Inspire Medical Systems, Inc.

Previous wording

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, 2025 (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 and in the "Part I, Item 1A "Risk Factors" section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Current wording

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, 2025 (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 and in the "Part II, Item 1A. Risk Factors" section of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2026, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Previous wording

We expect to incur a total of $20 million to $25 million of pre-tax restructuring charges in connection with Project Horizon. These actions are expected to generate approximately $30 million of annualized growth investment capacity which is expected to be invested in revenue growth initiatives. We expect the majority of actions related to the restructuring to be completed in the third quarter of 2026 and all actions to be substantially complete by the end of 2026.

Current wording

We expect to incur a total of approximately $25 million of pre-tax restructuring charges in connection with Project Horizon. These actions are expected to generate approximately $30 million of annualized growth investment capacity which is expected to be invested in revenue growth initiatives. The majority of actions related to the restructuring were completed in the third quarter of 2026 and we expect that all actions will be substantially complete by the end of 2026.

Previous wording

Third-party payors require physicians and hospitals to identify the service for which they are seeking reimbursement by using Current Procedural Terminology (CPT) codes, which are created and maintained by the American Medical Association. Our various generations of Inspire therapy have been billed under different codes and reimbursement approaches throughout our history. In November 2025, the final 2026 Medicare reimbursement payments were announced. Since this announcement, there has been, and still is currently, significant uncertainty and changes directly and indirectly relating to the appropriate coding and reimbursement for our Inspire V therapy from CMS and Medicare Administrative Contractors (MACs), as well as other payors and stakeholders in the overall coding and reimbursement process.

Current wording

Third-party payors require physicians and hospitals to identify the service for which they are seeking reimbursement by using Current Procedural Terminology (CPT®) codes, which are created and maintained by the American Medical Association (AMA). Our various generations of Inspire therapy have been billed under different codes and reimbursement approaches throughout our history. In November 2025, the final 2026 Medicare reimbursement payments were announced. Since this announcement, there has been, and still is currently, significant uncertainty and changes directly and indirectly relating to the appropriate coding and reimbursement for our Inspire V therapy from the Centers for Medicare & Medicaid Services (CMS) and Medicare Administrative Contractors (MACs), as well as other payors and stakeholders in the overall coding and reimbursement process.

Previous wording

In March 2026, the American Hospital Association (AHA) recommended use of CPT code 64999 for Inspire V commercial cases. CPT code 64999 is an unlisted procedure code for the nervous system and is to be used when no specific CPT code exists to accurately describe a service. Because CPT code 64999 is non-specific, reimbursement determinations typically required additional supporting documentation, which may result in increased claims review and processing time (in which case we will provide additional education and support to customers). The AHA's quarterly newsletter that included this recommendation indicates that its guidance does not dictate coverage and reimbursement policy as determined by local Medicare contractors or any other payer; nor is it a substitution for the judgment of a qualified practitioner in the application of HCPCS codes. Currently, many commercial policies still publish CPT code 64568 as the code to be used for the Inspire V procedure. As a result, Inspire continues to recommend that providers consider using the code listed in the applicable payer policy (recognizing that the payer policies may not reflect current coding guidance) and consult their provider's own compliance, coding advisors, and payers as needed.

Current wording

In March 2026, the American Hospital Association (AHA) recommended use of CPT code 64999 for Inspire V commercial cases. CPT code 64999 is an unlisted procedure code for the nervous system and is to be used when no specific CPT code exists to accurately describe a service. Because CPT code 64999 is non-specific, reimbursement determinations typically required additional supporting documentation, which may result in increased claims review and processing time (in which case we provide additional education and support to customers). The AHA's quarterly newsletter that included this recommendation indicates that its guidance does not dictate coverage and reimbursement policy as determined by local Medicare contractors or any other payer; nor is it a substitution for the judgment of a qualified practitioner in the application of HCPCS codes. Currently, many commercial policies still publish CPT code 64568 as the code to be used for the Inspire V procedure. As a result, Inspire continues to recommend that providers consider using the code listed in the applicable payer policy (recognizing that the payer policies may not reflect current coding guidance) and consult their provider's own compliance, coding advisors, and payers as needed.

Previous wording

In terms of Inspire V Medicare cases, in February 2026, the Centers for Medicare & Medicaid Services (CMS) announced that it would implement a series of HCPCS Level II C‑codes which were published on April 1, 2026. These C‑codes apply only to facility billing and do not address professional (or physician) fee reimbursement. We currently believe all Medicare Administrative Contractor (MAC) local coverage determinations identify CPT code 64582 as the appropriate code. Based on information provided to us, most procedures billed year‑to‑date have been submitted and paid without the use of a modifier. We are currently aware of two MACs that require the use of the -52 modifier when billing CPT code 64568. Based on available data, application of the modifier has resulted in physician reimbursement ranging from no reduction to approximately 30% below the existing national average payment. Additional MACs may in the future require the use of a modifier which could affect professional fee reimbursement.

