, subject to our achievement of certain revenue milestones. Amounts outstanding under the credit facility bore interest at a fixed rate of 7.95% per annum.
In February 2017, we amended the loan and security agreement. Under the loan and security agreement, as amended, and subject to the limitation noted below, amounts outstanding under the credit facility bear interest at a floating interest rate equal to the greater of 7.95% or LIBOR plus 6.9% per annum. Upon execution of the amendment, we borrowed an additional $1.0 million under the term A loan portion of the credit facility, receiving net proceeds of $0.5 million, net of expenses, for a total of $16.5 million outstanding under the credit facility and reduced borrowings available under the term B loan facility to $9.0 million. In connection with the execution of the amendment to the loan and security agreement, we issued 29,197 ten-year warrants to purchase Series F preferred shares of stock at an exercise price of $1.37 per share.
In February 2018, we borrowed an additional $8.0 million under the term B loan facility portion of the credit facility. After receipt of the $8.0 million, we had a total of $24.5 million outstanding under the credit facility, which bore interest at a floating interest rate equal to the greater of 7.95% or LIBOR plus 6.9% per annum. All amounts borrowed under the credit facility were interest-only through March 1, 2020, after which monthly payments of principal and interest were due through February 1, 2022. In connection with this borrowing, we issued 233,577 ten-year warrants to purchase Series F preferred shares of stock at an exercise price of $1.37 per share.
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 3.00% if such borrowings are prepaid prior to March 27, 2020, 2.00% on or after March 27, 2020 but prior to March 27, 2021 and 1.00% if such borrowings are prepaid on or after March 27, 2021.
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
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
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 June 30, 2019.
Expected future principal payments for the credit facility are as follows:

Year ending December 31: |  |
2019 (remaining) |  | $ | —
2020 |  | —
2021 |  | —
2022 |  | 9,188
2023 |  | 12,250
Thereafter |  | 3,062
Total expected future principal payments |  | $ | 24,500

6. Commitments
Operating Lease
We rented 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. This lease commenced January 15, 2019 and expires November 30, 2020. In May 2019, we entered into a non-cancelable operating lease agreement for the same space that provides for monthly rent, real estate taxes and operating expenses. The initial lease term commences on December 1, 2020 and expires May 31, 2028 with an option to renew for one additional period of five years.
Future minimum annual operating lease payments are as follows:

Year ending December 31: |  |
2019 (remaining) |  | $ | 519
2020 |  | 1,026
2021 |  | 888
2022 |  | 1,504
2023 |  | 2,043
Thereafter |  | 9,448
Total future operating lease payments |  | $ | 15,428

Rental payments are charged to expense on a straight-line basis over the period of the lease. Rent expense was $0.3 million and less than $0.1 million for the three months ended June 30, 2019 and 2018, respectively, and $0.5 million and $0.1 million for the for the six months ended June 30, 2019 and 2018, respectively.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
7. Employee Retirement Plan
We sponsor an employee retirement plan covering all of our full-time employees. The plan allows for eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations. We may elect to make a voluntary contribution to the plan. We have not made contributions since inception.
8. Stockholders' Equity
Preferred Stock
In connection with the IPO in May 2018, 76,235,050 shares of convertible preferred stock were converted into 12,111,710 shares of common stock, resulting in the reclassification of the related convertible preferred stock of $119.1 million to common stock and APIC. As of June 30, 2019, 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 233,577 ten-year warrants to purchase Series F preferred shares of stock at an exercise price of $1.37 per share. Based on the Black-Scholes option pricing model, the value of each warrant was determined to be $0.44 for a total value of $0.1 million at the date of issuance and was fully expensed during the three months ended March 31, 2018.
The preferred stock warrants issued in connection with the execution of the original credit facility and its subsequent amendments required re-measurement of the value of the preferred stock warrants each period, with changes in fair value recognized within other expenses on the statements of operations and comprehensive loss. The fair value of the preferred stock warrants was determined using the Black-Scholes option pricing model.
As of May 7, 2018, the date of the closing of our IPO, the following preferred stock warrants issued under the original credit facility and subsequent amendments were outstanding and exercisable:

