What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-05 · 264 added, 164 removed, 498 unchanged (46% of the section changed)

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our expectations regarding regulatory approvals and government and third-party payor coverage and reimbursement;

our ability to develop new products, improve our existing products and increase the value of our products, including the integration of non-invasive ventilation technology into our existing business;

our expectations of the impact of the COVID-19 PHE on direct-to-consumer sales, productivity, hiring, media expenditures, physician-based sales team and physician referrals, and worldwide demand for oxygen and non-invasive ventilation (NIV) therapies;

our ability to develop new products, improve our existing products and increase the value of our products, including the integration of non-invasive ventilation (NIV) technology into our existing business;

our expectations of the impact of the COVID-19 PHE on sales, productivity, hiring, media expenditures, physician-based sales team and physician referrals, and worldwide demand for oxygen and NIV therapies;

our expectations regarding the timing of new products and product improvement launches, as well as product features and specifications;

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We own pending applications for “Inogen,” “MOMENTUM TRANSFER” and “SONIC BLADE” with the United States Patent and Trademark Office.

We own trademark registrations for the mark “Inogen” in Australia, Canada, China, Ecuador, South Korea, Mexico, Europe (European Union Registration), Iceland, India, Israel, Japan, Kuwait, New Zealand, Norway, Peru, Turkey, Singapore, and Switzerland.

We own pending applications for the mark “Inogen” in Argentina, Australia, Brazil, Chile, China, Columbia, Europe (European Union application), India, Malaysia, Paraguay, South Africa and Uruguay.

We own trademark registrations for the mark “Inogen” in Argentina, Australia, Canada, China, Columbia, Ecuador, South Korea, Mexico, Europe (European Union Registration), Iceland, India, Israel, Japan, Kuwait, New Zealand, Norway, Peru, Turkey, Singapore, and Switzerland.

We own pending applications for the mark “Inogen” in Australia, Brazil, Chile, China, Europe (European Union application), India, Malaysia, Paraguay, South Africa and Uruguay.

We own a trademark registration for the mark “イノジェン” in Japan.

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Actual results may differ from these estimates and such differences could be material to the financial position and results of operations.

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three months ended March 31 , 2020 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.

The novel coronavirus outbreak of COVID-19 has had and likely will continue to have significant effects on businesses and healthcare institutions around the world.

While it is not possible at this time to estimate the overall impact that the COVID-19 PHE could have on our business, the continued rapid spread of COVID-19, both across the United States and throughout much of the world, and the measures taken by the governments of countries and local authorities affected has impacted and will likely continue to impact our business operations, demand for our products, the manufacture or shipment of our products, and could adversely impact our financial condition or operating results.

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three and six months ended June 30 , 2020 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 25, 2020.

The novel coronavirus outbreak of COVID-19 has had and likely will continue to have significant adverse effects on businesses and healthcare institutions around the world.

While it is not possible at this time to estimate the overall impact that the COVID-19 PHE could have on our business, the continued rapid spread of COVID-19, both across the United States and throughout much of the world, and the measures taken by the governments of countries and local authorities affected has adversely impacted and will likely continue to adversely impact our business operations, demand for our products, the manufacture or shipment of our products, and our financial condition and operating results.

Our priorities during the COVID-19 PHE include protecting the health and safety of our employees and supporting our patients and customers.

Given the COVID-19 impact to the respiratory system, oxygen therapy is prescribed by healthcare professionals for treatment and recovery for certain patients with COVID-19.

We also believe stationary and portable oxygen concentrators could provide relief to global hospital systems by allowing appropriate patients to be treated in the home, such as patients early in the disease progression or those in recovery post hospital discharge, thus making room for more severe patients who need treatment in the hospital.

The COVID-19 PHE did not have a material net impact to our consolidated operating results in the three months ended March 31, 2020.

However, the COVID-19 PHE had offsetting impacts during the period.

For example, towards the end of the first quarter ended March 31, 2020, there was heightened interest and demand for our oxygen concentrators within our domestic business-to-business sales channel.

The demand increase in our business-to-business sales channels, was partially offset by lower direct-to-consumer sales toward the end of the first quarter.

We also believe stationary oxygen concentrators, and, secondarily, portable oxygen concentrators (POCs) could provide relief to global hospital systems by allowing appropriate patients to be treated in the home, such as patients early in the disease progression or those in recovery post hospital discharge, thus making room for more severe patients who need treatment in the hospital.

However, the COVID-19 PHE adversely impacted our consolidated operating results in the three months ended June 30, 2020.

We experienced lower direct-to-consumer sales starting toward the end of the first quarter of 2020 and continuing throughout the second quarter of 2020.

We believe the social distancing, self-quarantine and related mandates and behaviors emanating from the COVID-19 PHE, including shelter-in-place orders, reduced travel, and lower consumer confidence reduced direct-to-consumer sales.

While there was an initial surge in demand for oxygen concentrators by our home medical equipment providers early in the COVID-19 PHE, we believe that demand could be limited or decline while physician offices continue limiting patient interactions for new chronic obstruction pulmonary disease (COPD) patient referrals.

The COVID-19 PHE could also lead to volatility in consumer access to our products due to government actions impacting our ability to produce and ship products or impacting consumers’ movements and access to our products.

The COVID-19 PHE may cause reduced demand for our products across all channels if it results in a recessionary global economic environment or a reduction in regular physician interactions and testing which could lead to lower rate of diagnosis for long-term oxygen therapy.

