10-Q 1 insp-20240930.htm 10-Q insp-20240930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
________________________________
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024 or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to                              
Commission File Number: 001-38468
______________________________
Inspire logo.jpg
Inspire Medical Systems, Inc.
(Exact name of registrant as specified in its charter)
______________________________
Delaware26-1377674
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
5500 Wayzata Blvd., Suite 1600
Golden Valley, MN
55416
(Address of principal executive offices)(Zip Code)
(844) 672-4357
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareINSPNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒
As of October 30, 2024, the registrant had 29,966,914 shares of common stock, $0.001 par value per share, outstanding.

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2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the "Quarterly Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report are forward-looking statements, including, without limitation, statements regarding our future results of operations and financial position, business strategy, the impact of macroeconomic trends on our business, financial results and financial position, prospective products, international product approvals and commercializations, our expectations regarding the final reimbursement levels for Inspire therapy procedures, research and development costs, timing and likelihood of success, other insurance providers' plans to begin approving our Inspire therapy, our sales and marketing initiatives, potential supply chain disruptions, and the plans and objectives of management for future operations.
In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “can,” “continue,” “could,” “designed,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions, including, but not limited to:
•our history of operating losses and dependency on our Inspire system for revenues;
•commercial success and market acceptance of our Inspire therapy;
•our ability to achieve and maintain adequate levels of coverage or reimbursement for our Inspire system or any future products we may seek to commercialize;
•competitive companies and technologies in our industry;
•the impact on our business, financial condition, and results of operation from public health crises and pandemics;
•our ability to expand our indications and develop and commercialize additional products and enhancements to our Inspire system;
•future results of operations, financial position, research and development costs, capital requirements, and our needs for additional financing;
•our ability to forecast customer demand for our Inspire system and manage our inventory;
•our dependence on third-party suppliers, vendors, and contract manufacturers;
•risks related to consolidation in the healthcare industry;
•our ability to expand, manage, and maintain our direct sales and marketing organization, and to market and sell our Inspire system in markets outside of the United States;
•our ability to manage our growth;
•our ability to hire and retain our senior management and other highly qualified personnel;
•risks related to product liability claims and warranty claims;
•our ability to address quality issues that may arise with our Inspire system;
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•our ability to successfully integrate any acquired business, products, or technologies;
•changes in global macroeconomic conditions;
•any failure of key information technology systems, processes, or sites or damage to or inability to access our physical facilities;
•our ability to commercialize or obtain regulatory approvals or certifications for our Inspire therapy and system, or the effect of delays in commercializing or obtaining regulatory approvals or certifications;
•any violations of anti-bribery, anti-corruption, and anti-money laundering laws;
•our ability to use our net operating losses and research and development carryforwards;
•risks related to the increasing and evolving focus on sustainability and environmental, social, and governance initiatives;
•U.S. Food and Drug Administration ("FDA") or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including risks associated with regulatory approvals, certifications, or healthcare reform measures in the United States and international markets;
•our ability to establish and maintain intellectual property protection for our Inspire therapy and system or avoid claims of infringement;
•changes in U.S. and foreign tax laws;
•risks related to our common stock; and
•other important factors that could cause actual results, performance, or achievements to differ materially from those contemplated that are found in "Part I, Item 1. Business," "Part I, Item 1A. Risk Factors," and "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 1A. Risk Factors" in this Quarterly Report.
Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Unless the context requires otherwise, references to “Inspire,” the “Company,” “we,” “us,” and “our,” refer to Inspire Medical Systems, Inc.
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PART I—FINANCIAL INFORMATION
Item 1.    Consolidated Financial Statements.
Inspire Medical Systems, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
September 30,
2024		December 31, 2023
(unaudited)
Assets
Current assets:
Cash and cash equivalents$147,512 $185,537 
Investments, short-term263,475 274,838 
Accounts receivable, net of allowance for credit losses of
    $515 and $1,648, respectively
89,743 89,884 
Inventories, net67,432 33,885 
Prepaid expenses and other current assets14,358 9,595 
Total current assets582,520 593,739 
Investments, long-term113,425 9,143 
Property and equipment, net67,447 39,984 
Operating lease right-of-use assets21,811 22,667 
Other non-current assets10,991 11,278 
Total assets$796,194 $676,811 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$34,926 $38,839 
Accrued expenses39,338 39,266 
Total current liabilities74,264 78,105 
Operating lease liabilities, non-current portion25,218 24,846 
Other non-current liabilities150 1,346 
Total liabilities99,632 104,297 
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized; no shares
     issued and outstanding
— — 
Common Stock, $0.001 par value per share; 200,000,000 shares authorized; 29,963,260 and 29,560,464 issued and outstanding at September 30, 2024 and December 31, 2023, respectively
30 30 
Additional paid-in capital1,021,970 917,107 
Accumulated other comprehensive income1,700 800 
Accumulated deficit(327,138)(345,423)
Total stockholders' equity696,562 572,514 
Total liabilities and stockholders' equity$796,194 $676,811 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
(in thousands, except share and per share amounts)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2024202320242023
Revenue$203,191 $153,302 $563,086 $432,291 
Cost of goods sold32,398 24,382 86,998 68,522 
Gross profit170,793 128,920 476,088 363,769 
Operating expenses:
Research and development26,083 29,144 83,792 85,484 
Selling, general and administrative130,392 113,247 388,097 327,853 
Total operating expenses156,475 142,391 471,889 413,337 
Operating income (loss)14,318 (13,471)4,199 (49,568)
Other (income) expense:
Interest and dividend income(5,890)(5,495)(17,695)(14,690)
Other (income) expense, net(118)224 77 268 
Total other income(6,008)(5,271)(17,618)(14,422)
Income (loss) before income taxes20,326 (8,200)21,817 (35,146)
Income taxes1,829 340 3,532 770 
Net income (loss)18,497 (8,540)18,285 (35,916)
Other comprehensive income (loss):
Foreign currency translation gain (loss)259 (181)86 (4)
Unrealized gain on investments1,556 122 814 134 
Total comprehensive income (loss)$20,312 $(8,599)$19,185 $(35,786)
Net income (loss) per share:
Basic$0.62 $(0.29)$0.61 $(1.23)
Diluted$0.60 $(0.29)$0.60 $(1.23)
Weighted average shares outstanding:
Basic29,879,621 29,365,968 29,741,720 29,229,626 
Diluted30,633,789 29,365,968 30,566,395 29,229,626 

