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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
________________________________

(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2023, the registrant had 29,524,189 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents
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 |  | 9
| Notes to Consolidated Financial Statements |  | 10
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 25
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |  | 37
Item 4. | Controls and Procedures |  | 37
PART II. | OTHER INFORMATION |  | 38
Item 1. | Legal Proceedings |  | 38
Item 1A. | Risk Factors |  | 38
Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |  | 40
Item 3. | Defaults Upon Senior Securities |  | 40
Item 4. | Mine Safety Disclosures |  | 40
Item 5. | Other Information |  | 40
Item 6. | Exhibits |  | 42
| Signatures |  | 43

2

Table of Contents
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the "Quarterly Report") 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 COVID-19 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 COVID-19, 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;
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•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.
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PART I—FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
Inspire Medical Systems, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)

|  | September 30, 2023 |  | December 31, 2022
|  | (unaudited) |  |
Assets |  |  |  |
Current assets: |  |  |  |
Cash and cash equivalents |  | $ | 329,897 |  |  | $ | 441,592 |
Investments, short-term |  | 134,317 |  |  | 9,821 |
Accounts receivable, net of allowance for credit losses of $1,376 and $36, respectively |  | 71,460 |  |  | 61,228 |
Inventories, net |  | 26,115 |  |  | 11,886 |
Prepaid expenses and other current assets |  | 7,802 |  |  | 5,505 |
Total current assets |  | 569,591 |  |  | 530,032 |
Investments, long-term |  | 2,961 |  |  | — |
Property and equipment, net |  | 32,249 |  |  | 17,249 |
Operating lease right-of-use assets |  | 23,081 |  |  | 6,880 |
Other non-current assets |  | 11,612 |  |  | 10,715 |
Total assets |  | $ | 639,494 |  |  | $ | 564,876 |
Liabilities and stockholders' equity |  |  |  |
Current liabilities: |  |  |  |
Accounts payable |  | $ | 40,031 |  |  | $ | 26,847 |
Accrued expenses |  | 29,964 |  |  | 34,339 |
Total current liabilities |  | 69,995 |  |  | 61,186 |
Operating lease liabilities, non-current portion |  | 25,173 |  |  | 7,536 |
Other non-current liabilities |  | 146 |  |  | 146 |
Total liabilities |  | 95,314 |  |  | 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; 29,403,189 and 29,008,368 issued and outstanding at September 30, 2023 and December 31, 2022, respectively |  | 29 |  |  | 29 |
Additional paid-in capital |  | 904,293 |  |  | 820,335 |
Accumulated other comprehensive income (loss) |  | 44 |  |  | (86) |
Accumulated deficit |  | (360,186) |  |  | (324,270) |
Total stockholders' equity |  | 544,180 |  |  | 496,008 |
Total liabilities and stockholders' equity |  | $ | 639,494 |  |  | $ | 564,876 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except share and per share amounts)

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Revenue |  | $ | 153,302 |  |  | $ | 109,188 |  |  | $ | 432,291 |  |  | $ | 269,956 |
Cost of goods sold |  | 24,382 |  |  | 19,786 |  |  | 68,522 |  |  | 43,963 |
Gross profit |  | 128,920 |  |  | 89,402 |  |  | 363,769 |  |  | 225,993 |
Operating expenses: |  |  |  |  |  |  |  |
Research and development |  | 29,144 |  |  | 20,993 |  |  | 85,484 |  |  | 47,397 |
Selling, general and administrative |  | 113,247 |  |  | 85,603 |  |  | 327,853 |  |  | 225,853 |
Total operating expenses |  | 142,391 |  |  | 106,596 |  |  | 413,337 |  |  | 273,250 |
Operating loss |  | (13,471) |  |  | (17,194) |  |  | (49,568) |  |  | (47,257) |
Other (income) expense: |  |  |  |  |  |  |  |
Interest and dividend income |  | (5,495) |  |  | (1,350) |  |  | (14,690) |  |  | (1,681) |
Interest expense |  | — |  |  | 656 |  |  | — |  |  | 1,677 |
Other expense, net |  | 224 |  |  | 101 |  |  | 268 |  |  | 290 |
Total other (income) expense |  | (5,271) |  |  | (593) |  |  | (14,422) |  |  | 286 |
Loss before income taxes |  | (8,200) |  |  | (16,601) |  |  | (35,146) |  |  | (47,543) |
Income taxes |  | 340 |  |  | 246 |  |  | 770 |  |  | 488 |
Net loss |  | (8,540) |  |  | (16,847) |  |  | (35,916) |  |  | (48,031) |
Other comprehensive loss: |  |  |  |  |  |  |  |
Foreign currency translation loss |  | (181) |  |  | (148) |  |  | (4) |  |  | (106) |
Unrealized gain (loss) on investments |  | 122 |  |  | (14) |  |  | 134 |  |  | (202) |
Total comprehensive loss |  | $ | (8,599) |  |  | $ | (17,009) |  |  | $ | (35,786) |  |  | $ | (48,339) |
Net loss per share, basic and diluted |  | $ | (0.29) |  |  | $ | (0.60) |  |  | $ | (1.23) |  |  | $ | (1.73) |
Weighted average common shares used to compute net loss per share, basic and diluted |  | 29,365,968 |  |  | 28,226,345 |  |  | 29,229,626 |  |  | 27,782,093 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Consolidated Statements of Stockholders' Equity (unaudited)
(in thousands, except share amounts)

| Nine Months Ended September 30, 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 |
Stock options exercised | 143,693 |  |  | — |  |  | 13,113 |  |  | — |  |  | — |  |  | 13,113 |
Vesting of restricted stock units | 9,349 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Withholding taxes on net share settlement of restricted stock units | (3,237) |  |  | — |  |  | (971) |  |  | — |  |  | — |  |  | (971) |
Issuance of common stock | 390 |  |  | — |  |  | 91 |  |  | — |  |  | — |  |  | 91 |
Issuance of common stock for employee stock purchase plan | 12,983 |  |  | — |  |  | 2,792 |  |  | — |  |  | — |  |  | 2,792 |
Stock-based compensation expense | — |  |  | — |  |  | 21,567 |  |  | — |  |  | — |  |  | 21,567 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | 71 |  |  | — |  |  | 71 |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | (11,952) |  |  | (11,952) |
Balance at June 30, 2023 | 29,326,179 |  |  | 29 |  |  | 880,873 |  |  | 103 |  |  | (351,646) |  |  | 529,359 |
Stock options exercised | 72,632 |  |  | — |  |  | 4,016 |  |  | — |  |  | — |  |  | 4,016 |
Vesting of restricted stock units | 6,272 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Issuance of common stock | 279 |  |  | — |  |  | 91 |  |  | — |  |  | — |  |  | 91 |
Withholding taxes on net share settlement of restricted stock units | (2,173) |  |  | — |  |  | (516) |  |  | — |  |  | — |  |  | (516) |
Stock-based compensation expense | — |  |  | — |  |  | 19,829 |  |  | — |  |  | — |  |  | 19,829 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | (59) |  |  | — |  |  | (59) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | (8,540) |  |  | (8,540) |
Balance at September 30, 2023 | 29,403,189 |  |  | $ | 29 |  |  | $ | 904,293 |  |  | $ | 44 |  |  | $ | (360,186) |  |  | $ | 544,180 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Consolidated Statements of Stockholders' Equity (unaudited)
(in thousands, except share amounts)