Additionally, we believe our initially planned 2020 sales and marketing expansion would be negatively impacted due to the COVID-19 PHE, which may reduce the close rates on patients who contact us resulting in less efficient marketing spend, reduce the number of oxygen therapy patients who respond to our marketing campaigns, reduce the number of sales representatives hired, or impact the results or timing of a pricing trial.

Given these uncertainties, we are implementing cost savings by decreasing personnel hires and reducing advertising spend, while also increasing rental setups to improve lead utilization.

While there was an initial surge in demand for oxygen concentrators by our home medical equipment (HME) providers early in the COVID-19 PHE, business-to-business demand declined in the second quarter of 2020 due to physician offices limiting patient interactions for chronic obstructive pulmonary disease (COPD) patient referrals, lower retail sales, HME providers minimizing patient interactions in response to the COVID-19 PHE, which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

Also, sales in Europe declined associated with the temporary closure of certain respiratory assessment centers and continued tender delays in certain markets due to the COVID-19 pandemic.

The COVID-19 PHE has also and could continue to lead to volatility in consumer access to our products due to government actions impacting our ability to produce and ship products or impacting consumers’ movements and access to our products.

The COVID-19 PHE has caused and may continue to cause reduced demand for our products across all channels due to the global economic environment and reduced regular physician interactions and testing which could lead to a lower rate of diagnosis for long-term oxygen therapy.

Additionally, while we initially planned for sales and marketing expansion in 2020, we believe this would have been negatively impacted due to the COVID-19 PHE, which may reduce the close rates on patients who contact us resulting in less efficient marketing spend, reduce the number of oxygen therapy patients who respond to our marketing campaigns, reduce the number of sales representatives hired, or impact the results or timing of a pricing trial.

Given these uncertainties, we have implemented cost savings by decreasing personnel hires, suspending our 401(k) match effective July 1, 2020, and reducing advertising spend, while also increasing rental setups to improve lead utilization.

The health and safety of our people and their families continues to be our primary focus.

Our ability to continue to operate without any significant negative impacts will in part depend on our ability to protect our employees and our supply chain.

Our ability to continue to operate without any significant negative operational impacts will in part depend on our ability to protect our employees and our supply chain.

As the COVID-19 PHE has developed, we have taken numerous steps to help ensure the health and safety of our employees and their families.

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We have also worked closely with local and national officials to keep our manufacturing facilities open due to the essential nature of our products.

For the three months ended March 31, 2020, we were able to broadly maintain our operations.

For the six months ended June 30, 2020, we were able to broadly maintain our operations.

We intend to continue to work with government authorities and implement our employee safety measures to help ensure that we are able to continue manufacturing and shipping our products during the COVID-19 PHE.

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For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q .

We are a medical technology company that primarily develops, manufactures and markets innovative portable oxygen concentrators (POCs) used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions.

We are a medical technology company that primarily develops, manufactures and markets innovative POCs used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions.

Long-term oxygen therapy is defined as the provision of oxygen therapy for use at home in patients who have chronic low blood oxygen levels (hypoxemia).

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In the second half of 2019, we restarted our sales capacity expansion efforts with a more measured approach, selectively hiring new sales representatives across all three of our facilities.

We also increased our sale representatives in the first quarter of 2020.

Going forward, except as otherwise limited by the impact of the COVID-19 PHE, our long-term plan is to continue to hire to expand sales capacity while focusing on increased productivity, improved sales personnel and lead distribution systems, improved training, and more emphasis on the availability of the Inogen One G5 ® , which has higher patient preference.

We also plan to expand our physician referral team in 2020 to drive increased physician referrals for rental patients and direct-to-consumer sales.

We also plan to expand our physician referral team to drive increased physician referrals for rental patients and direct-to-consumer sales.

This specialized sales team consisted of 20 employees as of December 31, 2019.

However, our sales expansion and productivity improvements planned in 2020 have been negatively impacted due to the COVID-19 PHE.

We plan to slow down the addition of sales representative headcount for the remainder of 2020 as a result.

This may also reduce the number of oxygen therapy patients who purchase our products through our direct-to-consumer sales channel.

We believe we could continue to see a decline in sales in our direct-to-consumer channel until patient mobility and consumer confidence increases.

As a result of the COVID-19 PHE, we slowed down sales representative additions in the second quarter of 2020 and plan to primarily focus on replacement of attrition for the remainder of 2020.

We believe this has reduced and may continue to reduce the number of oxygen therapy patients who purchase our products through our direct-to-consumer sales channel.

We have seen and believe we could continue to see a decline in sales in our direct-to-consumer channel until patient mobility and consumer confidence increases.

As this is a dynamic situation, we plan to continue to monitor the COVID-19 PHE in the United States and may adjust our sales plans accordingly.

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We expended $40.3 million in media and advertising costs in 2019 compared to $30.8 million in 2018, to drive greater patient awareness of our products and increase patient inquiries about their ability to switch from their current oxygen products to our technology.

Media and advertising costs remained relatively flat at $10.0 million in the first quarter of 2020 compared to $10.2 million in the first quarter of 2019.

Media and advertising costs declined to $7.2 million in the second quarter of 2020 compared to $11.6 million in the second quarter of 2019, primarily associated with reductions due to the COVID-19 PHE and increased focus on new rental setups.

We initially planned to continue to increase marketing spend to drive consumer and physician awareness of our products in 2020.

We also initially planned to perform a pricing trial in 2020 to optimize pricing in our direct-to-consumer sales channel as well as look for opportunities to improve the close rate of leads through product offerings, pricing, and partnerships with home medical equipment (HME) providers.

We currently plan to reduce marketing spend during the COVID-19 PHE due to the lower return on those investments and to conserve cash.