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

Nine Months Ended September 30, 2024
Common Stock
SharesAmountAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income (Loss)		Accumulated
Deficit		Total
Stockholders'
Equity
Balance at December 31, 202329,560,464 $30 $917,107 $800 $(345,423)$572,514 
Stock options exercised88,276 — 3,616 — — 3,616 
Vesting of restricted stock units41,185 — — — — — 
Shares held for tax withholdings(14,373)— (2,848)— — (2,848)
Issuance of common stock543 — 101 — — 101 
Stock-based compensation expense— — 26,322 — — 26,322 
Other comprehensive loss— — — (676)— (676)
Net loss— — — — (10,005)(10,005)
Balance at March 31, 202429,676,095 30 944,298 124 (355,428)589,024 
Stock options exercised88,328 — 5,517 — — 5,517 
Vesting of restricted stock units21,340 — — — — — 
Shares held for tax withholdings(10,985)— (1,862)— — (1,862)
Issuance of common stock365 — 85 — — 85 
Issuance of common stock for employee stock purchase plan30,158 — 3,431 — — 3,431 
Stock-based compensation expense— — 32,322 — — 32,322 
Other comprehensive loss— — — (239)— (239)
Net income— — — — 9,793 9,793 
Balance at June 30, 202429,805,301 30 983,791 (115)(345,635)638,071 
Stock options exercised152,106 — 14,226 — — 14,226 
Vesting of restricted stock units10,273 — — — — — 
Issuance of common stock469 — 65 — — 65 
Shares held for tax withholdings(4,889)— (4,335)— — (4,335)
Stock-based compensation expense— — 28,223 — — 28,223 
Other comprehensive income— — — 1,815 — 1,815 
Net income— — — — 18,497 18,497 
Balance at September 30, 202429,963,260 $30 $1,021,970 $1,700 $(327,138)$696,562 

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

Nine Months Ended September 30, 2023
Common Stock
SharesAmountAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
(Loss) Income		Accumulated
Deficit		Total
Stockholders'
Equity
Balance at December 31, 202229,008,368 $29 $820,335 $(86)$(324,270)$496,008 
Stock options exercised142,167 — 7,377 — — 7,377 
Vesting of restricted stock units18,852 — — — — — 
Shares held for tax withholdings(6,750)— (1,746)— — (1,746)
Issuance of common stock364 — 90 — — 90 
Stock-based compensation expense— — 18,225 — — 18,225 
Other comprehensive income— — — 118 — 118 
Net loss— — — — (15,424)(15,424)
Balance at March 31, 202329,163,001 29 844,281 32 (339,694)504,648 
Stock options exercised143,693 — 13,113 — — 13,113 
Vesting of restricted stock units9,349 — — — — — 
Shares held for tax withholdings(3,237)— (971)— — (971)
Issuance of common stock390 — 91 — — 91 
Issuance of common stock for employee stock purchase plan12,983 — 2,792 — — 2,792 
Stock-based compensation expense— — 21,567 — — 21,567 
Other comprehensive income— — — 71 — 71 
Net loss— — — — (11,952)(11,952)
Balance at June 30, 202329,326,179 29 880,873 103 (351,646)529,359 
Stock options exercised72,632 — 4,016 — — 4,016 
Vesting of restricted stock units6,272 — — 
Issuance of common stock279 — 91 — — 91 
Shares held for tax withholdings(2,173)— (516)— — (516)
Stock-based compensation expense— — 19,829 — — 19,829 
Other comprehensive loss— — — (59)— (59)
Net loss— — — — (8,540)(8,540)
Balance at September 30, 202329,403,189 $29 $904,293 $44 $(360,186)$544,180 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 Nine Months Ended
September 30,
 20242023
Operating activities  
Net income (loss)
$18,285 $(35,916)
Adjustments to reconcile net income (loss):  
Depreciation and amortization4,072 2,029 
Accretion of investment discount(7,317)(69)
Stock-based compensation expense86,867 59,621 
Provision (benefit) for estimated credit losses(1,133)1,340 
Other non-cash expenses1,106 1,258 
Changes in operating assets and liabilities:  
Accounts receivable1,347 (11,588)
Inventories(33,547)(14,228)
Prepaid expenses and other current assets(4,467)(2,947)
Accounts payable(3,357)11,075 
Accrued expenses and other liabilities(791)(3,189)
Net cash provided by operating activities61,065 7,386 
Investing activities  
Purchases of property and equipment(32,096)(15,596)
Purchases of investments(337,540)(137,253)
Proceeds from sales or maturities of investments252,753 10,000 
Purchases of strategic investments— (250)
Net cash used in investing activities(116,883)(143,099)
Financing activities  
Proceeds from the exercise of stock options23,359 24,506 
Payment of taxes on net share settlement of equity awards(9,045)(3,233)
Proceeds from issuance of common stock from employee stock purchase plan3,431 2,792 
Net cash provided by financing activities17,745 24,065 
Effect of exchange rate on cash48 (47)
Decrease in cash and cash equivalents(38,025)(111,695)
Cash and cash equivalents at beginning of period185,537 441,592 
Cash and cash equivalents at end of period$147,512 $329,897 
Supplemental cash flow information  
Property and equipment included in accounts payable and accrued expenses$3,456 $3,499 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Inspire Medical Systems, Inc.
Notes to Consolidated Financial Statements (Unaudited) 
(Table amounts in thousands, except share and per share amounts)