| Nine Months Ended September 30, 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 |
Stock options exercised | 52,383 |  |  | — |  |  | 1,549 |  |  | — |  |  | — |  |  | 1,549 |
Issuance of common stock | 314 |  |  | — |  |  | 80 |  |  | — |  |  | — |  |  | 80 |
Issuance of common stock for employee stock purchase plan | 13,743 |  |  | — |  |  | 2,134 |  |  | — |  |  | — |  |  | 2,134 |
Stock-based compensation expense | — |  |  | — |  |  | 12,659 |  |  | — |  |  | — |  |  | 12,659 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | (3) |  |  | — |  |  | (3) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | (14,490) |  |  | (14,490) |
Balance at June 30, 2022 | 27,634,444 |  |  | 28 |  |  | 537,730 |  |  | (201) |  |  | (310,573) |  |  | 226,984 |
Stock options exercised | 35,826 |  |  | — |  |  | 1,760 |  |  | — |  |  | — |  |  | 1,760 |
Issuance of common stock | 410 |  |  | — |  |  | 79 |  |  | — |  |  | — |  |  | 79 |
Sale of common stock from follow-on public offering, net of offering expenses | 1,150,000 |  |  | 1 |  |  | 243,800 |  |  | — |  |  | — |  |  | 243,801 |
Stock-based compensation expense | — |  |  | — |  |  | 14,589 |  |  | — |  |  | — |  |  | 14,589 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | (162) |  |  | — |  |  | (162) |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | (16,847) |  |  | (16,847) |
Balance at September 30, 2022 | 28,820,680 |  |  | $ | 29 |  |  | $ | 797,958 |  |  | $ | (363) |  |  | $ | (327,420) |  |  | $ | 470,204 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)

|  | Nine Months Ended September 30,
|  | 2023 |  | 2022
Operating activities |  |  |  |
Net loss |  | $ | (35,916) |  |  | $ | (48,031) |
Adjustments to reconcile net loss: |  |  |  |
Depreciation and amortization |  | 2,029 |  |  | 1,289 |
Non-cash lease expense |  | 986 |  |  | 778 |
Stock-based compensation expense |  | 59,621 |  |  | 36,969 |
Non-cash stock issuance for services rendered |  | 272 |  |  | 238 |
Other, net |  | 1,271 |  |  | (553) |
Changes in operating assets and liabilities: |  |  |  |
Accounts receivable |  | (11,588) |  |  | (14,395) |
Inventories |  | (14,228) |  |  | 2,086 |
Prepaid expenses and other current assets |  | (2,947) |  |  | (1,712) |
Accounts payable |  | 11,075 |  |  | 8,601 |
Accrued expenses and other liabilities |  | (3,189) |  |  | 7,030 |
Net cash provided by (used in) operating activities |  | 7,386 |  |  | (7,700) |
Investing activities |  |  |  |
Purchases of property and equipment |  | (15,596) |  |  | (6,146) |
Purchases of investments |  | (137,253) |  |  | — |
Proceeds from sales or maturities of investments |  | 10,000 |  |  | — |
Purchases of strategic investments |  | (250) |  |  | (10,500) |
Net cash used in investing activities |  | (143,099) |  |  | (16,646) |
Financing activities |  |  |  |
Payments on long-term debt obligation |  | — |  |  | (24,500) |
Proceeds from sale of common stock |  | — |  |  | 243,801 |
Proceeds from the exercise of stock options |  | 24,506 |  |  | 6,396 |
Taxes paid on net share settlement of restricted stock units |  | (3,233) |  |  | (43) |
Proceeds from issuance of common stock from employee stock purchase plan |  | 2,792 |  |  | 2,134 |
Net cash provided by financing activities |  | 24,065 |  |  | 227,788 |
Effect of exchange rate on cash |  | (47) |  |  | (101) |
(Decrease) increase in cash and cash equivalents |  | (111,695) |  |  | 203,341 |
Cash and cash equivalents at beginning of period |  | 441,592 |  |  | 214,467 |
Cash and cash equivalents at end of period |  | $ | 329,897 |  |  | $ | 417,808 |
Supplemental cash flow information |  |  |  |
Cash paid for interest |  | $ | — |  |  | $ | 2,321 |
Property and equipment included in accounts payable and accrued expenses |  | 3,499 |  |  | 1,332 |

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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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. Cash is carried at cost, which approximates fair value, and cash equivalents, which consist of money market funds and corporate debt securities, are stated at fair value.
Foreign Currency
Our functional and reporting currency is the U.S. dollar. Our subsidiaries have functional currency in Euro and Yen. 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
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
in effect on the date of the transaction. Foreign currency transaction gains and losses and the impacts of foreign currency remeasurement are recognized in other expense, net in the consolidated statements of operations and comprehensive loss. For the three-month periods ended September 30, 2023 and 2022, we recognized $0.2 million and $0.1 million of gains, net, respectively. For both of the nine-month periods ended September 30, 2023 and 2022, we recognized $0.3 million 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 September 30, 2023 and December 31, 2022.
Investments
Our investments are classified as available-for-sale and consisted of the following:

|  | September 30, 2023
|  | Amortized |  | Unrealized Gross |  | Aggregate
|  | Cost |  | Gains |  | Losses |  | Fair Value
Short-Term: |  |  |  |  |  |  |  |
Commercial paper |  | $ | 2,907 |  |  | $ | — |  |  | $ | (1) |  |  | $ | 2,906 |
Corporate debt securities |  | 29,182 |  |  | 1 |  |  | (25) |  |  | 29,158 |
Certificates of deposit |  | 2,953 |  |  | — |  |  | — |  |  | 2,953 |
U.S. treasury debt securities |  | 99,317 |  |  | 1 |  |  | (18) |  |  | 99,300 |
Short-term investments |  | $ | 134,359 |  |  | $ | 2 |  |  | $ | (44) |  |  | $ | 134,317 |
Long-Term: |  |  |  |  |  |  |  |
Corporate debt securities |  | $ | 1,930 |  |  | $ | — |  |  | $ | (1) |  |  | $ | 1,929 |
Asset-backed securities |  | 1,031 |  |  | 1 |  |  | — |  |  | 1,032 |
Long-term investments |  | $ | 2,961 |  |  | $ | 1 |  |  | $ | (1) |  |  | $ | 2,961 |

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

As of September 30, 2023 and December 31, 2022, we had no investments with a contractual maturity of greater than three years.
Investments are classified as available-for-sale and 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 $0.0 million and $0.2 million of unrecognized loss in our accumulated other comprehensive income (loss) balance at September 30, 2023 and December 31, 2022, respectively. Any realized gains and losses are calculated on the specific identification method and reported net in other expense, net in the consolidated statements of operations and comprehensive loss. For the three and nine months ended September 30, 2023 and 2022, we recognized $0 of realized losses, net.
Each reporting period, we evaluate whether declines in fair value below carrying value are due to expected credit losses, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Expected credit
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
losses, not to exceed the amount of the unrealized loss, are recorded as an allowance through other expense, net in the consolidated statements of operations and comprehensive loss. The total allowance for credit losses was $0 at both September 30, 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 include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs that are supported by little or no market activities, which would require us to develop our own assumptions.
We classify instruments within Level 1 if quoted prices are available in active markets for identical assets, which include our money market funds and U.S. treasury securities. We classify instruments in Level 2 if the instruments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or an income approach, such as a discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates, yield curves and other observable market information. These instruments include our commercial paper, certificates of deposit, corporate debt securities and asset-backed securities. The available-for-sale securities are held by a custodian who obtains investment prices from a third-party pricing provider that uses standard inputs (observable in the market) to models which vary by asset class.
The following tables set forth by level within the fair value hierarchy our assets that are measured on a recurring basis and reported at fair value as of September 30, 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.
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)

