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Item 7. Management’s Discussion and Analysis

2025-02-10 compared with 2024-02-09 · 129 added, 133 removed, 185 unchanged (59% of the section changed)

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Risk Factors’’ and elsewhere in this Annual Report on Form 10-K.

We are a medical technology company focused on the development and commercialization of innovative, minimally invasive solutions for patients with OSA.

Our proprietary Inspire system is the first and only FDA-approved neurostimulation technology that provides a safe and effective treatment for moderate to severe OSA.

We are 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 FDA, European Union ("EU") Medical Devices Regulation ("MDR"), and Japan Pharmaceuticals and Medical Devices Agency-approved neurostimulation technology of its kind that provides a safe and effective treatment for patients with moderate to severe OSA.

We have developed a novel, closed-loop solution that continuously monitors a patient’s breathing and delivers mild hypoglossal nerve stimulation to maintain an open airway.

Inspire therapy is indicated for patients with moderate to severe OSA who do not have significant central sleep apnea and do not have a complete concentric collapse of the airway at the soft palate level.

In addition, patients in the U.S., Japan, Singapore, and Hong Kong must have been confirmed to fail or be unable to tolerate positive airway pressure treatments, such as CPAP, and be 18 years of age or older, though there are no similar requirements for patients in Europe.

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

and in select countries in Europe and Japan through a direct sales organization and we sell our Inspire system in Singapore and Hong Kong through distributors.

Our direct sales force engages in sales efforts and promotional activities focused on ENT physicians and sleep centers.

Our direct sales force engages in sales efforts and promotional activities primarily focused on ENT physicians and sleep centers.

In addition, we highlight our compelling clinical data and value proposition to increase awareness and adoption amongst referring physicians.

We build upon this top-down approach with strong direct-to-consumer marketing initiatives to create awareness of the benefits of our Inspire system and drive interest through patient empowerment.

This outreach helps to educate thousands of patients on our Inspire therapy.

We believe this outreach helps to educate thousands of patients on our Inspire therapy.

Although our sales and marketing efforts are directed at patients and physicians because they are the primary users of our technology, we consider the hospitals and ASCs where the procedure is performed to be our customers, as they are the purchasing agents of our Inspire system.

Our customers are reimbursed the cost required to treat each patient through various third-party payors, such as commercial payors and government agencies.

Our Inspire system is currently reimbursed primarily on a per-patient prior authorization basis for patients covered by commercial payors, under Local Coverage Determinations for patients covered by Medicare, and under U.S.

Our customers are reimbursed according to the coding and correlated payment by various third-party payors, such as commercial payors and government healthcare programs.

Our Inspire system is currently covered on a per-patient basis for patients insured by commercial payors, under Local Coverage Determinations for patients insured by Medicare and Medicare Advantage, and under U.S.

government contract for patients who are treated by the Veterans Health Administration.

As of February 10, 2025, we have secured positive coverage policies with many U.S.

commercial payors, including virtually all large national commercial insurers, covering approximately 260 million lives in the U.S.

In addition, all seven Medicare Administrative Contractors published final policies in 2020 that provide coverage of Inspire therapy when certain coverage criteria are met.

Reimbursement in other countries can often be established through a combination of private (commercial insurance) and public funding sources, or at the hospital level through innovation budgets.

The procedures performed to implant, revise, or explant our device are described for billing purposes in the U.S.

with Category I Current Procedural Terminology (“CPT”) codes (64582, 64583, and 64584, respectively).

commercial payors, including all large national commercial insurers, covering approximately 260 million lives in the U.S.

In addition, all seven Medicare Administrative Contractors provide coverage of Inspire therapy when certain coverage criteria are met.

The procedures performed to implant, revise, or explant our Inspire IV device are described for billing purposes in the U.S.

with Category I Current Procedural Terminology codes (64582, 64583, and 64584, respectively).

A Category I code (42975) is also used for Drug-Induced Sleep Endoscopy ("DISE") to evaluate sleep disordered breathing, which may be a necessary procedure to determine which patients are appropriate for Inspire therapy.

The Medicare national average 2024 payment to implant our device in a hospital outpatient site of service is $29,586, an increase of 1% from the 2023 rate.

The 2024 Medicare national average ASC reimbursement is $24,847, a decrease of 1% from the 2023 rate.

In November 2024, the final 2025 Medicare reimbursement payments were announced.

The Medicare national average 2025 payment to implant our Inspire IV device in a hospital outpatient site of service is $30,474, an increase of 3% from the 2024 rate.

The 2025 Medicare national average ASC reimbursement is $25,832, an increase of 4% from the 2024 rate.

The 2025 Medicare national average physician reimbursement is $816 for implantation of a hypoglossal nerve stimulator, a 1% decrease over the 2024 payment.

The reimbursement for the DISE procedure in the hospital setting is $1,617, an 803% increase over the prior year amount.

In the ASC setting, the reimbursement for the DISE procedure is $757, a 714% increase from the 2023

The reimbursement for the DISE procedure in the hospital setting is $1,724, a 7% increase over the prior year amount.

In the ASC setting, the reimbursement for the DISE procedure is $792, a 714% increase from the 2024 amount.

The 2025 Medicare national average physician reimbursement for the DISE procedure is $94, a 2% decrease over the prior year amount.

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Many of these suppliers are currently single source suppliers.