Issuance |  | Expiration |  | Series |  | Exercise Price |  |  |  | Warrants Outstanding at May 7, 2018 |  |  |  | Initial Value |  |  |  | Fair Value at May 7, 2018 |  |
February 8, 2018 |  | February 8, 2028 |  | F |  |  | $ | 1.37 |  |  |  | 233,577 |  |  |  | $ | 103 |  |  |  | $ | 320 |
February 24, 2017 |  | February 24, 2027 |  | F |  |  | 1.37 |  |  |  | 29,197 |  |  |  | 4 |  |  |  | 40 |
August 7, 2015 |  | August 7, 2025 |  | E |  |  | 2.62 |  |  |  | 29,580 |  |  |  | 33 |  |  |  | 41 |
June 27, 2014 |  | June 27, 2024 |  | E |  |  | 2.62 |  |  |  | 76,334 |  |  |  | 85 |  |  |  | 174 |
August 5, 2013 |  | August 5, 2023 |  | C |  |  | 1.07 |  |  |  | 74,768 |  |  |  | 39 |  |  |  | 80 |
November 16, 2012 |  | November 16, 2022 |  | C |  |  | 1.07 |  |  |  | 186,916 |  |  |  | 96 |  |  |  | 200 |
Total |  |  |  |  |  |  |  |  |  |  | 630,372 |  |  |  |  |  |  |  | $ | 855 |

In connection with the closing of the IPO in May 2018, the warrants to purchase shares of preferred stock automatically converted into warrants to purchase shares of common stock, resulting in the reclassification of the related convertible preferred stock warrant liability of $0.9 million to APIC. Upon the closing of the IPO, the warrants to purchase 630,372 shares of preferred stock at a weighted average exercise price of $1.46 per share became exercisable to purchase 100,558 shares of common stock at weighted average exercise price of $9.38 per share. During 2018, warrants for 93,963 shares were exercised through cashless exercises, resulting in the issuance of a net 76,762 shares of our common stock.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
Warrants to purchase shares of our common stock are summarized below:

|  | Common Stock Warrants |  | Weighted Average Exercise Price |  | Weighted Average Remaining Contractual Life (years)
Outstanding at December 31, 2018 |  | 6,595 |  | $ | 15.16 |  | 5.5
Exercised |  | — |  | $ | — |  |
Outstanding at June 30, 2019 |  | 6,595 |  | $ | 15.16 |  | 5.0

9. 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, 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 June 30, 2019, there were 2,126,440 shares reserved for issuance under the 2018 Plan, of which 1,220,020 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 installments over the next 36 months of service. The stock options granted to the board of directors include either a one- or two-year service period with all shares vesting after the one year of service, or 50% vesting after one year and the remainder vesting after the second year. The stock options have a contractual life of ten years.
A summary of stock option activity and related information is as follows:

|  | Options |  | Weighted Average Exercise Price |  |  |  | Weighted average remaining contractual term (years) |  | Aggregate intrinsic value (in thousands)
Outstanding at December 31, 2018 |  | 2,745,156 |  |  | $ | 12.64 |  |  | 7.4 |  |
Granted |  | 113,552 |  |  | $ | 53.44 |  |  |  |  |
Exercised |  | (478,579) |  |  | $ | 1.61 |  |  |  |  |
Forfeited |  | (15,070) |  |  | $ | 35.01 |  |  |  |  |
Outstanding at June 30, 2019 |  | 2,365,059 |  |  | $ | 16.69 |  |  | 7.6 |  | $ | 103,976
Exercisable at June 30, 2019 |  | 1,143,974 |  |  | $ | 3.65 |  |  | 6.2 |  | $ | 65,204

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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
Total stock-based compensation recognized, before taxes, during the three and six months ended June 30, 2019 and 2018, is as follows:

|  | Three Months Ended |  |  |  | Six Months Ended |  |
|  | June 30, |  |  |  | June 30, |  |
|  | 2019 |  | 2018 |  | 2019 |  | 2018
Cost of goods sold |  | $ | 26 |  | $ | 1 |  | $ | 52 |  | $ | 3
Research and development |  | 161 |  | 5 |  | 324 |  | 11
Selling, general and administrative |  | 1,202 |  | 263 |  | 2,404 |  | 310
Total stock-based compensation |  | $ | 1,389 |  | $ | 269 |  | $ | 2,780 |  | $ | 324

As of June 30, 2019, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2023 related to unvested employee and non-employee director share-based awards is $15.7 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 share-based awards.
We estimate the fair value of share-based awards on the date of grant using the Black-Scholes option pricing model using the fair market value of our common stock on the date of grant and a number of other complex and subjective assumptions. These assumptions include, but are not limited to, estimates regarding the expected term of the awards, estimates of the stock volatility over a duration that approximates the expected term of the awards, estimates of the risk-free rate, and estimates of expected dividend rates.
Due to our limited amount of historical exercise, forfeiture, and expiration activity, we have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting terms and the original contractual term of the option. We will continue to analyze our 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 daily closing prices for the selected companies' shares over historical periods that approximate calculated expected term of our share-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 non-employee directors during the six months ended June 30, 2019 and 2018 was estimated as of the grant date using the Black-Scholes option pricing model using the following assumptions:
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)

|  | Six Months Ended |  |
|  | June 30, |  |
|  | 2019 |  | 2018
Expected life (years) |  | 5.50 - 6.25 |  | 5.50 - 6.25
Expected volatility |  | 47.7 - 50.6% |  | 37.5 - 49.8% |
Risk-free interest rate |  | 1.87 - 2.63% |  | 2.38 - 2.84%
Dividend yield |  | 0.0% |  |  | 0.0% |
Weighted average fair value |  | $26.55 |  | $6.10