|  | Fair Value Measurements as of
|  | September 30, 2023
|  | Estimated Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Cash equivalents: |  |  |  |  |  |  |  |
Money market funds |  | $ | 284,353 |  |  | $ | 284,353 |  |  | $ | — |  |  | $ | — |
Corporate debt securities |  | 2,923 |  |  | — |  |  | 2,923 |  |  | — |
Total cash equivalents |  | 287,276 |  |  | 284,353 |  |  | 2,923 |  |  | — |
Investments: |  |  |  |  |  |  |  |
Commercial paper |  | 2,906 |  |  | — |  |  | 2,906 |  |  | — |
Corporate debt securities |  | 31,087 |  |  | — |  |  | 31,087 |  |  | — |
Certificates of deposit |  | 2,953 |  |  | — |  |  | 2,953 |  |  | — |
Asset-backed securities |  | 1,032 |  |  | — |  |  | 1,032 |  |  | — |
U.S. government securities |  | 99,300 |  |  | 99,300 |  |  | — |  |  | — |
Total investments |  | 137,278 |  |  | 99,300 |  |  | 37,978 |  |  | — |
Total cash equivalents and investments |  | $ | 424,554 |  |  | $ | 383,653 |  |  | $ | 40,901 |  |  | $ | — |

|  | 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 September 30, 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 September 30, 2023 and December 31, 2022, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy.
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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:

|  | September 30, 2023 |  | December 31, 2022
Raw materials |  | $ | 4,381 |  |  | $ | 5,645 |
Finished goods |  | 21,734 |  |  | 6,241 |
Total inventories, net of reserves |  | $ | 26,115 |  |  | $ | 11,886 |

We expense prelaunch inventory as research and development expense in the period incurred unless objective and persuasive evidence exists that regulatory approval and subsequent commercialization of a product candidate is probable and where we also expect the future economic benefit from the sales of the product candidate to be realized. At both September 30, 2023 and December 31, 2022, there was $0 included in inventory related to prelaunch inventory.
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 $3.5 million and $2.7 million as of September 30, 2023 and December 31, 2022, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization and consisted of the following:
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)

|  | September 30, 2023 |  | December 31, 2022
Computer equipment and software |  | $ | 2,152 |  |  | $ | 1,729 |
Manufacturing equipment |  | 7,105 |  |  | 5,974 |
Other equipment |  | 1,847 |  |  | 535 |
Leasehold improvements |  | 2,136 |  |  | 2,064 |
Construction in process |  | 25,948 |  |  | 11,857 |
Property and equipment, cost |  | 39,188 |  |  | 22,159 |
Less: accumulated depreciation and amortization |  | (6,939) |  |  | (4,910) |
Property and equipment, net |  | $ | 32,249 |  |  | $ | 17,249 |

Depreciation is determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease. Depreciation and amortization expense was $0.8 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively, and $2.0 million and $1.3 million for the nine months ended September 30, 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 $10.8 million and $10.5 million as of September 30, 2023 and December 31, 2022, respectively. There were no adjustments to the carrying amount during either of the nine months ended September 30, 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 nine months ended September 30, 2023 or 2022.
Accrued Expenses
Accrued expenses consisted of the following:

|  | September 30, 2023 |  | December 31, 2022
Payroll related |  | $ | 26,218 |  |  | $ | 30,398 |
Product warranty liability |  | 805 |  |  | 920 |
Operating lease liabilities, current portion |  | — |  |  | 1,336 |
Other accrued expenses |  | 2,941 |  |  | 1,685 |
Total accrued expenses |  | $ | 29,964 |  |  | $ | 34,339 |

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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
The following table shows the changes in our estimated product warranty liability accrual, included in accrued liabilities:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
Balance at beginning of period |  | $ | 760 |  |  | $ | 488 |  |  | $ | 920 |  |  | $ | 468 |
Provisions for warranty |  | 174 |  |  | 201 |  |  | 457 |  |  | 322 |
Settlements of warranty claims |  | (129) |  |  | (61) |  |  | (572) |  |  | (162) |
Balance at the end of the period |  | $ | 805 |  |  | $ | 628 |  |  | $ | 805 |  |  | $ | 628 |

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 8 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.
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
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, prelaunch inventory, 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.
We expense prelaunch inventory as research and development expense in the period incurred unless objective and persuasive evidence exists that regulatory approval and subsequent commercialization of a product candidate is probable and where we also expect the future economic benefit from the sales of the product candidate to be realized. Prelaunch inventory expenses were $1.7 million and $0.0 million during the three months ended September 30, 2023 and 2022, respectively and $4.7 million and $0.0 million during the nine months ended September 30, 2023 and 2022, respectively.
Stock-Based Compensation
We maintain an equity incentive plan to provide lon g-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-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 $25.5 million and $20.1 million during the three months ended September 30, 2023 and 2022, respectively, and $74.3 million and $53.6 million during the nine months ended September 30, 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
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
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 Income (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.
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. Leases
We lease office space for our corporate headquarters under a non-cancelable operating lease. The corporate office leases were amended in May 2023 to increase the total space leased to approximately 106,000 square feet and to extend the noncancellable lease term through May 31, 2035, resulting in a non-cash increase in the associated right-of-use asset and lease liability of $15.1 million. We entered into an additional warehouse and office space lease for our corporate headquarters under a non-cancelable operating lease in August 2023. This space includes approximately 22,000 square feet and a noncancellable lease term through May 31, 2035, resulting in an associated right-of-use asset and lease liability of $2.3 million. Each lease includes options to renew for up to two additional periods of five years each at the then-prevailing market rates. 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 as of the lease modification date as they were not reasonably certain of exercise.
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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 in these leases, 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:

|  | September 30, 2023 |  | December 31, 2022
Right-of-use assets: |  |  |  |
Operating lease right-of-use assets |  | $ | 23,081 |  |  | $ | 6,880 |
Operating lease liabilities: |  |  |  |
Accrued expenses |  | — |  |  | 1,336 |
Operating lease liabilities, non-current portion |  | 25,173 |  |  | 7,536 |
Total operating lease liabilities |  | $ | 25,173 |  |  | $ | 8,872 |

Maturities of our lease liability for our operating lease are as follows as of September 30, 2023:

2023 (remaining) |  | $ | 633 |
2024 |  | (3,582) |
2025 |  | 3,056 |
2026 |  | 3,313 |
2027 |  | 3,416 |
Thereafter |  | 28,887 |
Total undiscounted lease payments |  | 35,723 |
Less: imputed interest |  | (10,550) |
Present value of lease liability |  | $ | 25,173 |