We have experienced and continue to experience supply disruptions that began during the COVID-19 pandemic, but to date we have managed to avoid major delays in implant procedures due to those issues.

During the third quarter of 2023, we also began experiencing an inventory supply issue related to our polyurethane-based stimulation leads, one component of the Inspire system currently used only in the European market.

We have experienced supply disruptions that began during the COVID-19 pandemic, but to date we have managed to avoid major delays in implant procedures due to those issues.

During the third quarter of 2023, we experienced an inventory supply issue related to our polyurethane-based stimulation leads, one component of the Inspire system used only in the European market at that time.

In 2022, the FDA approved our silicone-based stimulation and sensing leads in the U.S., which replaced the polyurethane versions of the leads, and we stopped manufacturing polyurethane leads.

We applied for European Union ("EU") Medical Devices Regulation ("MDR") approval in December 2021, which we expect to obtain in the second quarter of 2024, following delays in the process.

In the interim, we received derogation approval from the Dutch, German, Swiss, and Belgian national competent authorities allowing us to place the silicone-based leads on the market in those countries until various dates in 2024 or until we receive certification under the EU MDR, whichever occurs first.

We are also pursuing derogation in other European states, however, we cannot be certain that other national competent authorities will grant a derogation similar to the above-mentioned authorities.

Until we obtain certification under the EU MDR, silicone leads may only be sold in the EU members states that have granted derogation.

Polyurethane-based leads are the only leads that may be sold in the EU members states that have not granted derogation, and the polyurethane stimulation lead is in low supply.

During the fourth quarter of 2023 and extending into early 2024, the delay in certification and the shortage of polyurethane-based stimulation leads caused delays to implant procedures which adversely affected our business in the EU, including a reduction in our European revenue, and thereby our consolidated revenue.

We estimate the impact on our revenue during the fourth quarter of 2023 was approximately $4 million.

We continue to expect delays to implant procedures, and therefore reductions to our revenue, however, to a lesser extent than in prior year periods as a result of the derogations received thus far, and we believe would be further improved if we receive certification under the EU MDR.

We applied for EU MDR certification in December 2021, which we received in July 2024, following industry-wide delays in the process.

In the interim, we had received a derogation pursuant to Article 59 of the EU MDR from the Dutch, German, Swiss, Belgian, and Austrian competent authorities, and the British equivalent, i.e.

exceptional use authorization, from the United Kingdom national competent authority, allowing us to continue to place the silicone-based leads on the market in those countries until various dates in 2024 or until we received certification under the EU MDR, whichever occurred first.

Now that we have obtained certification under the EU MDR, silicone leads may be marketed throughout the EU.

During the fourth quarter of 2023 and extending into early 2024, the delay in certification and the shortage of polyurethane-based stimulation leads caused delays to implant procedures which adversely affected our business in Europe, including a reduction in our European revenue, and thereby our consolidated revenue.

We estimate the impact during the fourth quarter of 2023 was approximately $4.0 million in lost revenue opportunity, most of which we believe was recovered during the first half of 2024.

We typically seek to maintain higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges.

For example, during 2022, we recorded a charge of $2.8 million for obsolete inventory and component parts related to product introductions, including the new silicone leads and the Bluetooth®-enabled patient remote.

In the U.S., our products are shipped directly to our U.S.

Our products are shipped directly to our U.S.

customers and to our Singapore and Hong Kong distributors on a purchase order basis, primarily by a third-party vendor with a facility in Tennessee, although we do ship some products from our facility in Minnesota.

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We have devoted significant resources to research and development activities related to our Inspire system, including clinical and regulatory initiatives to obtain marketing approval, and sales and marketing activities.

For the year ended December 31, 2023, we generated revenue of $624.8 million with a gross margin of 84.5% and a net loss of $21.2 million, compared to revenue of $407.9 million with a gross margin of 83.8% and a net loss of $44.9 million for the year ended December 31, 2022, and revenue of $233.4 million with a gross margin of 85.7% and a net loss of $42.0 million for the year ended December 31, 2021.

For the year ended December 31, 2024, we generated revenue of $802.8 million with a gross margin of 84.7% and net income of $53.5 million, compared to revenue of $624.8 million with a gross margin of 84.5% and a net loss of $21.2 million for the year ended December 31, 2023, and revenue of $407.9 million with a gross margin of 83.8% and a net loss of $44.9 million for the year ended December 31, 2022.

Our accumulated deficit as of December 31, 2024 was $291.9 million.

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We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions.

We continue to make investments in research and development efforts to develop our next generation Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as additional European countries and the Asia Pacific region.

For example, in June 2023, we submitted a premarket approval ("PMA") supplement to the FDA for our next generation Inspire system.

Also in June 2023, we received approval from the FDA on an expanded indication which includes an increase on the upper limit of the Apnea Hypopnea Index to 100 events per hour from 65, and raises the Body Mass Index ("BMI") warning in the labeling to 40 from 32, and we also received FDA approval of our new physician programmer, called the SleepSync™ programmer, which we expect to formally launch in the U.S.

in early 2024.

In March 2023, we received FDA approval to offer Inspire therapy to certain pediatric patients with Down syndrome, and in 2022, we received FDA approval for additional magnetic resonance imaging ("MRI") scan conditions for use with Inspire therapy.

