What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-10 compared with 2022-02-15 · 219 added, 275 removed, 470 unchanged (51% of the section changed)

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Opinion on the Financial Statements

We have audited the accompanying balance sheets of Inspire Medical Systems, Inc.

(the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S.

We have audited the accompanying consolidated balance sheets of Inspire Medical Systems, Inc.

(the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S.

generally accepted accounting principles.

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(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter

below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Inventory valuation reserves

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We also audited management’s calculation of the inventory valuation reserve by testing the mathematical accuracy of the Company’s reserve calculation.

/s/Ernst & Young LLP

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

/s/Ernst & Young LLP

Minneapolis, Minnesota

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Inspire Medical Systems, Inc.

BALANCE SHEETS

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

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61,228 34,179

Inventories 17,231 8,479

Inventories, net 11,886 17,231

Prepaid expenses and other current assets 5,505 2,660

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Property and equipment, net 17,249 8,486

Operating lease right-of-use asset 7,919 5,805

Operating lease right-of-use assets 6,880 7,919

Other non-current assets 10,715 204

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Notes payable, non-current portion — 15,799

Operating lease liability, non-current portion 8,796 5,886

Other non-current liability 134 85

Operating lease liabilities, non-current portion 7,536 8,796

Other non-current liabilities 146 134

Total liabilities 68,868 66,036

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Additional paid-in capital 820,335 508,465

Accumulated other comprehensive (loss) income ( 55 ) 29

Accumulated other comprehensive loss ( 86 ) ( 55 )

Accumulated deficit ( 324,270 ) ( 279,389 )

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Inspire Medical Systems, Inc.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

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Other expense (income):

Interest income ( 125 ) ( 1,092 ) ( 3,801 )

Interest and dividend income ( 5,050 ) ( 125 ) ( 1,092 )

Interest expense 1,677 2,128 2,117

Other expense (income), net 49 117 ( 145 )

Total other expense (income) 2,120 880 ( 1,694 )

Total other (income) expense ( 3,324 ) 2,120 880

Loss before income taxes ( 44,268 ) ( 41,970 ) ( 57,088 )

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Other comprehensive loss:

Unrealized (loss) gain on investments ( 84 ) ( 73 ) 154

Foreign currency translation gain 89 — —

Unrealized loss on investments ( 120 ) ( 84 ) ( 73 )

Total comprehensive loss $ ( 44,912 ) $ ( 42,126 ) $ ( 57,276 )

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Balance at December 31, 2019 24,107,350 $ 24 $ 319,865 $ 102 $ ( 180,156 ) $ 139,835

Stock options and warrants exercised 669,719 1 1,139 — — 1,140

Stock options exercised 624,315 — 7,050 — — 7,050

Issuance of common stock 3,378 — 294 — — 294

Sale of common stock from follow-on public offering, net of offering expenses 2,300,000 3 124,651 — — 124,654

Issuance of common stock for employee stock purchase plan 34,233 — 2,361 — — 2,361

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

Other comprehensive income — — — 154 — 154

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

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

— — — — 12 12

Net loss — — — — ( 57,203 ) ( 57,203 )

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Issuance of common stock 1,463 — 301 — — 301

Sale of common stock from follow-on public offering, net of offering expenses 2,300,000 3 124,651 — — 124,654

Issuance of common stock for employee stock purchase plan 21,507 — 3,472 — — 3,472

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Other comprehensive loss — — — ( 84 ) — ( 84 )

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

— — — — 12 12

Net loss — — — — ( 42,042 ) ( 42,042 )

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Stock options exercised 416,602 1 12,080 — — 12,081

Vesting of restricted stock units 569 — — — — —

Withholding taxes on net share settlement of restricted stock units ( 205 ) — ( 43 ) — — ( 43 )

Issuance of common stock 1,587 — 325 — — 325

Sale of common stock from follow-on public offering, net of offering expenses 1,150,000 1 243,800 — — 243,801

Issuance of common stock for employee stock purchase plan 23,709 — 3,738 — — 3,738

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Inspire Medical Systems, Inc.

STATEMENTS OF CASH FLOWS

Consolidated Statements of Cash Flows

(in thousands)

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Depreciation and amortization 1,858 1,218 840

Amortization (accretion) of investment premium (discount) 14 ( 22 ) ( 983 )

Accretion of debt discount 240 224 268

Non-cash lease expense 1,040 771 972

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Accrued expenses and other liabilities 11,942 7,058 1,145

Net cash used in operating activities ( 20,119 ) ( 53,045 ) ( 32,846 )

Net cash provided by (used in) operating activities 11,569 ( 20,119 ) ( 53,045 )

Investing activities

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Proceeds from sales or maturities of investments — 43,800 141,803

Net cash provided by (used in) investing activities 29,139 86,627 ( 43,559 )

Purchases of strategic investments ( 10,500 ) — —

Net cash (used in) provided by investing activities ( 19,596 ) 29,139 86,627

Financing activities

Payment of debt fees — — ( 531 )