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. The current purchase period under the ESPP began on July 1, 2019 and ends December 31, 2019. On June 30, 2019, 18,187 shares were purchased under the ESPP, utilizing $0.6 million of employee contributions. As of June 30, 2019, 444,083 shares were available for future issuance under the ESPP. We recognized stock-based compensation expense associated with the ESPP of $0.1 million and $0 for the three months ended June 30, 2019 and 2018, respectively, and $0.2 million and $0 for the six months ended June 30, 2019 and 2018, respectively.
10. Income Taxes
During the three and six months ended June 30, 2019 and 2018, we did not record an income tax benefit related to our loss before income taxes in the statement of operations and comprehensive loss because a valuation allowance has been required to be established for all deferred tax assets due to our cumulative net loss position.
As of December 31, 2018, our gross federal net operating loss carryforwards of $124.7 million will expire at various dates beginning in 2028. In addition, net operating loss carryforwards for state income tax purposes of $115.3 million that include net operating losses, will begin to expire in 2028. We also have research and development credit carryforwards of $1.9 million as of December 31, 2018, which will expire at various dates beginning in 2032.
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. The annual limitation may result in the expiration of the net operating loss before utilization.
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, management believes 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.
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
We had no unrecognized tax benefits as of June 30, 2019 and December 31, 2018. We file income tax returns in the U.S. federal and various state jurisdictions. The 2014 to 2017 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.
11. Segment Reporting and Revenue Disaggregation
Operating segments are defined as components 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. We globally manage the business within one reporting segment, the development and commercialization of innovative and minimally invasive solutions for patients with obstructive sleep apnea. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.
We sell our Inspire system to hospitals and ambulatory surgery centers in the U.S. and in select countries in Europe through a direct sales organization. Revenue by geographic region is as follows:

|  | Three Months Ended |  |  |  | Six Months Ended |  |
|  | June 30, |  |  |  | June 30, |  |
|  | 2019 |  | 2018 |  | 2019 |  | 2018
United States |  | $ | 15,754 |  | $ | 9,529 |  | $ | 30,109 |  | $ | 18,272
Europe |  | 2,278 |  | 1,409 |  | 4,173 |  | 2,708
Total revenue |  | $ | 18,032 |  | $ | 10,938 |  | $ | 34,282 |  | $ | 20,980

All of our long-lived assets are located in the U.S.
12. 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 preferred stock, convertible preferred stock warrants, 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:

|  | June 30, |  |
|  | 2019 |  | 2018
Common stock warrants |  | 6,595 |  | 100,558
Common stock options outstanding |  | 2,365,059 |  | 2,195,333
Total |  | 2,371,654 |  | 2,295,891