1. Organization
Description of Business
Inspire Medical Systems, Inc. is a medical technology company focused on the development and commercialization of innovative, minimally invasive solutions for patients with obstructive sleep apnea ("OSA"). Our proprietary Inspire system is the first and only United States ("U.S.") Food and Drug Administration ("FDA"), European Union ("EU"), Medical Devices Regulation ("MDR"), and Japan Pharmaceuticals and Medical Devices Agency ("PDMA")-approved neurostimulation technology of its kind 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 accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial reporting and as required by the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, the results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. All intercompany accounts and transactions have been eliminated in consolidation.
For a complete discussion of our significant accounting policies and other information, the unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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, 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 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 (income) expense, net in the consolidated statements of operations and comprehensive income (loss). For the three-month periods ended September 30, 2024 and 2023, we recognized $0.1 million of gain and $0.2 million of loss, net, respectively. For the nine-month periods ended September 30, 2024 and 2023 we recognized $0.1 million of loss and $0.3 of loss, net, respectively. Any unrealized gains and losses due to translation adjustments are included in accumulated other comprehensive income within stockholders' equity in the consolidated balance sheets. We had $0.3 million and $0.2 million of unrecognized gain
10
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
in our accumulated other comprehensive income balance as of September 30, 2024 and December 31, 2023, respectively.
Investments
Our investments are classified as available-for-sale and consisted of the following:
September 30, 2024
AmortizedUnrealized GrossAggregate
CostGainsLossesFair Value
Short-Term:
Commercial paper$19,299 $59 $— $19,358 
Corporate debt securities46,988 168 (4)47,152 
Certificates of deposit11,272 24 — 11,296 
U.S. treasury debt securities185,082 587 — 185,669 
Short-term investments$262,641 $838 $(4)$263,475 
Long-Term:
Corporate debt securities$31,988 $211 $(2)$32,197 
Asset-backed securities422 1 — 423 
U.S. treasury debt securities80,465 350 (10)80,805 
Long-term investments$112,875 $562 $(12)$113,425 