Proceeds from the exercise of stock options and warrants 11,476 7,050 1,140

Payments on long-term debt obligation ( 24,500 ) — —

Proceeds from the exercise of stock options 12,081 11,476 7,050

Proceeds from sale of common stock 243,801 — 124,654

Taxes paid on the net share settlement of restricted stock units ( 43 ) — —

Proceeds from the issuance of common stock from employee stock purchase plan 3,738 3,472 2,361

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Effect of exchange rate on cash 75 ( 19 ) 11

Increase (decrease) in cash and cash equivalents 23,949 167,658 ( 74,428 )

Increase in cash and cash equivalents 227,125 23,949 167,658

Cash and cash equivalents at beginning of year 214,467 190,518 22,860

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Cash paid for interest $ 2,321 $ 1,888 $ 1,893

Change in property and equipment acquired but not yet paid 274 816 —

Property and equipment included in accounts payable and accrued expenses 2,067 274 816

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

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

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Our proprietary Inspire system is the first and only United States ("U.S.") Food and Drug Administration ("FDA") approved neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA.

Inspire therapy received premarket approval ("PMA") from the FDA in April 2014 and has been commercially available in certain European markets since November 2011.

Japan's Ministry of Health, Labour and Welfare ("MLHW") approved Inspire therapy to treat moderate to severe OSA in June 2018 and was formally added to the Japan National Health Insurance Payment Listing in June 2021.

In August 2020, the Australian Therapeutic Goods Administration approved Inspire therapy to treat moderate to severe OSA, and we are currently seeking reimbursement coverage in Australia.

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.

Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with U.S.

The consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles ("U.S.

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The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements.

GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements.

We use significant judgment when making estimates related to the allowance for credit losses, inventory reserves, warranty reserves, and stock-based awards.

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Actual results could differ from those estimates.

Follow-On Public Offering

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 $ 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 mature within 90 days or less from the date of purchase to be cash equivalents.

The carrying amount reported in the balance sheets for cash is cost, which approximates fair value.

Foreign Currency

Sales and expenses denominated in foreign currencies are translated at average exchange rates in effect throughout the year.

Foreign currency transaction gains and losses are included in other expense (income), net in the statements of operations and comprehensive loss.

Assets and liabilities of foreign operations are remeasured at period-end exchange rates with the impacts of foreign currency remeasurement recognized in other expense (income), net in the statements of operations and comprehensive loss.

We consider all highly liquid securities, readily convertible to cash, that have original maturities of 90 days or less from the date of purchase to be cash equivalents.

The carrying amount reported in the consolidated balance sheets for cash is cost, which approximates fair value.

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

At December 31, 2021, our long-term investments consisted of U.S.

government securities..

At December 31, 2020, our short-term investments consisted of commercial paper, corporate bonds, and U.S.

Foreign Currency

Our functional and reporting currency is the U.S.

Our subsidiary has a functional currency in Euro.

The consolidated financial statements are translated to U.S.

Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date.

Sales and expenses denominated in foreign currencies are translated at exchange rates in effect on the date of the transaction.

Foreign currency transaction gains and losses and the impacts of foreign currency remeasurement are recognized in other expense (income), net in the consolidated statements of operations and comprehensive loss.

For the years ended December 31, 2022 and 2021, we recognized a total of $ 0.1 million and $ 0.2 million of gains, net, respectively.

Any unrealized gains and losses due to translation adjustments are included in accumulated other comprehensive loss within stockholders' equity in the consolidated balance sheets.

We had $ 0.1 million and $ 0 of unrecognized gain in our accumulated other comprehensive loss balance as of December 31, 2022 and 2021, respectively.

At December 31, 2022 and 2021, our investments consisted of U.S.

government securities.

Investments are reported at their estimated fair market values which are based on quoted, active or inactive market prices when available.

Any unrealized gains and losses due to interest rate fluctuations and other external factors are reported as a separate component of accumulated other comprehensive (loss) income.

We had $ 0.1 million of unrecognized loss and approximately $ 0 of unrecognized income in our accumulated other comprehensive (loss) income balance at December 31, 2021 and 2020, respectively.

Any realized gains and losses are calculated on the specific identification method and reported net in other expense (income) in the statements of operations and comprehensive loss.

For the years ended December 31, 2021 and 2020, we recognized $ 0 and $ 0.1 million of gains, net, respectively.

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 $ 0.2 million and $ 0.1 million of unrecognized loss in our accumulated other comprehensive loss balance at December 31, 2022 and 2021, respectively.

Any realized gains and losses are calculated on the specific identification method and reported net in other expense (income), net in the consolidated statements of operations and comprehensive loss.

For both of the years ended December 31, 2022 and 2021, we recognized $ 0 of gains, net.

We recognize expected credit losses on investments in accordance with Accounting Standards Update ("ASU"), ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which we adopted effective January 1, 2020 using the modified retrospective approach.

The adoption of ASU 2016-13 did not have a material impact on the amount and timing of credit losses recognized in our financial statements.

The adoption of ASU 2016-13 did not have a material impact on the amount and timing of credit losses recognized in our consolidated financial statements.