However, due to the COVID-19 PHE, we revised these plans as discussed in our Quarterly Report on Form 10-Q for the period ended March 31, 2020, and we are continuing to reduce marketing spend during the COVID-19 PHE due to the lower return on those investments and to conserve cash.

As this is a dynamic situation, we plan to continue to monitor the progression of the COVID-19 PHE in the United States and may adjust our marketing plan accordingly.

Expand our domestic home medical equipment provider and reseller sales in the face of reimbursement uncertainty.

Expand our domestic HME provider and reseller sales in the face of reimbursement uncertainty.

We are also focused on building our domestic business-to-business partnerships, including relationships with distributors, key accounts, resellers, our private label partner, traditional HME providers , and charitable organizations .

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However, supplemental oxygen is a treatment prescribed by healthcare professionals for some patients with COVID-19.

As a result we have seen increased demand for our products for patients who can be treated in the home instead of an acute hospital setting.

This demand is mostly being filled through our HME provider partners, who work closely with hospitals to discharge patients into a home treatment program.

We also believe the increase in demand that we have recently experienced for our products in our business-to-business channels due to the COVID-19 PHE may be lumpy over time, and could also be limited or decline in the future as new COPD patient referrals could decline as physician offices are limiting patient interactions.

While there was an initial surge in demand for oxygen concentrators by our HME providers early in the COVID-19 PHE, business-to-business demand declined in the second quarter of 2020 due to physician offices limiting patient interactions for COPD patient referrals, lower retail sales, HME providers minimizing patient interactions in response to the COVID-19 PHE which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

Expand our rental revenues through a dedicated rental intake team.

During the year ended December 31, 2019, we added a rental intake team to focus exclusively on new rental additions to drive overall sales productivity and simplify training.

We ended 2019 with 25 patient intake representatives and administrative personnel and plan to continue to scale the rental intake team in 2020, which we believe will lead to increased patients on service and growth in rental revenue in future periods.

We ended 2019 with 25 patient intake representatives and administrative personnel and have scaled and plan to continue to scale the rental intake team in 2020, which we believe will lead to increased patients on service and growth in rental revenue in future periods.

Due to the COVID-19 PHE, we have also seen Medicare and commercial payors reduce the administrative burden for oxygen therapy, which we believe will increase rental setups during the COVID-19 PHE, and we have also seen increased reimbursement rates in some areas for Medicare beneficiaries, which should also increase rental revenue during the COVID-19 PHE.

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In order to take advantage of these international markets, we have built out an infrastructure over the past few years, which includes sales in 46 international countries and a contract manufacturing partner, Foxconn, located in the Czech Republic to support European sales volumes.

Like in the United States, the COVID-19 pandemic has led to an increase in international demand for oxygen therapy products.

Like in the United States, we also believe the increase in demand that we have recently experienced for our products in our business-to-business channels due to the COVID-19 PHE may be lumpy over time, and could also be limited or decline in the future as new COPD patient referrals could decline as physician offices are limiting patient interactions.

Further, we are also in the process of developing regulatory and sales pathways to capture opportunities in new and emerging markets.

We expect to begin sales in the Chinese market, and had previously expected clearance as early as 2021, although we believe that due to the COVID-19 PHE, regulatory clearance may be delayed.

As in the United States, while there was an initial surge in demand for oxygen concentrators by our international HME customers early in the COVID-19 pandemic, international demand declined in the second quarter of 2020 due to the temporary closure of certain European respiratory assessment centers due to the COVID-19 pandemic and continued tender delays in certain European markets.

In addition, as in the United States, providers turned their focus to supplying stationary oxygen concentrators with higher flow characteristics in response to the COVID-19 pandemic.

To grow our international sales markets, we are also in the process of developing regulatory and sales pathways to capture opportunities in new and emerging markets.

We expect to begin sales in the Chinese market as early as the end of 2021 although this could be delayed due to regulatory clearance delays, other impacts of the COVID-19 pandemic or government actions, by the United States or China that impose barriers or restrictions that would impact our ability to access the Chinese market.

Over time, as the U.S.

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Invest in our oxygen product offerings to develop innovative products .

We incurred $3.6 million and $1.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

We incurred $3.3 million and $1.5 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $6.9 million and $3.1 million for the six months ended June 30, 2020 and June 30, 2019, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

We launched our fifth-generation POC, the Inogen One G5, in our direct-to-consumer channel during the second quarter of 2019, in our domestic business-to-business channel during the third quarter of 2019, and in certain markets in our international business-to-business channel in the fourth quarter of 2019.

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We expect the Inogen One G5 to obsolete the Inogen One G3 ® over the intermediate term.

At volume, we expect the Inogen One G5 to be our lowest cost product to manufacture.

The Inogen One G5 represented more than 60% of total domestic POC units sold in the first quarter of 2020, showing the strong demand for this product from both patients and providers.

In the fourth quarter of 2018, we launched Inogen Connect, our new connectivity platform on our Inogen One G4 ® in our direct-to-consumer channel and in our domestic business-to-business channel in the first quarter of 2019.

We also launched Inogen Connect in our Inogen One G5 at the launch of this product in the United States.

Inogen Connect is compatible with Apple and Android platforms and includes patient features such as purity status, battery life, product support functions, notification alerts, and remote software updates.

We expect manufacturing cost for our Inogen One G5 to be at parity with our Inogen One G3 in the third quarter of 2020, and we still expect the Inogen One G5 to be our lowest cost to manufacture over time.