This full-body MRI approval expands the Inspire use labeling that previously allowed only head, neck, and extremity MRI scans.

Also in 2022, the FDA approved silicone-based stimulation and sensing leads, which provides improved manufacturability, easier system implantation, increased long-term performance, and enhanced reliability.

Our direct-to-consumer marketing includes the use of social media platforms such as Facebook, Google ad placements, and radio and television commercials.

In January 2022, we purchased our first national television advertising spots and began airing new TV commercials, and in March 2023, we began airing additional new television commercials.

The objective of this outreach is to bring patients to our website, where they can find educational materials and videos on sleep apnea and the use and benefits of our Inspire therapy, contact information for physicians and clinical sites, and information regarding community awareness events.

Further, our team leverages the Inspire Sleep app for patient education.

We plan to continue to refine our approach to direct-to-consumer outreach, including increasing attention to digital advertising directed towards qualified patients.

We expect to maintain our level of direct-to-consumer activities.

We have a call center which we refer to as the Inspire Advisor Care Program ("ACP").

We continue to make investments in research and development efforts to develop our next generations of the Inspire systems and support our future regulatory submissions for expanded indications and for new markets such as additional European countries and the Asia Pacific region.

For example, in August 2024, we received approval from the FDA for our next generation Inspire system, which we expect to fully launch in the U.S.

2023, we received approval from the FDA on an expanded indication which includes an increase on the upper limit of the Apnea Hypopnea Index to 100 events per hour from 65 and raises the Body Mass Index ("BMI") warning in the labeling to 40 from 32, and we also received FDA approval of our new physician programmer, called the SleepSync™ programmer, which we launched in the U.S.

in late 2024.

In March 2023, we received FDA approval to offer Inspire therapy to certain pediatric patients with Down syndrome.

Our direct-to-consumer marketing program's goals are therapy awareness, connecting patients with providers, and supporting the patient through their path to Inspire from start to finish.

Our investments in advertising are designed to increase patient awareness and encourage them to visit our website.

On our website, patients can explore educational materials and videos about sleep apnea, learn about the benefits of Inspire therapy, find physician and clinical site contact information, and stay informed about community awareness events.

We also use the Inspire Sleep app as a valuable tool for patient education.

Moving forward, we plan to refine and optimize our outreach strategies, with an emphasis on expanding digital advertising efforts to reach more qualified patients.

We generally expect to maintain our level of direct-to-consumer expenditures.

We have a call center which we refer to as the Inspire Advisor Care Program.

The primary purpose of this program is to assist patients with making a connection with a qualified healthcare provider based on their specific needs.

In 2022, we initiated a digital scheduling pilot program to facilitate and streamline patient access to care.

We plan to continue to enhance this scheduling capability during 2024.

We also continue to make significant investments to build our sales and marketing organization by increasing the number of U.S.

and European sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets throughout the U.S.

and in Europe.

In 2022, we initiated a digital scheduling program to facilitate and streamline patient access to care.

We intend to continue to enhance this scheduling capability during 2025.

We also continue to make significant investments to build our sales and marketing organization by increasing the number of U.S., European, and Japanese sales representatives and continuing our direct-to-consumer marketing efforts in existing and new markets.

During 2024, we activated 285 U.S.

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territories as of December 31, 2024.

During 2023, glucagon-like peptide 1 ("GLP-1s"), a class of drug indicated for diabetes and obesity, continued to gain popularity as a weight-loss drug.

During 2023 and 2024, glucagon-like peptide 1 ("GLP-1s"), a class of drug indicated for diabetes and obesity, continued to gain popularity as a weight-loss drug.

In late 2024, Zepbound (tirzepatide), which was FDA approved for weight loss in 2023, was also FDA approved for treatment of OSA in patients with obesity and moderate to severe OSA.

If GLP-1s are used to treat OSA in an indication for which Inspire therapy is approved, demand for our Inspire system for patients with that indication could be reduced.

OSA is a multifactorial disease with many independent factors including age, gender, weight, and neck circumference.

Inspire is designed to address anteroposterior airway collapse, also known as tongue-based collapse.

Inspire is designed to address anteroposterior airway collapse, also known as tongue base collapse.

Additionally, patients with a higher BMI are subject to a larger neck circumference and present predominantly with lateral-wall collapse.

A combination of tongue-based collapse and lateral-wall collapse is identified as a complete concentric collapse of the upper airway.

A combination of tongue base collapse and lateral wall collapse is identified as a complete concentric collapse of the upper airway.

Inspire is contraindicated for complete concentric collapse.

While weight loss may help reduce a patient’s Apnea-Hypopnea Index and other OSA symptoms, we have seen from numerous studies that weight loss alone will not resolve OSA for the vast majority of patients.

We expect GLP-1s may help patients address their lateral wall collapse, making them a potential candidate for Inspire therapy to the extent they also have tongue-based collapse.

In April 2024, Eli Lilly and Company ("Lilly") published headline results from its SURMOUNT-OSA trial demonstrating a 50.7% reduction in Apnea-Hypopnea Index ("AHI") for patients in the therapy arm of the study using tirzepatide, a GLP-1 injection.

Subsequently, in June 2024, Lilly published additional results from its SURMOUNT-OSA trial demonstrating 43% of participants treated with tirzepatide at the highest dose met criteria for disease resolution.