As of September 30, 2023, the remaining lease terms were 11.7 years and the weighted average discount rate was 4.9%. The operating cash outflows from our operating leases were $0.6 million and $0.2 million for the three-month periods ended September 30, 2023 and 2022, respectively, and $1.5 million and $0.3 million for the nine-month periods ended September 30, 2023 and 2022, respectively.
4. 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 September 30, 2023 and December 31, 2022, we had no remaining amounts outstanding under our former credit facility.
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
5. Employee Retirement Plan
We sponsor a defined contribution employee retirement plan covering all of our full-time employees. The plan allows eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations. Beginning January 1, 2022, we elected to begin making voluntary matching contributions to the plan. We match 50% of the first 6% of each participating employee's contribution, up to 3% of eligible earnings. Our match contributions are made to funds designated by the participant, none of which are based on Inspire common stock. Discretionary contributions to the plan totaled $0.8 million and $0.6 million for the three months ended September 30, 2023 and 2022, respectively, and $3.0 million and $1.9 million for the nine months ended September 30, 2023 and 2022, respectively.
6. Stock-Based Compensation
As of September 30, 2023, there were 4,259,385 shares authorized for issuance under our equity incentive plan, of which 1,537,529 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 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

|  | Nine Months Ended
|  | September 30,
|  | 2023 |  | 2022
Weighted average fair value |  | $153.59 |  | $119.23
Assumptions: |  |  |  |
Expected term (years) |  | 6.25 |  | 5.50 - 6.25
Expected volatility |  | 56.4 - 57.4% |  | 56.2 - 57.0%
Risk-free interest rate |  | 3.49 - 4.61% |  | 1.75 - 4.06%
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.
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
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.
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 |  | 409,977 |  |  |  | $ | 264.13 |  |  |  |  |  |
Exercised |  | (358,492) |  |  |  | $ | 68.64 |  |  |  |  |  | $72,896
Forfeited/expired |  | (40,404) |  |  |  | $ | 206.10 |  |  |  |  |  |
Outstanding at September 30, 2023 |  | 2,671,815 |  |  |  | $ | 139.93 |  |  |  | 6.8 |  | $196,553
Exercisable at September 30, 2023 |  | 1,699,560 |  |  |  | $ | 90.47 |  |  |  | 5.7 |  | $188,465

The aggregate intrinsic value of options exercised is the difference between the estimated fair market value of our common stock at the date of exercise and the exercise price for those options. The aggregate intrinsic value of outstanding options is the difference between the closing price as of the date outstanding and the exercise price of the underlying stock options. As of September 30, 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 $111.1 million, which we expect to recognize over a weighted average period of 2.5 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 |  | 112,076 |  |  |  | $ | 262.87 |  |  |  |
Vested |  | (34,473) |  |  |  | $ | 211.04 |  |  |  | $ | 9,168 |
Forfeited |  | (8,940) |  |  |  | $ | 237.12 |  |  |  |
Unvested at September 30, 2023 |  | 193,343 |  |  |  | $ | 241.77 |  |  |  | $ | 38,367 |

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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
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 September 30, 2023, there was $37.1 million of unrecognized stock-based compensation expense related to RSUs that is expected to be recognized over a weighted average period of 2.0 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 are assessed each reporting period. The number of shares earned at the end of each of the three-year periods will vary 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 |  | 95,994 |  |  |  | $ | 264.59 |  |  |  |
Forfeited |  | (2,897) |  |  |  | $ | 241.54 |  |  |  |
Unvested at September 30, 2023 |  | 170,569 |  |  |  | $ | 248.15 |  |  |  | $ | 33,848 |

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 September 30, 2023, there was $31.1 million of unrecognized stock-based compensation expense related to outstanding PSUs that is expected to be recognized over a weighted-average period of approximately 2.0 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 1,077,720 shares available for future issuance under the ESPP as of September 30, 2023. The current purchase period under the ESPP began on July 1, 2023 and ends December 31, 2023.
7. Income Taxes
At both September 30, 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 $0.3 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $0.8 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively. The nominal income tax expense reflects minimal state and foreign income tax expense in the nine months ended September 30, 2023, and minimal state income tax expense and an accrual for uncertain tax positions in the three and nine months ended September 30, 2022.
We filed our 2022 U.S. federal income tax return during the third quarter of 2023. Considering the provision to return true-ups, our gross federal net operating loss carryforward as of December 31, 2022 was $274.4 million, which will expire at various dates beginning in 2031. In addition, net operating loss carryforwards for state income tax
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Table amounts in thousands, except share and per share amounts)
purposes of $183.3 million that include net operating losses will begin to expire in 2028. We also have gross research and development credit carryforwards of $9.7 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 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 tax payable on unrecognized tax positions as of each of September 30, 2023 and December 31, 2022.
We file income tax returns in the applicable jurisdictions. The 2019 to 2022 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 positions over the next 12 months.
8. 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 and Japan through a direct sales organization, and in Singapore and Hong Kong through distributors. Revenue by geographic region is as follows:

|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2023 |  | 2022 |  | 2023 |  | 2022
United States |  | $ | 147,514 |  |  | $ | 106,279 |  |  | $ | 416,748 |  |  | $ | 260,581 |
All other countries |  | 5,788 |  |  | 2,909 |  |  | 15,543 |  |  | 9,375 |
Total revenue |  | $ | 153,302 |  |  | $ | 109,188 |  |  | $ | 432,291 |  |  | $ | 269,956 |

All of our long-lived assets are located in the U.S.
9. 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
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INSPIRE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
(Table amounts in thousands, except share and per share amounts)
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:

|  | September 30,
|  | 2023 |  | 2022
Common stock options outstanding |  | 2,671,815 |  |  | 2,788,306 |
Unvested restricted stock units |  | 193,343 |  |  | 107,930 |
Shares issuable under the ESPP |  | 6,319 |  |  | 5,706 |
Total |  | 2,871,477 |  |  | 2,901,942 |

