UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

________________________________

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023 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)

(844) 672-4357

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each 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 April 25, 2023, the registrant had 29,172,064 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

		Page
	Forward-Looking Statements	3
PART I.	FINANCIAL INFORMATION	5
Item 1.	Consolidated Financial Statements	5
	Balance Sheets	5
	Statements of Operations and Comprehensive Loss	6
	Statements of Stockholders' Equity	7
	Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	32
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
	Signatures	34

2

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements, including, without limitation, statements regarding our future results of operations and financial position, business strategy, the impact of the ongoing and global COVID-19 pandemic on our business, financial results and financial position, prospective products, international product approvals and commercialization, our expectations regarding the final reimbursement levels for Inspire therapy procedures, research and development costs, timing and likelihood of success, other insurance providers' plans to begin approving our Inspire therapy, human capital initiatives, environmental, social, and governance reporting, and the plans and objectives of management for future operations.

In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “can,” “continue,” “could,” “designed,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions, including, but not limited to:

•our history of operating losses and dependency on our Inspire system for revenues;

•commercial success and market acceptance of our Inspire therapy;

•our ability to achieve and maintain adequate levels of coverage or reimbursement for our Inspire system or any future products we may seek to commercialize;

•competitive companies and technologies in our industry;

•the impact on our business, financial condition, and results of operation from the ongoing and global COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease;

•our ability to expand our indications and develop and commercialize additional products and enhancements to our Inspire system;

•future results of operations, financial position, research and development costs, capital requirements, and our needs for additional financing;

•our ability to forecast customer demand for our Inspire system and manage our inventory;

•our dependence on third-party suppliers, vendors, and contract manufacturers;

•risks related to consolidation in the healthcare industry;

•our ability to expand, manage, and maintain our direct sales and marketing organization, and to market and sell our Inspire system in markets outside of the United States;

•our ability to manage our growth;

•our ability to hire and retain our senior management and other highly qualified personnel;

•risks related to product liability claims and warranty claims;

•our ability to address quality issues that may arise with our Inspire system;

3

•our ability to successfully integrate any acquired business, products or technologies;

•changes in global macroeconomic conditions;

•any failure of key information technology systems, processes or sites or damage to or inability to access our physical facilities;

•our ability to commercialize or obtain regulatory approvals or certifications for our Inspire therapy and system, or the effect of delays in commercializing or obtaining regulatory approvals or certifications;

•any violations of anti-bribery, anti-corruption, and anti-money laundering laws;

•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;

•risks related to the increasing and evolving focus on sustainability and environmental, social and governance initiatives;

•U.S. Food and Drug Administration ("FDA") or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including risks associated with regulatory approvals or 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;

•changes in U.S. and foreign tax laws;

•risks related to our common stock; and

•other important factors that could cause actual results, performance or achievements to differ materially from those contemplated that are found in "Part I, Item 1. Business," "Part I, Item 1A. Risk Factors," and "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as updated by “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q.

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Unless the context requires otherwise, references to “Inspire,” the “Company,” “we,” “us,” and “our,” refer to Inspire Medical Systems, Inc.

4

PART I—FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements.

Inspire Medical Systems, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	March 31, 2023		December 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	442,132	$	441,592
Investments, short-term	9,927		9,821
Accounts receivable, net of allowance for credit losses of     $36 and $36, respectively	59,766		61,228
Inventories, net	15,663		11,886
Prepaid expenses and other current assets	6,090		5,505
Total current assets	533,578		530,032
Property and equipment, net	20,920		17,249
Operating lease right-of-use assets	6,614		6,880
Other non-current assets	10,735		10,715
Total assets	$	571,847	$	564,876
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	36,478	$	26,847
Accrued expenses	23,390		34,339
Total current liabilities	59,868		61,186
Operating lease liabilities, non-current portion	7,185		7,536
Other non-current liabilities	146		146
Total liabilities	67,199		68,868
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized; no shares      issued and outstanding	—		—
Common Stock, $0.001 par value per share; 200,000,000 shares authorized; 29,163,001 and 29,008,368 issued and outstanding at March 31, 2023 and December 31, 2022, respectively	29		29
Additional paid-in capital	844,281		820,335
Accumulated other comprehensive income (loss)	32		(86)
Accumulated deficit	(339,694)		(324,270)
Total stockholders' equity	504,648		496,008
Total liabilities and stockholders' equity	$	571,847	$	564,876

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

5

Inspire Medical Systems, Inc.

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

(in thousands, except share and per share amounts)

	Three Months Ended March 31,
	2023		2022
Revenue	$	127,897	$	69,382
Cost of goods sold	19,888		10,004
Gross profit	108,009		59,378
Operating expenses:
Research and development	25,519		11,870
Selling, general and administrative	101,988		63,564
Total operating expenses	127,507		75,434
Operating loss	(19,498)		(16,056)
Other expense (income):
Interest and dividend income	(4,273)		(34)
Interest expense	—		527
Other (income) expense, net	(17)		45
Total other (income) expense	(4,290)		538
Loss before income taxes	(15,208)		(16,594)
Income taxes	216		100
Net loss	(15,424)		(16,694)
Other comprehensive loss:
Foreign currency translation gain	105		—
Unrealized gain (loss) on investments	13		(143)
Total comprehensive loss	$	(15,306)	$	(16,837)
Net loss per share, basic and diluted	$	(0.53)	$	(0.61)
Weighted average common shares used to    compute net loss per share, basic and diluted	29,089,950		27,517,268

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

6

Inspire Medical Systems, Inc.

Consolidated Statements of Stockholders' Equity (unaudited)

(in thousands, except share amounts)

	Three Months Ended March 31, 2023
	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Accumulated Deficit		Total Stockholders' Equity
Balance at December 31, 2022	29,008,368	$	29	$	820,335	$	(86)	$	(324,270)	$	496,008
Stock options exercised	142,167	—		7,377		—		—		7,377
Vesting of restricted stock units	18,852	—		—		—		—		—
Withholding taxes on net share settlement of restricted stock units	(6,750)	—		(1,746)		—		—		(1,746)
Issuance of common stock	364	—		90		—		—		90
Stock-based compensation expense	—	—		18,225		—		—		18,225
Other comprehensive income	—	—		—		118		—		118
Net loss	—	—		—		—		(15,424)		(15,424)
Balance at March 31, 2023	29,163,001	$	29	$	844,281	$	32	$	(339,694)	$	504,648

	Three Months Ended March 31, 2022
	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
Balance at December 31, 2021	27,416,106	$	27	$	508,465	$	(55)	$	(279,389)	$	229,048
Stock options exercised	151,186	1		3,086		—		—		3,087
Vesting of restricted stock units	569	—		—		—		—		—
Withholding taxes on net share settlement of restricted stock units	(205)	—		(43)		—		—		(43)
Issuance of common stock	348	—		79		—		—		79
Stock-based compensation expense	—	—		9,721		—		—		9,721
Other comprehensive loss	—	—		—		(143)		—		(143)
Net loss	—	—		—		—		(16,694)		(16,694)
Balance at March 31, 2022	27,568,004	$	28	$	521,308	$	(198)	$	(296,083)	$	225,055

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

7

Inspire Medical Systems, Inc.