December 31, 2023
AmortizedUnrealized GrossAggregate
CostGainsLossesFair Value
Short-Term:
Commercial paper$2,950 $1 $— $2,951 
Corporate debt securities30,154 61 — 30,215 
Certificates of deposit2,953 15 — 2,968 
U.S. treasury debt securities238,237 467 — 238,704 
Short-term investments$274,294 $544 $— $274,838 
Long-Term:
Corporate debt securities$3,109 $13 $— $3,122 
Asset-backed securities1,170 1 — 1,171 
U.S. treasury debt securities4,838 12 — 4,850 
Long-term investments$9,117 $26 $— $9,143 
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 $1.4 million and $0.6 million of unrecognized gain in our accumulated other comprehensive income balance at September 30, 2024 and December 31, 2023, respectively. Any realized gains and losses are calculated on the specific identification method and reported net in other (income) expense, net in the consolidated statements of operations and comprehensive income (loss). For the three and nine months ended September 30, 2024 and 2023, we recognized $0 of realized gains, net.
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Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
As of September 30, 2024 and December 31, 2023, we had no investments with a contractual maturity of greater than two years. Currently, we do not intend to sell the investments, and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. We do not consider those investments to be other-than-temporarily impaired as of September 30, 2024. Each reporting period, we evaluate whether declines in fair value below carrying value are due to expected credit losses, as well as our ability and intent to hold the investment until a forecasted recovery occurs. Expected credit losses, not to exceed the amount of the unrealized loss, are recorded as an allowance through other expense in the consolidated statements of operations and comprehensive income (loss). The total allowance for credit losses was $0 at both September 30, 2024 and December 31, 2023.
Fair Value of Financial Instruments
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents and investments. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
Level 1: Observable inputs, such as quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs that are supported by little or no market activities, which would require us to develop our own assumptions.
We classify instruments within Level 1 if quoted prices are available in active markets for identical assets, which include our money market funds and U.S. treasury securities. We classify instruments in Level 2 if the instruments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or an income approach, such as a discounted cash flow pricing model that calculates values from observable inputs such as quoted interest rates, yield curves and other observable market information. These instruments include our commercial paper, certificates of deposit, corporate debt securities and asset-backed securities. The available-for-sale securities are held by a custodian who obtains investment prices from a third-party pricing provider that uses standard inputs (observable in the market) to models which vary by asset class.
The following tables set forth by level within the fair value hierarchy our assets that are measured on a recurring basis and reported at fair value as of September 30, 2024 and December 31, 2023. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
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Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Fair Value Measurements as of
September 30, 2024
Estimated
Fair Value		Level 1Level 2Level 3
Cash equivalents:
Money market funds$69,000 $69,000 $— $— 
Total cash equivalents69,000 69,000 — — 
Investments:
Commercial paper19,358 — 19,358 — 
Corporate debt securities79,350 — 79,350 — 
Certificates of deposit11,296 — 11,296 — 
Asset-backed securities422 — 422 — 
U.S. government securities266,474 266,474 — — 
Total investments376,900 266,474 110,426 — 
Total cash equivalents and investments$445,900 $335,474 $110,426 $— 
Fair Value Measurements as of
December 31, 2023
Estimated
Fair Value		Level 1Level 2Level 3
Cash equivalents:
Money market funds$146,217 $146,217 $— $— 
Total cash equivalents146,217 146,217 — — 
Investments:
Commercial paper2,951 — 2,951 — 
Corporate debt securities33,337 — 33,337 — 
Certificates of deposit2,968 — 2,968 — 
Asset-backed securities1,171 — 1,171 — 
U.S. government securities243,554 243,554 — — 
Total investments283,981 243,554 40,427 — 
Total cash equivalents and investments$430,198 $389,771 $40,427 $— 
There were no transfers between levels during the periods ended September 30, 2024 and December 31, 2023.
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
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Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
extent recorded on the consolidated balance sheets. However, as of September 30, 2024 and December 31, 2023, 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.
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:
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Balance at beginning of period$515 $917 $1,648 $36 
Charges (credits) to the allowance, net96 459 459 1,340 
Accounts written off, net of recoveries(96)— (1,592)— 
Balance at the end of the period$515 $1,376 $515 $1,376 
The increase in accounts written off, net of recoveries during the nine months ended September 30, 2024 related primarily to accounts receivable with three 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:
September 30, 2024December 31, 2023
Raw materials$14,485 $6,115 
Finished goods52,947 27,770 
Total inventories, net of reserves$67,432 $33,885 
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. In August 2024, we received approval from the FDA for our next generation Inspire system, which we expect to fully launch in 2025. The balance of inventory related to our next generation Inspire system was $10.0 million and $0.9 million as of September 30, 2024 and December 31, 2023, respectively.
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Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
We regularly review inventory quantities on-hand for excess and obsolete inventory and, when circumstances indicate, incur charges to write down inventories to their net realizable value. The determination of a reserve for excess and obsolete inventory involves management exercising judgment to determine the required reserve, considering future demand, product life cycles, introduction of new products, and current market conditions. The reserve for excess and obsolete inventory was $0.9 million and $2.4 million as of September 30, 2024 and December 31, 2023, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization and consisted of the following:
September 30, 2024December 31, 2023
Computer equipment and software$10,624 $2,601 
Manufacturing equipment15,676 7,245 
Other equipment3,741 1,842 
Leasehold improvements9,245 2,356 
Construction in process39,504 33,211 
Property and equipment, cost78,790 47,255 
Less: accumulated depreciation and amortization(11,343)(7,271)
Property and equipment, net$67,447 $39,984 
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 ten 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 $1.9 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and $4.1 million and $2.0 million for the nine months ended September 30, 2024 and 2023, 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 as of both September 30, 2024 and December 31, 2023, respectively. There were no adjustments to the carrying amount during either of the nine months ended September 30, 2024 or 2023.
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 during either of the nine months ended September 30, 2024 or 2023.
15
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Accrued Expenses
Accrued expenses consisted of the following:
September 30, 2024December 31, 2023
Payroll related$31,143 $33,875 
Income tax payable1,838 577 
Product warranty liability822 1,100 
Operating lease liabilities, current portion109 — 
Other accrued expenses5,426 3,714 
Total accrued expenses$39,338 $39,266 
The following table shows the changes in our estimated product warranty liability accrual, included in accrued liabilities:
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Balance at beginning of period$1,431 $760 $1,100 $920 
Provisions for warranty(402)174 396 457 
Settlements of warranty claims(207)(129)(674)(572)
Balance at the end of the period$822 $805 $822 $805 
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.
16
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
See Note 7 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.
Stock-Based Compensation
We maintain an equity incentive plan to provide long-term incentives for eligible employees, consultants, and members of the board of directors. The plan allows for the issuance of restricted stock units ("RSUs"), performance stock units ("PSUs"), and non-statutory and incentive stock options to employees, and RSUs, PSUs, and non-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 income (loss). We estimate the fair value of stock options using the Black-Scholes option pricing model and the fair value of RSUs and PSUs is equal to the closing price of our common stock on the grant date. The fair value of each purchase under the employee stock purchase plan is estimated at the beginning of the offering period using the Black-Scholes option pricing model.
Stock-based compensation expense is recognized on a straight-line basis over the vesting term for stock options and RSUs, and over the vesting and performance period based on the probability of achieving the performance objectives for PSUs. We account for award forfeitures as they occur.
Advertising Expenses
We expense the costs of advertising, including promotional expenses, as incurred. Advertising expenses were $23.3 million and $25.5 million during the three months ended September 30, 2024 and 2023, respectively, and $72.1 million and $74.3 million during the nine months ended September 30, 2024 and 2023, 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 underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising
17
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
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. We will continue to maintain a full valuation allowance until the point at which we are more certain than not that the deferred tax assets will be realized. Therefore there is no provision for federal income taxes, but we do record provision for current state and foreign taxes, which includes a foreign tax reserve relating to uncertain tax positions. Our policy is to record interest and penalty expense related to uncertain tax positions as other expense in the consolidated statements of operations and comprehensive income (loss).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (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.
Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. For the periods presented with a net loss, diluted net loss per share is the same as basic net loss per share as all potentially dilutive shares consisting of outstanding stock options, unvested RSUs and PSUs, and shares issuable under our employee stock purchase plan were antidilutive in those periods.
Recent Accounting Pronouncements
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 2024 for annual periods and in the first quarter of fiscal 2025 for interim periods, with early adoption permitted. We are currently evaluating the effect of this new guidance on our consolidated financial statements and disclosures.
18
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
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.
In March 2024, the SEC issued climate-related disclosure rules, which the SEC has subsequently stayed pending ongoing legal challenges. If they survive litigation, the rules will require disclosure of material climate-related risks and material direct greenhouse gas emissions from operations owned or controlled (Scope 1) and/or material indirect greenhouse gas emissions from purchased energy consumed in owned or controlled operations (Scope 2). Additionally, the rules will require disclosure in the notes to the financial statements of the effects of severe weather events and other natural conditions, subject to certain materiality thresholds. We are in the process of analyzing the impact of the rules on our related 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 noncancelable operating lease. The prior corporate office leases were amended in May 2023 to increase the total space leased to approximately 106,000 square feet and to extend the noncancelable lease term through May 31, 2035. We entered into an additional warehouse and office space lease for our corporate headquarters under a noncancelable operating lease in August 2023. This space includes approximately 22,000 square feet and a noncancelable lease term through May 31, 2035. Each lease includes options to renew for up to two additional periods of five years each at the then-prevailing market rates. The exercises of the lease renewal options are at our sole discretion and were not included in the lease term for the calculation of the ROU assets and lease liabilities as of the lease modification date as they were not reasonably certain of exercise.
In March 2024, we entered into an amendment on our additional warehouse and office space lease which is expected to commence in January 2025. This amendment provides for approximately 18,000 square feet of additional space and follows the lease term and renewal options in the original lease described above.
In October 2024, we entered into an amendment on our corporate headquarters office space lease which is expected to commence in January 2025. This amendment provides for approximately 10,000 square feet of additional space and follows the lease term and renewal options in the original lease described above.
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:
19
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
September 30, 2024December 31, 2023
Right-of-use assets:
Operating lease right-of-use assets$21,811 $22,667 
Operating lease liabilities:
Accrued expenses$109 $— 
Operating lease liabilities, non-current portion25,218 24,846 
Total operating lease liabilities$25,327 $24,846 
As of September 30, 2024, the remaining lease terms were 10.7 years and the weighted average discount rate was 4.9%. The operating cash flows from our operating leases were $0.5 million of cash inflow and $0.6 million of cash outflow for the three-month periods ended September 30, 2024 and 2023, respectively, and $0.9 million and $1.5 million of cash outflows for the nine-month periods ended September 30, 2024 and 2023, respectively.