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 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 macroeconomic factors 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 and Japan through a direct sales organization and we sell our Inspire system in 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 November 7, 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.
In November 2023, the final 2024 Medicare reimbursement payments were announced. The 2024 rate for our hospital customers is $29,617 per implantation of a hypoglossal nerve stimulator, an increase of 1% over the 2023 rate. The ASC reimbursement for 2024 is $24,870 per implantation, a decrease of 1% over the 2023 rate. The 2024 physician payment is $823 for implantation, a 6% decrease over the 2023 payment. The 2024 national average drug-induced sleep endoscopy ("DISE") procedure reimbursement to ASCs increased 714% to $757 per procedure over the 2023 rate, while the reimbursement to hospitals for the DISE procedure increased by 806% to $1,619.
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For the nine months ended September 30, 2023, 96.4% of our revenue was derived in the U.S. and 3.6% was derived outside of the U.S. No single customer accounted for more than 10% of our revenue during the nine months ended September 30, 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 that began during the COVID-19 pandemic, but to date we have managed to avoid any delay in implant procedures due to those issues. During the third quarter of 2023, we began experiencing an inventory supply issue related to our polyurethane-based stimulation leads, one component of the Inspire system currently used only in the European market. In 2022, the FDA approved our silicone-based stimulation and sensing leads in the U.S., which replaced the polyurethane versions of the leads, and we stopped manufacturing polyurethane leads. We applied for European Union ("EU") Medical Devices Regulation ("MDR") in December 2021, which we expect to obtain in the first quarter of 2024, following delays in the process. In the interim, we received a derogation from the Dutch national competent authority allowing us to place the silicone-based leads on the market until April 1, 2024 or until we receive certification under the EU MDR, whichever occurs first. We are also pursuing derogation in several other EU member states. However, such derogations are granted at the national level only and we cannot be certain that national competent authorities of the other EU member states will grant a derogation similar to the Dutch authority. Until we obtain certification under the EU MDR or these derogations are received, we may only sell our polyurethane-based leads in the EU, where the stimulation lead is in low supply. During the fourth quarter of 2023 and possibly extending into early 2024, we expect that the delay in certification and the shortage of polyurethane-based stimulation leads may cause delays to implant procedures which may adversely affect our business in the EU, including a reduction in our European revenue, and thereby our consolidated revenue, of up to $4 million during the fourth quarter of 2023.
We typically 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 are shipped to our 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, and warehousing and shipping operations for our Japanese customers are handled by a third-party with a facility in Japan. Customers do not have the right to return a 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 September 30, 2023, we generated revenue of $153.3 million with a gross margin of 84.1% and had a net loss of $8.5 million compared to revenue of $109.2 million with a gross margin of 81.9% and a net loss of $16.8 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we generated revenue of $432.3 million with a gross margin of 84.1% and had a net loss of $35.9 million compared to revenue of $270.0 million with a gross margin of 83.7% and a net loss of $48.0 million for the nine months ended September 30, 2022. Our accumulated deficit as of September 30, 2023 was $360.2 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
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European countries and the Asia Pacific region. For example, in June 2023, we submitted a premarket approval ("PMA") supplement to the FDA for our next generation Inspire system. Also in June 2023, we received approval from the FDA on an expanded indication which includes an increase on the upper limit of the Apnea Hypopnea Index to 100 events per hour from 65, and raises the Body Mass Index ("BMI") warning in the labeling to 40 from 32, and we also received FDA approval of our new physician programmer, called the SleepSync™ programmer, which we expect to formally launch in the U.S. in early 2024. In March 2023, we received FDA approval to offer Inspire therapy to certain pediatric patients with Down syndrome, and 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, 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 maintain or increase our level of 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 and 2024.
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 September 30, 2023, we created 13 new U.S. sales territories, bringing the total to 274 U.S. territories as of September 30, 2023. During that same period, we activated 62 new centers, bringing the total to 1,107 U.S. medical centers implanting Inspire therapy as of September 30, 2023. At both of September 30, 2023 and December 31, 2022, ASCs made up 23% of our total U.S. implanting centers.
During 2023, glucagon-like peptide 1 ("GLP-1s"), a class of drug indicated for diabetes and obesity, continued to gain popularity as a weight-loss drug. OSA is a multifactorial disease with many independent factors including age, gender, weight, and neck circumference. Inspire is designed to address anteroposterior airway collapse, also known as tongue-based collapse. Patients with a higher BMI are subject to a larger neck circumference and present predominantly with lateral-wall collapse. A combination of tongue-based collapse and lateral-wall collapse is identified as a complete concentric collapse of the upper airway which is detected during a DISE procedure. Inspire is contraindicated for complete concentric collapse. While weight loss may help reduce a patient’s Apnea-Hypopnea Index and other OSA symptoms, we have seen from numerous studies that weight loss alone will not resolve OSA for the vast majority of patients. We expect GLP-1s will help patients address their lateral wall collapse, potentially bringing them into our indication. As shown in our ongoing ADHERE patient registry, the average BMI of patients treated with Inspire therapy is 29 and the American Academy of Sleep Medicine guidelines recommend weight loss prior to surgery for patients with BMI over 35 and nonsurgical solutions for patients with BMI over 40. Therefore, there is not a significant overlap in in the Inspire patient population with the GLP-1s today. While we cannot quantify the impact, we believe that there could be a benefit to our business as a result of the GLP-1s, although there can be no assurance of such benefit.
Because of these and other factors, we may incur net losses for the next several years and require substantial additional funding, which may include future equity and debt financings.
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Macroeconomic Environment
The global economy is experiencing increased inflationary pressures in part due to global supply chain disruptions, labor shortages, and other impacts from COVID-19 and the current macroeconomic environment which we anticipate will continue. Higher interest rates and capital costs, higher shipping costs, increased costs of labor, international conflicts and terrorism, 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 throughout 2023. As mentioned above, the delay on EU MDR approval of our silicone-based leads and the shortage of polyurethane-based stimulation leads may cause delays to implant procedures and a reduction in our European revenue.
COVID-19 Update
Our business, operations, and financial condition and results have been and may continue to be impacted by COVID-19. During the first quarter of 2022, resurgences of COVID-19 in various U.S. and international regions impacted our revenue slightly, 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 COVID-19 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. In addition, in the three months ended September 30, 2023, we believe our revenue growth was adversely impacted by certain changes to our prior authorization support, as well as lack of ENT surgeon capacity. While we believe the impact of the prior authorizations support has improved, the ENT surgeon capacity challenges remain. If such impacts continue, our revenue growth may be further adversely impacted.
Our business has grown rapidly in recent years, resulting in substantially increased revenues, and we expect that our business will continue to grow. However, our revenue growth rate has generally declined recently, and it may continue to do so as a result of the difficulty of maintaining growth rates as our revenues increase to higher levels.
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
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management personnel, including employee compensation, stock-based compensation, supplies, and travel. We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.
We calculate gross margin as gross profit divided by revenue. Our gross margin has been and we expect it will continue to be affected by a variety of factors, including manufacturing costs, the average selling price of our Inspire system, the implementation of cost-reduction strategies, inventory obsolescence costs, which generally occur when new generations of our Inspire system are introduced, and to a lesser extent the sales mix between the U.S. and 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 yields decrease, or 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 in the second half 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%.
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, prelaunch inventory, 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 expense prelaunch inventory as research and development expense in the period incurred unless objective and persuasive evidence exists that regulatory approval and subsequent commercialization of a product candidate is probable and we also expect future economic benefit from the sales of the product candidate to be realized.
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
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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.
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 |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2023 |  | 2022 |  | $ Change |  | % Change |  | 2023 |  | 2022 |  | $ Change |  | % Change
|  | (in thousands, except percentages)
Revenue |  | $ | 153,302 |  |  | $ | 109,188 |  |  | $ | 44,114 |  |  | 40.4 | % |  | $ | 432,291 |  |  | $ | 269,956 |  |  | $ | 162,335 |  |  | 60.1 | %
Cost of goods sold |  | 24,382 |  |  | 19,786 |  |  | 4,596 |  |  | 23.2 | % |  | 68,522 |  |  | 43,963 |  |  | 24,559 |  |  | 55.9 | %
Gross profit |  | 128,920 |  |  | 89,402 |  |  | 39,518 |  |  | 44.2 | % |  | 363,769 |  |  | 225,993 |  |  | 137,776 |  |  | 61.0 | %
Gross margin |  | 84.1% |  | 81.9% |  |  |  |  |  | 84.1% |  | 83.7% |  |  |  |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  | 29,144 |  |  | 20,993 |  |  | 8,151 |  |  | 38.8 | % |  | 85,484 |  |  | 47,397 |  |  | 38,087 |  |  | 80.4 | %
Selling, general and administrative |  | 113,247 |  |  | 85,603 |  |  | 27,644 |  |  | 32.3 | % |  | 327,853 |  |  | 225,853 |  |  | 102,000 |  |  | 45.2 | %
Total operating expenses |  | 142,391 |  |  | 106,596 |  |  | 35,795 |  |  | 33.6 | % |  | 413,337 |  |  | 273,250 |  |  | 140,087 |  |  | 51.3 | %
Operating loss |  | (13,471) |  |  | (17,194) |  |  | 3,723 |  |  | (21.7) | % |  | (49,568) |  |  | (47,257) |  |  | (2,311) |  |  | 4.9 | %
Other (income) expense, net |  | (5,271) |  |  | (593) |  |  | (4,678) |  |  | 789 | % |  | (14,422) |  |  | 286 |  |  | (14,708) |  |  | (5,143) | %
Loss before income taxes |  | (8,200) |  |  | (16,601) |  |  | 8,401 |  |  | (50.6) | % |  | (35,146) |  |  | (47,543) |  |  | 12,397 |  |  | (26.1) | %
Income taxes |  | 340 |  |  | 246 |  |  | 94 |  |  | 38.2 | % |  | 770 |  |  | 488 |  |  | 282 |  |  | 57.8 | %
Net loss |  | $ | (8,540) |  |  | $ | (16,847) |  |  | $ | 8,307 |  |  | (49.3) | % |  | $ | (35,916) |  |  | $ | (48,031) |  |  | $ | 12,115 |  |  | (25.2) | %