We reassess our estimated credit losses on investments each reporting period.

government securities and cash equivalents are under a "zero-loss exception" for credit losses, meaning no credit loss risk calculation is necessary on those instruments due to the exceptionally low rate of default, which continues to decrease as the securities approach maturity, which for us is no longer than two years.

government securities, we use a discounted cash flow approach to calculate expected credit losses using estimated default rates based upon historical loss data, current conditions, as well as expectations of future economic conditions.

We record changes in the allowance for credit losses for available-for-sale debt securities with a corresponding adjustment in credit loss expense on the statement of operations and comprehensive loss.

We record changes in the allowance for credit losses for available-for-sale debt securities with a corresponding adjustment in credit loss expense on the consolidated statement of operations and comprehensive loss.

No reversal of a previously recorded allowance for credit losses may be made to an amount below zero.

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A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

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

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

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

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

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

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

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

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

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These are included as Level 1 measurements in the tables below.

Commercial paper:

Short-term, highly liquid investments are included as a Level 2 measurement in the table below.

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

Corporate bonds:

Consists of short- and long-term notes and bonds with various yields.

These are included as a Level 2 measurement in the table below.

government securities:

Consists of U.S.

government Treasury bills with original maturities of less than two years.

government Treasury bills with original maturities of less than two years and are based on quoted prices in active markets.

These are included as a Level 1 measurement in the tables below.

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Total cash equivalents 189,369 189,369 — —

Commercial paper 13,275 — 13,275 —

Corporate bonds 6,540 — 6,540 —

government securities 9,938 9,938 — —

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We place restrictions on maturities and concentration by type and issuer.

We are exposed to credit risk in the event of a default by the issuers of these securities to the extent recorded on the balance sheets.

However, as of December 31, 2021 and 2020, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy.

We are exposed to credit risk in the event of a default by the issuers of these securities to the

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

extent recorded on the consolidated balance sheets.

However, as of December 31, 2022 and 2021, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy.

We believe that the credit risk in our accounts receivable is mitigated by our credit evaluation process, relatively short collection terms, and dispersion of our customer base.

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Collateral or any other security to support payment of these receivables generally is not required.

We recognize expected credit losses on accounts receivable in accordance with ASU 2016-13, Financial Instruments - Credit Losses ("ASU 2016-13"), which we adopted effective January 1, 2020 using the modified retrospective approach through a cumulative-effect adjustment to retained earnings.

The adoption of ASU 2016-13 did not have a material impact on the amount and timing of credit losses recognized in our financial statements.

Each reporting period, we estimate the credit loss related to accounts receivable based on a migration analysis of accounts grouped by individual receivables delinquency status, and apply our historic loss rate adjusted for management's assumption of future market conditions.

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The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products and current market conditions.

During the year ended December 31, 2022, we recorded a $ 1.8 million inventory reserve related to product introductions, including the new silicone-based leads and the Bluetooth®-enabled patient remote.

The reserve for excess and obsolete inventory was $ 2.7 million and $ 0.3 million as of December 31, 2022 and 2021, respectively.

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

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Depreciation and amortization expense was $ 1.9 million, $ 1.2 million, and $ 0.8 million during the years ended December 31, 2022, 2021, and 2020, respectively.

Strategic Investments

For equity securities without readily determinable fair values, we have elected the measurement alternative under which we measure these investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

These securities are presented within other non-current assets on the consolidated balance sheets.

The balance of equity securities without readily determinable fair values was $ 10.5 million and $ 0 as of December 31, 2022 and 2021, respectively.

There were no adjustments to the carrying amount during the year ended December 31, 2022.

Impairment of Long-lived Assets

Long-lived assets consist primarily of property and equipment and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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.

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We did not record any impairment charges on long-lived assets during the years ended December 31, 2022, 2021, or 2020.

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

Accrued Expenses

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Product warranty liability 920 468

Current operating lease liability 312 —

Operating lease liabilities, current portion 1,336 312

Other accrued expenses 1,685 1,859

Total accrued expenses $ 34,339 $ 20,454

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(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:

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Balance at beginning of period $ 468 $ 159 $ 115

Accruals of warranties issued 576 137 156

Provisions for warranty 798 576 137

Settlements of warranty claims ( 346 ) ( 267 ) ( 93 )

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Revenue Recognition

We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606").

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.

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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.

We estimate the amount of our product sales that may be returned by our customers based on historical sales and

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

As our historical product returns to date have been immaterial, we have not recorded a reduction in revenue related to variable consideration for product returns.

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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,

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

consulting, and travel expenses related to research and development programs.

Clinical expenses include clinical trial design, clinical site reimbursement, data management, travel expenses, and the cost of manufacturing products for clinical trials.

These expenses include employee compensation, including stock-based compensation, supplies, materials, consulting, and travel expenses related to research and development programs.

Clinical expenses include clinical study design, clinical site reimbursement, data management, travel expenses, and the cost of manufacturing products for clinical studies.

Stock-Based Compensation

We maintain an equity incentive plan to provide 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") and non-statutory and incentive stock options to employees and RSUs and non-statutory stock options to consultants and directors.