4. Employee Retirement Plan
We sponsor a defined contribution employee retirement plan covering all of our full-time employees. The plan allows eligible employees to defer a portion of their eligible compensation up to the maximum allowed by IRS Regulations. We make voluntary matching contributions of 50% of the first 6% of each participating employee's contribution, up to 3% of eligible earnings. Our match contributions are made to funds designated by the participant, none of which are based on Inspire common stock. Our matching contributions to the plan totaled $1.1 million and $0.8 million for the three months ended September 30, 2024 and 2023, respectively, and $3.7 million and $3.0 million for the nine months ended September 30, 2024 and 2023, respectively.

5. Stock-Based Compensation
As of September 30, 2024, there were 4,603,343 shares reserved for issuance under our equity incentive plan, of which 1,386,572 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 with an exercise price, which is equal to the closing price of our stock on the date of grant. Stock options include a four-year service period and 25% vest after the first year of service and the remainder vest in equal installments over the next 36 months of service. The stock options granted to the board of directors vest in one or three equal annual installments, in each case subject to the director's continuous service through the applicable vesting date. The stock options have a contractual life of ten years.
The fair value per share of options is estimated on the date of grant using the Black-Scholes option pricing model.
20
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Option Value and Assumptions
Nine Months Ended
September 30,
20242023
Weighted average fair value$113.56$153.59
Assumptions:
Expected term (years)
6.25
6.25
Expected volatility
58.6 - 61.0%
56.4 - 57.4%
Risk-free interest rate
3.67 - 4.71%
3.49 - 4.61%
Expected dividend yield0.0%0.0%
Expected Term — Due to our limited amount of historical exercise, forfeiture, and expiration activity, we have opted to use the "simplified method" for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting terms and the original contractual term of the option. We will continue to analyze our expected term assumption as more historical data becomes available.
Expected Volatility — During the nine months ended September 30, 2024, we based expected volatility on the historic volatility of our common stock. Prior to 2024, due to our limited company specific historical and implied volatility data, we 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, 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.
Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. government Treasury instruments with maturities similar to the expected term of our stock options.
Expected Dividend Yield — The expected dividend assumption is based on our history of not paying dividends and our expectation that we will not declare dividends for the foreseeable future.
Stock Option Activity
OptionsWeighted Average
Exercise Price		Weighted Average
Remaining
Contractual Term
(years)		Aggregate Intrinsic
Value
(in thousands)
Outstanding at December 31, 20232,447,141 $152.17 7.0$160,691
Granted247,048 $177.99 
Exercised(328,744)$61.50 $41,756
Forfeited/expired(121,453)$188.61 
Outstanding at September 30, 20242,243,992 $166.33 6.6$127,634
Exercisable at September 30, 20241,580,149 $142.70 5.9$120,461
The aggregate intrinsic value of options exercised is the difference between the estimated fair market value of our common stock at the date of exercise and the exercise price for those options. The aggregate intrinsic value of outstanding options is the difference between the closing price as of the date outstanding and the exercise price of the underlying stock options. As of September 30, 2024, the amount of unearned stock-based compensation to be expensed from now through the year 2028 related to unvested stock options is $79.4 million, which we expect to recognize over a weighted average period of 2.3 years.
21
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
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:
Restricted Stock UnitsWeighted Average
Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 2023201,070 $235.47 $40,904 
Granted575,928 $188.61 
Vested(72,798)$240.43 $14,167 
Forfeited(39,767)$204.87 
Unvested at September 30, 2024664,433 $196.14 $140,229 
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 award vesting. As of September 30, 2024, the amount of unearned stock-based compensation currently estimated to be expensed from now through the year 2027 related to unvested RSUs was $103.5 million which we expect to recognize over a weighted average period of 2.3 years.
Performance Stock Units
During 2022, 2023, and 2024, 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, 2025, and 2026, 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 UnitsWeighted Average
Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Unvested at December 31, 2023168,969 $248.19 $34,373 
Granted184,905 $196.41 
Forfeited(28,933)$223.33 
Unvested at September 30, 2024324,941 $220.94 $68,579 
The fair value of the PSUs is equal to the closing price of our common stock on the grant date. The aggregate intrinsic value of unvested PSUs was based on our closing stock price on the last trading day of the period. As of September 30, 2024, there was $36.8 million of unrecognized stock-based compensation expense related to outstanding PSUs that is expected to be recognized over a weighted-average period of approximately 1.7 years.
22
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)
Employee Stock Purchase Plan
Employees may participate in our ESPP provided they meet certain eligibility requirements. The purchase price for our common stock under the terms of the ESPP is defined as 85% of the lower of the closing market price per share of our common stock on the first or last trading day of each stock purchase period. There were 1,217,973 shares available for future issuance under the ESPP as of September 30, 2024. The current purchase period under the ESPP began on July 1, 2024 and ends December 31, 2024.
Share Repurchase Program
In August 2024, our Board of Directors authorized the repurchase of up to $150.0 million of our outstanding shares of common stock from time to time through open market transactions, privately negotiated transactions, tender offers, or other means. We are not obligated to repurchase any specific number of shares and the program may be modified, suspended, or discontinued at any time. The share repurchase program will expire in August 2026, subject to the earlier termination or extension by the Board, in its sole discretion and without prior notice. As of September 30, 2024, no shares have been repurchased under this program.