Current wording

In terms of Inspire V Medicare cases, in February 2026, CMS announced that it would implement a series of HCPCS Level II C‑codes which were published on April 1, 2026. These C‑codes apply only to facility billing and do not address professional (or physician) fee reimbursement. We currently believe all Medicare Administrative Contractor (MAC) local coverage determinations identify CPT code 64582 as the appropriate code. We are currently aware of two MACs that require the use of the -52 modifier when billing CPT code 64582 for the implantation of a hypoglossal nerve stimulator without the insertion of a distal respiratory sensor. Based on available data and information provided to us, application of the modifier has resulted in physician reimbursement ranging from no reduction to approximately 30% below the existing national average payment, although most procedures billed year-to-date have been submitted and paid without use of the modifier. Additional MACs may in the future require the use of a modifier which could affect professional fee reimbursement.

Previous wording

These and other recent coding and reimbursement decisions (particularly the uncertainty of the decisions and volatility of the announcements from multiple stakeholders) have adversely impacted our revenue in the first half of 2026 and we anticipate that this will continue to adversely impact revenue during the remainder of 2026. Inspire is actively engaging with relevant stakeholders regarding the reimbursement uncertainty affecting Inspire V and is providing support as appropriate - with a goal of limiting and moving past the uncertainty as soon as possible. In the short-term, we are working to minimize potential delays and continue to support patient access to therapy. This includes providing proactive education and assistance to our field team, our customers and physicians. We are also seeking a long-term solution, including the creation of a separate CPT code. There can be no guarantee as to the timing or outcome of the CPT code application.

Current wording

These and other recent coding and reimbursement decisions (particularly the uncertainty of the decisions and volatility of the announcements from multiple stakeholders) have adversely impacted our revenue in the first nine months of 2026 and we anticipate that this will continue to adversely impact revenue during the remainder of 2026. Inspire is actively engaging with relevant stakeholders regarding the reimbursement uncertainty affecting Inspire V and is providing support as appropriate - with a goal of limiting and moving past the uncertainty as soon as possible. In the short term, we are working to minimize potential delays and continue to support patient access to therapy. This includes providing proactive education and assistance to our field team, our customers, and physicians. In July 2026, the preliminary 2027 Medicare reimbursement payments related to our therapy were announced, which generally increased proposed reimbursement rates over 2026 levels. We expect the 2027 final rates will be announced in November 2026.

Previous wording

In addition, the Wasteful and Inappropriate Service Reduction Model (WISeR) program, which is a government initiative requiring prior authorization of Medicare cases in six pilot states, began in mid-January 2026. During the first half of 2026, we experienced delays due to the new WISeR requirements for traditional Medicare procedures in the six WISeR states which adversely impacted our revenue in the first half of 2026. We anticipate that this will continue to adversely impact revenue for the remainder of 2026, although to a lesser extent than in the first half of the year.

Current wording

In addition, the Wasteful and Inappropriate Service Reduction Model (WISeR) program, which is a government initiative requiring prior authorization of Medicare cases in six pilot states, began in mid-January 2026. During the first nine months of 2026, we experienced delays due to the new WISeR requirements for traditional Medicare procedures in the six WISeR states which adversely impacted our revenue during that period. We anticipate that this will continue to adversely impact revenue for the remainder of 2026, although to a lesser extent than in the first nine months of the year.

Previous wording

We continue to make significant investments in our sales and marketing organization. In 2025, we began optimizing our sales model through targeted territory consolidation and increased field clinical representatives (FCRs). This enables territory managers to focus on therapy awareness, surgeon recruiting and training, and driving the adoption of Inspire therapy, while FCRs provide technical and clinical expertise as well as educational and field support. As of June 30, 2026, we had 280 U.S. sales territories and 301 field clinical representatives, as compared with 295 U.S. sales territories and 275 field clinical representatives as of December 31, 2025.

Current wording

We continue to make significant investments in our sales and marketing organization. In 2025, we began optimizing our sales model through targeted territory consolidation and increased field clinical representatives (FCRs). This enables territory managers to focus on therapy awareness, surgeon recruiting and training, and driving the adoption of Inspire therapy, while FCRs provide technical and clinical expertise as well as educational and field support. As of September 30, 2026, we had 279 U.S. sales territories and 306 field clinical representatives, as compared with 295 U.S. sales territories and 275 field clinical representatives as of December 31, 2025.