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

	Three Months Ended March 31,
	2023		2022
Operating activities
Net loss	$	(15,424)	$	(16,694)
Adjustments to reconcile net loss:
Depreciation and amortization	593		359
Non-cash lease expense	265		260
Stock-based compensation expense	18,225		9,721
Non-cash stock issuance for services rendered	90		79
Other, net	(1)		61
Changes in operating assets and liabilities:
Accounts receivable	1,489		(382)
Inventories	(3,777)		(4,967)
Prepaid expenses and other current assets	(579)		216
Accounts payable	8,390		5,520
Accrued expenses and other liabilities	(10,615)		(6,921)
Net cash used in operating activities	(1,344)		(12,748)
Investing activities
Purchases of property and equipment	(3,753)		(1,215)
Purchases of strategic investments	—		(250)
Net cash used in investing activities	(3,753)		(1,465)
Financing activities
Proceeds from the exercise of stock options	7,377		3,087
Taxes paid on net share settlement of restricted stock units	(1,746)		(43)
Net cash provided by financing activities	5,631		3,044
Effect of exchange rate on cash	6		(7)
Increase (decrease) in cash and cash equivalents	540		(11,176)
Cash and cash equivalents at beginning of period	441,592		214,467
Cash and cash equivalents at end of period	$	442,132	$	203,291
Supplemental cash flow information
Cash paid for interest	$	—	$	466
Property and equipment included in accounts payable and accrued expenses	2,577		284

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

8

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements (Unaudited) 

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

1. Organization

Description of Business

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

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial reporting and as required by the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, the results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. All intercompany accounts and transactions have been eliminated in consolidation.

For a complete discussion of our significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Follow-On Public Offering

On August 15, 2022, we completed a follow-on offering that included our offer and sale of 1,150,000 shares of common stock at a public offering price of $215.00 per share. We received net proceeds of $243.8 million after deducting underwriting discounts, commissions, and offering expenses.

Cash and Cash Equivalents

We consider all highly liquid securities, readily convertible to cash, that have original maturities of 90 days or less from the date of purchase to be cash equivalents. The carrying amount reported in the consolidated balance sheets for cash is cost, which approximates fair value.

Foreign Currency

Our functional and reporting currency is the U.S. dollar. Our subsidiary has a functional currency in Euro. The consolidated financial statements are translated to U.S. dollars. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Sales and expenses denominated in foreign currencies are translated at exchange rates in effect on the date

9

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

of the transaction. Foreign currency transaction gains and losses and the impacts of foreign currency remeasurement are recognized in other (income) expense, net in the consolidated statements of operations and comprehensive loss. For both of the three-month periods ended March 31, 2023 and 2022, we recognized $0 of gains, net. Any unrealized gains and losses due to translation adjustments are included in accumulated other comprehensive income (loss) within stockholders' equity in the consolidated balance sheets. We had $0.1 million of unrecognized gain in our accumulated other comprehensive income (loss) balance as of both March 31, 2023 and December 31, 2022.

Investments

At both March 31, 2023 and December 31, 2022, our investments consisted of U.S. government securities. Investments are reported at their estimated fair market values which are based on quoted, active or inactive market prices when available. Any unrealized gains and losses due to interest rate fluctuations and other external factors are reported as a separate component of accumulated other comprehensive loss within stockholders' equity. We had $0.1 million and $0.2 million of unrecognized loss in our accumulated other comprehensive income (loss) balance at March 31, 2023 and December 31, 2022, respectively. Any realized gains and losses are calculated on the specific identification method and reported net in other (income) expense, net in the consolidated statements of operations and comprehensive loss. For both of the three months ended March 31, 2023 and 2022, we recognized $0 of realized gains, net.

We reassess our estimated credit losses on investments each reporting period. U.S. government securities and cash equivalents are under a "zero-loss exception" for credit losses, meaning no credit loss risk calculation is necessary on those instruments due to the exceptionally low rate of default, which continues to decrease as the securities approach maturity, which for us is no longer than one year. We record changes in the allowance for credit losses for available-for-sale debt securities with a corresponding adjustment in credit loss expense on the consolidated statement of operations and comprehensive loss. No reversal of a previously recorded allowance for credit losses may be made to an amount below zero. The total allowance for credit losses was $0 at both March 31, 2023 and December 31, 2022.

Fair Value of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and investments. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1: Observable inputs, such as quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability.

Level 3: Unobservable inputs that are supported by little or no market activities, which would require us to develop our own assumptions.

We use the methods and assumptions described below in determining the fair value of our financial instruments.

Money market funds: Fair values of money market funds are based on quoted market prices in active markets. These are included as Level 1 measurements in the tables below.

10

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

U.S. government securities: Consists of U.S. government Treasury bills with original maturities of less than one year and are based on quoted prices in active markets. These are included as Level 1 measurements in the tables below.

The following tables set forth by level within the fair value hierarchy our assets that are measured on a recurring basis and reported at fair value as of March 31, 2023 and December 31, 2022. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	Fair Value Measurements as of
	March 31, 2023
	Estimated Fair Value		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	395,037	$	395,037	$	—	$	—
Total cash equivalents	395,037		395,037		—		—
Investments:
U.S. government securities	9,927		9,927		—		—
Total investments	9,927		9,927		—		—
Total cash equivalents and investments	$	404,964	$	404,964	$	—	$	—

	Fair Value Measurements as of
	December 31, 2022
	Estimated Fair Value		Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	390,846	$	390,846	$	—	$	—
Total cash equivalents	390,846		390,846		—		—
Investments:
U.S. government securities	9,821		9,821		—		—
Total investments	9,821		9,821		—		—
Total cash equivalents and investments	$	400,667	$	400,667	$	—	$	—

There were no transfers between levels during the periods ended March 31, 2023 and December 31, 2022.

Concentration of Credit Risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash equivalents, investments, and accounts receivable. We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at certain of these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.

Our investment policy limits investments to certain types of debt securities issued by the U.S. government and its agencies, corporations with investment-grade credit ratings, or commercial paper and money market funds issued by the highest quality financial and non-financial companies. We place restrictions on maturities and concentration by type and issuer. We are exposed to credit risk in the event of a default by the issuers of these securities to the extent recorded on the consolidated balance sheets. However, as of March 31, 2023 and December 31, 2022, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy.

11

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

We believe that the credit risk in our accounts receivable is mitigated by our credit evaluation process, relatively short collection terms, and dispersion of our customer base. We generally do not require collateral, and losses on accounts receivable have historically not been significant.

Accounts Receivable and Allowance for Expected Credit Losses

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Customer credit terms are established prior to shipment with the general standard being net 30 days. Collateral or any other security to support payment of these receivables generally is not required.

Each reporting period, we estimate the credit loss related to accounts receivable based on a migration analysis of accounts grouped by individual receivables delinquency status, and apply our historic loss rate adjusted for management's assumption of future market conditions. Any change in the allowance from new receivables acquired, or changes due to credit deterioration on previously existing receivables, is recorded in selling, general and administrative expenses. Write-offs of receivables considered uncollectible are deducted from the allowance. Specific accounts receivable are written-off once a determination is made that the amount is uncollectible. The write-off is recorded in the period in which the account receivable is deemed uncollectible. Recoveries are recognized when received and as a direct credit to earnings or as a reduction to the allowance for credit losses (which would indirectly reduce the loss by decreasing bad debt expense).