6. Income Taxes
At both September 30, 2024 and December 31, 2023, a valuation allowance was recorded against all deferred tax assets due to our cumulative net loss position. We recorded income tax expense of $1.8 million and $0.3 million for the three months ended September 30, 2024 and 2023, respectively, and $3.5 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively. The income tax expense reflects state and foreign income tax expense in both of the nine months ended September 30, 2024 and September 30, 2023.
We filed our 2023 U.S. federal income tax return during the third quarter of 2024. Considering the provision to return true-ups, our gross federal net operating loss carryforward as of December 31, 2023 was $206.6 million, which a portion created prior to 2018 will expire at various dates beginning in 2036. In addition, net operating loss carryforwards for state income tax purposes of $173.5 million that include net operating losses will begin to expire in 2024. We also have gross research and development credit carryforwards of $15.7 million as of December 31, 2023, which will expire at various dates beginning in 2033.
Utilization of the net operating loss carryforwards and research and development ("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 or 2024, the timing of our ability to utilize the tax attributes may be affected.
Realization of the deferred tax assets is dependent upon the generation of future taxable income, if any, the amount and timing of which are uncertain. Based on available objective evidence and cumulative losses, we believe it is more likely than not that the deferred tax assets are not recognizable and will not be recognizable until we have sufficient book income. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.
We had $0.1 million of tax payable on unrecognized tax positions as of both September 30, 2024 and December 31, 2023.
We file income tax returns in the applicable jurisdictions. The 2020 to 2023 tax years remain open to examination by the major taxing authorities to which we are subject. We do not expect a significant change to our unrecognized tax positions over the next 12 months.
23
Inspire Medical Systems, Inc. 
Notes to Consolidated Financial Statements (unaudited) 
(Table amounts in thousands, except share and per share amounts)

7. Segment Reporting and Revenue Disaggregation
We operate our business as one operating segment. An operating segment is defined as a component of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.
We sell our Inspire system to hospitals and ambulatory surgery centers in the U.S. and in select countries in Europe and Japan through a direct sales organization, and in Singapore and Hong Kong through distributors. Revenue by geographic region is as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2024202320242023
United States$195,828 $147,514 $539,407 $416,748 
All other countries7,363 5,788 23,679 15,543 
Total revenue$203,191 $153,302 $563,086 $432,291 
Long-lived tangible assets by geographic location were as follows:
September 30, 2024December 31, 2023
United States$66,203 $39,916 
All other countries1,244 68 
Total long-lived tangible assets$67,447 $39,984 

8. Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock and dilutive potential shares of common stock outstanding during the period. For the periods presented with a net loss, 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 income (loss) per common share for the periods presented because including them would have been antidilutive:
September 30,
20242023
Common stock options outstanding2,243,992 2,671,815 
Unvested restricted stock units664,433 193,343 
Unvested performance stock units68,683 — 
Shares issuable under the ESPP14,185 6,319 
Total2,991,293 2,871,477 

24
INSPIRE MEDICAL SYSTEMS, INC. 
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 
(Table amounts in thousands, except share and per share amounts)
9. Related Party Transaction
In December 2023, we entered into an agreement with an entity controlled by our Chief Executive Officer (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.