We also offer an employee stock purchase plan which allows participating employees to purchase shares of our common stock at a discount through payroll deductions.

We recognize equity-based compensation expense for awards of equity instruments to employees and directors based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation ("ASC 718").

ASC 718 requires all equity-based compensation awards to employees and directors, including grants of RSUs and stock options, to be recognized as expense in the statements of operations and comprehensive loss based on their grant date fair values.

We estimate the fair value of stock options using the Black-Scholes option pricing model and the fair value of RSUs is equal to the closing price of our common stock on the grant date.

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.

We have not granted any stock-based awards to our consultants.

The Black-Scholes option pricing model requires the input of certain subjective assumptions, including (i) the expected share price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) the expected dividend yield.

Due to our limited operating history and a lack of company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a peer group of public companies for the calculation of volatility.

The group of peer companies have characteristics similar to us, including stage of product development and focus on the life science industry.

The historical volatility is calculated based on a period of time commensurate with the expected term assumption.

We use the simplified method, which is the average of the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees and directors as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

The risk-free interest rate is based on a U.S.

government Treasury instrument whose term is consistent with the expected term of the stock options.

We use an assumed dividend yield of zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

We expense the fair value of our equity-based compensation awards granted to employees and directors on a straight-line basis over the associated service period, which is generally the period in which the related services are received.

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.

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Advertising expenses were $ 74.3 million, $ 47.8 million, and $ 26.4 million during the years ended December 31, 2022, 2021, and 2020, respectively.

Operating leases are included in operating lease right-of-use ("ROU") asset, accrued expenses, and operating lease liability – non-current portion in our balance sheets.

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

In determining the present value of lease payments,

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

judgment based on information available at lease commencement.

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.

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Operating lease cost is recognized on a straight-line basis over the expected lease term.

Lease agreements entered into after the adoption of ASC 842 that include lease and non-lease components are accounted for as a single lease component.

Lease agreements with a noncancelable term of less than 12 months are not recorded on our balance sheets.

Lease agreements that include lease and non-lease components are accounted for as a single lease component.

Lease agreements with a noncancelable term of less than 12 months are not recorded on our consolidated balance sheets.

We account for income taxes using the liability method.

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Valuation allowances against deferred tax assets are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than minimal state taxes and an accrual for uncertain tax benefits.

Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the statements of operations and comprehensive loss.

Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the consolidated statements of operations and comprehensive loss.

Comprehensive Loss

Comprehensive loss consists of net loss and changes in unrealized gains and losses due to interest rate fluctuations and other external factors on investments classified as available-for-sale.

Accumulated other comprehensive (loss) income is presented in the accompanying balance sheets as a component of stockholders' equity.

Comprehensive loss consists of net loss and changes in unrealized gains and losses due to interest rate fluctuations and other external factors on investments classified as available-for-sale, and foreign currency translation adjustments.

Accumulated other comprehensive loss is presented in the accompanying consolidated balance sheets as a component of stockholders' equity.

Loss Per Share

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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 shares issuable under our employee stock purchase plan were antidilutive in those periods.

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.

Purchase Commitments

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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.

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

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

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

December 31, 2022

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government securities $ 9,998 $ — $ ( 177 ) $ 9,821

Long-term investments $ 9,993 $ — $ ( 55 ) $ 9,938

Short-term investments $ 9,998 $ — $ ( 177 ) $ 9,821

December 31, 2021

1 unchanged sentence

Cost Gains Losses Fair Value

Commercial paper $ 13,275 $ — $ — $ 13,275

Corporate bonds 6,543 — ( 3 ) 6,540

government securities $ 9,993 $ — $ ( 55 ) $ 9,938

Short-term investments $ 43,815 $ 32 $ ( 3 ) $ 43,844

As of December 31, 2021 and 2020, we had no investments with a contractual maturity of greater than two years.

Long-term investments $ 9,993 $ — $ ( 55 ) $ 9,938

As of December 31, 2022, we had no investments with a contractual maturity of greater than two years.

Currently, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

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Securities with a valuation allowance for expected credit losses and deemed uncollectible are permanently written down, and a reversal out of the valuation allowance occurs.

Adoption of ASC Topic 842, Leases

On December 31, 2019, we adopted the new accounting standard ASC 842, Leases , which requires lessees to recognize a lease liability and a ROU asset for all leases with lease terms greater than 12 months.

We used the effective date of this standard as the date of initial application, with no retrospective adjustments to prior comparative periods.

We were an emerging growth company as defined by the JOBS Act until December 31, 2019 and therefore this guidance became effective for us on the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Leases Overview

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

In September 2018, we entered into a non-cancelable operating lease agreement to sublease approximately 45,000 square feet of office space for our corporate headquarters, which included real estate taxes and operating expenses in the base rent.

This lease commenced January 15, 2019 and expired November 30, 2020.

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

In May 2019, we entered into a new, non-cancelable operating lease agreement for the same space directly with the landlord.

The initial lease term commenced on December 1, 2020 and expires May 31, 2028 with an option to renew for one additional period of five years at the then-prevailing market rate.

