Inspire Medical Systems, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of Inspire Medical Systems, Inc. (we, us, our, or the Company) have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The information included in this Form 10-Q should be read in conjunction with our most recent Form 10-K. We use the same accounting policies in preparing quarterly and annual financial statements. In the opinion of management, all adjustments necessary for a fair presentation of quarterly and year to date operating results are reflected herein. The results of operations for the three-month period ended March 31, 2026 are not necessarily indicative of the results to be expected for the full year.

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.

Recent Accounting Pronouncements Not Yet Adopted

In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income-Expense Disaggregation (Subtopic 220-40): Disaggregation of Income Statement Expenses (ASU 2024-03). The guidance requires the disclosure of additional information related to certain costs and expenses, including amounts of inventory purchases, employee compensation, and depreciation and amortization included in each income statement line item. ASU 2024-03 also requires disclosure of the total amount of selling expenses and our definition of selling expenses. The ASU is effective for the annual reporting period beginning after December 15, 2026 and interim reporting periods within the annual reporting period beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact that adoption of this ASU may have on our financial statements and disclosures.

In September 2025, the FASB issued ASU 2025-06, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Targeted Improvements to the Accounting for Internal-Use Software. This ASU modifies the criteria for when software costs may be capitalized by eliminating consideration of software project development stages and by enhancing guidance for the "probable-to-complete" threshold. The update is effective for annual reporting periods beginning after December 15, 2027 including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact that adoption of this ASU may have on our financial statements and 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.

2. Financial Instruments

Investments

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.

The following table shows the fair value of our available-for sale securities by maturity:

The following tables show all available-for-sale investments in an unrealized loss position for which an allowance for credit losses has not been recorded and the related gross unrealized loss and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

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 at maturity. We do not consider those investments to be other-than-temporarily impaired as of March 31, 2026. We recognized $0 of gross realized gains and losses from the sale or maturity of available-for-sale investments during each of the three months ended March 31, 2026 and 2025, respectively. The total allowance for credit losses was $0 at both March 31, 2026 and December 31, 2025.

Fair Value of Financial Instruments

Financial assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement: 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); and Level 3 (unobservable inputs that are supported by little or no market activities, which would require us to develop our own assumptions). We do not have any Level 3 financial assets or liabilities.

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 March 31, 2026 and December 31, 2025.

Equity Securities without Readily Determinable Fair Values

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 $16.4 million as of both March 31, 2026 and December 31, 2025. There wereno adjustments to the carrying amounts during either of the three months ended March 31, 2026 and 2025.

3. 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:

4. Stockholders' Equity

Share Repurchases

We periodically repurchase shares of our common stock under board-authorized repurchase programs through a combination of open market transactions, accelerated share repurchase arrangements, and other privately negotiated transactions with financial institutions. As of March 31, 2026, $100.0 million remained available for future repurchases under the current share repurchase program.

Information regarding the shares we repurchased and retired was as follows:

5. 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. As of March 31, 2026, there were 5,168,425 shares reserved for issuance under our equity incentive plan, of which 604,223 shares were available for issuance.

Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, which is the vesting period or term to become eligible for a qualified retirement for stock options and RSUs, and over the vesting and 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.

The table below sets forth the number of stock-based compensation awards granted during the three months ended March 31, 2026, along with the weighted average grant date fair value. There wereno stock options granted during the three months ended March 31, 2026.

1 Service condition awards which generally vest over athree-year period.

2 Performance condition awards which generally vest over athree-year period, shown with the grant amount equal to the target number of performance shares based on the share price at grant date. These awards allow for the right to receive a variable number of shares, between 0% and 200% of target, dependent on being employed at the end of the performance period and achieving defined performance goals.

Total share-based compensation expense included in the consolidated statements of operations was $30.7 million and $31.1 million for the three months ended March 31, 2026 and 2025, respectively.

As of March 31, 2026, there was $239.8 million of unrecognized stock-based compensation expense related to outstanding stock options, RSUs, and PSUs, that is expected to be recognized over a weighted-average period of 2.3 years.

6. Income Taxes

We file income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and other international jurisdictions.

For interim periods, income tax expense and the resulting effective tax rate are based upon an estimated annual effective tax rate adjusted for the effects of items required to be treated as discrete to the period, including changes in tax laws, changes in estimated exposures for uncertain tax positions, and other items.

The effective tax rate for the three months ended March 31, 2026 and 2025 was 571.2% and 28.1%, respectively. The increase in the effective tax rate was primarily driven by shortfalls related to stock-based compensation, which were driven by a decline in our stock price at award vesting and exercise compared to grant-date fair value (tax shortfall). For the three months ended March 31, 2025, we recorded state and foreign tax expense while maintaining a full valuation allowance against federal and state deferred tax assets, which was subsequently released at December 31, 2025.

The total liability for unrecognized tax positions was $0.1 million at both March 31, 2026 and December 31, 2025. Penalties and interest related to unrecognized tax positions are recorded as other expense in the consolidated statements of operations.

