Inspire Medical Systems, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Inspire Medical Systems, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Inspire Medical Systems, Inc. (the Company) as of December 31, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 9, 2024 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (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 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. 91 Table of Contents Inventory valuation reserves Description of the Matter At December 31, 2023, the Company’s net inventory balance was $33.9 million. As explained in Note 2 to the financial statements, 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. Auditing management’s estimate for excess and obsolete inventory involved subjective auditor judgment because of the assumptions and judgments used to calculate the inventory valuation reserve, including consideration of the timing of the introduction of new products and current market conditions. In particular, the excess and obsolete inventory calculations are sensitive to significant assumptions, including forecasted customer demand, technological and/or market obsolescence, introduction of new products, and possible alternative uses. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's process to determine the amount of the Company’s reserve for excess and obsolete inventory. This included controls over the Company’s review of the significant assumptions underlying the reserve estimate. To test the adequacy of the Company's inventory valuation reserve, we performed audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the estimation calculations and evaluating significant assumptions, specifically forecasted customer demand, technological and/or market obsolescence, introduction of new products and possible alternative uses. We evaluated management’s ability to accurately estimate the amount of excess and obsolete inventory by comparing actual inventory write-off activity in recent years to management’s prior year estimates of the inventory valuation reserve. We also audited management’s calculation of the inventory valuation reserve by testing the mathematical accuracy of the Company’s reserve calculation. We have served as the Company's auditor since 2015. /s/Ernst & Young LLP Minneapolis, Minnesota February 9, 2024 92 Table of Contents Inspire Medical Systems, Inc. Consolidated Balance Sheets (in thousands, except share and per share amounts) December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 185,537 $ 441,592 Investments, short-term 274,838 9,821 Accounts receivable, net of allowance for credit losses of $ 1,648 and $ 36 , respectively 89,884 61,228 Inventories, net 33,885 11,886 Prepaid expenses and other current assets 9,595 5,505 Total current assets 593,739 530,032 Investments, long-term 9,143 — Property and equipment, net 39,984 17,249 Operating lease right-of-use assets 22,667 6,880 Other non-current assets 11,278 10,715 Total assets $ 676,811 $ 564,876 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 38,839 $ 26,847 Accrued expenses 39,266 34,339 Total current liabilities 78,105 61,186 Operating lease liabilities, non-current portion 24,846 7,536 Other non-current liabilities 1,346 146 Total liabilities 104,297 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, 200,000,000 shares authorized; 29,560,464 and 29,008,368 shares issued and outstanding at December 31, 2023 and 2022, respectively 30 29 Additional paid-in capital 917,107 820,335 Accumulated other comprehensive income (loss) 800 ( 86 ) Accumulated deficit ( 345,423 ) ( 324,270 ) Total stockholders' equity 572,514 496,008 Total liabilities and stockholders' equity $ 676,811 $ 564,876 The accompanying notes are an integral part of these financial statements. 93 Table of Contents Inspire Medical Systems, Inc. Consolidated Statements of Operations and Comprehensive Loss (in thousands, except share and per share amounts) Year Ended December 31, 2023 2022 2021 Revenue $ 624,799 $ 407,856 $ 233,394 Cost of goods sold 96,576 66,115 33,279 Gross profit 528,223 341,741 200,115 Operating expenses: Research and development 116,536 68,645 37,350 Selling, general and administrative 451,958 320,688 202,615 Total operating expenses 568,494 389,333 239,965 Operating loss ( 40,271 ) ( 47,592 ) ( 39,850 ) Other expense (income): Interest and dividend income ( 20,560 ) ( 5,050 ) ( 125 ) Interest expense — 1,677 2,128 Other expense, net 195 49 117 Total other (income) expense ( 20,365 ) ( 3,324 ) 2,120 Loss before income taxes ( 19,906 ) ( 44,268 ) ( 41,970 ) Income taxes 1,247 613 72 Net loss ( 21,153 ) ( 44,881 ) ( 42,042 ) Other comprehensive loss: Foreign currency translation gain 140 89 — Unrealized gain (loss) on investments 746 ( 120 ) ( 84 ) Total comprehensive loss $ ( 20,267 ) $ ( 44,912 ) $ ( 42,126 ) Net loss per share, basic and diluted $ ( 0.72 ) $ ( 1.60 ) $ ( 1.54 ) Weighted average common shares used to compute net loss per share, basic and diluted 29,302,154 28,071,748 27,262,979 The accompanying notes are an integral part of these financial statements. 