In this context, "disease resolution" means achieving an AHI of fewer than 5 events per hour, or an AHI of 5 to 14 events per hour and an Epworth Sleepiness Scale ("ESS") score of ≤10.

ESS is a standard questionnaire designed to assess excessive daytime sleepiness.

Given a baseline AHI of 50.3, and based on these results, we believe that most patients enrolled in the study will continue to have residual moderate to severe OSA that will require treatment and fall within Inspire’s FDA-approved indication.

While weight loss may help reduce a patient’s AHI and other OSA symptoms, numerous other studies have shown that weight loss alone will not resolve OSA for the vast majority of patients.

We expect GLP-1s may help patients address their lateral wall collapse, making them a potential candidate for Inspire therapy to the extent they also have tongue base collapse.

Based on our ongoing ADHERE patient registry, the average BMI of patients treated with Inspire therapy is 29 and the American Academy of Sleep Medicine guidelines recommend weight loss prior to surgery for patients with BMI over 35 and nonsurgical solutions for patients with BMI over 40.

Therefore, we do not believe there is not a significant overlap between the Inspire patient population and the patient population being treated with GLP-1s today.

While we cannot quantify the impact, we believe that there could be a benefit to our business as a result of GLP-1s, although there can be no assurance of such benefit.

If GLP-1s are successful in treating OSA in an indication for which Inspire therapy is approved, demand for our Inspire system could be reduced.

Therefore, we believe there is not a notable overlap between the Inspire patient population and the patient population being treated with GLP-1s today.

While we cannot quantify the impact, we believe that there could be a benefit to our business as a result of GLP-1s reducing the BMI of our prospective patients and increasing the number of eligible patients for our Inspire therapy, although there can be no assurance of such benefit at this time.

Macroeconomic Environment

The global economy continues to experience increased inflationary pressures which we anticipate will continue.

Higher interest rates and capital costs, higher shipping costs, increased costs of labor, international conflicts and terrorism, and weakening foreign currency exchange rates are creating additional economic challenges.

The global economy continues to experience increased inflationary pressures.

Higher interest rates and capital costs, higher shipping costs and new or increased tariffs, increased costs of labor, international conflicts and terrorism, and weakening foreign currency exchange rates are creating additional economic challenges.

These conditions may cause our customers to decrease or delay orders for our products.

Our inventory on-hand has been constrained by the continuing supply chain challenges and component shortages, although the supply chain constraints eased somewhat throughout 2023.

As mentioned above, not having received EU MDR approval of our silicone-based leads which resulted in shortages of polyurethane-based leads, we have experienced and may continue experience to cause delays to implant procedures and a reduction in our European revenue.

Our inventory on-hand has been constrained by the supply chain challenges and component shortages, although to a lesser degree in 2024 than in prior periods.

Components of Our Results of Operations

We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S., select countries in Europe, Japan, Singapore, and Hong Kong.

We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S.

and in select countries in Europe and the Asia Pacific region.

We recognize revenues from sales of our Inspire system when the customer obtains control of the product, which occurs at a point in time, either upon shipment of the product or receipt of the product, depending on shipment terms.

Our revenue has fluctuated, and may continue to fluctuate, from quarter to quarter due to a variety of factors.

For example, we have historically experienced seasonality in our first and fourth quarters and have experienced adverse impacts on our revenue due to the COVID-19 pandemic and foreign currency exchange rates.

In addition, in the three months ended September 30, 2023, we believe our revenue growth was adversely impacted by certain changes to the assistance that we provide to patients in connection with their seeking prior authorization approval prior to treatment, as well as lack of ENT surgeon capacity.

While we believe the impact caused by the changes to the assistance that we provide in connection with prior authorizations has improved, ENT surgeon capacity challenges remain.

For example, we have historically experienced seasonality in our first and fourth quarters.

We have also previously experienced adverse impacts on our revenue due to the prior delay in obtaining EU MDR approval of our silicone-based leads and foreign currency exchange rates.

In addition, we believe our revenue growth has been adversely impacted by lack of ENT surgeon capacity.

If such impacts continue, our revenue growth may be further adversely impacted.

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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.

The overhead costs include the cost of material procurement, depreciation expense for manufacturing equipment, amortization of internal-use software, and operations and quality supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel.

We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.

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tends to be higher than in other countries.

Our gross margin may increase slightly to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs, and when we

implement price increases on our products, thereby increasing our revenue.

On the other hand, our gross margin may decrease slightly to the extent our yields decrease, or materials and labor prices increase due to supply chain issues and inflation, thereby increasing our per unit costs.

However, our gross margin may also fluctuate from quarter to quarter due to seasonality and foreign currency exchange rates.

Our gross margin in the second half of 2022 was lower than in previous periods primarily due to inventory obsolescence charges associated with product introductions, additional costs associated with the transition of manufacturing lines to produce our new silicone-based leads, and higher costs of certain component parts which were impacted by supply chain issues.

In 2024, we expect gross margins to be in the range of 83% to 85%.

Research and Development Expenses

Research and development expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services, prelaunch inventory, and other costs associated with the next generation versions of the Inspire system and SleepSync™, a cloud-based patient management system.

Research and development ("R&D") expenses consist primarily of product development, engineering, clinical studies to develop and support our products, regulatory expenses, quality assurance, testing, consulting services, prelaunch inventory, and other costs associated with the next generation versions of the Inspire system and SleepSync™, a cloud-based patient management system.