Comparison of the Three Months Ended September 30, 2023 and 2022
Revenue
Revenue increased $44.1 million, or 40.4%, to $153.3 million for the three months ended September 30, 2023 compared to $109.2 million for the three months ended September 30, 2022. These results reflect an increase in sales of our Inspire system of $41.2 million in the U.S. and an increase of $2.9 million outside of the U.S. Overall
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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, partially offset by the factors described under "Components of our Results of Operations - Revenue" above.
Revenue information by region is summarized as follows:

|  | Three Months Ended September 30, |  |
|  | 2023 |  | 2022 |  | Change
|  | Amount |  | % of Revenue |  | Amount |  | % of Revenue |  | $ |  | %
|  | (in thousands, except percentages)
United States |  | $ | 147,514 |  |  | 96.2 | % |  | $ | 106,279 |  |  | 97.3 | % |  | $ | 41,235 |  |  | 38.8 | %
All other countries |  | 5,788 |  |  | 3.8 | % |  | 2,909 |  |  | 2.7 | % |  | 2,879 |  |  | 99.0 | %
Total revenue |  | $ | 153,302 |  |  | 100.0 | % |  | $ | 109,188 |  |  | 100.0 | % |  | $ | 44,114 |  |  | 40.4 | %

Revenue generated in the U.S. was $147.5 million for the three months ended September 30, 2023, an increase of $41.2 million, or 38.8%, compared to the three months ended September 30, 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.
Revenue generated outside of the U.S. was $5.8 million in the three months ended September 30, 2023, an increase of $2.9 million, or 99.0%, compared to the three months ended September 30, 2022. Revenue growth was primarily due to increased market penetration in existing territories, the expansion of our European sales representatives into new territories, increased sales in the Asia Pacific region, and, we believe, increased physician and patient awareness of our Inspire system.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $4.6 million, or 23.2%, to $24.4 million for the three months ended September 30, 2023 compared to $19.8 million for the three months ended September 30, 2022. The increase was primarily due to product costs associated with higher sales volume of our Inspire system and additional costs associated with an isolated production issue at a supplier which has since been resolved.
Gross margin increased to 84.1% for the three months ended September 30, 2023 from 81.9% for the three months ended September 30, 2022. Gross margin for the three months ended September 30, 2023 was higher primarily due to $2.8 million of inventory obsolescence charges taken during the third quarter of 2022 associated with new product introductions, which lowered the gross margin during that period.
Research and Development Expenses
Research and development expenses increased $8.2 million, or 38.8%, to $29.1 million for the three months ended September 30, 2023 compared to $21.0 million for the three months ended September 30, 2022. This change was primarily due to an increase of $3.9 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense. The change also includes an increase of $4.6 million for incremental ongoing research and development costs, including ongoing development of the SleepSync™ platform, the next generation Inspire neurostimulator and physician programmer, and $1.7 million of prelaunch inventory related to our next generation Inspire neurostimulator. These increases were partially offset by a decrease of $0.3 million for clinical and regulatory submissions expenses.
Selling, General and Administrative Expenses
SG&A expenses increased $27.6 million, or 32.3%, to $113.2 million for the three months ended September 30, 2023 compared to $85.6 million for the three months ended September 30, 2022. The primary driver of this change
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was an increase of $16.3 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 $7.0 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 SG&A expenses included an increase in travel expenses of $1.4 million and an increase in general corporate costs of $2.9 million primarily due to consulting fees, legal fees, bank fees, and rent expense.
Other (Income) Expense
Other (income) expense changed by $4.7 million, or 788.9%, to $5.3 million of income, net for the three months ended September 30, 2023 compared to $0.6 million of expense, net for the three months ended September 30, 2022. The change was primarily due to an increase of $4.1 million in interest and dividend income due to higher interest rates on our higher cash, cash equivalents, and investment balances, a decrease of $0.7 million in interest expense due to the August 2022 early termination of our credit facility, and an increase of $0.1 million in foreign currency translation and remeasurement losses due to exchange rates.
Income Taxes
We recorded a provision for incomes taxes of approximately $0.3 million and $0.2 million for the three months ended September 30, 2023 and September 30, 2022, respectively.
Comparison of the Nine Months Ended September 30, 2023 and 2022
Revenue
Revenue increased $162.3 million, or 60.1%, to $432.3 million for the nine months ended September 30, 2023 compared to $270.0 million for the nine months ended September 30, 2022. The increase was attributable to a $156.2 million increase in sales of our Inspire system in the U.S and an increase of $6.2 million outside of the U.S. Overall revenue growth was primarily due to increased market penetration in existing territories, expansion into new territories, and increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some customers in May 2022, partially offset by the factors described under "Components of our Results of Operations - Revenue" above.
Revenue information by region is summarized as follows:

|  | Nine Months Ended September 30, |  |
|  | 2023 |  | 2022 |  | Change
|  | Amount |  | % of Revenue |  | Amount |  | % of Revenue |  | $ |  | %
|  | (in thousands, except percentages)
United States |  | $ | 416,748 |  |  | 96.4 | % |  | $ | 260,581 |  |  | 96.5 | % |  | $ | 156,167 |  |  | 59.9 | %
All other countries |  | 15,543 |  |  | 3.6 | % |  | 9,375 |  |  | 3.5 | % |  | 6,168 |  |  | 65.8 | %
Total revenue |  | $ | 432,291 |  |  | 100.0 | % |  | $ | 269,956 |  |  | 100.0 | % |  | $ | 162,335 |  |  | 60.1 | %