The Inogen One G5 represented more than 66% of total domestic POC units sold in the six months ended June 30, 2020, showing the strong demand for this product from both patients and providers.

Inogen Connect, our connectivity platform on our Inogen One G4 ® and Inogen One G5 products in the United States and Canada is compatible with Apple and Android platforms and includes patient features such as purity status, battery life, product support functions, notification alerts, and remote software updates.

We believe home oxygen providers will also find features such as remote troubleshooting, equipment health checks, and location tracking to help drive operational efficiencies when transitioning away from the oxygen tank delivery model.

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We plan to only sell this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in the remainder of 2020, although we expect limited contributions to revenue in 2020.

The COVID-19 PHE also had an impact on sales of this product in the second quarter of 2020, primarily due to lower retail demand.

We plan to incorporate the TAV technology directly into our Inogen One POCs and make the TAV product compatible with our Inogen At Home stationary concentrators to continue to advance patient preference and maintain our technology leadership position in the long-term oxygen therapy market.

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However, in September 2019, we received a revised communication that the product was assigned HCPCS code E1390 and E1352, which was then revoked at our request in December 2019.

In September 2019, we appealed to the Centers for Medicare and Medicaid Services, and in January 2020 our appeal was denied.

In September 2019, we appealed to the CMS, and in January 2020 our appeal was denied.

We are currently pursuing additional appeal opportunities.

If we do not receive revised coding, it could limit this product’s adoption by home medical equipment providers and also our direct rentals until revisions are made to the product to meet the coding requirements.

If we do not receive revised coding, it could limit this product’s adoption by HME providers and also our direct rentals until revisions are made to the product to meet the coding requirements.

In addition, the Medicare Coverage Advisory Committee (MEDCAC) recently had a meeting on July 22, 2020 to discuss home use of non-invasive positive pressure ventilation in patients with chronic respiratory failure consequent to COPD.

CMS is seeking MEDCAC’s recommendations regarding the characteristics that define those patient selection and usage criteria.

This request could signal forthcoming changes in Medicare coverage of these items, and possibly changes in HCPCS codes, which could impact our NIV business and growth initiatives.

For a discussion of certain significant risks relating to the TAV reimbursement, see the risk factor entitled “ The competitive bidding process under Medicare could negatively affect our business and financial condition .”

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While nearly all of our manufacturing and assembly processes were originally outsourced, assembly of the compressors, sieve beds, concentrators and certain manifolds were brought in-house in order to improve quality control and reduce cost.

In support of our European sales, we use a contract manufacturer located in the Czech Republic to manufacture high volume products to improve delivery to our European accounts.

In support of our European sales, we use a contract manufacturer located in the Czech Republic to manufacture high volume products and perform product repairs to improve delivery to our European accounts.

We expect to maintain our assembly operations for our products at our facilities in Richardson, Texas and Goleta, California.

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In order to mitigate against the risks related to a single source of supply, for certain components we qualify alternative suppliers and develop contingency plans for responding to disruptions.

However, any reduction or halt in supply from one of these single-source suppliers could limit our ability to manufacture our products or devices until a replacement supplier is found and qualified.

However, any reduction or halt in supply from one of these single-source

suppliers could limit our ability to manufacture our products or devices until a replacement supplier is found and qualified.

For additional discussion of potential risks related to our manufacturing and raw materials, please see the risk factor entitled “ We obtain some of the components, subassemblies and completed products included in our products from a single source or a limited group of manufacturers or suppliers, and the partial or complete loss of one or more of these manufacturers or suppliers could cause significant production delays, an inability to meet customer demand, substantial loss in revenue, and an adverse effect on our financial condition and results of operations.

Historically, we have generated a majority of our revenue from sales and rentals to customers in the United States.

In the three months ended March 3 1 , 20 20 and March 3 1 , 201 9 , approximately 22.7 % and 2 1.9 %, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

In the three months ended June 30, 2020 and June 30, 2019, approximately 19.3% and 22.3%, respectively, and 21.2% and 22.2% for the six months ended June 30, 2020 and June 30, 2019, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

Approximately 77.2% and 71.8% of the non-U.S.

revenue for the three months ended March 3 1 , 20 20 and March 3 1 , 201 9 , respectively, was invoiced in E uros with the remainder invoiced in U n ited States dollars.

W e s ell our products in 4 6 countries outside the United States through our wholly - owned subsidiary, distributors or directly to large “house” accounts, which include gas companies, HME oxygen providers, and resellers.

revenue for the three months ended June 30, 2020 and June 30, 2019, respectively, and 72.2% and 71.6% for the six months ended June 30, 2020 and June 30, 2019, respectively, was invoiced in Euros with the remainder invoiced in United States dollars.

We sell our products in 46 countries outside the United States through our wholly-owned subsidiary, distributors or directly to large “house” accounts, which include gas companies, HME oxygen providers, and resellers.

In those instances, we sell to and bill the distributor or “house” accounts directly, leaving responsibility for the patient billing, support and clinical setup to the local provider.

Our total revenue was $88.5 million and $90.2 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

The decrease in total revenue in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to a decline in direct-to-consumer sales, partially offset by increased domestic business-to-business sales.

We generated net income (loss) of ($1.6) million and $5.3 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

We generated Adjusted EBITDA of $4.1 million and $11.1 million in the three months ended March 31, 2020 and March 31, 2019, respectively (see “Non-GAAP financial measures” for reconciliations between U.S.

Our total revenue was $71.7 million and $101.1 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $160.2 million and $191.3 million for the six months ended June 30, 2020 and June 30, 2019, respectively.