The exercise of the lease renewal option is at our sole discretion and was not included in the lease term for the calculation of the ROU asset and lease liability when the lease commenced on December 1, 2020 as it is not reasonably certain of exercise.

Beginning December 1, 2020, in addition to base rent, we also pay our proportionate share of the operating expenses, as defined in the lease.

These payments are made monthly, and are adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes and insurance.

In conjunction with this lease, the landlord provided Inspire with a $ 0.6 million rent abatement and a refurbishment allowance in the amount of the cost of any leasehold improvements, not to exceed $ 1.1 million upon Inspire providing the necessary documentation evidencing the costs of the leasehold improvements that are completed by May 31, 2022.

However, the lease allows us to allocate the refurbishment allowance against base rent instead of taking a tenant improvement reimbursement.

At this time, we intend to allocate the full amount of the refurbishment allowance against base rent.

In August 2021, we entered into a new, non-cancelable operating lease agreement for approximately 25,000 square feet of additional corporate office space with our existing landlord.

The initial lease term commenced on October 1, 2021 and expires May 31, 2028 with an option to renew for one additional period of five years at the then-prevailing market rate.

The exercise of the lease renewal option is at our sole discretion and was not included in the lease term for the calculation of the ROU asset and lease liability when the lease commenced on October 1, 2021 as it is not reasonably certain of exercise.

Beginning October 1, 2021, in addition to base rent on the additional space, we also pay our proportionate share of the operating expenses, as defined in the lease.

These payments are made monthly and will be adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes and insurance.

In conjunction with this lease, the landlord provided a $ 0.2 million rent abatement and a refurbishment allowance in the amount of the cost of any leasehold improvements, not to exceed $ 0.4 million upon Inspire providing the necessary documentation evidencing the costs of the leasehold improvements that are completed by May 31, 2022.

However, the lease allows us to allocate the refurbishment allowance against base rent instead of taking a tenant improvement reimbursement.

At this time, we intend to allocate the full amount of the refurbishment allowance against base rent.

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

We lease approximately 70,000 square feet of office space for our corporate headquarters under non-cancelable operating leases.

The leases expire May 31, 2028 with options to renew for one additional period of five years at the then-prevailing market rate.

The exercises of the lease renewal options are at our sole discretion and were not included in the lease term for the calculation of the ROU assets and lease liabilities when the leases commenced as they were not reasonably certain of exercise.

In addition to base rent, we also pay our proportionate share of the operating expenses, as defined in the leases.

These payments are made monthly and adjusted annually to reflect actual charges incurred for operating expenses, such as common area maintenance, taxes, and insurance.

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

Right-of-use assets:

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Total operating lease liabilities $ 8,872 $ 9,108

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

The cost components of our operating leases were as follows:

4 unchanged sentences

Total lease cost $ 2,895 $ 2,126 $ 1,107

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

Variable lease costs consist primarily of taxes, insurance and common area maintenance costs on our current corporate office leases, the first of which commenced December 1, 2020, and our prior corporate office lease, which expired March 31, 2019.

Variable lease costs consist primarily of taxes, insurance and common area maintenance costs on our current corporate office leases.

Maturities of our lease liability for our operating lease are as follows as of December 31, 2022:

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Present value of lease liability $ 8,872

As of December 31, 2021, the remaining lease term on both operating leases was 6.4 years and the weighted average discount rate was 5.3 %.

The operating cash outflows from our operating leases were $ 0.1 million, $ 1.0 million, and $ 1.0 million for the years ended December 31, 2021 and 2020, and 2019, respectively.

As of December 31, 2022, the remaining lease term was 5.4 years and the weighted average discount rate was 5.3 %.

The operating cash outflows from our operating leases were $ 0.7 million, $ 0.1 million, and $ 1.0 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Long-Term Debt

Credit Facility

In August 2015, we entered into a loan and security agreement that initially provided for a term A loan facility in the amount of $ 15.5 million, which was fully funded on the closing date, and a term B loan facility in an amount between $ 3.5 million and $ 10.0 million, subject to our achievement of certain revenue milestones.

We refer to our term A loan facility and our term loan B facility together as our credit facility.

In February 2017, we amended the loan and security agreement to, among other things, increase borrowings under the term A loan facility by $ 1.0 million, for a total of $ 16.5 million outstanding under the credit facility and reduced borrowings available under the term B loan facility to $ 9.0 million.

In February 2018, we borrowed an additional $ 8.0 million under the term B loan facility portion of the credit facility for a total of $ 24.5 million outstanding under the credit facility.

In March 2019, we amended the loan and security agreement.

The amendment modified the terms of the loan and security agreement to:

(1) extend the interest-only date from March 1, 2020 to April 1, 2022 and extend the maturity date from February 1, 2022 to March 1, 2024;

(2) reduce the final payment percentage from 5.50 % to 3.50 %;

(3) modify the basic rate to be a per annum rate of interest (based on a year of 360 days) equal to the sum of (i) the greater of (A) the 30 day U.S.