94 Table of Contents Inspire Medical Systems, Inc. STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Common Stock Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Accumulated Deficit Total Stockholders' Equity Balance at December 31, 2020 27,069,276 27 467,038 29 ( 237,347 ) 229,747 Stock options exercised 323,860 — 11,476 — — 11,476 Issuance of common stock 1,463 — 301 — — 301 Issuance of common stock for employee stock purchase plan 21,507 — 3,472 — — 3,472 Stock-based compensation expense — — 26,178 — — 26,178 Other comprehensive loss — — — ( 84 ) — ( 84 ) Net loss — — — — ( 42,042 ) ( 42,042 ) Balance at December 31, 2021 27,416,106 27 508,465 ( 55 ) ( 279,389 ) 229,048 Stock options exercised 416,602 1 12,080 — — 12,081 Vesting of restricted stock units 569 — — — — — Shares held for tax withholdings ( 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 Stock-based compensation expense — — 51,970 — — 51,970 Other comprehensive loss — — — ( 31 ) — ( 31 ) Net loss — — — — ( 44,881 ) ( 44,881 ) Balance at December 31, 2022 29,008,368 $ 29 $ 820,335 $ ( 86 ) $ ( 324,270 ) $ 496,008 Stock options exercised 595,188 1 25,808 — — 25,809 Vesting of restricted stock units 40,915 — — — — — Shares held for tax withholdings ( 113,062 ) — ( 17,158 ) — — ( 17,158 ) Issuance of common stock 1,575 — 353 — — 353 Issuance of common stock for employee stock purchase plan 27,480 — 5,299 — — 5,299 Stock-based compensation expense — — 82,470 — — 82,470 Other comprehensive income — — — 886 — 886 Net loss — — — — ( 21,153 ) ( 21,153 ) Balance at December 31, 2023 29,560,464 $ 30 $ 917,107 $ 800 $ ( 345,423 ) $ 572,514 The accompanying notes are an integral part of these financial statements. 95 Table of Contents Inspire Medical Systems, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Operating activities Net loss $ ( 21,153 ) $ ( 44,881 ) $ ( 42,042 ) Adjustments to reconcile net loss: Depreciation and amortization 2,846 1,858 1,218 (Accretion) amortization of investment (discount) premium ( 2,469 ) ( 4 ) 14 Non-cash lease expense 1,400 1,040 771 Stock-based compensation expense 82,470 51,970 26,178 Non-cash stock issuance for services rendered 353 325 301 Other, net 1,987 ( 549 ) 296 Changes in operating assets and liabilities: Accounts receivable ( 30,218 ) ( 27,017 ) ( 9,244 ) Inventories ( 21,999 ) 5,345 ( 8,752 ) Prepaid expenses and other assets ( 4,758 ) ( 2,815 ) ( 696 ) Accounts payable 9,296 14,355 4,779 Accrued expenses and other liabilities 6,898 11,942 7,058 Net cash provided by (used in) operating activities 24,653 11,569 ( 20,119 ) Investing activities Purchases of property and equipment ( 23,629 ) ( 9,096 ) ( 4,668 ) Purchases of investments ( 281,189 ) — ( 9,993 ) Proceeds from sales or maturities of investments 10,246 — 43,800 Purchases of strategic investments ( 250 ) ( 10,500 ) — Net cash (used in) provided by investing activities ( 294,822 ) ( 19,596 ) 29,139 Financing activities Payments on long-term debt obligation — ( 24,500 ) — Proceeds from the exercise of stock options 25,809 12,081 11,476 Proceeds from sale of common stock — 243,801 — Payment of taxes on net share settlement of equity awards ( 17,158 ) ( 43 ) — Proceeds from the issuance of common stock from employee stock purchase plan 5,299 3,738 3,472 Net cash provided by financing activities 13,950 235,077 14,948 Effect of exchange rate on cash 164 75 ( 19 ) (Decrease) increase in cash and cash equivalents ( 256,055 ) 227,125 23,949 Cash and cash equivalents at beginning of year 441,592 214,467 190,518 Cash and cash equivalents at end of year $ 185,537 $ 441,592 $ 214,467 Supplemental cash flow information Cash paid for interest $ — $ 2,321 $ 1,888 Property and equipment included in accounts payable and accrued expenses 4,018 2,067 274 The accompanying notes are an integral part of these financial statements. 96 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (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 and certain Asia Pacific markets since 2021. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments, consisting of only normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows have been made. The results of operations for the year ended December 31, 2023 are not necessarily indicative of the operating results for any future periods. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements. We use significant judgment when making estimates related to the inventory reserves and stock-based awards. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. 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 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 97 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (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 years ended December 31, 2023 and 2022, we recognized a total of $ 0.2 million and $ 0.1 million of losses, 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 $ 0.2 million and $ 0.1 million of unrecognized gain in our accumulated other comprehensive loss balance as of December 31, 2023 and 2022, respectively. Investments Our investments are classified as available-for-sale and consist of the following: December 31, 2023 Amortized Unrealized Gross Aggregate Cost Gains Losses Fair Value Short-Term: Commercial paper $ 2,950 $ 1 $ — $ 2,951 Corporate debt securities 30,154 61 — 30,215 Certificates of deposit 2,953 15 — 2,968 U.S. treasury debt securities 238,237 467 — 238,704 Short-term investments $ 274,294 $ 544 $ — $ 274,838 Long-Term: Corporate debt securities $ 3,109 $ 13 $ — $ 3,122 Asset-backed securities 1,170 1 — 1,171 U.S. treasury debt securities 4,838 12 — 4,850 Long-term investments $ 9,117 $ 26 $ — $ 9,143 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 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 income (loss) within stockholders' equity. We had $ 0.6 million of unrecognized gain and $ 0.2 million of unrecognized loss in our accumulated other comprehensive income (loss) balance at December 31, 2023 and 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 both of the years ended December 31, 2023 and 2022, we recognized $ 0 of gains, net. As of December 31, 2023, we had no investments with a contractual maturity of greater than three years. Currently, we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. We do not consider those investments to be other-than-temporarily impaired as of December 31, 2023. 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 98 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) intent to hold the investment until a forecasted recovery occurs. Expected credit 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 December 31, 2023 and 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 sets forth by level within the fair value hierarchy our assets that are measured on a recurring basis and reported at fair value as of December 31, 2023 and 2022. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 99 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) Fair Value Measurements as of December 31, 2023 Estimated Fair Value Level 1 Level 2 Level 3 Cash equivalents: Money market funds $ 146,217 $ 146,217 $ — $ — Total cash equivalents 146,217 146,217 — — Investments: Commercial paper $ 2,951 $ — $ 2,951 $ — Corporate debt securities 33,337 — 33,337 — Certificates of deposit 2,968 — 2,968 — Asset-backed securities 1,171 — 1,171 — U.S. government securities 243,554 243,554 — — Total investments 283,981 243,554 40,427 — Total cash equivalents and investments $ 430,198 $ 389,771 $ 40,427 $ — 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 years ended December 31, 2023 and 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 December 31, 2023 and 2022, we limited our credit risk associated with cash equivalents by placing investments with banks we believe are highly creditworthy. We believe that the credit risk in our accounts receivable is mitigated by our credit evaluation process, relatively short collection terms, and dispersion of our customer base. We generally do not require collateral, and losses on accounts receivable have historically not been significant. 100 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) 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). The following table presents the changes in the allowance for credit losses related to accounts receivable: Year Ended December 31, 2023 2022 2021 Balance at beginning of period $ 36 $ 99 $ 42 Charges (credits) to the allowance, net 1,622 ( 13 ) 57 Accounts written off, net of recoveries ( 10 ) ( 50 ) — Balance at the end of the period $ 1,648 $ 36 $ 99 The increase in charges to the allowance during the year ended December 31, 2023 relate primarily to accounts receivable with two healthcare systems. 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: December 31, 2023 2022 Raw materials $ 6,115 $ 5,645 Finished goods 27,770 6,241 Total inventories, net of reserves $ 33,885 $ 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. We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products, and current market conditions. During the 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 $ 2.4 million and $ 2.7 million as of December 31, 2023 and 2022, respectively. 