The decrease in total revenue in the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to a decline in direct-to-consumer sales and domestic and international business-to-business sales, primarily associated with the COVID-19 PHE.

Similarly, the decrease in total revenue in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, was primarily due to a decline in direct-to-consumer sales and domestic and international business-to-business sales, primarily associated with the COVID-19 PHE.

We generated net income of $2.6 million and $10.2 million for the three months ended June 30, 2020 and June 30, 2019, respectively, and $1.0 million and $15.5 million for the six months ended June 30, 2020 and June 30, 2019, respectively.

We generated Adjusted EBITDA of $10.0 million and $16.8 million in the three months ended June 30, 2020 and June 30, 2019, respectively, and $14.1 million and $27.9 million for the six months ended June 30, 2020 and June 30, 2019, respectively, (see “Non-GAAP financial measures” for reconciliations between U.S.

GAAP and non-GAAP results).

As of March 31, 2020, our retained earnings were $79.8 million.

As of June 30, 2020, our retained earnings were $82.4 million.

Sales revenue

Our future financial performance will be driven in part by the growth in sales of our Inogen One systems, and, to a lesser extent, sales of batteries, other accessories, our Inogen At Home stationary oxygen concentrators and the TAV products.

We plan to grow our system sales in the coming years through multiple strategies including:

hiring additional sales representatives, productivity improvements, investing in consumer awareness through increased marketing efforts, expanding our sales infrastructure and efforts outside of the United States, expanding our business-to-business sales through key partnerships, and enhancing our product offerings through additional product launches, although, as mentioned above, these plans may be impacted by the COVID-19 PHE.

While HME providers continue to convert their business model and purchase POCs, we expect growth could be challenged due to their ongoing restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and pending competitive bidding Round 2021 with the lack of visibility to who will win contracts and any change in reimbursement rates.

While we believe most HME providers are still in the process of converting their business model to a non-delivery model and purchase POCs, growth has been challenged and we expect it could continue to be challenged due to the COVID-19 PHE, their ongoing restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and pending competitive bidding Round 2021 with the lack of visibility to who will win contracts and any change in reimbursement rates.

As our product offerings grow, we solicit feedback from our customers and focus our research and development efforts on continuing to improve patient preference and reduce the total cost of the product in order to further drive sales of our products.

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As a result of these factors, product purchases can be subject to changes in demand by customers.

We sold approximately 53,400 systems in the three months ended March 31, 2020 and 50,400 systems for the same period in 2019.

We sold approximately 42,500 systems in the three months ended June 30, 2020 and 56,500 systems for the same period in 2019.

We sold approximately 95,900 systems in the six months ended June 30, 2020 compared to 106,900 systems for the same period in 2019.

Management focuses on system sales as an indicator of current business success.

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As a result, the period of time from initial contact with a patient to billing can vary significantly and be up to one month or longer.

However, due to the COVID-19 PHE, CMS has proposed to reduce the paperwork requirements for Medicare oxygen therapy patients.

The interim final rule was published on April 6, 2020, and there is a comment period until June 1, 2020 (discussed in more detail in the Reimbursement section below).

Changes are expected to be retroactive to March 1, 2020.

Rental revenue decreased slightly in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, primarily due to lower patients on service, partially offset by higher Medicare reimbursement rates.

However, due to the COVID-19 PHE, CMS has reduced the paperwork requirements for Medicare oxygen therapy patients, as discussed in more detail in the Reimbursement section below, effective in early March 2020.

Rental revenue increased in the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to a greater number of patients on service and higher Medicare reimbursement rates.

Medicare reimbursement rates for oxygen therapy increased 1.5% to 3.5%, effective January 1, 2020.

In addition, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (discussed in more detail in the Reimbursement section below), the 2% Medicare sequester reduction was temporarily eliminated, and Medicare reimbursement rates for non-rural, non-competitive bid areas through the duration of the COVID-19 PHE were increased to a 75/25 blended rate retroactive to March 6, 2020.

In addition, as part of the CARES Act (discussed in more detail in the Reimbursement section below), the 2% Medicare sequestration reduction was temporarily eliminated, and Medicare reimbursement rates for non-rural, non-competitive bid areas through the duration of the COVID-19 PHE were increased to a 75/25 blended rate retroactive to March 6, 2020.

The 50/50 blended rate for HME providers in rural and non-contiguous, non-competitive bid areas was also extended for the duration of the COVID-19 PHE, which could increase the rates in 2021 if the COVID-19 PHE continues.

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The percentage of capped patients may fluctuate over time as new patients come on service, patients come off of service before and during the capped rental period, and existing patients enter the capped rental period.

We had approximately 24,600 and 26,200 oxygen rental patients as of March 31, 2020 and March 31, 2019, respectively.

We had approximately 26,400 and 25,900 oxygen rental patients as of June 30, 2020 and June 30, 2019, respectively.

Management focuses on patients on service as a leading indicator of likely future rental revenue;

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Reimbursement

Medicare and private insurance rentals represented 6.0% of our total revenue in the three months ended March 31, 2020, as well as in the three months ended March 31, 2019.

Medicare and private insurance rentals represented 8.5% and 5.1% of our total revenue in the three months ended June 30, 2020 and June 30, 2019, respectively, and 7.1% and 5.5% in the six months ended June 30, 2020 and June 30, 2019, respectively.

In cases where we rent our long-term oxygen therapy solutions directly to patients, we bill third-party payors, such as Medicare or private insurance, for monthly rentals on behalf of our patients.

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We rely significantly on reimbursement from Medicare and private payors, including Medicare Advantage plans, Medicaid and patients for our rental revenue.