7. Segment Reporting and Revenue Disaggregation

We operate our business asone 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 (CODM) in deciding how to allocate resources and in assessing performance. Our CODM is the Company's President, Chief Executive Officer, and Chair of the Board of Directors. Reportable segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. Our segment revenues are derived from the sales of our product, the Inspire system, to hospitals and ambulatory surgery centers in the U.S. and in select countries in Europe and the Asia Pacific region. We do not have any intra-entity sales or transfers.

Our CODM uses consolidated earnings (loss) and operating income (loss) as the measures of profit or loss. Our CODM assesses performance for the segment and allocates resources using consolidated earnings (loss) and operating income (loss).

(a) The significant expense categories and amounts align with the segment-level information that is regularly provided to our chief operating decision maker.

(b) Other income represents the consolidated amounts for interest and dividend income, net, and other expense, net, as shown on our consolidated statements of operations.

For the three-month periods ended March 31, 2026 and 2025, depreciation and amortization expense was $5.1 million and $3.0 million, respectively, and is included within the segment expense captions of cost of goods sold, research and development expense, and selling, general and administrative (SG&A) expense.

For the three-month periods ended March 31, 2026 and 2025, stock-based compensation expense was $30.7 million and $31.1 million, respectively, and is included within the segment expense captions of cost of goods sold, research and development expense, and SG&A expense.

Revenue by geographic region is as follows:

The measure of segment assets is reported on the balance sheet as total consolidated assets.

8. Earnings Per Share

Basic earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net earnings (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 table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per share:

9. Commitments and Contingencies

We may from time to time be involved in claims, governmental inquiries or investigations, litigation and other legal proceedings arising in the ordinary course of business, some of which may seek monetary damages, including claims for punitive damages, which may not be covered by insurance. Such matters, even if not meritorious, could result in the expenditure of significant financial and managerial resources. 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.

On November 6, 2025, the City of Pontiac Reestablished General Employees’ Retirement System, on behalf of itself and other similarly situated investors, filed a putative securities class action in the United States District Court for the District of Minnesota against the Company and certain of its executive officers, captioned City of Pontiac Reestablished General Employees’ Retirement System v. Inspire Medical Systems, Inc., et al., Case No. 0:25‑cv‑04247‑PJS‑ECW (D. Minn.) (the City of Pontiac Lawsuit). The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b‑5 promulgated thereunder, based on purportedly materially false and misleading statements made between August 6, 2024, and August 4, 2025, regarding the launch of the Company’s Inspire V neurostimulator. The complaint further alleged that when subsequent disclosures were made concerning issues with the Inspire V launch and the Company announced its third‑quarter fiscal 2025 results, the Company’s stock price declined, purportedly causing investor losses. On December 23, 2025, the plaintiff filed a Notice of Voluntary Dismissal. On December 29, 2025, the case was administratively closed without prejudice.

On December 22, 2025, the Indiana Public Retirement System, on behalf of itself and other similarly situated investors, filed a putative securities class action in the United States District Court for the Southern District of New York against the Company and certain of its executive officers, captioned Indiana Public Retirement System v. Inspire Medical Systems, Inc., et al., Case No. 1:25‑cv‑10620 (S.D.N.Y.) (the Indiana PRS Lawsuit). The Indiana PRS Lawsuit arises from the same underlying subject matter as the City of Pontiac Lawsuit. It alleges the same violations of law and is based on the same or similar purportedly materially false and misleading statements made during the same class period, all of which relate to the launch of the Company’s Inspire V neurostimulator. The plaintiffs seek, among other relief, unquantified compensatory damages, together with attorneys’ fees and costs. On January 22, 2026, the Company and the individual defendants moved to transfer the case to the United States District Court for the District of Minnesota. That motion remains pending. On February 27, 2026, the Court entered a stipulation from the parties which stated, in pertinent part, that any deadline for the Defendants to respond to the complaint is suspended until an amended complaint is filed. The Company and the individual defendants intend to vigorously defend against the action. No accrual for loss has been recorded in the Company’s financial statements as of, or for the period ended, March 31, 2026 since the Company is unable to determine whether any loss ultimately will occur or to estimate the range of such loss.

On January 27, 2026, a stockholder derivative lawsuit was filed in the United States District Court for the Southern District of New York, purportedly on behalf of Inspire against certain of our present and former executive officers and against all current members of the Board of Directors and Inspire (as a nominal defendant), captioned Korte v. Herbert, et al., Case No. 1:26‑cv‑680 (S.D.N.Y.) (the Korte Derivative Lawsuit). The Korte Derivative Lawsuit arises out of the same subject matter as the Indiana PRS Lawsuit described above and alleges the following claims: (1) Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder; (2) Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; (3) Section 20(a) of the Exchange Act; (4) a common-law claim for breach of fiduciary duty; (5) common-law aiding and abetting; (6) unjust enrichment; and (7) waste of corporate assets. The Korte Derivative Lawsuit seeks unspecified damages. The Company and the individual defendants intend to vigorously defend against the action.