LIBOR rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (B) 2.50 %, plus (ii) 5.10 %;

provided, however, under no circumstances will the basic rate be less than 7.60 %;

(4) provide a mechanism for determining an alternative interest rate to replace the U.S.

LIBOR rate upon the occurrence of certain circumstances;

and (5) revise the prepayment fee to be between 1.00 % and 3.00 % of the principal amount, depending on the timing of any prepayment.

Upon closing the amendment to the loan and security agreement, payment of the previously accrued final payment under the credit facility was required.

In addition to the principal and interest payments, under the credit facility, we are required to pay a final payment fee of 3.50 % on all amounts outstanding, which is being accreted using the effective interest rate method over the term

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

of the loan and security agreement and shall be due at the earlier of maturity or prepayment.

Borrowings are prepayable at our option in whole, but not in part, together with all accrued and unpaid interest thereon and, if not previously made, the final payment, subject to a prepayment fee of 1.00 %.

The credit facility includes affirmative and restrictive covenants and events of default, including the following events of default:

payment defaults, breaches of covenants, judgment defaults, cross defaults to certain other contracts, certain events with respect to governmental approvals if such events could cause a material adverse change, a material impairment in the perfection or priority of the lender's security interest or in the value of the collateral, a material adverse change in the business, operations, or condition of us or any of our subsidiaries, and a material impairment of the prospect of repayment of the loans.

Upon the occurrence of an event of default, a default increase in the interest rate of an additional 5.00 % could be applied to the outstanding loan balance and the lender could declare all outstanding obligations immediately due and payable and take such other actions as set forth in the loan and security agreement.

Our obligations under the credit facility are secured by a first priority security interest in substantially all of our assets, other than our intellectual property.

There are no financial covenants contained in the loan and security agreement.

We were in compliance with the affirmative and restrictive covenants as of December 31, 2021.

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

Year ending December 31 :

Total expected future principal payments $ 24,500

In March 2019, we amended our $ 24.5 million 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 being accreted using the effective interest rate method over the term of the credit facility and was to be due at the earlier of maturity or prepayment.

Borrowings were prepayable in whole at our option, subject to a prepayment fee of 1.00 %.

In August 2022, we prepaid the outstanding principal balance of $ 19.4 million, the final payment fee of $ 0.9 million, and the prepayment fee of $ 0.2 million.

As of December 31, 2022, we had no remaining amounts outstanding under our former credit facility.

Employee Retirement Plan

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The plan allows for eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations.

As of December 31, 2021, we had not made contributions since inception.

Beginning January 1, 2022, we elected to begin making voluntary matching contributions to the plan.

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Our match contributions are made to funds designated by the participant, none of which are based on Inspire common stock.

Stockholders' Equity and Stock-Based Compensation

Preferred Stock

We have 10,000,000 shares of authorized preferred stock.

As of December 31, 2020 and 2021, no preferred stock had been issued.

Stock-Based Compensation Plans

We adopted the 2007 Stock Incentive Plan (the "2007 Plan") in November 2007, which terminated in accordance with its terms on November 28, 2017;

however, the outstanding stock options may continue to be exercised in accordance with their terms.

Immediately following the termination of the 2007 Plan, we adopted the 2017 Stock Incentive Plan (the "2017 Plan"), which contains substantially similar terms and conditions as the 2007 Plan.

Upon the IPO, no further grants were made under the 2017 Plan and we adopted the 2018 Stock Incentive Plan (the "2018 Plan").

Discretionary contributions to the plan totaled $ 2.4 million for the year ended December 31, 2022.

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

The purpose of the 2018 Plan is to promote the interest of our company and our stockholders by aiding in attracting and retaining employees, officers, consultants, independent contractors, and directors capable of assuring the future success of our business and to afford such persons an opportunity to acquire a proprietary interest in our company.

The board of directors may amend, alter, suspend, discontinue, or terminate the 2018 Plan at any time with the approval of our stockholders.

A total of 1,386,809 shares of common stock were initially reserved for issuance under the 2018 Plan, and this share reserve will automatically be supplemented each January 1, commencing on January 1, 2019 and ending on and including January 1, 2028, by an amount of shares equal to the lesser of:

a) 739,631 shares, b) 4 % of the shares outstanding on the final day of the immediately preceding fiscal year and c) such smaller number of shares as determined by the board of directors.

As of December 31, 2021, there were 3,250,937 shares reserved for issuance under the 2018 Plan, of which 1,272,049 shares were available for issuance.

The following table presents the components and classification of stock-based compensation expense recognized for stock options and RSUs granted under the 2017 Plan, the 2018 Plan and under our Employee Stock Purchase Plan (the "ESPP"):

Year Ended December 31,

2021 2020 2019

Stock options $ 24,703 $ 11,823 $ 5,699

Restricted stock units 105 — —

Employee stock purchase plan 1,370 994 498

Total stock-based compensation $ 26,178 $ 12,817 $ 6,197

Cost of goods sold $ 341 $ 170 $ 121

Research and development 4,419 1,931 689

Selling, general and administrative 21,418 10,716 5,387

Total stock-based compensation $ 26,178 $ 12,817 $ 6,197

Stock-Based Compensation

As of December 31, 2022, there were 3,824,770 shares reserved for issuance under our equity incentive plan, of which 1,372,644 shares were available for issuance.