101 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization and consisted of the following: December 31, 2023 2022 Computer equipment and software $ 2,601 $ 1,729 Manufacturing equipment 7,245 5,974 Other equipment 1,842 535 Leasehold improvements 2,356 2,064 Construction in process 33,211 11,857 Property and equipment, cost 47,255 22,159 Less: accumulated depreciation and amortization ( 7,271 ) ( 4,910 ) Property and equipment, net $ 39,984 $ 17,249 Construction in process is comprised primarily of production equipment. 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 $ 2.8 million, $ 1.9 million, and $ 1.2 million during the years ended December 31, 2023, 2022, and 2021, 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 $ 10.4 million and $ 10.5 million as of December 31, 2023 and 2022, respectively. We recognized an impairment charge of $ 0.4 million during the year ended December 31, 2023 due to a deterioration in the performance and quality of one of the equity securities that had an original carrying amount of $ 0.8 million. There was no adjustment to the carrying amounts during the year ended December 31, 2022. Impairment of Long-lived Assets Long-lived assets consist primarily of property and equipment, operating lease right-of-use assets, and strategic investments 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, other than the $ 0.4 million discussed above in the Strategic Investments section, during the years ended December 31, 2023, 2022, or 2021. 102 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) Accrued Expenses Accrued expenses consisted of the following: December 31, 2023 2022 Payroll related $ 33,875 $ 30,398 Product warranty liability 1,100 920 Operating lease liabilities, current portion — 1,336 Other accrued expenses 4,291 1,685 Total accrued expenses $ 39,266 $ 34,339 The following table shows the changes in our estimated product warranty liability accrual, included in accrued liabilities: Year Ended December 31, 2023 2022 2021 Balance at beginning of period $ 920 $ 468 $ 159 Provisions for warranty 912 798 576 Settlements of warranty claims ( 732 ) ( 346 ) ( 267 ) Balance at the end of the period $ 1,100 $ 920 $ 468 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. 103 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) 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. 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 $ 5.2 million and $ 0 during the years ended December 31, 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 $ 100.3 million, $ 74.3 million, and $ 47.8 million during the years ended December 31, 2023, 2022, and 2021, respectively. Leases Operating leases are included in operating lease right-of-use ("ROU") assets, accrued expenses, and operating lease liabilities – non-current portion in our consolidated balance sheets. ROU assets represent our right to use an 104 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date as the rate implicit in the lease is not readily determinable. The determination of our incremental borrowing rate requires management judgment based on information available at lease commencement. The operating lease ROU assets also include adjustments for prepayments, accrued lease payments, and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating lease cost is recognized on a straight-line basis over the expected lease term. Lease agreements that include lease and non-lease components are accounted for as a single lease component. Lease agreements with a noncancelable term of less than 12 months are not recorded on our consolidated balance sheets. Income Taxes We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. Valuation allowances against deferred tax assets are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. As we have historically incurred operating losses, we have recorded a full valuation allowance against our net deferred tax assets, and there is no provision for income taxes other than minimal state and foreign taxes, which includes a foreign tax provision relating to uncertain tax positions. Our policy is to record interest and penalties expense related to uncertain tax positions as other expense in the consolidated statements of operations and comprehensive loss. Comprehensive Loss Comprehensive 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. Purchase Commitments As of December 31, 2023, we had purchase commitments to suppliers for purchases totaling $ 91.4 million. Recent Accounting Pronouncements In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). The standard requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items to reconcile to segment profit or loss, and the title and position of the entity’s CODM. The amendments in this update also expand the interim segment disclosure requirements. This authoritative guidance will be effective for us in fiscal 105 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) 2025 for annual periods and in the first quarter of fiscal 2026 for interim periods, with early adoption permitted. We are currently evaluating the effect of this new guidance on our consolidated financial statements and disclosures. In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”). The guidance is intended to improve income tax disclosure requirements by requiring (i) consistent categories and greater disaggregation of information in the rate reconciliation and (ii) the disaggregation of income taxes paid by jurisdiction. The guidance makes several other changes to the income tax disclosure requirements. The amendments in ASU 2023-09 are effective for us in fiscal 2025, with early adoption permitted, and is required to be applied prospectively with the option of retrospective application. We are evaluating the impact of the standard on our income tax disclosures. We have reviewed and considered all other 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 period 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. 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: December 31, 2023 2022 Right-of-use assets: Operating lease right-of-use assets $ 22,667 $ 6,880 Operating lease liabilities: Accrued liabilities — 1,336 Operating lease liabilities, non-current portion 24,846 7,536 Total operating lease liabilities $ 24,846 $ 8,872 106 Table of Contents 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: Year Ended December 31, 2023 2022 2021 Operating lease cost $ 2,166 $ 1,529 $ 1,125 Short-term lease cost 250 — — Variable lease cost 1,667 1,366 1,001 Total lease cost $ 4,083 $ 2,895 $ 2,126 Variable lease costs consist primarily of taxes, insurance, and common area maintenance costs. Maturities of our lease liability for our operating lease are as follows as of December 31, 2023: 2024 $ ( 3,582 ) 2025 3,056 2026 3,313 2027 3,416 2028 3,523 Thereafter 25,363 Total undiscounted lease payments 35,089 Less: imputed interest ( 10,243 ) Present value of lease liability $ 24,846 As of December 31, 2023, the remaining lease terms were 11.4 years and the weighted average discount rate was 4.9 %. The operating cash outflows from our operating leases were $ 2.2 million, $ 0.7 million, and $ 0.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. 4. Long-Term Debt 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, 2023, we had no remaining amounts outstanding under our former credit facility. 5. Employee Retirement Plan We sponsor a defined contribution employee retirement plan covering all of our full-time employees. The plan allows for eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations. Beginning January 1, 2022, we elected to begin making voluntary matching contributions to the plan. We match 50 % of the first 6 % of each participating employee's contribution, up to 3 % of eligible earnings. Our match contributions are made to funds designated by the participant, none of which are based on Inspire common 107 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) stock. Discretionary contributions to the plan totaled $ 3.7 million and $ 2.4 million for the years ended December 31, 2023 and 2022, respectively. 6. Stock-Based Compensation As of December 31, 2023, there were 4,233,020 shares reserved for issuance under our equity incentive plan, of which 1,510,522 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. 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 services 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 Year Ended December 31, 2023 2022 2021 Weighted average fair value $ 149.70 $ 121.43 $ 113.71 Assumptions: Expected term (years) 6.25 5.50 - 6.25 5.50 - 6.25 Expected volatility 56.4 % - 58.2 % 56.2 % - 57.0 % 54.9 % - 55.9 % Risk-free interest rate 3.49 % - 4.89 % 1.75 % - 4.18 % 0.79 % - 1.44 % 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. 