For the three months ended March 31, 2020, approximately 78.2% of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

For the three and six months ended June 3 0 , 20 20 , approximately 80.0 % and 79.2 %, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

list price for our stationary oxygen rentals (HCPCS E1390) is $260 per month and the U.S.

list price for our oxygen generating portable equipment (OGPE) rentals (HCPCS E1392) is $70 per month.

The average Medicare reimbursement rates in competitive bidding areas in 2018 were $77.03 a month for E1390 and $36.06 a month for E1392.

The average Medicare reimbursement rates in competitive bidding areas (CBAs) in 2018 were $77.03 a month for E1390 and $36.06 a month for E1392.

These are the two primary codes that we bill to Medicare and other payors for our oxygen product rentals.

There have been significant U.S.

reimbursement and policy changes associated with the COVID-19 Public Health Emergency (PHE) that impact oxygen therapy.

The Coronavirus Preparedness and Response Supplement Appropriations Act (H.R.

6074) passed on March 6, 2020 allows the U.S.

reimbursement and policy changes associated with the COVID-19 PHE that impact oxygen therapy.

The CARES Act allows the U.S.

Department of Health and Human Services (HHS) to waive certain Medicare telehealth payment requirements during the COVID-19 PHE declared by the HHS on January 31, 2020 to allow beneficiaries in all areas to receive telehealth services, including at their home, starting March 6, 2020.

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Under this authority, CMS clarified that HHS would not conduct audits to determine whether there was a prior physician-patient relationship for telehealth claims submitted during the COVID-19 PHE.

The CARES Act, passed on March 27, 2020 , included the extension of the 50/50 blended rate for HME in rural and non-contiguous, non-competitively bid areas and established a new 75/25 blended rate for all other non-competitively bid areas through the duration of the COVID-19 PHE .

The CARES Act included the extension of the 50/50 blended rate for HME in rural and non-contiguous, non-competitively bid areas and established a new 75/25 blended rate for all other non-competitively bid areas through the duration of the COVID-19 PHE.

The 75/25 blended rate is retroactive to March 6, 2020.

While the duration of the current emergency is impossible to predict, the Zika virus PHE lasted approximately 360 days, and the H1N1 flu PHE lasted approximately 450 days.

The CARES Act also included a temporary elimination of the 2 % percent Medicare sequester reduction that went into effect in 2013.

This relief will be effective May 1, 2020 through December 31, 2020.

The CARES Act also included a temporary elimination of the 2% percent Medicare sequestration reduction that went into effect in 2013.

This relief is effective May 1, 2020 through December 31, 2020, and extends the end date of the sequester by one year, through 2030, in order to offset the 2020 suspension.

On April 6, 2020, an Interim Final Rule (IFR) was published in the Federal Register for policy and regulatory revisions in response to the COVID-19 PHE.

There is a comment period until June 1, 2020 before this IFR can be finalized.

There was a comment period until June 1, 2020.

This IFR included that for the duration of the COVID-19 PHE, the face-to-face requirements and clinical indications of coverage for home oxygen, among other respiratory products, will be waived.

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Both the IFR and temporary regulatory changes show significant flexibility from CMS to improve access for oxygen and other DMEPOS items during this COVID-19 PHE.

These changes are expected to be retroactive to early March 2020.

These changes were retroactive to early March 2020.

However, in July 2020, CMS released a COVID-19 Product Burden Relief FAQs that included updates to this IFR, including that the pausing of the national prior authorization program for certain DMEPOS and medical review suspension will likely end, effective August 3, 2020.

Effective January 1, 2019, Medicare beneficiaries may receive durable medical equipment from any Medicare-enrolled supplier until new contracts are in effect under competitive bidding Round 2021, which is expected to begin on January 1, 2021.

Reimbursement rates between January 1, 2019 and December 31, 2020 are set at the current pricing level throughout the United States for all Medicare patients, subject to Consumer Price Index (CPI) and budget neutrality adjustments.

Pricing in competitive bidding areas is subject to annual CPI adjustments beginning in 2019 until Round 2021 begins.

Pricing in CBAs is subject to annual CPI adjustments beginning in 2019 until Round 2021 begins.

However, CMS also changed the calculation on budget neutrality to apply the offset to all oxygen and oxygen equipment classes beginning January 1, 2019 instead of previously only applying these adjustments to stationary oxygen equipment and oxygen contents.

Based on these CPI and budget neutrality adjustments, effective January 1, 2019 the average Medicare reimbursement rates in former competitive bidding areas decreased to $72.92 a month for E1390 and $35.72 a month for E1392.

Based on these CPI and budget neutrality adjustments, effective January 1, 2019 the average Medicare reimbursement rates in former CBAs decreased to $72.92 a month for E1390 and $35.72 a month for E1392.

Medicare also established new payment classes for liquid oxygen equipment and high flow portable liquid oxygen contents effective January 1, 2019.

Effective January 1, 2020, the average Medicare reimbursement rates were increased by 1.5% to $73.98 a month for E1390 and $36.25 a month for E1392 in these regions that were previously subject to competitive bidding.

In addition, the average Medicare reimbursement rates in non-rural, non-former competitive bidding areas increased by 3.5% to $74.84 a month for E1390 and $36.87 a month for E1392.

In addition, the average Medicare reimbursement rates in non-rural, non-former CBAs increased by 3.5% to $74.84 a month for E1390 and $36.87 a month for E1392.

In Round 2021 of durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) competitive bidding program, there have been some revisions to the bidding methodology including bid surety bond requirements, lead item pricing, and setting reimbursement rates at the maximum winning bid rate instead of the median winning bid rate.