Revenue generated in the U.S. was $416.7 million for the nine months ended September 30, 2023, an increase of $156.2 million, or 59.9%, compared to the nine months ended September 30, 2022. Revenue growth in the U.S. was primarily due to increased market penetration in existing territories, the expansion into new territories, and, we believe, 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 COVID-19.
Revenue generated outside of the U.S. was $15.5 million for the nine months ended September 30, 2023, an increase of $6.2 million, or 65.8%, compared to the nine months ended September 30, 2022. Revenue growth was primarily due to increased market penetration in existing territories, the expansion of our European sales
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representatives into new territories, increased sales in the Asia Pacific region, and, we believe, increased physician and patient awareness of our Inspire system. As noted above, revenue generated outside the U.S. during the three months ended March 31, 2022 was slightly negatively impacted by COVID-19.
Cost of Goods Sold and Gross Margin
Cost of goods sold increased $24.6 million, or 55.9%, to $68.5 million for the nine months ended September 30, 2023 compared to $44.0 million for the nine months ended September 30, 2022. The increase was primarily due to product costs associated with higher sales volume of our Inspire system, additional costs associated with the transition of manufacturing lines to produce our new silicone-based leads, and higher costs of certain component parts that were impacted by inflation and supply chain issues.
Gross margin increased to 84.1% for the nine months ended September 30, 2023 from 83.7% for the nine months ended September 30, 2022. Gross margin for the nine months ended September 30, 2023 was higher primarily due to $2.8 million of inventory obsolescence charges taken during the third quarter of 2022 associated with new product introductions, which lowered the gross margin during that period. Gross margin for the nine months ended September 30, 2023 was negatively impacted by additional manufacturing costs of sensors and lower yields prior to process enhancements, additional costs associated with an isolated production issue at a supplier, and higher costs of certain component parts, partially offset by the price increase that began taking effect for some U.S. customers in May 2022.
Research and Development Expenses
Research and development expenses increased $38.1 million, or 80.4%, to $85.5 million for the nine months ended September 30, 2023 compared to $47.4 million for the nine months ended September 30, 2022. This change was primarily due to an increase of $21.0 million of incremental ongoing research and development costs, including ongoing development of the SleepSync™ platform, the next generation Inspire neurostimulator and physician programmer. The change also includes an increase of $17.1 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, and $4.7 million of prelaunch inventory related to our next generation Inspire neurostimulator.
Selling, General and Administrative Expenses
SG&A expenses increased $102.0 million, or 45.2%, to $327.9 million for the nine months ended September 30, 2023 compared to $225.9 million for the nine months ended September 30, 2022. The primary driver of this change was an increase of $59.1 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 $28.5 million, primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing in March 2023, and the expansion of our Advisor Care Program call center. Other drivers of the change to SG&A expenses included an increase in travel expenses of $6.3 million and an increase in general corporate costs of $8.1 million primarily due to bank fees, consulting fees, legal fees, computer equipment and software, and office rent expense.
Other (Income) Expense, Net
Other (income) expense, net changed by $14.7 million, to $14.4 million of income, net for the nine months ended September 30, 2023 compared to $0.3 million of expense for the nine months ended September 30, 2022. This change was primarily due to an increase of $13.0 million in interest and dividend income due to higher interest rates on our higher cash, cash equivalents and investment balances, somewhat offset by a decrease of $1.7 million in interest expense due to the early termination of our credit facility.
Income Taxes
We recorded a provision for income taxes of $0.8 million and $0.5 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.
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Liquidity and Capital Resources
As of September 30, 2023, we had cash, cash equivalents, and available-for-sale debt securities of $467.2 million, an increase of $15.8 million from $451.4 million as of December 31, 2022. Working capital totaled $499.6 million as of September 30, 2023, an increase of $30.8 million from December 31, 2022. We define working capital as current assets less current liabilities. The increase in working capital was primarily due to the following factors:
•an increase of $124.5 million in short-term investments;
•an increase of $14.2 million in inventory balances which increased as supply chain issues ease;
•an increase of $10.2 million in accounts receivable due to higher sales which occurred during the third quarter of 2023;
•a decrease of $4.4 million in accrued expenses which decreased primarily due to the payment of year-end bonuses and commissions; and
•an increase of $2.3 million in prepaid expense and other current assets which increased primarily due to prepaid insurance and other prepaid expenses.
The increase in working capital was partially offset by the following factors:
•a $111.7 million decrease in cash and cash equivalents, primarily due to the purchase of short- and long-term available for sale investments, offset somewhat by sales of the Inspire system and proceeds from the exercise of stock options; and
•a $13.2 million increase in accounts payable, generally due to our business volume and headcount growth from the prior year.
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 4 in this Quarterly Report on Form 10-Q 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 September 30, 2023, we had $284.4 million in money market funds, $99.3 million in U.S. government securities, and $40.9 million in corporate debt securities, certificates of deposit, and asset-asset-backed securities. See Note 2 in this Quarterly Report on Form 10-Q for additional information on our investments.
In the nine months ended September 30, 2023, our R&D and SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases during the remainder of 2023 and 2024. 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 and 2024, primarily related to the ongoing development of the SleepSync™ platform and the next generation Inspire neurostimulator.
We spent $15.6 million on purchases of property and equipment in the nine months ended September 30, 2023, mainly on testing systems and production equipment for our next generation Inspire system as well as our SleepSync™ platform. We anticipate further capital expenditures in 2023 and 2024, primarily for additional production equipment and, to a lesser extent, leasehold improvements on our corporate office buildings.
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As of September 30, 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 $467.2 million as of September 30, 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 the same levels achieved in prior periods.
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 and expansion 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. 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:

|  | Nine Months Ended
|  | September 30,
|  | 2023 |  | 2022
|  | (in thousands)
Net cash provided by (used in): |  |  |  |
Operating activities |  | $ | 7,386 |  |  | $ | (7,700) |
Investing activities |  | (143,099) |  |  | (16,646) |
Financing activities |  | 24,065 |  |  | 227,788 |
Effect of exchange rate on cash |  | (47) |  |  | (101) |
Net (decrease) increase in cash and cash equivalents |  | $ | (111,695) |  |  | $ | 203,341 |