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.
Overview
We are a medical technology company focused on the development and commercialization of innovative and minimally invasive solutions for patients with obstructive sleep apnea. Our proprietary Inspire system is the first and only FDA-approved neurostimulation technology that provides a safe and effective treatment for moderate to severe obstructive sleep apnea. 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 obstructive sleep apnea 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 22 years of age or older, though there are no similar requirements for patients in Europe.
We sell our Inspire system to hospitals and ambulatory service centers in the U.S. and in select countries in Europe through a direct sales organization. Our direct sales force engages in sales efforts and promotional activities focused on ear, nose and throat 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-patient marketing initiatives to create awareness of the benefits of our Inspire system and drive demand through patient empowerment. This outreach helps to educate thousands of patients on our Inspire therapy and frequently results in patient leads.
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 ambulatory service centers 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, on a medical necessity basis for most patients covered by Medicare, and under U.S. government contract for patients who are treated by the Veterans Health Administration. To date, approximately 375 commercial payors have reimbursed hospitals and ambulatory service centers for patients' treatment with our Inspire therapy through the prior authorization process. We have secured positive coverage policies from 35 U.S. commercial payors, covering approximately 125 million lives. In June 2018, Japan's Ministry of Health, Labour and Welfare approved our Inspire therapy to treat moderate to severe obstructive sleep apnea, and we are currently seeking reimbursement coverage in Japan. For the six months ended June 30, 2019, 87.8% of our revenue was derived in the U.S. and 12.2% was derived in Europe. No single customer accounted for more than 10% of our revenue.
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. We ship our physician programmers and some Inspire systems from our facility in Minnesota. Warehousing and shipping operations for our European
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customers are handled by the same third-party vendor with facilities 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 through registered offerings of our common stock. Historically, we have devoted substantially all of our resources to research and development activities related to our Inspire system, including clinical and regulatory initiatives to obtain marketing approval, and sales and marketing activities. For the three months ended June 30, 2019, we generated revenue of $18.0 million with a gross margin of 82.8% and had a net loss of $7.7 million compared to revenue of $10.9 million with a gross margin of 80.8% and a net loss of $5.9 million for the three months ended June 30, 2018. For the six months ended June 30, 2019, we generated revenue of $34.3 million with a gross margin of 82.6% and had a net loss of $15.9 million compared to revenue of $21.0 million with a gross margin of 79.0% and a net loss of $12.4 million for the six months ended June 30, 2018. Our accumulated deficit as of June 30, 2019 was $162.8 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 intend to make significant investments building our sales and marketing organization by increasing the number of U.S. sales representatives and continuing our direct-to-patient marketing efforts in existing and new markets throughout the U.S. and in Europe. We also intend to continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as additional European countries and Japan. 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.
On May 7, 2018, we completed our IPO by issuing 7,762,500 shares of common stock, at a public offering price of $16.00 per share, for net proceeds of approximately $112.0 million after deducting underwriting discounts and commissions and offering expenses payable by us. On December 11, 2018, we completed the 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 discounts and commissions and offering expenses. We received no proceeds from the sale of our common stock by the selling stockholders.
Components of Our Results of Operations
Revenue
We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ambulatory service centers in the U.S. and select countries in Europe. Recent revenue growth has been driven by, and we expect continued growth as a result of, increased patient and physician awareness of the Inspire system, additional sales representatives, an increase in approvals of prior authorization submissions, and additional positive coverage policies. Any reversal in these recent trends, however, could have a negative impact on our future revenue. In addition, we have expanded our sales and marketing organization to help us drive and support revenue growth and intend to continue this expansion. Moreover, we expect that our revenue growth will be positively impacted by, and to the extent we obtain, additional positive coverage policies. Our revenue has fluctuated, and we expect our revenue to 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.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of acquisition costs of the components of the Inspire system, overhead costs, scrap and inventory obsolescence, as well as distribution-related expenses such as logistics and shipping costs, net
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of costs charged to customers. The overhead costs include the cost of material procurement and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel. We expect overhead costs as a percentage of revenue to continue to decrease as our sales volume increases. We expect cost of goods sold to increase in absolute dollars primarily as, and to the extent, our revenue grows.
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, 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 and monitoring, 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 such as 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 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-patient 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 increased expenses related to audit, legal, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with being a public company. We also expect to see an increase in our stock-based compensation expense with grants of restricted stock or options and shares of our common stock purchased pursuant to our employee stock purchase plan.
Other (Income) Expense, Net
Other (income) expense, net consists primarily of interest expense payable under our credit facility. Other items include interest income and 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.
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Results of Operations

|  | Three Months Ended |  |  |  |  |  |  |  | Six Months Ended |  |  |  |  |  |
|  | June 30, |  |  |  |  |  |  |  | June 30, |  |  |  |  |  |
|  | 2019 |  | 2018 |  | $ Change |  | % Change |  | 2019 |  | 2018 |  | $ Change |  | % Change
|  | (in thousands, except percentages) |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenue |  | $ | 18,032 |  | $ | 10,938 |  | $ | 7,094 |  | 64.9 | % |  | $ | 34,282 |  | $ | 20,980 |  | $ | 13,302 |  | 63.4 | %
Cost of goods sold |  | 3,094 |  | 2,102 |  | 992 |  | 47.2 | % |  | 5,948 |  | 4,396 |  | 1,552 |  | 35.3 | %
Gross profit |  | 14,938 |  | 8,836 |  | 6,102 |  | 69.1 | % |  | 28,334 |  | 16,584 |  | 11,750 |  | 70.9 | %
Gross margin |  | 82.8 | % |  | 80.8 | % |  |  |  |  |  | 82.6 | % |  | 79.0 | % |  |  |  |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  | 2,846 |  | 1,735 |  | 1,111 |  | 64.0 | % |  | 5,449 |  | 3,465 |  | 1,984 |  | 57.3 | %
Selling, general and administrative |  | 20,268 |  | 12,738 |  | 7,530 |  | 59.1 | % |  | 39,838 |  | 23,951 |  | 15,887 |  | 66.3 | %
Total operating expenses |  | 23,114 |  | 14,473 |  | 8,641 |  | 59.7 | % |  | 45,287 |  | 27,416 |  | 17,871 |  | 65.2 | %
Operating loss |  | (8,176) |  | (5,637) |  | (2,539) |  | 45.0 | % |  | (16,953) |  | (10,832) |  | (6,121) |  | 56.5 | %
Other (income) expense, net |  | (526) |  | 219 |  | (745) |  | (340.2) | % |  | (1,037) |  | 1,525 |  | (2,562) |  | (168.0) | %
Net loss |  | $ | (7,650) |  | $ | (5,856) |  | $ | (1,794) |  | 30.6 | % |  | $ | (15,916) |  | $ | (12,357) |  | $ | (3,559) |  | 28.8 | %