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This would lead to combined E1390 plus E1392 reimbursement rates to decrease by approximately 15%.

The bidding window closed on September 18, 2019, and we bid in 129 of the 130 total Competitive Bidding Areas (CBAs).

The bidding window closed on September 18, 2019, and we bid in 129 of the 130 total CBAs.

It is unclear how pricing will be impacted due to these new bids.

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In all five rounds of competitive bidding in which we have participated, we have gained access to certain CBAs and been excluded from other CBAs.

Medicare revenue, including patient co-insurance and deductible obligations, represented 4.7% of our total revenue in the three months ended March 31, 2020.

Medicare revenue, including patient co-insurance and deductible obligations, represented 6.8% and 5.6% of our total revenue in the three and six months ended June 30, 2020, respectively.

Medicare reimbursement for oxygen rental equipment is limited to a maximum of 36 months within a 60-month service period, and the equipment remains the property of the home oxygen supplier.

The supplier that billed Medicare for the 36th month of service continues to be responsible for the patient’s oxygen therapy needs for months 37 through 60, and there is generally no additional reimbursement for oxygen generating portable equipment for these later months.

Medicare does not separately reimburse suppliers for oxygen tubing, cannulas and supplies that may be required for the patient.

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The supplier may not arbitrarily issue new equipment.

We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three months ended March 31, 2020 and March 31, 2019.

Our capped patients as a percentage of total patients on service was approximately 19.5% as of March 31, 2020 and March 31, 2019.

We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three and six months ended June 30, 2020 and June 30, 2019, respectively.

Our capped patients as a percentage of total patients on service was approximately 17.2% as of June 30, 2020 and 20.2% as of June 30, 2019.

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It is uncertain if the current TAV product acquired from New Aera, will be reimbursable in its current configuration under HCPCS code E0466.

We requested confirmation on the assigned HCPCS codes for the TAV system from the Pricing, Data Analysis, and Coding Contractor in August 2019 following the closing of the New Aera transaction.

We requested confirmation on the assigned HCPCS codes for the TAV system from the PDAC Contractor in August 2019 following the closing of the New Aera transaction.

In August 2019, we received positive confirmation that this product was assigned HCPCS code E0466.

However, in September 2019, we received a revised communication that the product was assigned HCPCS code E1390 and E1352, which was then revoked at our request in December 2019.

In September 2019, we appealed to the Centers for Medicare and Medicaid Services, and in January 2020 our appeal was denied.

In September 2019, we appealed to CMS, and in January 2020 our appeal was denied.

We are currently pursuing additional appeal opportunities.

If we do not receive revised coding, it could limit this product’s adoption by home medical equipment providers and also our direct rentals.

If we do not receive revised coding, it could limit this product’s adoption by HME providers and also our direct rentals.

In addition, the M EDCAC recently had a meeting on July 22, 2020 to discuss home use of non-invasive positive pressure ventilation in patients with chronic respiratory failure consequent to COPD.

CMS is seeking MEDCAC’s recommendations regarding the characteristics that define patient selection and usage criteria for these items .

This request could signal forthcoming changes in Medicare coverage of these items, and possibly changes in HCPCS codes, which could impact our NIV business and growth initiatives.

For a discussion of certain significant risks relating to the TAV reimbursement and the upcoming round of competitive bidding, see the risk factor entitled “ The competitive bidding process under Medicare could negatively affect our business and financial condition.”

As of March 31, 20 20 , we had 9 0 contracts with Medicaid, Medicare Advantage, government and private payors.

As of June 30, 2020, we had 90 contracts with Medicaid, Medicare Advantage, government and private payors.

These contracts qualify us as an in-network provider for these payors.

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For example, we typically experience higher total sales in the second and third quarters as a result of consumers traveling and vacationing during warmer weather in the spring and summer months, but this may vary year-over-year.

Particularly, due to the mandates and behaviors emanating from the COVID-19 PHE, including shelter-in-place orders, reduced travel, and lower consumer confidence, we may not see the typical seasonal increases in direct-to-consumer sales in 2020 that we have seen in prior years.

As more home medical equipment (HME) providers adopt POCs in their businesses, we expect our historical seasonality in the domestic business-to-business channel could change as well, which was previously influenced mainly by consumer buying patterns.

Particularly, due to the mandates and behaviors emanating from the COVID-19 PHE, including shelter-in-place orders, reduced travel, and lower consumer confidence, we did not see the typical seasonal increases in direct-to-consumer sales in the second quarter of 2020 that we have seen in prior years.

As more HME providers adopt POCs in their businesses, we expect our historical seasonality in the domestic business-to-business channel could change as well, which was previously influenced mainly by consumer buying patterns.

Direct-to-consumer sales seasonality may also be impacted by the number of our sales representatives and the amount of marketing spend in each quarter.

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Our rental revenue is primarily derived from the rental of our Inogen One and Inogen At Home systems to patients through reimbursement from Medicare, private payors and Medicaid, which typically also includes a patient responsibility component for patient co-insurance and deductibles.

Rental revenue decreased slightly in the three months ended March 31, 2020, primarily due to lower patients on service, partially offset by higher Medicare reimbursement rates.

We expect our rental revenue to modestly increase in 2020 as we scale the rental intake team, increase new rental setups, and benefit from the higher Medicare reimbursement rates for oxygen therapy.

Rental revenue increased in the three and six months ended June 30, 2020, primarily due to higher patients on service and higher Medicare reimbursement rates.