Inventories

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

	March 31, 2023		December 31, 2022
Raw materials	$	5,143	$	5,645
Finished goods	10,520		6,241
Total inventories, net of reserves	$	15,663	$	11,886

We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions. The reserve for excess and obsolete inventory was $2.7 million as of both March 31, 2023 and December 31, 2022.

Property and Equipment

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

	March 31, 2023		December 31, 2022
Computer equipment and software	$	1,729	$	1,729
Manufacturing equipment	5,974		5,974
Other equipment	600		535
Leasehold improvements	2,086		2,064
Construction in process	16,034		11,857
Property and equipment, cost	26,423		22,159
Less: accumulated depreciation and amortization	(5,503)		(4,910)
Property and equipment, net	$	20,920	$	17,249

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Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Depreciation and amortization expense was $0.6 million and $0.4 million for the three months ended March 31, 2023 and 2022, respectively.

Strategic Investments

For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These securities are presented within other non-current assets on the consolidated balance sheets. The balance of equity securities without readily determinable fair values was $10.5 million as of both March 31, 2023 and December 31, 2022. There were no adjustments to the carrying amount during either of the three months ended March 31, 2023 or 2022.

Impairment of Long-lived Assets

Long-lived assets consist primarily of property and equipment and operating lease right-of-use asset and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require that an asset be tested for possible impairment, we compare the undiscounted cash flows expected to be generated by the asset to the carrying amount of the asset. If the carrying amount of the asset is not recoverable on an undiscounted cash flow basis, we determine the fair value of the asset and recognize an impairment loss to the extent the carrying amount of the asset exceeds its fair value. We determine fair value using the income approach based on the present value of expected future cash flows or other appropriate measures of estimated fair value. Our cash flow assumptions consider historical and forecasted revenue and operating costs and other relevant factors. We did not record any impairment charges on long-lived assets during either of the three months ended March 31, 2023 or 2022.

Accrued Expenses

Accrued expenses consisted of the following:

	March 31, 2023		December 31, 2022
Payroll related	$	19,258	$	30,398
Product warranty liability	741		920
Operating lease liabilities, current portion	1,367		1,336
Other accrued expenses	2,024		1,685
Total accrued expenses	$	23,390	$	34,339

The following table shows the changes in our estimated product warranty liability accrual, included in accrued liabilities:

	Three Months Ended March 31, 2023
	2023		2022
Balance at beginning of period	$	920	$	468
Provisions for warranty	132		11
Settlements of warranty claims	(311)		(41)
Balance at the end of the period	$	741	$	438

13

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

Revenue Recognition

We derive our revenue from sales of our products in the U.S. and internationally. Customers are primarily comprised of hospitals and ambulatory surgery centers, with distributors being used in certain international locations where we do not have a direct commercial presence.

Revenues from product sales are recognized when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms. Our standard shipping terms are free on board shipping point, unless the customer requests that control and title to the inventory transfer upon delivery. In those cases where shipping and handling costs are billed to customers, we classify the amounts billed as a component of cost of goods sold.

Revenue is measured as the amount of consideration we expect to receive, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, which is based on the invoiced price, in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. The majority of our contracts have a single performance obligation and are short term in nature.

Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

Variable consideration related to certain customer sales incentives is estimated based on the amounts expected to be paid based on the agreement with the customer using probability assessments.

We offer customers a limited right of return for our product in case of non-conformity or performance issues. We estimate the amount of our product sales that may be returned by our customers based on historical sales and returns. As our historical product returns to date have been immaterial, we have not recorded a reduction in revenue related to variable consideration for product returns.

See Note 9 for disaggregated revenue by geographic area.

Cost of Goods Sold

Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap and inventory obsolescence, warranty replacement costs, as well as distribution-related expenses such as logistics and shipping costs, net of shipping costs charged to customers. The overhead costs include the cost of material procurement, depreciation expense for production equipment, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel.

Research and Development

Research and development expenses consist primarily of product development, clinical and regulatory affairs, quality assurance, consulting services, and other costs associated with products and technologies in development. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Clinical expenses include clinical study design, clinical site reimbursement, data management, travel expenses, and the cost of manufacturing products for clinical studies.

Stock-Based Compensation

We maintain an equity incentive plan to provide long-term incentives for eligible employees, consultants, and members of the board of directors. The plan allows for the issuance of restricted stock units ("RSUs"), performance stock units ("PSUs"), and non-statutory and incentive stock options to employees, and RSUs, PSUs, and non-

14

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

statutory stock options to consultants and directors. We also offer an employee stock purchase plan ("ESPP") which allows participating employees to purchase shares of our common stock at a discount through payroll deductions.

We recognize equity-based compensation expense for awards of equity instruments based on the grant date fair value of those awards as expense in the consolidated statements of operations and comprehensive loss. We estimate the fair value of stock options using the Black-Scholes option pricing model and the fair value of RSUs and PSUs is equal to the closing price of our common stock on the grant date. The fair value of each purchase under the employee stock purchase plan is estimated at the beginning of the offering period using the Black-Scholes option pricing model.

Stock-based compensation expense is recognized on a straight-line basis over the vesting term for stock options and RSUs, and over the vesting and performance period based on the probability of achieving the performance objectives for PSUs. We account for award forfeitures as they occur.

Advertising Expenses

We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $23.6 million and $15.5 million during the three months ended March 31, 2023 and 2022, respectively.

Leases

Operating leases are included in operating lease right-of-use ("ROU") asset, accrued expenses, and operating lease liability – non-current portion in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date as the rate implicit in the lease is not readily determinable. The determination of our incremental borrowing rate requires management judgment based on information available at lease commencement. The operating lease ROU assets also include adjustments for prepayments, accrued lease payments, and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on our consolidated balance sheets.

Income Taxes

We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Valuation allowances against deferred tax assets are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than minimal state and foreign taxes, which includes a foreign tax provision relating to uncertain tax positions. Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the consolidated statements of operations and comprehensive loss.

Comprehensive Loss

Comprehensive income (loss) consists of net loss and changes in unrealized gains and losses due to interest rate fluctuations and other external factors on investments classified as available-for-sale, and foreign currency translation adjustments. Accumulated other comprehensive income (loss) is presented in the accompanying consolidated balance sheets as a component of stockholders' equity.

15

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. Because we have reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share as all potentially dilutive shares consisting of outstanding stock options, unvested RSUs and PSUs, and shares issuable under our employee stock purchase plan were antidilutive in those periods.

Recent Accounting Pronouncements

We have reviewed and considered all recent accounting pronouncements that have not yet been adopted and believe there are none that could potentially have a material impact on our business practices, financial condition, results of operations, or disclosures.