108 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) 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, 2020 2,857,564 $ 66.09 7.9 $ 351,626 Granted 228,302 $ 215.34 Exercised ( 323,860 ) $ 35.44 $ 58,360 Forfeited/expired ( 115,771 ) $ 118.85 Outstanding at December 31, 2021 2,646,235 $ 80.41 7.1 $ 397,015 Granted 500,148 $ 217.85 Exercised ( 416,602 ) $ 29.00 $ 73,036 Forfeited/expired ( 69,047 ) $ 161.48 Outstanding at December 31, 2022 2,660,734 $ 112.19 6.9 $ 372,068 Granted 441,394 $ 257.22 Exercised ( 595,188 ) $ 45.09 $ 105,952 Forfeited/expired ( 59,799 ) $ 214.61 Outstanding at December 31, 2023 2,447,141 $ 152.17 7.0 $ 160,691 Exercisable at December 31, 2023 1,573,566 $ 107.96 6.1 $ 155,377 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. The total grant date fair value of options vested during the year was $ 45.7 million, $ 30.6 million and $ 23.9 million for the years ended December 31, 2023, 2022, and 2021, respectively. As of December 31, 2023, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2027 related to unvested stock options is $ 99.6 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 service terminates prior to the release of the vesting restrictions. The RSUs granted to employees include three - or four-year service periods and vest in equal installments on each anniversary of the date of grant. The RSUs granted to the board of directors include one - or three-year service periods and vest in equal installments on each anniversary of the date of grant. 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: 109 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) Restricted Stock Units Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested at December 31, 2020 — $ — $ — Granted 2,275 $ 201.51 Unvested at December 31, 2021 2,275 $ 201.51 $ 524 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 Granted 128,661 $ 249.58 Vested ( 40,915 ) $ 214.06 $ 10,190 Forfeited ( 11,356 ) $ 236.30 Unvested at December 31, 2023 201,070 $ 235.47 $ 40,904 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, 2023, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2026 related to unvested RSUs is $ 34.4 million which we expect to recognize over a weighted average period of 1.9 years. Performance Stock Units During 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 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 Granted 95,994 $ 264.59 Forfeited ( 4,497 ) $ 242.27 Unvested at December 31, 2023 168,969 $ 248.19 $ 34,373 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, 2023, there was $ 27.6 million of unrecognized stock-based 110 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) compensation expense related to outstanding PSUs that is expected to be recognized over a weighted average period of 1.8 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 a purchase period. We issued 27,480 shares under the ESPP during 2023 and there were 1,063,223 shares available for future issuance under the ESPP as of December 31, 2023. 7. Income Taxes Due to our cumulative net loss position, a valuation allowance is required for all deferred tax assets as of December 31, 2023, 2022, and 2021. The components of our provision for income taxes are as follows: December 31, 2023 2022 2021 Current United States $ 644 $ 342 $ 23 Foreign 603 271 49 Total current 1,247 613 72 Total provision for income taxes $ 1,247 $ 613 $ 72 The reconciliation of taxes at the federal statutory rate to our provision for income taxes are as follows: Year Ended December 31, 2023 2022 2021 Tax at federal statutory rate 21.0 % 21.0 % 21.0 % State, net of federal benefit 4.0 3.4 4.0 Stock-based compensation 33.6 9.1 18.1 Research and development ("R&D") tax credit 20.6 6.4 3.3 Other ( 4.6 ) ( 0.7 ) 0.4 Executive compensation ( 16.3 ) ( 0.1 ) — Change in valuation allowance ( 64.6 ) ( 40.5 ) ( 47.0 ) Total ( 6.3 ) % ( 1.4 ) % ( 0.2 ) % 111 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) Significant components of net deferred tax assets and liabilities were as follows: Year Ended December 31, 2023 2022 Deferred tax assets: Net operating losses $ 57,276 $ 64,321 R&D tax credits 14,110 9,626 R&D expenditures, capitalized for tax 22,533 14,230 Accruals and other 3,587 2,305 Depreciation 79 — Lease liability 6,138 2,223 Inventory 2,561 997 Stock-based compensation 16,824 12,439 Other comprehensive loss — 44 Total deferred tax assets 123,108 106,185 Deferred tax liabilities: Depreciation — ( 9 ) Lease asset ( 5,600 ) ( 1,724 ) Other comprehensive income ( 141 ) — Total deferred tax liabilities ( 5,741 ) ( 1,733 ) Net deferred tax assets 117,367 104,452 Valuation allowance ( 117,367 ) ( 104,452 ) $ — $ — 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. As of December 31, 2023, our gross federal net operating loss carryforwards of $ 226.1 million will expire at various dates beginning in 2034. In addition, net operating loss carryforwards for state income tax purposes of $ 173.5 million will begin to expire in 2024. We also have gross R&D credit carryforwards of $ 14.7 million as of December 31, 2023 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 decrease in our net operating loss carry forwards and an increase in the 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 Code and similar state provisions. During 2023, we finalized a detailed analysis to determine whether an ownership change has occurred through December 31, 2022, 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 of federal net operating losses nor the $ 1.7 million of federal R&D credits that were accumulated on December 11, 2018 will expire unused solely due to the limitations under Sections 382 and 383 of the Code. We are in the process of updating the analysis through December 31, 2023. Although unexpected, if we experienced an ownership change during 2023, the timing of our ability to utilize the tax attributes may be affected. 