Operating Activities
The net cash provided by operating activities was $7.4 million for the nine months ended September 30, 2023 and consisted of a net loss of $35.9 million, non-cash charges of $64.2 million, and a decrease in net operating assets of $20.9 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 a greater number of employees at a higher fair market value. The remainder of the non-cash charges included depreciation and amortization expense, non-cash lease expense, stock issued for services rendered, and other, net. Operating assets include inventories, which increased as supply chain constraints eased, and prepaid expenses and other current assets, which increased primarily due to prepaid insurance and other prepaid expenses. Operating assets also include accounts receivable, which increased due to higher sales volume. Operating liabilities include 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 $7.7 million for the nine months ended September 30, 2022 and consisted of a net loss of $48.0 million, non-cash charges of $38.7 million, and a decrease in net operating assets of $1.6 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 a greater number of employees at a higher fair market
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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, and other, net. Operating assets include accounts receivable which increased due to higher sales, and prepaid expenses and other current assets which increased primarily due to prepaid insurance. Operating assets also include inventories, which decreased primarily due to sales demand. Operating liabilities include 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 increased primarily due to compensation and personnel-related costs and the accrual of R&D and inventory related costs.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2023 was $143.1 million and consisted primarily of the purchase of investments of $137.3 million, the purchases of property and equipment of $15.6 million, and the purchase of strategic investments of $0.3 million, partially offset by the proceeds from sales or maturities of investments of $10.0 million.
Net cash used in investing activities for the nine months ended September 30, 2022 was $16.6 million and consisted of purchases of property and equipment of $6.1 million and the purchase of strategic investments of $10.5 million.
Financing Activities
Net cash provided by financing activities was $24.1 million for the nine months ended September 30, 2023 and consisted of $24.5 million in proceeds from the exercise of stock options and $2.8 million in proceeds from the issuance of common stock from our ESPP, somewhat offset by $3.2 million of taxes paid on net share settlement of RSUs.
Net cash provided by financing activities was $227.8 million for the nine months ended September 30, 2022 and consisted primarily of proceeds from the offering of common stock of $243.8 million, as well as proceeds from the exercise of stock options of $6.4 million, and proceeds from the issuance of common stock from our ESPP of $2.1 million, partially offset by $24.5 million in payments on our long-term debt obligation, which we prepaid in August 2022, and 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, other than as described in Note 3 in this Quarterly Report on Form 10-Q, 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. Other than the addition of prelaunch inventory described in Note 2 in this Quarterly Report on Form 10-Q and below, no material changes were made to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Prelaunch inventory
We capitalize prelaunch inventory prior to receiving regulatory approval if regulatory approval and subsequent commercialization of a product is probable and we also expect future economic benefit from the sales of the product to be realized. Prior to this, we expense prelaunch inventory as research and development expense in the period incurred. For prelaunch inventory that is capitalized, we consider a number of specific facts and circumstances, including the product’s historical shelf life, the product's current status in the development and regulatory approval
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process, results from related clinical trials, results from meetings with relevant regulatory agencies prior to the filing of regulatory applications, potential obstacles to the approval process, historical experience, viability of commercialization and market trends. If either the regulatory approval or market acceptance post-approval do not occur at all or on a timely basis prior to the inventory shelf-life expiration, we may be required to write-off some or all prelaunch inventory, which could affect our financial condition and financial results.
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 nine months ended September 30, 2023 would have impacted interest income on our consolidated financial statements by approximately $16.2 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 fiscal 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 September 30, 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
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procedures were effective, at the reasonable assurance level, as of the end of the period covered by this Quarterly Report on Form 10-Q.
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 September 30, 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, other than the following:
We may not receive the necessary approvals or certifications for our future products or expanded indications, and failure to timely obtain necessary approvals or certifications for our future products or expanded indications would adversely affect our ability to grow our business.
An element of our strategy is to continue to upgrade our products, add new features and expand the indications and uses for our current products. In the U.S., before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must first receive PMA from the FDA. In the process of obtaining PMA, which was required for our Inspire system, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical study, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.
Modifications to products that are approved through a PMA application generally require FDA approval. PMA can be expensive, lengthy and uncertain. The process of obtaining a PMA is costly and more uncertain than the 510(k) clearance process used for lower risk devices. Despite the time, effort and cost, a device may not be approved by the FDA. Any delay or failure to obtain necessary regulatory approvals could harm our business. Furthermore, even if we are granted regulatory approval, it may include significant limitations on the indicated uses for the device, which may limit the market for the device.
The FDA and other regulatory authorities or notified bodies outside the U.S. can delay, limit or deny approval or certification of a device for many reasons, including:
•our inability to demonstrate to the satisfaction of the FDA or the applicable foreign regulatory entity or notified body that our products are safe or effective for their intended uses;
•the disagreement of the FDA or the applicable foreign regulatory authority or notified body with the design or implementation of our clinical studies or the interpretation of data from pre-clinical studies or clinical studies;
•serious and unexpected adverse device effects experienced by participants in our clinical studies;
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•the data from our pre-clinical studies and clinical studies may be insufficient to support approval or certification, where required;
•our inability to demonstrate that the clinical and other benefits of the device outweigh the risks;
•the manufacturing process or facilities we use may not meet applicable requirements; and
•the potential for approval policies or regulations of the FDA or applicable foreign regulatory authorities to change significantly in a manner rendering our clinical data or regulatory filings insufficient for clearance, approval or certification.
In addition, the FDA or other regulatory authorities or notified bodies outside the U.S. may change their approval or certification policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or certification of our future products under development or impact our ability to modify our currently cleared or certified products on a timely basis. Such policy or regulatory changes could impose additional requirements or time delays upon us that could delay our ability to obtain new approvals or certifications, increase the costs of compliance, adversely impact our revenues or inventory forecasting or restrict our ability to maintain our current approval or certification.
Subject to the transitional provisions, in order to sell our products in EU member states, our products must comply with the general safety and performance requirements of the EU Medical Devices Regulation, which repeals and replaces EU Medical Devices Directive and the AIMDD. Compliance with these requirements is a prerequisite to be able to affix the European Conformity (“CE”) mark to our products, without which they cannot be sold or marketed in the EU. To demonstrate compliance with the general safety and performance requirements, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its (risk) classification. Except for low risk medical devices (Class I), where the manufacturer can self-assess the conformity of its products with the general safety and performance requirements (except for any parts which relate to sterility, metrology or reuse aspects), a conformity assessment procedure requires the intervention of a notified body. The notified body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. If satisfied that the relevant product conforms to the relevant general safety and performance requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the CE mark to the device, which allows the device to be placed on the market throughout the EU. If we fail to comply with applicable laws and regulations, we would be unable to affix the CE mark to our products, which would prevent us from selling them within the EU. The aforementioned EU rules are generally applicable in the EEA, and non-compliance with the above requirements would also prevent us from selling our products in these three countries.
Once devices are certified under the EU Medical Devices Regulation, we must inform the notified body that carried out the conformity assessment of the medical devices that we market or sell in the EU and the EEA of any planned substantial changes to our quality system or substantial changes to our medical devices that could affect compliance with the general safety and performance requirements laid down in Annex I to the EU Medical Devices Regulation or cause a substantial change to the intended use for which the device has been CE marked. The notified body will then assess the planned changes and verify whether they affect the products’ ongoing conformity with the EU Medical Devices Regulation. If the assessment is favorable, the notified body will issue a new certificate of conformity or an addendum to the existing certificate attesting compliance with the general safety and performance requirements and quality system requirements laid down in the Annexes to the EU Medical Devices Regulation. The notified body may disagree with our proposed changes or take more time than anticipated to review and assess applications resulting in regulatory delays (See Part I., "Item 1A. Risk Factors — Risks Related to Government Regulation” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for additional information regarding disruptions faced by notified bodies). As a consequence, product introductions or modifications could be delayed or canceled, which could adversely affect our ability to grow our business. For example, we applied for certification of silicone-based leads under the EU Medical Devices Regulation in December 2021 in order to replace the polyurethane-based leads, two components of the Inspire system currently used only in the European market. However, designated notified bodies currently have severe capacity constraints, and review times have lengthened significantly, including for our certification application. We forecasted our polyurethane-based leads inventory based on our notified body’s original lead-time for certification of the silicone-based leads, and we now expect to obtain certification of our silicone-based leads in the first quarter of 2024. Because of these
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unanticipated delays, we began experiencing an inventory issue related to our polyurethane-based stimulation leads during the third quarter of 2023. In the interim, we received a derogation from the Dutch national competent authority allowing us to place the silicone-based leads on the market until April 1, 2024 or until we receive certification under the EU Medical Devices Regulation, whichever occurs first. We are also pursuing similar derogations in several other EU member states. However, such derogations are only granted at the national level, and we cannot be certain that national competent authorities of the other EU member states will grant a derogation similar to the Dutch authority. Until we obtain certification under the EU Medical Devices Regulation or these derogations are received, we may only sell our polyurethane-based leads in the EU where the stimulation lead is in low supply. During the fourth quarter of 2023 and possibly extending into early 2024, we expect that the delay in certification and the shortage of polyurethane-based stimulation leads may cause delays to implant procedures which may adversely affect our business in the EU, including a reduction in our European and, thereby, our consolidated revenue.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) None.
(b) None.
(c) On August 10, 2023, Philip J. Ebeling, Chief Operating Officer, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 21,600 shares of the Company’s common stock until August 9, 2024.
On August 15, 2023, Randall Ban, Chief Commercialization Officer, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to16,339 shares of the Company’s common stock until February 22, 2024.
On August 17, 2023, Steven Jandrich, Vice President, Human Resources, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 10,000 shares of the Company’s common stock until March 29, 2024.
On August 28, 2023, Timothy P. Herbert, Chief Executive Officer, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 40,000 shares of the Company’s common stock until June 30, 2024. This trading arrangement was adopted by the Timothy P. Herbert 2018 Family Continuation Trust, of which Mr. Herbert is a trustee.
On August 29, 2023, Georgia Garinois-Melenikiotou, Director, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 3,225 shares of the Company’s common stock until August 29, 2024.
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On August 31, 2023, Richard J. Buchholz, Chief Financial Officer, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 15,000 shares of the Company’s common stock until August 30, 2024.
There were no other Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements adopted, modified or terminated by the Company’s directors and executive officers during the quarter ended September 30, 2023.
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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 |  | Employment Agreement between the Company and Charisse Sparks dated July 27, 2023 |  |  |  |  |  |  |  |  |  | *
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: | November 7, 2023 | By: | /s/ TIMOTHY P. HERBERT
|  |  | Timothy P. Herbert
|  |  | President, Chief Executive Officer and Director
|  |  | (principal executive officer)
Date: | November 7, 2023 | By: | /s/ RICHARD J. BUCHHOLZ
|  |  | Richard J. Buchholz
|  |  | Chief Financial Officer
|  |  | (principal financial officer and principal accounting officer)

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