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

Additionally, these expenses include clinical study management, payments to clinical investigators, data management and travel expenses for our various clinical studies.

We expense prelaunch inventory as research and development expense in the period incurred unless objective and persuasive evidence exists that regulatory approval and subsequent commercialization of a product candidate is probable and we also expect future economic benefit from the sales of the product candidate to be realized.

We expect research and development expenses to increase in the future as we develop next generation versions of our Inspire system and SleepSync™ and continue to expand our clinical studies to further expand positive coverage policies from private commercial payors in the U.S.

We expense prelaunch inventory as R&D expense in the period incurred unless objective and persuasive evidence exists that regulatory approval and subsequent commercialization of a product candidate is probable, and we also expect future economic benefit from the sales of the product candidate to be realized.

We expect R&D expenses to increase in the future as we develop next generation versions of our Inspire system and SleepSync™ and continue to expand our clinical studies to further expand positive coverage policies from private commercial payors in the U.S.

and enter into new markets including additional European countries and the Asia Pacific region.

We expect research and development expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities.

We expect R&D expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts and new clinical development activities.

Selling, General and Administrative Expenses

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Additionally, we anticipate an increase in our stock-based compensation expense with grants of stock options, restricted stock units, performance stock units, and shares of our common stock purchased pursuant to our employee stock purchase plan.

Other (Income) Expense, Net

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

Other Income, Net

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

Results of Operations

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Total operating expenses 643,735 568,494 75,241 13.2 %

Operating loss (40,271) (47,592) 7,321 (15.4) %

Operating income (loss) 36,083 (40,271) 76,354 (189.6) %

Other income, net (22,370) (20,365) (2,005) 9.8 %

Loss before income taxes (19,906) (44,268) 24,362 (55.0) %

Income (loss) before income taxes 58,453 (19,906) 78,359 (393.6) %

Income taxes 4,944 1,247 3,697 296.5 %

Net loss $ (21,153) $ (44,881) $ 23,728 (52.9) %

Net income (loss) $ 53,509 $ (21,153) $ 74,662 (353.0) %

Revenue increased $178.0 million, or 28.5%, to $802.8 million for the year ended December 31, 2024 compared to the year ended December 31, 2023.

These results reflect an increase in sales of our Inspire system of $211.3 million in the U.S.

and an increase of $5.6 million outside of the U.S.

Overall revenue growth was primarily due to increased market penetration in existing territories, expansion into new territories, and, we believe, increased physician and patient awareness of our Inspire system, and to a lesser extent, a list price increase that began to impact some customers in May 2022, partially offset by ENT surgeon capacity constraints and reduced procedures as a result of the polyurethane-based lead shortage in Europe and the factors described under "Components of our Results of Operations - Revenue" above.

The increase was attributable to a $164.9 million increase in sales of our Inspire system in the U.S and an increase of $13.1 million outside of the U.S.

Overall revenue growth was primarily due to increased market penetration in existing centers, expansion into new territories and centers, and, we believe, increased physician and patient awareness of our Inspire system, partially offset by ENT surgeon capacity constraints.

Revenue information by region is summarized as follows:

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Revenue growth in the U.S.

was primarily due to increased market penetration in existing territories, the expansion into new territories, and, we believe, increased physician and patient awareness of our Inspire system and, to a lesser extent, a list price increase that began to impact some U.S.

customers in May 2022.

was primarily due to increased market penetration in existing centers, the expansion into new territories and centers, and, we believe, increased physician and patient awareness of our Inspire system.

Revenue generated outside of the U.S.

was $31.8 million in the year ended December 31, 2024, an increase of $13.1 million, or 70.6%, over the year ended December 31, 2023.

Revenue growth was primarily due to increased market penetration in existing territories, the expansion of our European sales representatives into new territories,

increased sales in the Asia Pacific region, and, we believe, increased physician and patient awareness of our Inspire system.

As noted above, during the fourth quarter of 2023, not having received EU MDR certification of our silicone-based stimulation lead and the resulting shortage of polyurethane-based stimulation leads had an estimated adverse impact on European revenue of approximately $4 million.

The revenue increase experienced during 2024 was partially due to the

recovery of most of the estimated $4.0 million of revenue opportunity from the fourth quarter of 2023.

Other factors contributing to revenue growth were increased market penetration in existing centers, the expansion of our European sales representatives into new territories and centers, the start of reimbursed procedures in France, increased sales in the Asia Pacific region, and, we believe, increased physician and patient awareness of our Inspire system.

Cost of Goods Sold and Gross Margin

Cost of goods sold increased $26.4 million, or 27.3%, to $123.0 million for the year ended December 31, 2024 compared to $96.6 million for the year ended December 31, 2023.

The increase was primarily due to product costs associated with higher sales volume of our Inspire system, additional manufacturing costs of sensors and lower yields prior to process enhancements, additional costs associated with an isolated production issue at a supplier, and higher costs of certain component parts.

The increase was primarily due to product costs associated with the higher sales volume of our Inspire system experienced during 2024.

Gross margin was 84.7% for the year ended December 31, 2024 compared to 84.5% for the year ended December 31, 2023.

Gross margin for the year ended December 31, 2023 was higher than the previous year primarily due to $2.8 million of inventory obsolescence charges taken during 2022 associated with new product introductions, which lowered the gross margin during that period.