3. Investments

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

	March 31, 2023
	Amortized		Unrealized Gross				Aggregate
	Cost		Gains		Losses		Fair Value
Short-Term:
U.S. government securities	$	9,999	$	—	$	(72)	$	9,927
Short-term investments	$	9,999	$	—	$	(72)	$	9,927

	December 31, 2022
	Amortized		Unrealized Gross				Aggregate
	Cost		Gains		Losses		Fair Value
Short-Term:
U.S. government securities	$	9,998	$	—	$	(177)	$	9,821
Short-term investments	$	9,998	$	—	$	(177)	$	9,821

As of March 31, 2023 and December 31, 2022, we had no investments with a contractual maturity of greater than one year. Currently, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. We do not consider those investments to be other-than-temporarily impaired as of March 31, 2023. At the end of each reporting period, we evaluate potential credit impairment on available-for-sale securities in an unrealized loss position, based on the expected cash flows to be collected and the yield-to-maturity on those securities. Securities with a valuation allowance for expected credit losses and deemed uncollectible are permanently written down, and a reversal out of the valuation allowance occurs.

4. Leases

We lease approximately 70,000 square feet of office space for our corporate headquarters under non-cancelable operating leases. The leases expire May 31, 2028 with options to renew for one additional period of five years at the then-prevailing market rate. The exercises of the lease renewal options are at our sole discretion and were not included in the lease term for the calculation of the ROU assets and lease liabilities when the leases commenced as they were not reasonably certain of exercise.

16

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

In addition to base rent, we also pay our proportionate share of the operating expenses, as defined in the leases. These payments are made monthly and adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes, and insurance.

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

	March 31, 2023		December 31, 2022
Right-of-use assets:
Operating lease right-of-use assets	$	6,614	$	6,880
Operating lease liabilities:
Accrued expenses	1,367		1,336
Operating lease liabilities, non-current portion	7,185		7,536
Total operating lease liabilities	$	8,552	$	8,872

As of March 31, 2023, the remaining lease term was 5.2 years and the weighted average discount rate was 5.3%. The operating cash outflows from our operating leases were $0.4 million and $0.1 million for the three-month periods ended March 31, 2023 and 2022, respectively.

5. Long-Term Debt

In March 2019 we amended our $24.5 million term loan and security agreement, which we refer to as our former credit facility. The debt was interest only until April 1, 2022 and was scheduled to mature on March 1, 2024. The basic interest rate was the 30-day U.S. LIBOR rate, subject to a floor of 7.60%. In addition to the principal and interest payments, we were required to pay a final payment fee of 3.50% on all amounts outstanding, which was accreted using the effective interest rate method over the term of the credit facility and was to be due at the earlier of maturity or prepayment. Borrowings were prepayable in whole at our option, subject to a prepayment fee of 1.00%.

In August 2022, we prepaid the outstanding principal balance of $19.4 million, the final payment fee of $0.9 million, and the prepayment fee of $0.2 million. As of March 31, 2023 and December 31, 2022, we had no remaining amounts outstanding under our former credit facility.

6. Employee Retirement Plan

We sponsor a defined contribution employee retirement plan covering all of our full-time employees. The plan allows for eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations. Beginning January 1, 2022, we elected to begin making voluntary matching contributions to the plan. We match 50% of the first 6% of each participating employee's contribution, up to 3% of eligible earnings. Our match contributions are made to funds designated by the participant, none of which are based on Inspire common stock. Discretionary contributions to the plan totaled $1.2 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively.

7. Stock-Based Compensation

As of March 31, 2023, there were 4,455,427 shares authorized for issuance under our equity incentive plan, of which 1,646,543 shares were available for future awards.

Stock-based compensation expense is recognized on a straight-line basis over the vesting term for stock options and RSUs, and over the performance period based on the probability of achieving the performance objectives for PSUs, and is reduced by actual forfeitures as they occur. If there are any modifications or cancellations of the

17

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

underlying unvested securities, we may be required to accelerate, increase, or cancel any remaining unearned stock compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock-based awards.

Stock Options

Options are granted at the exercise price, which is equal to the closing price of our stock on the date of grant. The stock options granted to employees include a four-year service period and 25% vest after the first year of service and the remainder vest in equal installments over the next 36 months of service. The stock options granted to the board of directors vest in one or three equal annual installments, in each case, subject to the director's continuous service through the applicable vesting date. The stock options have a contractual life of ten years.

The fair value per share of options is estimated on the date of grant using the Black-Scholes option pricing model.

Option Value and Assumptions

	Three Months Ended
	March 31,
	2023	2022
Weighted average fair value	$151.88	$125.75
Assumptions:
Expected term (years)	6.25	6.25
Expected volatility	57.2 - 57.4%	56.6 - 56.9%
Risk-free interest rate	3.55 - 4.07%	1.75 - 2.40%
Expected dividend yield	0.0%	0.0%

Expected Term — Due to our limited amount of historical exercise, forfeiture, and expiration activity, we have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting terms and the original contractual term of the option. We will continue to analyze our expected term assumption as more historical data becomes available.

Expected Volatility — Due to our limited company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a group of similar companies that are publicly traded for the calculation of volatility. When selecting this peer group of public companies on which we have based our expected stock price volatility, we generally selected companies with comparable characteristics, including enterprise value, stages of clinical development, risk profiles, position within the industry, and those with historical share price information sufficient to meet the expected life of the stock-based awards. We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available.

Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. government Treasury instruments with maturities similar to the expected term of our stock options.

Expected Dividend Yield — The expected dividend assumption is based on our history of not paying dividends and our expectation that we will not declare dividends for the foreseeable future.

18

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

Stock Option Activity

	Options	Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2022	2,660,734		$	112.19	6.9	$372,068
Granted	314,517		$	260.89
Exercised	(142,167)		$	52.69		$29,432
Forfeited/expired	(14,695)		$	191.61
Outstanding at March 31, 2023	2,818,389		$	131.38	7.1	$299,585
Exercisable at March 31, 2023	1,670,615		$	79.15	6.0	$259,222

The aggregate intrinsic value of options exercised is the difference between the estimated fair market value of our common stock at the date of exercise and the exercise price for those options. The aggregate intrinsic value of outstanding options is the difference between the closing price as of the date outstanding and the exercise price of the underlying stock options. As of March 31, 2023, the amount of unearned stock-based compensation to be expensed from now through the year 2027 related to unvested employee and non-employee director stock options is $122.8 million, which we expect to recognize over a weighted average period of 2.6 years.

Restricted Stock Units

RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. The RSUs cannot be transferred and the awards are subject to forfeiture if the holder’s employment terminates prior to the release of the vesting restrictions. The RSUs include three- or four-year service periods and vest in equal installments on each anniversary of the date of grant, provided the employee remains continuously employed with the Company. The fair value of the RSUs is equal to the closing price of our common stock on the grant date. A summary of RSUs and related information is as follows:

	Restricted Stock Units	Weighted Average Grant Date Fair Value			Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 2022	124,680		$	213.97	$	31,404
Granted	76,355		$	260.17
Vested	(18,852)		$	229.92	$	4,882
Forfeited	(2,809)		$	217.18
Unvested at March 31, 2023	179,374		$	231.91	$	41,986

The aggregate intrinsic value of unvested RSUs was based on our closing stock price on the last trading day of the period. The aggregate intrinsic value of vested RSUs was based on our closing stock price on the date of vest. As of March 31, 2023, there was $37.7 million of unrecognized stock-based compensation expense related to RSUs that is expected to be recognized over a weighted average period of 2.5 years.