112 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) 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. The valuation allowance increased by $ 12.9 million and $ 17.5 million during the years ended December 31, 2023 and 2022, respectively. The changes to our gross unrecognized tax benefits were as follows: Year Ended December 31, 2023 2022 2021 Balance beginning of the year $ 146 $ 134 $ 85 Increase in balances related to current year tax positions — 12 49 Increase in balances related to prior year tax positions — — — Balance end of the year $ 146 $ 146 $ 134 We file income tax returns in the applicable jurisdictions. The 2020 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 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 consolidated statements of operations and comprehensive loss. There were no interest or penalties accrued as of December 31, 2023 and 2022. 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: Year Ended December 31, 2023 2022 2021 United States $ 606,178 $ 394,833 $ 220,976 All other countries 18,621 13,023 12,418 Total revenue $ 624,799 $ 407,856 $ 233,394 Long-lived tangible assets by geographic location were as follows: December 31, 2023 2022 United States $ 39,916 $ 17,249 All other countries 68 — Total long-lived tangible assets $ 39,984 $ 17,249 113 Table of Contents Inspire Medical Systems, Inc. Notes to Consolidated Financial Statements (Table amounts in thousands, except share and per share amounts) 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 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: Year Ended December 31, 2023 2022 2021 Common stock options outstanding 2,447,141 2,660,734 2,646,235 Unvested restricted stock units 201,070 124,680 2,275 Total 2,648,211 2,785,414 2,648,510 10. Related Party Transaction In December 2023, we entered into an agreement with an entity controlled by our CEO (the "Entity"), pursuant to which we agreed to share the costs of a corporate suite at a sports and entertainment venue (the "Venue") (the “Suite”) (the “Cost Sharing Agreement”). In August 2023, the Entity entered into an agreement with the Venue, pursuant to which the Entity acquired certain rights to use the Suite for specified sporting and other events at the Venue through August 2026. Pursuant to this agreement, the Entity agreed to pay $ 0.2 million per year, with each year beginning September 1 and ending August 31, and the fee increasing by 5 % for each succeeding year. Under the Cost Sharing Agreement, we will reimburse the Entity 50 % of the cost of the Suite in exchange for the right to use the Suite for 50 % of the specified events at the Venue through August 2026. 11. Commitments and Contingencies On December 22, 2023, plaintiff City of Hollywood Firefighters’ Pension Fund, on behalf of itself and similarly situated investors, filed a putative class action lawsuit in the United States District Court for the District of Minnesota against the Company and certain of its executive officers, captioned City of Hollywood Firefighters’ Pension Fund v. Inspire Medical Systems, Inc., et. al. , 0:23-cv-03884 (D. Minn). The complaint generally alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, by making allegedly materially false and misleading statements between May 3, 2023 and November 7, 2023 regarding the effectiveness of the Company’s Acceleration Program, a program designed to facilitate customers’ receiving prior authorizations from doctors with the goal of increasing demand for the Company’s Inspire therapy. The Complaint alleges that when subsequent disclosures were made regarding issues with the Acceleration Program and the Company announced its third quarter 2023 financial results, the Company’s stock price fell, causing significant losses and damages. The plaintiffs are seeking, among other things, unquantified compensatory damages, attorneys' fees and costs. The defendants believe the allegations are without merit and intend to vigorously defend against these claims. 114 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.