Gross margin for the year ended December 31, 2023 was negatively impacted by additional manufacturing costs of sensors and lower yields prior to process enhancements, additional costs associated with an isolated production issue at a supplier, and higher costs of certain component parts, partially offset by the price increase that began taking effect for some U.S.

customers in May 2022.

This increase was primarily due to increased sales volume and manufacturing efficiencies.

Research and Development Expenses

Research and development expenses increased $47.9 million, or 69.8%, to $116.5 million for the year ended December 31, 2023 compared to $68.6 million for the year ended December 31, 2022.

This change was primarily due to an increase of $21.7 million of compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense and $20.8 million of incremental ongoing research and development costs, including ongoing development of the SleepSync™ platform and the next generation Inspire neurostimulator and physician programmer.

The change also includes an increase of $5.2 million of prelaunch inventory expense related to our next generation Inspire neurostimulator, and an increase of $0.2 million in clinical studies expenses and quality compliance audit fees.

Research and development expenses decreased $2.4 million, or 2.1%, to $114.1 million for the year ended December 31, 2024 compared to $116.5 million for the year ended December 31, 2023.

This change was primarily due to a decrease of $23.6 million in ongoing research and development costs, primarily with respect to our next generation versions of the Inspire neurostimulator and our SleepSync™ platform, partially offset by an increase of $20.1 million in compensation and employee-related expenses, mainly as a result of increased headcount and stock-based compensation expense, and an increase of $1.1 million in regulatory and clinical studies expenses and quality compliance fees.

Selling, General and Administrative Expenses

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The primary driver of this change was an increase of $66.6 million in compensation, including salaries, commissions, stock-based compensation, and other employee-related expenses, mainly as a result of increased headcount.

In addition, marketing expenses increased $36.3 million, primarily consisting of direct-to-consumer initiatives, including new national TV advertisements, which began airing in March 2023, and the expansion of our Advisor Care Program call center.

Other drivers of the change to SG&A expenses included an increase in travel expenses of $7.8 million and an increase in general corporate costs of $11.5 million primarily due to consulting fees, computer equipment and software, legal fees, bank fees, bad debt expense, and office rent expense.

Other (Income) Expense, Net

Other (income) expense, net changed by $17.1 million, or 512.7%, to $20.4 million of income for the year ended December 31, 2023 compared to $3.3 million of income for the year ended December 31, 2022.

This change was due to an increase of $15.5 million in interest and dividend income due to higher interest rates on our higher cash, cash equivalents, and investment balances, and a decrease of $1.7 million in interest expense due to the early termination of our credit facility, partially offset by a $0.1 million change in foreign currency translation and remeasurement gains due to exchange rates.

In addition, general corporate costs increased $8.6 million primarily due to computer equipment and software expense, bank fees, and depreciation expense, as well as an increase in travel expenses of $5.1 million, partially offset by a decrease of $2.7 million of marketing expenses primarily consisting of direct-to-consumer initiatives.

Other Income, Net

Other income, net increased by $2.0 million, or 9.8%, to $22.4 million of income for the year ended December 31, 2024 compared to $20.4 million of income for the year ended December 31, 2023.

This change was primarily due to an increase of $2.7 million in interest and dividend income due to higher cash, cash equivalents, and investment balances, partially offset by an increase in net losses of $0.7 million in foreign currency translation and remeasurement gains due to exchange rates.

We recorded a provision for income taxes of $4.9 million and $1.2 million for the years ended December 31, 2024 and 2023, respectively.

This change was primarily due to an increase of $0.3 million in state and local taxes, as well as $0.3 million in foreign taxes.

This change was primarily due to an increase in state and local taxes.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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Liquidity and Capital Resources

We believe our balance sheet and liquidity as of February 10, 2025 provides us with flexibility, and that our cash, cash equivalents, and investments will satisfy our operating needs and capital expenditures for at least the next 12 months.

Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning processes.

We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, property, plant, and equipment, and other operating costs.

Our sources of capital include sales of our Inspire system and registered offerings of our common stock.

As of December 31, 2024, we had cash, cash equivalents and available-for-sale debt securities of $516.5 million, an increase of $47.0 million from $469.5 million as of December 31, 2023.

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The increase in working capital was primarily due to the following factors:

• an increase of $9.0 million in cash and cash equivalents and short-term available for sale investments due primarily to sales of the Inspire system, proceeds from the exercise of stock options, and interest and dividend income;

• an increase of $46.2 million in inventory balances which increased as supply chain issues eased and we increased inventory levels to support higher sales and the anticipated 2025 launch of our next generation Inspire system in the U.S.;

• an increase of $3.2 million in accounts receivable due to higher sales which occurred during the fourth quarter of 2024;

• an increase of $22.0 million in inventory balances which increased as supply chain issues ease;

• an increase of $4.1 million in prepaid expense and other current assets which increased primarily due to miscellaneous prepaid expenses and interest income receivable.

• an increase of $2.5 million in prepaid expense and other current assets which increased primarily due to increases in miscellaneous receivables and interest income receivable;

• a decrease of $0.2 million in accounts payable.