Performance Stock Units

During each of the quarters ended March 31, 2022 and 2023, we granted PSUs to officers and key employees. The number of PSUs that will ultimately be earned is based on our performance relative to pre-established goals for the three-year periods ending December 31, 2024 and December 31, 2025, respectively. The expense is recorded on a straight-line basis over the requisite service periods based on an estimate of the number of PSUs expected to vest. Management expectations related to the achievement of the performance goals associated with PSU grants is assessed each reporting period. The number of shares earned at the end of each of the three-year periods will vary

19

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

based on actual performance, from 0% to 200% of the number of PSUs granted. If the performance conditions are not met or not expected to be met, any compensation expense recognized associated with the grants will be reversed.

A summary of PSUs and related information is as follows:

	Performance Stock Units	Weighted Average Grant Date Fair Value			Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 2022	77,472		$	227.53	$	19,514
Granted	90,434		$	263.16
Forfeited	(879)		$	227.53
Unvested at March 31, 2023	167,027		$	246.82	$	39,096

The fair value of the PSUs is equal to the closing price of our common stock on the grant date. The aggregate intrinsic value of unvested PSUs was based on our closing stock price on the last trading day of the period. As of March 31, 2023, there was $49.6 million of unrecognized stock-based compensation expense related to outstanding PSUs that is expected to be recognized over a weighted-average period of approximately 2.5 years.

Employee Stock Purchase Plan

Employees may participate in our ESPP provided they meet certain eligibility requirements. The purchase price for our common stock under the terms of the ESPP is defined as 85% of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. There were 1,090,703 shares available for future issuance under the ESPP as of March 31, 2023. The current purchase period under the ESPP began on January 1, 2023 and ends June 30, 2023.

8. Income Taxes

At both March 31, 2023 and December 31, 2022, a valuation allowance was recorded against all deferred tax assets due to our cumulative net loss position. We recorded income tax expense of $0.2 million and $0.1 million in the three months ended March 31, 2023 and 2022, respectively. The nominal income tax expense reflects minimal state and foreign income tax expense in the three months ended March 31, 2023, and minimal state income tax expense and an accrual for uncertain tax benefits in the three months ended March 31, 2022.

As of December 31, 2022, our gross federal net operating loss carryforward was $257.4 million, which will expire at various dates beginning in 2033. In addition, net operating loss carryforwards for state income tax purposes of $183.3 million that include net operating losses will begin to expire in 2024. We also have gross research and development credit carryforwards of $10.1 million as of December 31, 2022, which will expire at various dates beginning in 2033.

Utilization of the net operating loss carryforwards and R&D credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by Section 382 and Section 383 of the Internal Revenue Code of 1986 and similar state provisions. During the three months ended March 31, 2023, we finalized a detailed analysis to determine whether an ownership change has occurred and if a limitation exists. It was determined that December 11, 2018 was the only date that we experienced an ownership change. The study concluded that none of the $126.5 million federal net operating losses and $1.7 million of federal R&D credits that were accumulated on December 11, 2018, will expire unused solely due to the limitations under Section 382 and 383.

Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence and cumulative losses, we believe it is

20

Inspire Medical Systems, Inc. 

Notes to Consolidated Financial Statements (unaudited) 

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

more likely than not that the deferred tax assets are not recognizable and will not be recognizable until we have sufficient book income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

We had $0.1 million of gross unrecognized tax benefits as of each of March 31, 2023 and December 31, 2022.

We file income tax returns in the applicable jurisdictions. The 2019 to 2021 tax years remain open to examination by the major taxing authorities to which we are subject. We do not expect a significant change to our unrecognized tax benefits over the next 12 months.

9. Segment Reporting and Revenue Disaggregation

We operate our business as one operating segment. An operating segment is defined as a component of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.

We sell our Inspire system to hospitals and ambulatory surgery centers in the U.S. and in select countries in Europe through a direct sales organization, and in Japan, Singapore, and Hong Kong through distributors. Revenue by geographic region is as follows:

	Three Months Ended
	March 31,
	2023		2022
United States	$	124,485	$	66,426
All other countries	3,412		2,956
Total revenue	$	127,897	$	69,382

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

10. Loss Per Share

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

The following common stock-based awards were excluded from the computation of diluted net loss per common share for the periods presented because including them would have been anti-dilutive:

	March 31,
	2023	2022
Common stock options outstanding	2,818,389	2,763,215
Unvested restricted stock units	179,374	60,785
Shares issuable under the ESPP	5,136	5,435
Total	3,002,899	2,829,435

21

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 consolidated 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” sections included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, such as information with respect to our plans and strategy for our business and the impact of the ongoing and global COVID-19 pandemic on our business, financial results and financial condition on our business, financial results and financial condition includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, 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, minimally invasive solutions for patients with OSA. Our proprietary Inspire system is the first and only FDA-approved neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA. We have developed a novel, closed-loop solution that continuously monitors a patient’s breathing and delivers mild hypoglossal nerve stimulation to maintain an open airway. Inspire therapy is indicated for patients with moderate to severe OSA who do not have significant central sleep apnea and do not have a complete concentric collapse of the airway at the soft palate level. In addition, patients in the U.S., Japan, Singapore, and Hong Kong must have been confirmed to fail or be unable to tolerate positive airway pressure treatments, such as CPAP, and be 18 years of age or older, though there are no similar requirements for patients in Europe.

We sell our Inspire system to hospitals and ambulatory surgery centers ("ASCs") in the U.S. and in select countries in Europe through a direct sales organization and we sell our Inspire system in Japan, Singapore, and Hong Kong through distributors. Our direct sales force engages in sales efforts and promotional activities focused on ENT physicians and sleep centers. In addition, we highlight our compelling clinical data and value proposition to increase awareness and adoption amongst referring physicians. We build upon this top-down approach with strong direct-to-consumer marketing initiatives to create awareness of the benefits of our Inspire system and drive interest through patient empowerment. This outreach helps to educate thousands of patients on our Inspire therapy.

Although our sales and marketing efforts are directed at patients and physicians because they are the primary users of our technology, we consider the hospitals and ASCs where the procedure is performed to be our customers, as they are the purchasing agents of our Inspire system. Our customers are reimbursed the cost required to treat each patient through various third-party payors, such as commercial payors and government agencies. Our Inspire system is currently reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial payors, under Local Coverage Determinations for patients covered by Medicare, and under U.S. government contract for patients who are treated by the Veterans Health Administration. As of May 2, 2023, we have secured positive coverage policies with many U.S. commercial payors, including virtually all large national commercial insurers, covering approximately 260 million lives in the U.S. In addition, all seven Medicare Administrative Contractors published final policies in 2020 that provide coverage of Inspire therapy when certain coverage criteria are met. Reimbursement in other countries can often be established through a combination of private (commercial insurance) and public funding sources, or at the hospital level through innovation budgets.

For the three months ended March 31, 2023, 97.3% of our revenue was derived in the U.S. and 2.7% was derived outside of the U.S. No single customer accounted for more than 10% of our revenue during the three months ended March 31, 2023.