On March 20, 2026, a stockholder derivative lawsuit was filed in the United States District Court for the Southern District of New York, purportedly on behalf of Inspire against certain of our present and former officers and against all current members of the Board of Directors and Inspire (as a nominal defendant), captioned Davis v. Herbert et al., Case No. 1:26-cv-02315 (S.D.N.Y.) (the Davis Derivative Lawsuit). The Davis Derivative Lawsuit arises out of the same subject matter as the Indiana PRS Lawsuit described above, and alleges substantially the same claims as the Korte Derivative Lawsuit, plus a claim for contribution under Section 21D of the Exchange Act. The Davis Derivative Lawsuit seeks unspecified damages. On April 21, 2026, counsel for Plaintiffs in the Korte and Davis Derivative Lawsuits submitted, along with all Defendants in those lawsuits, a proposed stipulation to consolidate them into one lawsuit and to stay them, among other terms. The Company and the individual defendants intend to vigorously defend against both the Korte Derivative Lawsuit and the Davis Derivative Lawsuit.

On January 17, 2025, we received a civil investigative demand (CID) from the Department of Justice U.S. Attorney’s Office for the District of Minnesota pursuant to the False Claims Act in the course of the government’s investigation concerning allegations of false claims, including false claims arising from violations of the Anti-Kickback Statute, submitted to government payors in connection with our implant. The CID requests information relating to the marketing, promotion, and reimbursement practices associated with our products. We are cooperating with the investigation. No assurance can be given as to the timing or outcome of the government’s investigation. No amount of loss has been recorded in the Company’s financial statements as of, or for the period ended, March 31, 2026 since the Company is unable to determine whether any loss ultimately will occur or to estimate the range of such loss.

On November 19, 2024, a former Inspire employee, Patrick Collins, filed a civil False Claims Act qui tam lawsuit under seal in the United States District Court for the Central District of California against the Company, captioned United States ex rel. Collins v. Inspire Medical Systems, Inc., No. 2:24-cv-10001-JFW-AS (C.D. Cal.) The complaint alleges that Inspire violated the False Claims Act by improperly certifying that physicians were eligible to seek reimbursement from the Medicare program for Inspire devices, and the procedures to implant them. Relator’s complaint seeks unspecified treble damages, civil penalties, and costs and expense of the action, among other relief. On January 28, 2026, the United States, acting through the United States Attorney’s Office for the Central District of California, declined to intervene in the action, and, on January 29, 2026, the Court ordered that the case be unsealed. Notwithstanding the government's decision not to intervene, the Relator has decided to proceed with the litigation. The Company intends to defend the claims in this lawsuit vigorously.

On May 30, 2025, Inspire filed a lawsuit against Nyxoah SA and its subsidiary Nyxoah, Inc. (collectively Nyxoah) in the United States District Court for the District of Delaware, alleging that Nyxoah's Genio product infringes on certain of Inspire's U.S. patents related to neurostimulation therapy for obstructive sleep apnea. Inspire seeks a judgment of patent infringement and relief for such infringement, including monetary damages such as lost profits. Nyxoah has denied infringement and has asserted counterclaims seeking declaratory judgments of invalidity and non‑infringement. On December 18, 2025, Nyxoah filed three (3) petitions with the United States Patent Trial and Appeal Board (PTAB) seeking inter partes review (IPR) of thethree patents asserted by Inspire in the lawsuit. On April 14, 2026, the PTAB denied institution of allthree IPRs. The district court matter is ongoing. Because these matters are in their early stages, we cannot predict the outcome or estimate the range of potential loss.

On September 15, 2025, Nyxoah filed a lawsuit against us in the United States District Court for the District of Delaware alleging that the Inspire IV and Inspire V devices infringe certain of Nyxoah’s patents. The lawsuit is in its early stages. The Company intends to defend the claims in this lawsuit vigorously and believes it has good and substantial defenses to them, but there is no guarantee that the Company will be successful in these efforts. No amount of loss has been recorded in the Company’s financial statements as of and for the period ended March 31, 2026 since the Company is unable to determine whether any loss ultimately will occur or to estimate the range of such loss.

On December 5, 2025, Nyxoah brought suit against Inspire and its wholly-owned subsidiary, Inspire Medical Systems Europe GmbH in the Unified Patent Court, Munich Division, alleging that the Inspire IV implantable neurostimulator infringes a patent owned by Nyxoah. The lawsuit is in its early stages. The Company intends to defend the claims in this lawsuit vigorously and believes it has good and substantial defenses to them, but there is no guarantee that the Company will be successful in these efforts. No amount of loss has been recorded in the Company’s financial statements as of and for the period ended March 31, 2026 since the Company is unable to determine whether any loss ultimately will occur or to estimate the range of such loss.