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

• an increase of $12.0 million in accounts payable, generally due to our business volume and headcount growth from the prior year;

• a decrease of $14.8 million in cash and cash equivalents and short-term available for sale investments primarily due to the ASR we entered in November 2024 and the purchase of long-term available-for-sale investments and inventory, partially offset by proceeds from sales of the Inspire system, proceeds from the exercise of stock options, and interest and dividend income;

• an increase of $10.5 million in accrued expenses which increased primarily due to compensation and personnel-related costs.

We proactively manage our access to capital to support liquidity and continued growth.

Our sources of capital have included sales of our Inspire system and registered offerings of our common stock.

In August 2022, we completed a follow-on offering that included our offer and sale of 1,150,000 shares of common stock at a public offering price of $215.00 per share.

We received net proceeds of approximately $243.8 million after deducting underwriting discounts, commissions, and offering expenses.

During the quarter ended September 30, 2022, we repaid all amounts outstanding under our former credit facility.

See Note 4 to our audited financial statements for additional information on our previous credit facility.

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk or decreasing availability.

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At December 31, 2024, we had $59.6 million in money market funds, $267.4 million in U.S.

government securities, and $40.4 million in corporate debt securities, certificates of deposit, commercial paper, and asset-asset-backed securities.

Treasury debt securities, and $99.0 million in corporate debt securities, commercial paper, certificates of deposit, and asset-asset-backed securities.

See Note 2 to our audited financial statements for additional information on our investments.

In 2023, our R&D and SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases during 2024.

Our SG&A expenditures, primarily for increasing headcount and advertising, may

exceed any associated increases in revenues, and therefore would reduce our cash flow from operations.

We also anticipate R&D expenses will continue to be significant in 2024, primarily related to the ongoing development of the SleepSync™ platform and next generation products.

We spent $23.6 million on purchases of property and equipment in 2023, mainly on testing systems and production equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware and software, and leasehold improvements.

We anticipate further capital expenditures in 2024, primarily for additional production equipment and our SleepSync™ platform, computer hardware and software, and leasehold improvements on our corporate office buildings.

In 2024, our SG&A expenditures increased significantly over the prior year levels, and we anticipate further increases during 2025.

Our SG&A expenditures, primarily for increasing headcount and advertising, may exceed any associated increases in revenues, and therefore would reduce our cash flow from operations.

We also anticipate R&D expenses will increase in 2025, primarily related to the ongoing development of the SleepSync™ platform and next generation products.

We spent $39.1 million on purchases of property and equipment in 2024, mainly on testing systems and manufacturing equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware

and software, and leasehold improvements.

We anticipate further capital expenditures in 2025, primarily for additional manufacturing equipment and our SleepSync™ platform, computer hardware and software, and leasehold improvements on our corporate office buildings.

We believe that our existing cash and cash equivalents and available for sale investments, which totaled $516.5 million as of December 31, 2024, together with cash flows from operations, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for at least the next 12 months.

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Beyond the next 12 months, our cash requirements will depend extensively on the timing of market introduction, and extent of market acceptance of, our Inspire system.

Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry and expansion into new markets such as Hong Kong and Australia, whether we make strategic acquisitions, and competition.

Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry and expansion into new markets, whether we make strategic acquisitions, whether we repurchase more shares of our common stock, and competition.

We cannot accurately predict our long-term cash requirements at this time.

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As of December 31, 2024, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Repurchase Program

In August 2024, our Board of Directors authorized the repurchase of up to $150.0 million in our common stock through August 5, 2026 (the "Repurchase Program").

In November 2024, we entered into an accelerated share repurchase agreement (“ASR”) with a large financial institution as part of the Repurchase Program, whereupon we paid the counterparties to the ASR $75.0 million for the repurchase of shares of our common stock.

In November 2024, we received an initial delivery of 305,157 shares of common stock representing a portion of the prepayment, which shares had an average price paid per share of $196.62.

Upon final settlement of this ASR in January 2025, we received an incremental delivery of 103,886 shares of our common stock.

Under this ASR, we repurchased a total of 409,043 shares at an average price paid per share of $190.29.

See section titled “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this report for stock repurchases during the quarter ended December 31, 2024 and Note 6 of our Notes to our Consolidated Financial Statements for further details regarding our Repurchase Program.

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

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Effect of exchange rate on cash (118) 164

(Decrease) increase in cash and cash equivalents $ (256,055) $ 227,125

Decrease in cash and cash equivalents $ (35,387) $ (256,055)

Operating Activities

Net cash provided by operating activities was $130.2 million for 2024 and consisted of net income of $53.5 million, non-cash charges of $114.4 million, and a decrease in net operating assets of $37.7 million.

The non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more equity awards to a greater number of employees as compared to the same prior year period.

The remainder of the non-cash charges included accretion of investment discount due to higher investment balances, depreciation and amortization expense which increased with additional purchases of property and equipment, the benefit for estimated credit losses related primarily to accounts receivable with two healthcare systems, and other non-cash expenses.

Operating assets include inventories, which increased as supply chain constraints continued to ease and inventory on hand increased to support higher sales and the launch of our next generation Inspire system, and accounts receivable, which increased due to the higher sales volume we typically experience late in the fourth quarter.

Operating assets also include prepaid expenses and other current assets, which increased primarily due to miscellaneous receivables and interest income receivable on our higher investment balances.

Operating liabilities include accrued expenses which increased primarily due to compensation and personnel-related costs, and accounts payable.