We rely on third-party suppliers to manufacture our Inspire system and its components. Many of these suppliers are currently single source suppliers. We have experienced and continue to experience supply disruptions which began

22

during the COVID-19 pandemic, but have managed to avoid any significant supply and inventory issues or delay in implant procedures due to those issues. 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. For example, during the three months ended September 30, 2022, we recorded a charge of $2.8 million for obsolete inventory and component parts related to product introductions which were completed in October 2022, including the new silicone leads and the Bluetooth®-enabled patient remote.

In the U.S., our products are shipped directly to our U.S. customers and Singapore and Hong Kong distributors on a purchase order basis, primarily by a third-party vendor with a facility in Tennessee, although we do ship some products from our facility in Minnesota. Warehousing and shipping operations for our European customers are handled by a third-party vendor with a facility located in the Netherlands. Shipments of products to our Japanese distributor are handled from our facility in Minnesota. 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 former credit facility, and equity offerings of our common stock. We have devoted significant resources to research and development activities related to our Inspire system, including clinical and regulatory initiatives to obtain marketing approval, and sales and marketing activities. For the three months ended March 31, 2023, we generated revenue of $127.9 million with a gross margin of 84.4% and had a net loss of $15.4 million compared to revenue of $69.4 million with a gross margin of 85.6% and a net loss of $16.7 million for the three months ended March 31, 2022. Our accumulated deficit as of March 31, 2023 was $339.7 million.

We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions. We continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as additional European countries and the Asia Pacific region. For example, in March 2023, we received FDA approval to offer Inspire therapy to certain pediatric patients with Down syndrome. In 2022, we received FDA approval for additional magnetic resonance imaging ("MRI") scan conditions for use with Inspire therapy. This full-body MRI approval expands the Inspire use labeling that previously allowed only head, neck, and extremity MRI scans. Also in 2022, the FDA approved silicone-based stimulation and sensing leads, which provides improved manufacturability, easier system implantation, increased long-term performance, and enhanced reliability.

Our direct-to-consumer marketing includes the use of social media platforms such as Facebook, Google ad placements, and radio and television commercials. In January 2022, we purchased our first national television advertising spots and began airing new TV commercials, and in March 2023 and we began airing additional new television commercials. The objective of this outreach is to bring patients to our website, where they can find educational materials and videos on sleep apnea and the use and benefits of our Inspire therapy, contact information for physicians and clinical sites, and information regarding community awareness events. Further, our team leverages the Inspire Sleep app for patient education. We expect to continue to increase our direct-to-consumer activities.

We have a call center which we refer to as the Inspire Advisor Care Program ("ACP"). The primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs. In 2022, we initiated a digital scheduling pilot program to facilitate and streamline patient access to care. We plan to continue to expand this scheduling capability during the remainder of 2023.

We also continue to make significant investments to build our sales and marketing organization by increasing the number of U.S. and European sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets throughout the U.S. and in Europe. During the three months ended March 31, 2023, we created 17 new U.S. sales territories, bringing the total to 242 U.S. territories as of March 31, 2023. During that same period, we activated 68 new centers, bringing the total to 973 U.S. medical centers implanting Inspire therapy

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as of March 31, 2023. At March 31, 2023, ASCs made up 24% of our total U.S. implanting centers, up from 23% at December 31, 2022.

Because of these and other factors, we may incur net losses for the next several years, and we may require substantial additional funding, which may include future equity and debt financings.

Macroeconomic Environment

The global economy is experiencing increased inflationary pressures in part due to global supply chain disruptions, labor shortages, and other impacts of the COVID-19 pandemic and current macroeconomic environment which we anticipate will continue. Higher interest rates and capital costs, higher shipping costs, increased costs of labor, and weakening foreign currency exchange rates are creating additional economic challenges. These conditions may cause our customers to decrease or delay orders for our products.

Our operations have been adversely impacted by the inflationary pressures primarily related to labor, raw materials, and component parts. Our inventory on-hand has been constrained by the continuing supply chain challenges and component shortages, although the supply chain constraints eased somewhat in the first quarter of 2023.

COVID-19 Pandemic Update

Our business, operations, and financial condition and results have been and may continue to be impacted by the COVID-19 pandemic. During the first quarter of 2022, resurgences of COVID-19 in various U.S. and international regions impacted our revenue, although surgical volumes had generally returned to pre-pandemic levels by the end of the first quarter, and therefore the impact on the remainder of 2022 was less significant. As discussed above, we have also experienced, and continue to experience, COVID-19-related supply chain issues which has negatively impacted our inventory levels. The extent to which the COVID-19 pandemic continues to impact our results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of COVID-19 and its variants, the resurgence of COVID-19 in regions that have begun to recover from the initial impact of the pandemic, the impact of COVID-19 on economic activity, and the actions to contain its impact on public health and the global economy.

Components of Our Results of Operations

Revenue

We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S., select countries in Europe, Japan, Singapore, and Hong Kong. We recognize revenues from sales of our Inspire system when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms.

Our revenue has fluctuated, and may continue to fluctuate, from quarter to quarter due to a variety of factors. For example, we have historically experienced seasonality in our first and fourth quarters and have experienced adverse impacts on our revenue due to the COVID-19 pandemic and foreign currency exchange rates.

Cost of Goods Sold and Gross Margin

Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap, and inventory obsolescence, warranty replacement costs, as well as distribution-related expenses such as logistics and shipping costs, net of shipping costs charged to customers. The overhead costs include the cost of material procurement, depreciation expense for production equipment, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel. We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.

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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 countries outside of the U.S., as our average selling price in the U.S. tends to be higher than in other countries. Our gross margin may increase slightly 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, and when we implement price increases on our products, thereby increasing our revenue. On the other hand, our gross margin may decrease slightly to the extent our materials and labor prices increase due to supply chain issues and inflation, thereby increasing our per unit costs. However, our gross margin may also fluctuate from quarter to quarter due to seasonality and foreign currency exchange rates.

Our gross margin for the last nine months of 2022 was lower than in previous periods primarily due to inventory obsolescence charges associated with product introductions, additional costs associated with the transition of manufacturing lines to produce our new silicone-based leads, and higher costs of certain component parts which were impacted by inflation and supply chain issues. In 2023, we expect gross margins to be in the range of 83% to 85% given continued higher costs of certain component parts, somewhat offset by the price increase which began taking effect for U.S. customers in May 2022, as well as anticipated manufacturing efficiencies.

Research and Development Expenses

Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services and other costs associated with the next generation versions of the Inspire system. These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs. Additionally, these expenses include clinical study management, payments to clinical investigators, data management and travel expenses for our various clinical studies.

We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and continue to expand our clinical studies to further expand positive coverage policies from private commercial payors in the U.S. and enter into new markets including additional European countries and the Asia Pacific region. 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 ("SG&A") expenses consist primarily of compensation for personnel, including base salaries, stock-based compensation expense and commissions related to our sales organization, finance, information technology, human resource, and legal functions, as well as spending related to marketing, sales operations, and training and reimbursement personnel. Other SG&A expenses include training physicians, travel expenses, advertising, direct-to-consumer promotional programs, conferences, trade shows and consulting services, professional services fees, audit fees, insurance costs and general corporate expenses, including facilities-related expenses.