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

If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase, or cancel any remaining unearned stock compensation expense.

Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock-based awards.

Stock Options

Options are granted at the exercise price, which is equal to the closing price of our stock on the date of grant.

The stock options granted to employees include a four-year service period and 25 % vest after the first year of service and the remainder vest in equal monthly installments over the next 36 months of service.

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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

Year Ended December 31,

2022 2021 2020

Weighted average fair value $ 121.43 $ 113.71 $ 73.93

Expected term (years) 5.50 - 6.25

Expected volatility 56.2 % - 57.0 %

54.9 % - 55.9 %

42.3 % - 49.3 %

Risk-free interest rate 1.75 % - 4.18 %

0.79 % - 1.44 %

0.36 % - 1.42 %

Expected dividend yield — % — % — %

Expected Term — Due to our limited amount of historical exercise, forfeiture, and expiration activity, we have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting terms and the original contractual term of the option.

We will continue to analyze our expected term assumption as more historical data becomes available.

Expected Volatility — Due to our limited company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a group of similar companies that are publicly traded for the calculation of volatility.

When selecting this peer group of public companies on which we have based our expected stock price volatility, we generally selected companies with comparable characteristics, including enterprise value, stages of clinical development, risk profiles, position within the industry, and those with historical share price information sufficient to meet the expected life of the stock-based awards.

We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available.

Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S.

government Treasury instruments with maturities similar to the expected term of our stock options.

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

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

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

Stock Option Activity

Options Weighted Average

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The total grant date fair value of options vested during the year was $ 30.6 million, $ 23.9 million and $ 11.1 million for the years ended December 31, 2022, 2021, and 2020, respectively.

As of December 31, 2021, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2025 related to unvested employee and non-employee director stock options is $ 67.5 million which we expect to recognize over a weighted average period of 2.4 years.

If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase, or cancel any remaining unearned stock compensation expense.

Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock-based awards.

We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model using the fair market value of our common stock on the date of grant and a number of other assumptions.

These assumptions include estimates regarding the expected term of the awards, estimates of the stock volatility over a duration that approximates the expected term of the awards, estimates of the risk-free rate, and estimates of expected dividend rates.

The fair value of options granted to employees and directors during the years ended December 31, 2021, 2020, and 2019 was estimated as of the grant date using the Black-Scholes option pricing model using the following assumptions:

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

Year Ended December 31,

2021 2020 2019

Expected term (years) 5.50 - 6.25

Expected volatility 54.9 - 55.9 %

42.3 - 49.3 %

43.1 - 50.6 %

Risk-free interest rate 0.79 - 1.44 %

0.36 - 1.42 %

1.39 - 2.63 %

Dividend yield — % — % — %

Weighted average fair value $ 113.71 $ 73.93 $ 30.69

We will continue to analyze our expected term assumption as more historical data becomes available.

Expected Volatility — Due to our limited operating history and a lack of company specific historical and implied volatility data, we have incorporated our historical stock trading volatility with those of a group of similar companies that are publicly traded for the calculation of volatility.

When selecting this peer group of public companies on which we have based our expected stock price volatility, we generally selected companies with comparable characteristics to it, including enterprise value, stages of clinical development, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards.

We will continue to analyze the historical stock price volatility assumption as more historical data for our common stock becomes available.

Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S.

government Treasury instruments with maturities similar to the expected term of our stock options.

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

The amount of stock-based compensation expense is recognized on a straight-line basis over the vesting term and is reduced by actual forfeitures as they occur.

As of December 31, 2022, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2026 related to unvested stock options is $ 87.0 million which we expect to recognize over a weighted average period of 2.4 years.

Restricted Stock Units

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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 a four-year service period and vest in equal installments on each of the first four anniversaries of the date of grant, provided the employee remains continuously employed with the Company.

The RSUs include three - or four-year service periods and vest in equal installments on each of the first four anniversaries 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.

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Unvested at December 31, 2021 2,275 $ 201.51 $ 524

There were no RSUs granted prior to 2021.

The aggregate intrinsic value of RSUs outstanding was based on our closing stock price on the last trading day of the period.

As of December 31, 2021, there was $ 0.4 million of unrecognized stock-based compensation expense related to RSUs to be recognized over a period of 3.1 years.

Granted 130,463 $ 214.16

Vested ( 569 ) $ 201.51 $ 118

Forfeited ( 7,489 ) $ 214.40

Unvested at December 31, 2022 124,680 $ 213.97 $ 31,404

Inspire Medical Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements

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

There were no RSUs granted prior to 2021.

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 December 31, 2022, there was $ 21.3 million of unrecognized stock-based compensation expense related to RSUs to be recognized over a period of 2.4 years.

Performance Stock Units

During 2022, we granted PSUs to officers and key employees.

The number of PSUs that will ultimately be earned is based on our performance relative to a pre-established goal for the three-year period ending December 31, 2024.