Previous wording

•Revenue decreased $16.5 million, or 7.6%, to $200.6 million driven primarily by a decline in US revenue, partially offset by growth in International. The U.S. decline was driven primarily by the adverse impacts of coding and reimbursement challenges.

Current wording

•Revenue decreased $17.8 million, or 7.9%, to $206.7 million, driven primarily by a decline in U.S. revenue. The U.S. revenue decline was primarily driven by the adverse impacts of coding and reimbursement challenges.

Previous wording

•Gross margin increased to 86.0% compared to 84.4%, primarily due to increased sales mix of the Inspire V system, which has a higher gross margin than the Inspire IV system.

Current wording

•Gross margin increased to 86.0% compared to 85.8%, primarily due to increased sales mix of the Inspire V system, which has a higher gross margin than the Inspire IV system.

Previous wording

•Research and development expenses decreased $3.5 million, or 6.5%, to $50.5 million, primarily due to lower stock-based compensation costs due to accelerated stock-based compensation expense recognized in the prior year period and increased internal cost allocations into SG&A and cost of goods sold.

Current wording

•Research and development expenses decreased $2.0 million, or 8.4%, to $22.2 million, primarily due to lower stock-based compensation expense primarily driven by forfeitures related to actions of Project Horizon and increased internal cost allocations into SG&A and cost of goods sold, partially offset by an increase in development costs, mainly for our next generation neurostimulator, and $1.3 million of restructuring charges.

Previous wording

•The effective tax rate was 299.2% compared to 132.8%. The increase in the effective tax rate was primarily driven by tax shortfall related to stock-based compensation. Additionally, for the six months ended June 30, 2025, we maintained a full valuation allowance against federal and state deferred tax assets, which was subsequently released at December 31, 2025.

Current wording

•The effective tax rate was 2.5% compared to 26.7%. The decrease in the effective tax rate was primarily driven by the current period pre-tax loss and discrete tax charges related to restructuring. Additionally, for the three months ended September 30, 2025, we maintained a full valuation allowance against federal and state deferred tax assets, a majority of which was subsequently released at December 31, 2025.

Previous wording

Comparison of the Six Months Ended June 30, 2026 and 2025

Current wording

Comparison of the Nine Months Ended September 30, 2026 and 2025

Previous wording

•Revenue decreased $13.2 million, or 3.2%, to $405.2 million primarily due to a decline in U.S. revenue, partially offset by growth in International. The U.S. decline was driven primarily by the adverse impacts of coding and reimbursement challenges and the WISeR program.

Current wording

•Revenue decreased $31.0 million, or 4.8%, to $611.9 million primarily due to a decline in U.S. revenue, partially offset by growth in International. The U.S. decline was driven primarily by the adverse impacts of coding and reimbursement challenges and the WISeR program.

Previous wording

•Gross margin increased to 85.5% compared to 84.0%, primarily due to increased sales mix of the Inspire V system, which has a higher gross margin than the Inspire IV system.

Current wording

•Gross margin increased to 86.0% compared to 84.9%, primarily due to increased sales mix of the Inspire V system, which has a higher gross margin than the Inspire IV system.

Previous wording

•Research and development expenses decreased $1.5 million, or 5.8%, to $24.7 million, primarily due to lower stock-based compensation costs due to accelerated stock-based compensation expense recognized in the prior year period and increased internal cost allocations into SG&A and cost of goods sold, partially offset by an increase in development costs, mainly for our next generation generator.

Current wording

•Research and development expenses decreased $5.5 million, or 7.1%, to $72.7 million, primarily due to increased internal cost allocations into SG&A and cost of goods sold, and lower stock-based compensation expense, partially offset by an increase in development costs, mainly for our next generation neurostimulator, and $1.3 million of restructuring charges.

Previous wording

•SG&A expenses decreased $4.3 million, or 1.4%, to $299.5 million, primarily due to lower stock-based compensation costs due to accelerated stock-based compensation expense recognized in the prior year period and lower marketing expenses partially offset by an increase in payroll costs and internal cost allocations from R&D.

Current wording

•SG&A expenses increased $21.2 million, or 4.6%, to $483.9 million, primarily due to $22.8 million of restructuring charges, a legal settlement expense of $7.0 million, higher legal fees, and higher internal cost allocations from R&D, partially offset by lower marketing expenses and lower stock-based compensation expense primarily due to forfeitures related to actions of Project Horizon and accelerated stock-based compensation expense recognized in the prior year period for retirement eligible employees in accordance with the implementation of changes to the treatment of equity awards.