We expect SG&A expenses to continue to increase as we expand our commercial infrastructure to both drive and support our planned growth in revenue and as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance personnel and information technology services. Additionally, we anticipate an increase in our stock-based compensation expense with grants of stock options, restricted stock units, performance stock units, and shares of our common stock purchased pursuant to our employee stock purchase plan.

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Other (Income) Expense

Other (income) expense consists primarily of interest and dividend income, interest expense under our former credit facility, the impacts of foreign currency transactions and remeasurements, and gains and losses on investments.

Seasonality

Historically, we have experienced seasonality in our first and fourth fiscal 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. Conversely, in the first quarter, many U.S. patients' insurance deductibles reset, requiring more out-of-pocket costs, which negatively impacts our sales during this period.

Results of Operations

	Three Months Ended
	March 31,
	2023		2022		$ Change		% Change
	(in thousands, except percentages)
Revenue	$	127,897	$	69,382	$	58,515	84.3	%
Cost of goods sold	19,888		10,004		9,884		98.8	%
Gross profit	108,009		59,378		48,631		81.9	%
Gross margin	84.4%		85.6%
Operating expenses:
Research and development	25,519		11,870		13,649		115.0	%
Selling, general and administrative	101,988		63,564		38,424		60.4	%
Total operating expenses	127,507		75,434		52,073		69.0	%
Operating loss	(19,498)		(16,056)		(3,442)		21.4	%
Other (income) expense, net	(4,290)		538		(4,828)		(897.4)	%
Loss before income taxes	(15,208)		(16,594)		1,386		(8.4)	%
Income taxes	216		100		116		116.0	%
Net loss	$	(15,424)	$	(16,694)	$	1,270	(7.6)	%

Comparison of the Three Months Ended March 31, 2023 and 2022

Revenue

Revenue increased $58.5 million, or 84.3%, to $127.9 million for the three months ended March 31, 2023 compared to $69.4 million for the three months ended March 31, 2022. These results reflect an increase in sales of our Inspire system of $58.1 million in the U.S. and an increase of $0.4 million outside of the U.S. Overall revenue growth was primarily due to increased utilization, increased market penetration in existing territories, expansion into new territories, increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some U.S. customers in May 2022.

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Revenue information by region is summarized as follows:

	Three Months Ended March 31,
	2023				2022				Change
	Amount		% of Revenue		Amount		% of Revenue		$		%
	(in thousands, except percentages)
United States	$	124,485	97.3	%	$	66,426	95.7	%	$	58,059	87.4	%
All other countries	3,412		2.7	%	2,956		4.3	%	456		15.4	%
Total revenue	$	127,897	100.0	%	$	69,382	100.0	%	$	58,515	84.3	%

Revenue generated in the U.S. was $124.5 million for the three months ended March 31, 2023, an increase of $58.1 million, or 87.4%, compared to the three months ended March 31, 2022. Overall revenue growth was primarily due to increased utilization, increased market penetration in existing territories, expansion into new territories, increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some U.S. customers in May 2022. As noted above, U.S. revenue during the three months ended March 31, 2022 was slightly negatively impacted by the COVID-19 pandemic.

Revenue generated outside of the U.S. was $3.4 million in the three months ended March 31, 2023, an increase of $0.4 million, or 15.4%, compared to the three months ended March 31, 2022. While units sold outside the U.S. increased 23.7% over the prior year period, sales to distributors in the Asia Pacific region at a lower average selling price and unfavorable exchange rates adversely impacted revenue growth. As noted above, international revenue during the three months ended March 31, 2022 was slightly negatively impacted by the COVID-19 pandemic.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $9.9 million, or 98.8%, to $19.9 million for the three months ended March 31, 2023 compared to $10.0 million for the three months ended March 31, 2022. The increase was primarily due to product costs associated with higher sales volume of our Inspire system, higher costs of certain component parts which were impacted by inflation and supply chain issues, and additional costs associated with the transition of manufacturing lines to produce our new silicone-based leads.

Gross margin decreased to 84.4% for the three months ended March 31, 2023 compared to 85.6% for the three months ended March 31, 2022. Gross margin for the three months ended March 31, 2023 was lower primarily due to higher costs of certain component parts, somewhat offset by increased sales volume and manufacturing efficiencies and a price increase which began taking effect for some U.S. customers in May 2022.

Research and Development Expenses

Research and development expenses increased $13.6 million, or 115.0%, to $25.5 million for the three months ended March 31, 2023 compared to $11.9 million for the three months ended March 31, 2022. This change was primarily due to an increase of $6.3 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense and $7.3 million for incremental ongoing research and development costs, including ongoing development of the Inspire Cloud, the next generation Inspire neurostimulator and the physician programmer.

Selling, General and Administrative Expenses

SG&A expenses increased $38.4 million, or 60.4%, to $102.0 million for the three months ended March 31, 2023 compared to $63.6 million for the three months ended March 31, 2022. The primary driver of this change was an increase of $22.8 million in compensation, including salaries, commissions, stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount. In addition, marketing expenses increased $9.9 million, primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing in the first quarter of 2023, and the expansion of our ACP call center. Other drivers of the change to

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SG&A expenses included an increase in travel expenses of $3.4 million and an increase in general corporate costs of $2.3 million primarily due to computer equipment and software, consulting fees, legal fees and bank fees.

Other (Income) Expense

Other (income) expense changed by $4.8 million, or 897.4%, to $4.3 million of income, net for the three months ended March 31, 2023 compared to $0.5 million of expense, net for the three months ended March 31, 2022. The change was primarily due to an increase of $4.2 million in interest and dividend income due to higher interest rates on our higher cash and cash equivalents balances, a decrease of $0.5 million in interest expense due to the August 2022 early termination of our credit facility, and a net change of $0.1 million in foreign currency translation and remeasurement gains due to exchange rates and loss on investments.

Income Taxes

We recorded a provision for incomes taxes of approximately $0.2 million and $0.1 million for the three months ended March 31, 2023 and March 31, 2022, respectively.

Liquidity and Capital Resources

As of March 31, 2023, we had cash, cash equivalents and available-for-sale securities of $452.1 million, an increase of $0.6 million from $451.4 million as of December 31, 2022. Working capital totaled $473.7 million as of March 31, 2023, an increase of $4.9 million from December 31, 2022. We define working capital as current assets less current liabilities. The increase in working capital was primarily due the following factors:

•a decrease of $10.9 million in accrued expenses which decreased primarily due to the payment of year-end bonuses and commissions;

•an increase of $3.8 million in inventory balances which increased as supply chain issues ease;

•an increase of $0.6 million in prepaid expense and other current assets;

•a $0.5 million increase in cash and cash equivalents, primarily due to sales of the Inspire system and proceeds from the exercise of stock options, somewhat offset by cash used to support operations; and

•an increase of $0.1 million in short-term investments.

The increase in working capital was offset by the following factors:

•a $9.6 million increase in accounts payable, generally due to our business volume and headcount growth from the prior year; and

•a decrease of $1.5 million in accounts receivable due to collection on higher sales which occurred during the fourth quarter of 2022.