10. Commitments and Contingencies
We are involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which may not be covered by insurance. We evaluate all matters and record liabilities for losses from legal proceedings when we determine that it is probable that the outcome will be unfavorable and the amount, or potential range, of loss can be reasonably estimated. An adverse determination in one or more of these pending matters could have an adverse effect on our consolidated financial position, results of operations or cash flows.
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, Inspire and two of its executive officers were named as defendants in a purported federal securities law class action filed in the United States District Court for the District of Minnesota, captioned City of Hollywood Firefighters’ Pension Fund v. Inspire Medical Systems, Inc., et. al., Court File No. 0:23-cv-03884 (the "City of Hollywood Lawsuit"). The plaintiff filed an amended complaint on April 19, 2024, which alleges violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5, which alleged violations relate to certain prior disclosures of Inspire about the effectiveness of a program intended to help certain customers establish independence in seeking prior authorization from payors for our Inspire therapy. The plaintiff seeks to represent a class of shareholders who purchased or otherwise acquired Inspire common stock between May 3, 2023 and November 7, 2023. The plaintiff seeks damages and other relief, including attorneys' fees and costs. The defendants are vigorously defending this lawsuit. On June 28, 2024, the defendants moved to dismiss the amended complaint in its entirety. The motion is now fully briefed and will be argued in November 2024.
On July 16, 2024, a stockholder derivative lawsuit was filed in the United States District Court for the District of Minnesota, purportedly on behalf of Inspire against certain of our present and former officers and directors and Inspire (as a nominal defendant), captioned Lawrence Hollin v. Herbert, et al., Court File No. 0:24-cv-02716 (the “Hollin Lawsuit”). The Hollin Lawsuit arose out of the same subject matter as the City of Hollywood Lawsuit and alleged the following claims under common law and the Exchange Act: (1) breach of fiduciary duty; (2) unjust enrichment; (3) waste of corporate assets; and (4) as against the officer defendants, contribution under Sections 10(b) and 21D of the Exchange Act. The lawsuit sought unspecified damages. On September 5, 2024, counsel for Mr. Hollin filed a motion for voluntary dismissal of the Hollin Lawsuit, which motion remains pending.
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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report, as well as the audited financial statements and the related notes thereto, the discussion under "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part I, Item 1. Business” sections included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the "Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, such as information with respect to our plans and strategy for our business and the impact of macroeconomic factors on our business, financial results and financial condition includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Part I, Item 1A. Risk Factors" section of our Annual Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Overview
We are a medical technology company focused on the development and commercialization of innovative, minimally invasive solutions for patients with 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 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.
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 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. 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. government contract for patients who are treated by the Veterans Health Administration. As of November 4, 2024, 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 provide coverage of Inspire therapy when certain coverage criteria are met.
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 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. In November 2024, the final 2025 Medicare reimbursement payments were announced. The Medicare national average 2025 payment to implant our 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 prior year amount. 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
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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 5% 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.
Reimbursement in other countries can often be established through a combination of private (commercial insurance) and public funding sources, or at the hospital level through innovation budgets.
For the nine months ended September 30, 2024, 95.8% of our revenue was derived in the U.S. and 4.2% was derived outside of the U.S. No single customer accounted for more than 10% of our revenue during the nine months ended September 30, 2024.
We rely on third-party suppliers to manufacture our Inspire system and its components. Many of these suppliers are currently single source suppliers. We have experienced 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 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.
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. Warehousing and shipping operations for our European customers are handled by a third-party vendor with a facility located in the Netherlands, and warehousing and shipping operations for our Japanese customers are handled by a third-party with a facility in Japan. Customers do not have the right to return a non-defective product, nor do we place product on consignment. Our sales representatives do not maintain trunk stock.
Since our inception in 2007, we have financed our operations primarily through sales of our Inspire system, private placements of our convertible preferred securities, amounts borrowed under our former credit facility, and equity offerings of our common stock. We have devoted significant resources to research and development activities related to our Inspire system, including clinical and regulatory initiatives to obtain marketing approval, and sales and marketing activities. For the three months ended September 30, 2024, we generated revenue of $203.2 million with a gross margin of 84.1% and had a net income of $18.5 million compared to revenue of $153.3 million with a gross margin of 84.1% and a net loss of $8.5 million for the three months ended September 30, 2023. For the nine months ended September 30, 2024, we generated revenue of $563.1 million with a gross margin of 84.5% and had a net income of $18.3 million compared to revenue of $432.3 million with a gross margin of 84.1% and a net loss of $35.9 million for the nine months ended September 30, 2023. Our accumulated deficit as of September 30, 2024 was $327.1 million.
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We have invested heavily in product development. Our research and development activities have been centered on driving continuous improvements to our Inspire therapy. We have also made significant investments in clinical studies to demonstrate the safety and efficacy of our Inspire therapy and to support regulatory submissions. We continue to make investments in research and development efforts to develop our next 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 2025. 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 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 includes the use of social media platforms such as Facebook, Google ad placements, and radio and 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. 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 intend to continue to enhance this scheduling capability during the remainder of 2024 and beyond.
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 the three months ended September 30, 2024, we added 13 new U.S. sales territories, bringing our total to 323 U.S. sales territories as of September 30, 2024. During that same period, we activated 66 new U.S. medical centers, bringing the total to 1,371 U.S. medical centers implanting Inspire therapy as of September 30, 2024.
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. 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 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 base collapse and lateral wall collapse is identified as a complete concentric collapse of the upper airway. Inspire is contraindicated for complete concentric collapse. On April 17, 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, on June 21, 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 believe there is not a notable overlap between the Inspire patient population and the patient population being treated with GLP-1s today.
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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 at this time.
Macroeconomic Environment
The global economy continues to experience increased inflationary pressures. Higher interest rates and capital costs, higher shipping costs, increased costs of labor, international conflicts and terrorism, and weakening foreign currency exchange rates are creating additional economic challenges. These conditions may cause our customers to decrease or delay orders for our products.
Our inventory on-hand has been constrained by the supply chain challenges and component shortages, although to a lesser degree in 2024 than in recent periods.