The expense is recorded on a straight-line basis over the requisite service period based on an estimate of the number of PSUs expected to vest.

Management expectations related to the achievement of the performance goal associated with PSU grants is assessed each reporting period.

The number of shares earned at the end of the three-year period will vary based on actual performance, from 0 % to 200 % of the number of PSUs granted.

If the performance condition is not met or not expected to be met, any compensation expense recognized associated with the grant will be reversed.

A summary of PSUs and related information is as follows:

Performance Stock Units Weighted Average

Grant Date Fair Value Aggregate Intrinsic Value (in thousands)

Unvested at December 31, 2021 — $ — $ —

Granted 78,351 $ 227.53

Forfeited ( 879 ) $ 227.53

Unvested at December 31, 2022 77,472 $ 227.53 $ 19,514

There were no PSUs granted prior to 2022.

The fair value of the PSUs is equal to the closing price of our common stock on the grant date.

The aggregate intrinsic value of unvested PSUs was based on our closing stock price on the last trading day of the period.

As of December 31, 2022, there was $ 23.2 million of unrecognized stock-based compensation expense related to outstanding PSUs that is expected to be recognized over a period of approximately 2.3 years.

Employee Stock Purchase Plan

Our employee stock purchase plan (“ESPP”) allows participating employees to purchase shares of our common stock at a discount through payroll deductions.

The plan is available to all of our U.S.-based full-time employees.

Participating employees may purchase common stock, on a voluntary after-tax basis, at a price equal to 85 % of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period.

The plan provides for six -month purchase periods, beginning on January 1 and July 1 of each calendar year.

A total of 277,362 shares of common stock were initially reserved for issuance under the ESPP, and this share reserve will automatically be supplemented each January 1, commencing on January 1, 2019 and ending on and including January 1, 2028, by an amount of shares equal to the lesser of:

a) 184,908 shares, b) 1 % of the shares outstanding on the final day of the immediately preceding calendar year and c) such smaller number of shares as the board of directors may determine.

During the year ended December 31, 2021, 21,507 shares were purchased under the ESPP, utilizing $ 3.5 million of employee contributions.

As of December 31, 2021, 744,596 shares were available for future issuance under the ESPP.

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 a purchase period.

We issued 23,709 shares under the ESPP during 2022 and there were 905,795 shares available for future issuance under the ESPP as of December 31, 2022.

Due to our cumulative net loss position, a valuation allowance has been required to be established for all deferred tax assets as of December 31, 2022, 2021, and 2020.

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

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

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Total ( 1.4 ) % ( 0.2 ) % ( 0.2 ) %

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

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

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Depreciation and amortization — 62

Lease asset 2,277 1,444

Lease liability 2,223 2,277

Stock-based compensation 12,439 4,543

3 unchanged sentences

Depreciation ( 9 ) ( 59 )

Lease liability ( 1,980 ) ( 1,424 )

Other comprehensive income — ( 7 )

Lease asset ( 1,724 ) ( 1,980 )

Total deferred tax liabilities ( 1,733 ) ( 2,039 )

1 unchanged sentence

Valuation allowance ( 104,452 ) ( 86,913 )

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

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

2 unchanged sentences

We also have gross R&D credit carryforwards of $ 10.1 million as of December 31, 2022 which will expire at various dates beginning in 2033.

Under the Tax Cuts and Jobs Act of 2017, R&D costs are no longer fully deductible and are required to be capitalized and amortized for U.S.

tax purposes effective January 1, 2022.

The mandatory capitalization requirement increased our deferred tax assets, which were fully offset by a valuation allowance.

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.

We have not performed a detailed analysis to determine whether an ownership change has occurred.

Such a change of ownership would limit our utilization of the net operating losses and R&D credits and could be triggered by subsequent sales of securities by us or our stockholders.

We are currently performing a detailed analysis to determine whether an ownership change has occurred and if a limitation exists.

Based on the preliminary results of the analysis, we believe there is no evidence that this limitation would hinder the utilization of our net operating loss carryforwards or R&D credit carryforwards in the future.

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.

2 unchanged sentences

The valuation allowance increased by $ 17.5 million and $ 19.8 million during the years ended December 31, 2022 and 2021, respectively.

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

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

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We do not expect a significant change to our unrecognized tax benefits over the next 12 months.

Our policy is to record interest related to uncertain tax positions as interest expense and any penalties as other expense in our statements of operations and comprehensive loss.

There was no interest or penalties accrued at December 31, 2021 and 2020.

Our policy is to record interest related to uncertain tax positions as interest expense and any penalties as other expense in our consolidated statements of operations and comprehensive loss.

There were no interest or penalties accrued as of December 31, 2022 and 2021.

Segment Reporting and Revenue Disaggregation

2 unchanged sentences

Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.

Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements

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

We sell our Inspire system to hospitals and ambulatory surgery centers in the U.S.

and in select countries in Europe through a direct sales organization, and in Japan through a distributor.

and in select countries in Europe through a direct sales organization, and in Japan and Singapore through distributors.

Revenue by geographic region is as follows:

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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.

INSPIRE MEDICAL SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

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

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:

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data