Previous wording

•Other income, net increased by $0.5 million, or 7.8%, to $7.1 million, primarily due to a $4.0 million impairment charge recognized during the prior year period, partially offset by a decrease in interest and dividend income due to lower average interest rates and lower average cash, cash equivalents, and investment balances in the current period.

Current wording

•Other income, net increased by $0.3 million, or 3.0%, to $10.9 million, primarily due to a $4.0 million impairment charge recognized during the prior year period, partially offset by a decrease in interest and dividend income due to lower average interest rates and lower average cash, cash equivalents, and investment balances in the current period.

Previous wording

•The effective tax rate was 89.9% compared to (54.0)%. The increase in the effective tax rate was primarily driven by tax shortfall related to stock-based compensation. Additionally, for the three months ended June 30, 2025, we maintained a full valuation allowance against federal and state deferred tax assets, which was subsequently released at December 31, 2025.

Current wording

•The effective tax rate was (81.4)% compared to 39.3%. The decrease in the effective tax rate was primarily driven by the current period pre-tax loss and shortfalls related to stock-based compensation. Additionally, for the nine months ended September 30, 2025, we maintained a full valuation allowance against federal and state deferred tax assets, a majority of which was subsequently released at December 31, 2025.

Previous wording

We rely on cash provided by operations for our material cash requirements, including working capital needs, investments in research and development, capital expenditures, other operating costs, and share repurchases. Our anticipated future uses of capital have not changed in any material respects from that described in our Annual Report. Our sources of capital have generally included sales of our Inspire system and registered offerings of our common stock.

Current wording

We primarily rely on cash provided by operations for our material cash requirements, including working capital needs, investments in research and development, capital expenditures, other operating costs, and share repurchases. Our anticipated future uses of capital have not changed in any material respects from that described in our Annual Report. Our sources of capital have generally included sales of our Inspire system and registered offerings of our common stock.

Previous wording

Beyond the next twelve months, our cash requirements will depend extensively on the extent of market acceptance of our Inspire system and the demand for our therapy. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry and expansion into new markets, whether we make strategic acquisitions, whether we repurchase more shares of our common stock, competition, and our ability to obtain financing. We cannot accurately predict our long-term cash requirements at this time. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity, and financial condition. We may seek additional sources of liquidity and capital resources through equity or debt financings, such as additional securities offerings or through borrowings under a new credit facility. There can be no assurance that such transactions will be available to us on favorable terms, if at all.

Current wording

Beyond the next twelve months, our cash requirements will depend extensively on the extent of market acceptance of our Inspire system and the demand for our therapy. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization, entry and expansion into new markets, whether we make strategic acquisitions, whether we repurchase more shares of our common stock, competition, and our ability to obtain financing. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity, and financial condition. If the business need were to arise, we may seek additional sources of liquidity and capital resources through equity or debt financings, such as additional securities offerings or through borrowings under a new credit facility. There can be no assurance that such transactions will be available to us on favorable terms, if at all.

Previous wording

Net cash provided by operating activities was $36.1 million for the six months ended June 30, 2026 compared to $4.0 million of net cash used in operating activities in the prior year period. The change was primarily driven by improved working capital, mainly in receivables and inventories.

Current wording

Net cash provided by operating activities was $82.5 million for the nine months ended September 30, 2026 compared to $64.5 million in the prior year period. The change was primarily driven by improved working capital, mainly in receivables and inventories.

Previous wording

Net cash used in investing activities was $7.7 million for the six months ended June 30, 2026, compared to $45.0 million of net cash provided by investing activities in the prior year period. The change was primarily driven by lower proceeds from the sale or maturity of investments.

Current wording

Net cash provided by investing activities was $9.3 million for the nine months ended September 30, 2026, compared to $33.4 million in the prior year period. The change was primarily driven by lower proceeds from the sale or maturity of investments.

Previous wording

Net cash used in financing activities was $5.6 million for the six months ended June 30, 2026, compared to $84.1 million in the prior year period. The change was primarily driven by higher share repurchases in the prior year period.

Current wording

Net cash used in financing activities was $6.0 million for the nine months ended September 30, 2026, compared to $135.1 million in the prior year period. The change was primarily driven by higher share repurchases in the prior year period.

Previous wording

There have been no material changes to our short-term and long-term anticipated cash requirements under contractual obligations from those described in our Annual Report.

Current wording

There have been no material changes to our short-term and long-term anticipated cash requirements under contractual obligations from those described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.

Previous wording

There have been no material changes in market risk from those described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.

Current wording

There have been no material changes to our critical accounting policies and estimates from those described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.