We proactively manage our access to capital to support liquidity and continued growth. Our sources of capital include sales of our Inspire system and registered offerings of our common stock. In August 2022, we completed a follow-on offering that included our offer and sale of 1,150,000 shares of common stock at a public offering price of $215.00 per share. We received net proceeds of approximately $243.8 million after deducting underwriting discounts, commissions, and offering expenses. During the quarter ended September 30, 2022, we repaid all amounts outstanding under our former credit facility. See Note 5 to our audited financial statements for additional information on our previous credit facility.

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk or decreasing availability. To achieve these objectives, our investment policy allows us to maintain a portfolio of certain types of debt securities issued by the U.S. government and its agencies, corporations with investment-grade credit ratings, or commercial paper and money market funds issued by the highest quality financial and non-financial companies. At March 31, 2023, we had $395.0 million in money market funds and $9.9 million of investments in U.S. government securities, and no investments with a contractual maturity over one year.

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In the three months ended March 31, 2023, our R&D and SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases in 2023. Our SG&A expenditures, primarily for increasing headcount and advertising, may exceed any associated increases in revenues, and therefore would reduce our cash flow from operations. We also anticipate R&D expenses will continue to be significant in 2023, primarily related to the ongoing development of the next generation Inspire neurostimulator and the SleepSync™ platform.

We spent $3.8 million on purchases of property and equipment in the three months ended March 31, 2023, mainly on testing systems for our next generation Inspire system as well as our Inspire Cloud. We anticipate further capital expenditures in 2023, primarily for additional production equipment and to a lesser extent, leasehold improvements on our corporate office.

As of March 31, 2023, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

We believe that our existing cash and cash equivalents and investments, which totaled $452.1 million as of March 31, 2023, together with cash flow from operations, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for at least the next 12 months. There can be no assurance, however, that our business will continue to generate cash flows at historic levels.

Beyond the next 12 months, our cash requirements will depend extensively on the timing of market introduction, and extent of market acceptance of, our Inspire system. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry into new markets such as Hong Kong and Australia, whether we make strategic acquisitions, and competition. We cannot accurately predict our long-term cash requirements at this time. Additionally, the COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity, and financial condition. We may seek additional sources of liquidity and capital resources through additional securities offerings or through borrowings under a new credit facility. There can be no assurance that such transactions will be available to us on favorable terms, if at all.

Cash Flows

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

	Three Months Ended
	March 31,
	2023		2022
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(1,344)	$	(12,748)
Investing activities	(3,753)		(1,465)
Financing activities	5,631		3,044
Effect of exchange rate on cash	6		(7)
Net increase (decrease) in cash and cash equivalents	$	540	$	(11,176)

Operating Activities

The net cash used in operating activities was $1.3 million for the three months ended March 31, 2023 and consisted of a net loss of $15.4 million, non-cash charges of $19.2 million, and a decrease in net operating assets of $5.1 million. The non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more stock options, restricted stock units, and performance stock units to more employees at a higher fair market value. The remainder of the non-cash charges included depreciation and amortization expense, non-cash lease expense, and stock issued for services rendered. Operating assets include accounts receivable which

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decreased due to collections on the higher sales volume we typically experience late in the fourth quarter. Operating assets also include inventories, which increased as supply chain constraints eased, and to a lesser extent prepaid expenses and other current assets. Operating liabilities includes accounts payable, which increased generally due to our increased business volume year-over-year and the costs to support the growth of our operations, and accrued expenses, which decreased primarily due to the payment of year-end bonuses and commissions.

The net cash used in operating activities was $12.7 million for the three months ended March 31, 2022 and consisted of a net loss of $16.7 million, non-cash charges of $10.5 million, and a decrease in net operating assets of $6.5 million. The non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more stock options and restricted stock to employees at a higher fair market value, as well as the introduction of performance stock unit grants. The remainder of the non-cash charges included depreciation and amortization, non-cash lease expense, stock issued for services rendered, accretion of the debt discount, and accretion of the investment discount. Operating assets includes inventories, which increased due to manufacturing of systems inventory to meet increased sales and to establish safety stock to avoid inventory shortages in the event of COVID-related production or supply issues. Operating assets also include accounts receivable which increased slightly over the prior year-end balance, and prepaid expenses and other current assets which decreased slightly. Operating liabilities includes accrued expenses, which decreased primarily due to the payment of accrued compensation as annual bonuses were paid, and accounts payable, which increased generally due to our increased business volume year-over-year and the costs to support the growth of our operations, including compensation and personnel-related costs.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 was $3.8 million and consisted of purchases of property and equipment.

Net cash provided by investing activities for the three months ended March 31, 2022 was $1.5 million and consisted of purchases of property and equipment of $1.2 million and the purchase of an investment of $0.3 million.

Financing Activities

Net cash provided by financing activities was $5.6 million for the three months ended March 31, 2023 and consisted of $7.4 million in proceeds from the exercise of stock options, somewhat offset by $1.7 million of taxes paid on net share settlement of RSUs.

Net cash provided by financing activities was $3.0 million for the three months ended March 31, 2022 and consisted of proceeds from the exercise of stock options of $3.1 million, partially offset by less than $0.1 million of taxes paid to net share settlement of RSUs.

Contractual Obligations and Commitments

There have been no material changes to our short-term and long-term anticipated cash requirements under contractual obligations from those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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, 2022. We have reviewed and determined that those critical accounting policies and estimates remain our critical accounting policies and estimates as of and for the three months ended March 31, 2023.

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Recent Accounting Pronouncements

We have reviewed all recently issued standards and have determined that such standards will not have a significant impact on our consolidated financial statements or do not otherwise apply to our operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

The risk associated with fluctuating interest rates is primarily limited to our cash equivalents which are carried at quoted market prices and our short-term investments. We do not currently use or plan to use financial derivatives in our investment portfolio. A hypothetical 1% increase in interest rates during the three months ended March 31, 2023 would have impacted interest income on our consolidated financial statements by approximately $5.2 million.

Credit Risk, Foreign Currency Risk, and Inflation Risk

For market risks related to changes in credit, foreign currency, and inflation, reference is made to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2022. Our exposure to these risks has not materially changed from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, other than as described below.

As of March 31, 2023 and December 31, 2022, our cash, cash equivalents, and investments were maintained with financial institutions which we believe have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us, however our cash balances were in excess of insured limits. Market conditions can impact the viability of where our cash is held. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all.

Item 4.    Controls and Procedures.

Evaluation of disclosure controls and procedures

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

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Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.

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

Item 1A.    Risk Factors.

For a discussion of our potential risks and uncertainties, see the information in "Part I, Item IA. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 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, 2022.

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	Agreement under Inspire Medical Systems, Inc. 2018 Incentive Award Plan for awards granted on or after January 31, 2023	10-K	001-38468	10.10	2/10/23
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.

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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:	May 2, 2023	By:	/s/ TIMOTHY P. HERBERT
			Timothy P. Herbert
			President, Chief Executive Officer and Director
			(principal executive officer)
Date:	May 2, 2023	By:	/s/ RICHARD J. BUCHHOLZ
			Richard J. Buchholz
			Chief Financial Officer
			(principal financial officer and principal accounting officer)

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