Comparison of the Three Months Ended June 30, 2019 and 2018
Revenue
Revenue increased $7.1 million, or 64.9%, to $18.0 million for the three months ended June 30, 2019 compared to $10.9 million for the three months ended June 30, 2018. The increase was attributable to a $6.2 million increase in sales of our Inspire system in the U.S. and an increase of $0.9 million in Europe, primarily in Germany.
Revenue information by region is summarized as follows:

|  | Three Months Ended June 30, |  |  |  |  |  |  |  |  |  |
|  | 2019 |  |  |  | 2018 |  |  |  | Change |  |
|  | Amount |  | % of Revenue |  | Amount |  | % of Revenue |  | $ |  | %
|  | (in thousands, except percentages) |  |  |  |  |  |  |  |  |  |
United States |  | $ | 15,754 |  | 87.4 | % |  | $ | 9,529 |  | 87.1 | % |  | $ | 6,225 |  | 65.3 | %
Europe |  | 2,278 |  | 12.6 | % |  | 1,409 |  | 12.9 | % |  | 869 |  | 61.7 | %
Total revenue |  | $ | 18,032 |  | 100.0 | % |  | $ | 10,938 |  | 100.0 | % |  | $ | 7,094 |  | 64.9 | %

Revenue generated in the U.S. was $15.8 million for the three months ended June 30, 2019, an increase of $6.2 million, or 65.3%, compared to the three months ended June 30, 2018. Revenue growth in the U.S. was primarily due to increased market penetration in existing territories, the expansion of our U.S. sales representatives into new territories, increased physician and patient awareness of our Inspire system, a greater number of prior authorization approvals, and 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.
Revenue generated in Europe was $2.3 million in the three months ended June 30, 2019, an increase of $0.9 million, or 61.7%, compared to the three months ended June 30, 2018. 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, and to a lesser extent, an
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increase in our average selling price as a result of the introduction of the new sensing lead on the Inspire system to European markets in October 2018 and changes in foreign currency rates.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $1.0 million, or 47.2%, to $3.1 million for the three months ended June 30, 2019 compared to $2.1 million for the three months ended June 30, 2018. The increase was primarily due to increased purchases of manufactured products due to higher sales volume of our Inspire system.
Gross margin was 82.8% for the three months ended June 30, 2019 compared to 80.8% for the three months ended June 30, 2018. Gross margin for the three months ended June 30, 2019 was higher primarily due to the introduction of the new sensing lead on the Inspire system in the U.S. in February 2019, which had a higher gross margin than the previous sensor.
Research and Development Expenses
Research and development expenses increased $1.1 million, or 64.0%, to $2.8 million for the three months ended June 30, 2019 compared to $1.7 million for the three months ended June 30, 2018. This change was primarily due to an increase of $0.6 million of compensation and employee-related expenses, mainly as a result of increased headcount, and $0.5 million for ongoing research and development costs, including initial development of the next generation Inspire therapy system and the growth of clinical studies in the U.S. and Europe.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.6 million, or 59.1%, to $20.3 million for the three months ended June 30, 2019 compared to $12.7 million for the three months ended June 30, 2018. The primary driver of this increase was an increase of $4.7 million due to compensation, travel and other employee-related expenses, mainly as a result of increased headcount and increased stock-based compensation. In addition, selling, general and administrative expenses increased by $0.8 million due primarily to legal fees, financial audit fees, insurance, and other corporate costs, which increased primarily as a result of being a public company compared to being a public company during only part of the same prior year period, as well as out-sourced information technology services and facilities costs. Other drivers included an increase of $1.9 million of marketing, primarily consisting of direct-to-patient initiatives, and an increase of $0.2 million of regulatory and reimbursement costs, which increased primarily due to consulting services used to obtain coverage policies.
Other (Income) Expense, Net
Other (income) expense, net decreased $0.7 million, or 340.2%, to $0.5 million of income for the three months ended June 30, 2019 compared to $0.2 million of expense for the three months ended June 30, 2018. This change was primarily due to an increase in interest income of $0.7 million earned on our higher cash, cash equivalents and investments balances.
Comparison of the Six Months Ended June 30, 2019 and 2018
Revenue
Revenue increased $13.3 million, or 63.4%, to $34.3 million for the six months ended June 30, 2019 compared to $21.0 million for the six months ended June 30, 2018. The increase was attributable to a $11.8 million increase in sales of our Inspire system in the U.S. and an increase of $1.5 million in Europe, primarily in Germany.
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Revenue information by region is summarized as follows:

|  | Six Months Ended June 30, |  |  |  |  |  |  |  |  |  |
|  | 2019 |  |  |  | 2018 |  |  |  | Change |  |
|  | Amount |  | % of Revenue |  | Amount |  | % of Revenue |  | $ |  | %
|  | (in thousands, except percentages) |  |  |  |  |  |  |  |  |  |
United States |  | $ | 30,109 |  | 87.8 | % |  | $ | 18,272 |  | 87.1 | % |  | $ | 11,837 |  | 64.8 | %
Europe |  | 4,173 |  | 12.2 | % |  | 2,708 |  | 12.9 | % |  | 1,465 |  | 54.1 | %
Total revenue |  | $ | 34,282 |  | 100.0 | % |  | $ | 20,980 |  | 100.0 | % |  | $ | 13,302 |  | 63.4 | %

Revenue generated in the U.S. was $30.1 million for the six months ended June 30, 2019, an increase of $11.8 million, or 64.8%, compared to the six months ended June 30, 2018. Revenue growth in the U.S. was due to increased market penetration in existing territories, the expansion of our U.S. sales representatives into new territories, increased physician and patient awareness of our Inspire system, a greater number of prior authorization approvals, and 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.
Revenue generated in Europe was $4.2 million in the six months ended June 30, 2019, an increase of $1.5 million, or 54.1%, compared to the six months ended June 30, 2018. 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, and to a lesser extent, changes in foreign currency rates.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $1.5 million, or 35.3%, to $5.9 million for the six months ended June 30, 2019 compared to $4.4 million for the six months ended June 30, 2018. The increase was primarily due to increased purchases of manufactured products due to higher sales volume of our Inspire system.
Gross margin was 82.6% for the six months ended June 30, 2019 compared to 79.0% for the six months ended June 30, 2018. Gross margin for the six months ended June 30, 2019 was higher primarily due to the introduction of the new sensing lead on the Inspire system in the U.S. in February 2019 which has a higher gross margin than the previous sensor. The gross margin for the six months ended June 30, 2018 was lower by 1.9% due to excess and obsolete inventory costs associated with our previous generation system.
Research and Development Expenses
Research and development expenses increased $1.9 million, or 57.3%, to $5.4 million for the six months ended June 30, 2019 compared to $3.5 million for the six months ended June 30, 2018. This change was primarily due to an increase of $0.9 million of compensation and employee-related expenses, mainly as a result of increased headcount and $1.0 million for ongoing research and development costs, including initial development of the next generation Inspire therapy system.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $15.8 million, or 66.3%, to $39.8 million for the six months ended June 30, 2019 compared to $24.0 million for the six months ended June 30, 2018. The primary driver of this increase was an increase of $9.6 million due to compensation, travel and other employee-related expenses, mainly as a result of increased headcount and increased stock-based compensation. In addition, selling, general and administrative expenses increased by $2.0 million due to legal fees, financial audit fees, insurance costs, and other corporate costs which increased primarily as a result of being a public company during the first half of 2019 compared to being a public company during only part of the same prior year period, as well as out-sourced information technology services and facilities costs. Other drivers included an increase of $3.2 million of marketing,
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primarily consisting of direct-to-patient initiatives, and an increase of $1.0 million of regulatory and reimbursement costs, which increased primarily due to consulting services used to obtain coverage policies.
Other (Income) Expense, Net
Other (income) expense, net decreased $2.5 million, or 168.0%, to $1.0 million of income for the six months ended June 30, 2019 compared to $1.5 million of expense for the six months ended June 30, 2018. Interest income increased $1.7 million due to our higher cash, cash equivalents and investments balances. Interest expense decreased $0.9 million, primarily due to the lack of the $0.7 million fair value adjustment taken in the six months ended June 30, 2018 on our previously outstanding convertible preferred stock warrants.
Seasonality
Historically, we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. In the U.S., we have experienced, and may in the future experience, higher sales in the fourth quarter as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs. In the first quarter of each year in Europe, we have experienced, and may in the future experience, reduced demand for our Inspire therapy as Neue Untersuchungs-und-Behandlungsmethoden ("NUB") coverage status is being determined and as hospitals are establishing their budgets pertaining to allocation of funds to purchase our Inspire therapy.
Liquidity and Capital Resources
As of June 30, 2019, we had cash, cash equivalents and investments of $164.7 million and an accumulated deficit of $162.8 million, compared to cash, cash equivalents and investments of $188.2 million and an accumulated deficit of $146.9 million as of December 31, 2018. As of June 30, 2019, we had $24.5 million of outstanding borrowings under our credit facility. No borrowings remain available under this credit facility.
On May 7, 2018, we completed our IPO by issuing 7,762,500 shares of common stock, at a public offering price of $16.00 per share, for net proceeds of approximately $112.0 million after deducting underwriting discounts and commissions and offering expenses payable by us. On December 11, 2018, we completed the 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 discounts and commissions and offering expenses. We received no proceeds from the sale of our common stock by the selling stockholders.
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. As of June 30, 2019, we had raised a total of $119.1 million in net proceeds from private placements of our convertible preferred securities and $181.8 million from registered equity offerings.
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.
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Cash Flows
The following table presents a summary of our cash flow for the periods indicated:

|  | Six Months Ended |  |
|  | June 30, |  |
|  | 2019 |  | 2018
|  | (in thousands) |  |
Net cash provided by (used in): |  |  |  |
Operating activities |  | $ | (23,826) |  | $ | (12,552)
Investing activities |  | (23,066) |  | 5,023
Financing activities |  | 875 |  | 120,427
Effect of exchange rate on cash |  | (3) |  | —
Net (decrease) increase in cash and cash equivalents |  | $ | (46,020) |  | $ | 112,898

Operating Activities
The net cash used in operating activities was $23.8 million for the six months ended June 30, 2019 and consisted of a net loss of $15.9 million, an increase in net operating assets of $10.4 million and non-cash charges of $2.5 million. Net operating assets consisted of prepaid expenses and other current assets, accounts receivable, accrued expenses, inventories, and accounts payable to support the growth of our operations. Non-cash charges consisted of stock-based compensation, accretion of debt discount, depreciation and amortization, and stock issued for services rendered, offset by the non-cash income related to the accretion of the investment discount and other, net. These changes generally were driven by our increased revenues year-over-year, which resulted in increases to accounts receivable, inventories, prepaid expenses and other expenditures, including compensation and personnel-related costs.
The net cash used in operating activities was $12.6 million for the six months ended June 30, 2018 and consisted primarily of a net loss of $12.4 million, an increase in net operating assets of $1.6 million and non-cash charges of $1.4 million. Net operating assets consisted primarily of accounts receivable and inventory to support the growth of our operations and accrued compensation as annual bonuses were paid. The increase in net operating assets was also attributed to an increase in prepaid expenses and other assets and accounts payable. Non-cash charges consisted of the change in fair value of preferred stock warrants, accretion of debt discount, stock-based compensation, and depreciation.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2019 was $23.1 million and consisted primarily of purchases of investments of $101.0 million, partially offset by proceeds from sales or maturities of investments of $79.2 million. Purchases of property and equipment, net were $1.2 million.
Net cash provided by investing activities was $5.0 million for the six months ended June 30, 2018 and consisted primarily of proceeds from sales or maturities of short-term investments of $10.2 million, partially offset by purchases of short-term investments of $5.1 million.
Financing Activities
Net cash provided by financing activities was $0.9 million for the six months ended June 30, 2019 and consisted of $0.8 million in proceeds from the exercise of stock options and $0.6 million in proceeds from issuance of common stock from the employee stock purchase plan, partially offset by a $0.5 million final payment fee due upon the amendment of our credit facility.
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Net cash provided by financing activities was $120.4 million for the six months ended June 30, 2018 and consisted of $112.0 million of net proceeds from the IPO in May 2018, borrowings of $8.0 million under our credit facility and $0.4 million in proceeds from the exercise of stock options.
Indebtedness
In August 2015, we entered into a loan and security agreement with Oxford Finance LLC ("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 $8.0 million under the term B loan 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, subject to a prepayment fee of 3.0% if such borrowings are prepaid prior to March 27, 2020, 2.0% if such borrowings are prepaid on or after March 27, 2020 but 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 June 30, 2019.
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, resulting in 6,595 warrants outstanding at June 30, 2019 with a weighted average exercise price of $15.16 per share as of such date.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments from those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for the March 2019 amendment of our loan and security agreement as described in Note 5 and the corporate office space lease executed in May 2019 as described in Note 6.
Our operating leases and long-term debt, including interest, as of June 30, 2019 is summarized in the table below:

| Payments Due by Year |  |  |  |  |  |  |  |
(In thousands) | Total |  | Less than 1 year |  | 1 - 3 years |  | 3 - 5 years |  | More than 5 years
Long-term debt, including interest (1) | $ | 31,665 |  | $ | 1,893 |  | $ | 6,818 |  | $ | 22,954 |  | $ | —
Operating leases (2) | 15,428 |  | 1,038 |  | 1,888 |  | 4,086 |  | 8,416