Net cash provided by operating activities was $24.7 million for 2023 and consisted of a net loss of $21.2 million, non-cash charges of $86.6 million, and a decrease in net operating assets of $40.8 million.

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Operating liabilities include accounts payable, which increased generally due to our increased business volume year-over-year and the costs to support the growth of our operations, and accrued expenses, which increased primarily due to compensation and personnel-related costs.

Net cash provided by operating activities was $11.6 million for 2022 and consisted of a net loss of $44.9 million, non-cash charges of $54.6 million, and a decrease in net operating assets of $1.8 million.

The non-cash charges consisted primarily of stock-based compensation, which increased mainly as a result of granting more stock options and restricted stock units to more employees at a higher fair market value, as well as the introduction of performance stock unit grants.

The remainder of the non-cash charges included depreciation and amortization, non-cash lease expense, stock issued for services rendered, and other, net.

Operating assets includes accounts receivable which increased due to higher sales, and to a lesser extent prepaid expenses and other current assets.

Operating assets also includes inventories, which decreased primarily due to increased sales demand and supply chain constraints.

Operating liabilities includes accounts payable, which increased generally due to our increased business volume year-over-year and the costs to support the growth of our operations, and accrued expenses, which increased primarily due to compensation and personnel-related costs.

Investing Activities

Net cash used in investing activities for 2024 was $113.1 million and consisted primarily of the purchase of investments of $418.4 million, partially offset by $344.6 million of proceeds from sales or maturities of investments.

Investing activities also included purchases of property and equipment of $23.6 million, mainly for testing systems and production equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware and software, and leasehold improvements, as well as the purchase of strategic investments of $0.3 million.

Net cash used in investing activities for 2022 was $19.6 million and consisted of the purchase of strategic investments of $10.5 million and the purchases of property and equipment, net of $9.1 million, mainly for testing systems, production equipment, and leasehold improvements on our corporate office.

Investing activities also included purchases of property and equipment of $39.1 million, mainly for testing systems and manufacturing equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware and software, and leasehold improvements.

We also purchased strategic investments of $0.3 million.

Net cash used in investing activities for 2023 was $294.8 million and consisted primarily of the purchase of investments of $281.2 million, partially offset by $10.2 million of proceeds from sales or maturities of investments.

Investing activities also included purchases of property and equipment of $23.6 million, mainly for testing systems and manufacturing equipment for our next generation Inspire system, our SleepSync™ platform, computer hardware and software, and leasehold improvements, as well as the purchase of strategic investments of $0.3 million.

Financing Activities

Net cash provided by financing activities was $14.0 million for 2023 and consisted primarily of proceeds from the exercise of stock options of $25.8 million and proceeds from the issuance of common stock from our employee stock purchase plan of $5.3 million, partially offset by $17.2 million of taxes paid on net share settlement of equity awards.

Net cash provided by financing activities was $235.1 million for 2022 and consisted primarily of proceeds from the offering of common stock of $243.8 million, as well as proceeds from the exercise of stock options of $12.1 million, and proceeds from the issuance of common stock from our employee stock purchase plan of $3.7 million, partially offset by $24.5 million in payments on our long-term debt obligation, which we prepaid in August 2022, and less than $0.1 million of taxes paid on net share settlement of equity awards.

Net cash used in financing activities was $52.4 million for 2024 and consisted primarily of a $75.0 million payment for our ASR agreement and $5.2 million of taxes paid on net share settlement of equity awards, partially offset by proceeds from the exercise of stock options of $22.2 million and proceeds from the issuance of common stock from our Employee Stock Purchase Plan ("ESPP") of $5.6 million.

Net cash provided by financing activities was $14.0 million for 2023 and consisted primarily of proceeds from the exercise of stock options of $25.8 million and proceeds from the issuance of common stock from our ESPP of $5.3 million, partially offset by $17.2 million of taxes paid on net share settlement of equity awards.

Critical Accounting Estimates

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Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the carrying value of our inventories and reported operating results.

Likewise, the timing of FDA approval of a next generation product, if granted, could have a significant impact on the carrying value of the inventory of our previous generation product, and therefore our reported operating results.

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

Likewise, the timing of FDA approval of a next generation product, if granted, and the associated commercial launch, could have a significant impact on the carrying value of the inventory of our previous generation product, and therefore our reported operating results.

The net inventory balance was $80.1 million and $33.9 million as of December 31, 2024 and 2023, respectively.

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Management expectations related to the achievement of the performance goals associated with PSU grants is assessed each reporting period, which determines the amount of stock-based compensation expense recorded during the period.

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

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

If the performance goals are not met, no shares will be earned.

If 200% of the PSUs outstanding as of December 31, 2023 are ultimately earned, the total stock-based compensation expense recognized over the three-year period ending December 31, 2024 will be $83.9 million.

If the performance conditions are not met or not expected to be

met, any compensation expense previously recognized associated with the grant will be reversed which will impact our operating results.

If 200% of the PSUs outstanding as of December 31, 2024 are ultimately earned, the total stock-based compensation expense recognized over the five-year period ending December 31, 2026 will be $142.8 million.

If the performance conditions are not met or not expected to be met, any compensation expense previously recognized associated with the grant will be reversed which will impact our operating results.

Recent Accounting Pronouncements

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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 7. Management’s Discussion and Analysis