Components of Our Results of Operations
Revenue
We derive primarily all of our revenue from the sale of our Inspire system to hospitals and ASCs in the U.S. 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 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.
Our business has grown rapidly in recent years, resulting in substantially increased revenues, and we expect that our business will continue to grow. However, our revenue growth rate has generally declined in recent periods, and it may continue to do so as a result of the difficulty of maintaining growth rates as our revenues increase to higher levels.
Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of acquisition costs for the components of the Inspire system, overhead costs, scrap, and inventory obsolescence, warranty replacement costs, as well as distribution-related expenses such as logistics and shipping costs, net of shipping costs charged to customers. The overhead costs include the cost of material procurement, depreciation expense for production equipment, and operations supervision and management personnel, including employee compensation, stock-based compensation, supplies, and travel. We expect cost of goods sold to increase or decrease in absolute dollars primarily as, and to the extent, our revenue grows or declines, respectively.
We calculate gross margin as gross profit divided by revenue. Our gross margin has been and we expect it will continue to be affected by a variety of factors, including manufacturing costs, the average selling price of our Inspire system, the implementation of cost-reduction strategies, inventory obsolescence costs, which generally occur when new generations of our Inspire system are introduced, and to a lesser extent the sales mix between the U.S. and countries outside of the U.S., as our average selling price in the U.S. tends to be higher than in other countries. Our gross margin may increase slightly to the extent our production volumes increase and we receive discounts on the costs charged by our contract manufacturers, thereby reducing our per unit costs, and when we implement price increases on our products, thereby increasing our revenue. On the other hand, our gross margin may decrease slightly to the extent our yields decrease, or materials and labor prices increase due to supply chain issues and inflation, thereby increasing our per unit costs. However, our gross margin may also fluctuate from quarter to quarter due to seasonality and foreign currency exchange rates.
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Research and Development Expenses
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 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 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
Selling, general and administrative ("SG&A") expenses consist primarily of compensation for personnel, including base salaries, stock-based compensation expense and commissions related to our sales organization, finance, information technology, human resource, and legal functions, as well as spending related to marketing, sales operations, and training and reimbursement personnel. Other SG&A expenses include training physicians, travel expenses, advertising, direct-to-consumer promotional programs, conferences, trade shows and consulting services, professional services fees, audit fees, insurance costs and general corporate expenses, including facilities-related expenses.
We expect SG&A expenses to continue to increase as we expand our commercial infrastructure to both drive and support our planned growth in revenue and as we increase our headcount and expand administrative personnel to support our growth and operations as a public company including finance, legal, and human resources personnel and information technology services. Additionally, we anticipate an increase in our stock-based compensation expense with grants of stock options, restricted stock units, performance stock units, and shares of our common stock purchased pursuant to our employee stock purchase plan.
Other (Income) Expense
Other (income) expense consists primarily of interest and dividend income, the impacts of foreign currency transactions and remeasurements, and gains and losses on investments.
Seasonality
Historically, we have experienced seasonality in our first and fourth fiscal quarters, and we expect this trend to continue. In the U.S., we have experienced, and may in the future experience, higher sales in the fourth quarter as a result of patients having paid their annual insurance deductibles in full, thereby reducing their out-of-pocket costs. Conversely, in the first quarter, many U.S. patients' insurance deductibles reset, requiring more out-of-pocket costs, which negatively impacts our sales during this period. We have also begun to experience some seasonality during summer months in the U.S. and Europe, which we believe is attributable to the postponement of elective surgeries due to summer vacation plans of physicians and patients.

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Results of Operations
Three Months EndedNine Months Ended
September 30,September 30,
20242023$ Change% Change20242023$ Change% Change
(in thousands, except percentages)
Revenue$203,191 $153,302 $49,889 32.5 %$563,086 $432,291 $130,795 30.3 %
Cost of goods sold32,398 24,382 8,016 32.9 %86,998 68,522 18,476 27.0 %
Gross profit170,793 128,920 41,873 32.5 %476,088 363,769 112,319 30.9 %
Gross margin84.1%84.1%84.5%84.1%
Operating expenses:
Research and development26,083 29,144 (3,061)(10.5)%83,792 85,484 (1,692)(2.0)%
Selling, general and administrative130,392 113,247 17,145 15.1 %388,097 327,853 60,244 18.4 %
Total operating expenses156,475 142,391 14,084 9.9 %471,889 413,337 58,552 14.2 %
Operating income (loss)14,318 (13,471)27,789 (206.3)%4,199 (49,568)53,767 (108.5)%
Other income, net(6,008)(5,271)(737)14.0 %(17,618)(14,422)(3,196)22.2 %
Income (loss) before income taxes20,326 (8,200)28,526 (347.9)%21,817 (35,146)56,963 (162.1)%
Income taxes1,829 340 1,489 437.9 %3,532 770 2,762 358.7 %
Net income (loss)$18,497 $(8,540)$27,037 (316.6)%$18,285 $(35,916)$54,201 (150.9)%
Comparison of the Three Months Ended September 30, 2024 and 2023
Revenue
Revenue increased $49.9 million, or 32.5%, to $203.2 million for the three months ended September 30, 2024 compared to $153.3 million for the three months ended September 30, 2023. These results reflect an increase in sales of our Inspire system of $48.3 million in the U.S. and an increase of $1.6 million outside of the U.S. compared to the same prior year period. Overall revenue growth was primarily due to increased market penetration in existing centers, expansion into new territories and centers, and, we believe, increased physician and patient awareness of our Inspire system, partially offset by ENT surgeon capacity constraints.
Revenue information by region is summarized as follows:
Three Months Ended September 30,
20242023Change
Amount% of RevenueAmount% of Revenue$%
(in thousands, except percentages)
United States$195,828 96.4 %$147,514 96.2 %$48,314 32.8 %
All other countries7,363 3.6 %5,788 3.8 %1,575 27.2 %
Total revenue$203,191 100.0 %$153,302 100.0 %$49,889 32.5 %
Revenue generated in the U.S. was $195.8 million for the three months ended September 30, 2024, an increase of $48.3 million, or 32.8%, compared to the three months ended September 30, 2023. Revenue growth in the U.S. 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.
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Revenue generated outside