1.The total amount outstanding under the credit facility was $24.5 million at June 30, 2019 . All amounts borrowed under the credit facility are interest-only until April 1, 2022, after which payments of interest and principal will be payable in 24 consecutive monthly installments. Variable interest is assumed at June 30, 2019 rates. Under the terms of the credit facility, 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.
2.We currently sublease approximately 45,000 square feet of office space for our corporate headquarters in Golden Valley, Minnesota, under an operating lease which expires November 30, 2020. In May 2019, we entered into a non-cancelable operating lease agreement for the same space. This lease commences on December 1, 2020 and expires May 31, 2028.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three and six months ended June 30, 2019. Other than the adoption of ASC 606 described in Note 2, no changes were made to our critical accounting policies during the period presented.
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our unaudited financial statements included elsewhere in this report, such standards will not have a significant impact on our financial statements or do not otherwise apply to our operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
The risk associated with fluctuating interest rates is primarily limited to our cash equivalents which are carried at quoted market prices and our investments. If overall interest rates had decreased by 100 basis points during the six months ended June 30, 2019, our interest income would have decreased by approximately $1.7 million. We do not currently use or plan to use financial derivatives in our investment portfolio.
The interest rate for our outstanding debt is variable. If overall interest rates had increased by 100 basis points during the six months ended June 30, 2019 our interest expense would have increased by approximately $0.2 million.
Credit Risk
As of June 30, 2019 and December 31, 2018, our cash, cash equivalents, and investments were maintained with one financial institution in the U.S. We believe this institution has sufficient assets and liquidity to conduct its 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.
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 June 30, 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.
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.
Item 4. Controls and Procedures.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2019.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are not party to any material legal proceedings.
Item 1A. Risk Factors.
For a discussion of our potential risks and uncertainties, see the information in Part I, "Part I, Item IA. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.

Exhibit Number |  | Description |  | Form |  | File No. |  | Exhibit |  | Filing Date |  | Filed/ Furnished Herewith
3.1 |  | Seventh Amended and Restated Certificate of Incorporation of Inspire Medical Systems, Inc. |  | 8-K |  | 001-38468 |  | 3.1 |  | 5/7/2018 |  |
3.2 |  | Amended and Restated Bylaws of Inspire Medical Systems, Inc. |  | 8-K |  | 001-38468 |  | 3.2 |  | 5/7/2018 |  |
10.1 |  | I nspire Medical Systems, Inc. Non-Employee Director Comp ensation Polic y |  |  |  |  |  |  |  |  |  | *
31.1 |  | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  |  |  |  |  |  |  |  |  | *
31.2 |  | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  |  |  |  |  |  |  |  |  | *
32.1 |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  |  |  |  |  |  |  |  |  | **
32.2 |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  |  |  |  |  |  |  |  |  | **
101.INS |  | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |  |  |  |  |  |  |  |  |  | *
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document |  |  |  |  |  |  |  |  |  | *
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document |  |  |  |  |  |  |  |  |  | *
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document |  |  |  |  |  |  |  |  |  | *
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document |  |  |  |  |  |  |  |  |  | *
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document |  |  |  |  |  |  |  |  |  | *
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |  |  |  |  |  |  |  |  |  | *

_______________________________________________________________________________
* Filed herewith.
** Furnished herewith.
Agreements filed as exhibits to this Quarterly Report on Form 10-QK contain representations and warranties that the parties thereto made to each other. These representations and warranties have been made solely for the benefit of the other parties to such agreements and may have been qualified by certain information that has been disclosed to the other parties to such agreements and that may not be reflected in such agreements. In addition, these representations and warranties may be intended as a way of allocating risks among parties if the statements contained therein prove to be incorrect, rather than as actual statements of fact. Accordingly, there can be no reliance on any such representations and warranties as characterizations of the actual state of facts. Moreover, information concerning the subject matter of any such representations and warranties may have changed since the date of such agreements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | Inspire Medical Systems, Inc. |
Date: | August 6, 2019 | By: | /s/ TIMOTHY P. HERBERT
|  |  | Timothy P. Herbert
|  |  | President, Chief Executive Officer and Director
|  |  | (principal executive officer)
Date: | August 6, 2019 | By: | /s/ RICHARD J. BUCHHOLZ
|  |  | Richard J. Buchholz
|  |  | Chief Financial Officer
|  |  | (principal financial officer and principal accounting officer)

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