We expect our rental revenue to increase in future periods as we scale the rental intake team, increase new rental setups, and benefit from the higher Medicare reimbursement rates for oxygen therapy.

We also expect that our rental revenue will be impacted by the number of our sales and rental intake representatives, reimbursement rate changes including the impact of COVID-19 PHE changes, Round 2021 competitive bidding, the level of and response from potential customers to direct-to-consumer marketing spend, product launches, and other uncontrollable factors such as changes in the market and competition.

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We continue to monitor the Section 301 tariffs being imposed by the United States on certain imported Chinese materials and products in addition to potential retaliatory responses from other nations.

In 2019, the impact of the China Tariffs on our financial results was minimal as we have received some exemptions, negotiated cost sharing and price reductions with suppliers, and re-allocated purchases.

In 2019 and the six months ended June 30, 2020, the impact of the Chinese tariffs on our financial results was minimal as we have received some exemptions, negotiated cost sharing and price reductions with suppliers, and re-allocated purchases.

Assuming the Chinese tariffs stay at the current levels, we currently expect the overall financial impact to our business to be minimal to the average unit cost for 2020.

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Beginning in the third quarter of 2019, research and development expense also includes intangible amortization costs associated with the New Aera acquisition, which is expected to substantially increase our research and development expense in 2020 through 2028 by approximately $7.8 million per year and $4.9 million in 2029.

We plan to continue to invest in research and development activities to stay at the forefront of patient preference in oxygen therapy and non-invasive ventilation devices.

We plan to continue to invest in research and development activities to stay at the forefront of patient preference in oxygen therapy and NIV devices.

We expect research and development expense to increase in absolute dollars in future periods as we continue to invest in our engineering and technology teams to support our new and enhanced product research and development efforts and manufacturing improvements.

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It also includes expenses for media and advertising, printing, informational kits, dues and fees, credit card fees, recruiting, training, sales promotional activities, travel and entertainment expenses as well as allocated facilities costs.

Sales and marketing expense decreased in the three months ended March 31, 2020 as compared to March 31, 2019, primarily due to reduced personnel-related expenses for lower average sales representative headcount.

We restarted our sales capacity expansion efforts in the second half of 2019, but we plan to hire additional sales representatives at a more controlled pace across all of our facilities to expand sales capacity.

In addition, due to the COVID-19 PHE, we expect to reduce marketing spend and reduce sales representative headcount additions for the remainder of 2020.

Sales and marketing expense decreased in the three months ended June 30, 2020 as compared to June 30, 2019, primarily due to reduced advertising spend.

Our average sales representative headcount in the second quarter of 2020 was relatively flat compared to the second quarter of 2019, and our plan was to hire additional sales representatives at a more controlled pace across all of our facilities to expand sales capacity for the remainder of 2020.

However, due to the COVID-19 PHE, we have reduced and expect to continue to reduce marketing spend and reduce sales representative headcount additions and primarily focus on replacement of attrition of existing sales representatives for the remainder of 2020.

However, we still expect a further increase in sales and marketing expense in future periods as we continue to invest in our business, including expanding our sales and sales support team, increasing media spend to drive consumer awareness, and rising patient support costs as our patient and customer base increases.

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Results of operations

Comparison of three months ended March 30, 2020 and March 31, 2019

Comparison of three months ended June 30, 2020 and June 30, 2019

Three months ended

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Total revenue

Sales revenue decreased $1.7 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or a decrease of 2.0% from the comparable period.

The decrease was primarily attributable to reduced direct-to-consumer sales, partially offset by higher domestic business-to-business sales.

We sold approximately 53,400 oxygen systems during the three months ended March 31, 2020 compared to approximately 50,400 oxygen systems sold during the three months ended March 31, 2019, or an increase of 6.0%.

The increase in the number of systems sold resulted mainly from an increase in business-to-business sales in the United States, primarily due to increased sales to our private label partner.

In addition, international business-to-business sales increased slightly, mostly from our partners in Canada and Australia, partially offset by a decline in sales to our partners in Europe primarily due to unfavorable currency rates and tender uncertainty in certain European regions.

These increases were partially offset by a decline in domestic direct-to-consumer sales, primarily due to a decline in average sales representative headcount and reduced demand associated with the COVID-19 PHE late in the quarter, partially offset by increased productivity.

Rental revenue was relatively flat for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, or a decrease of 0.7% from the comparable period.

The decrease in rental revenue was primarily related to a 6.1% decline in rental patients on service from the comparative period, partially offset by higher Medicare reimbursement rates.

Sales revenue decreased $30.3 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or a decrease of 31.6% from the comparable period.

The decrease was primarily attributable to reduced direct-to-consumer sales and reduced domestic and international business-to-business sales, primarily associated with the impacts of the COVID-19 PHE.

We sold approximately 42,500 oxygen systems during the three months ended June 30, 2020 compared to approximately 56,500 oxygen systems sold during the three months ended June 30, 2019, or a decrease of 24.8%.

The decrease in the number of systems sold resulted mainly from a decrease in sales across all channels, primarily due to the COVID-19 PHE.

Rental revenue increased $0.9 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, or an increase of 16.9% from the comparable period.

The increase in rental revenue was primarily related to a 1.9% increase in rental patients on service, higher Medicare reimbursement rates, and increased billable patients from the comparative period.

Three months ended

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Total revenue

Domestic business-to-business sales increased 5.7% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The increase was primarily the result of increased demand from our home medical equipment partners for oxygen concentrators in response to the COVID-19 PHE, partially offset by lower Inogen One G5 availability early in the quarter and uncertainty around competitive bidding Round 2021.

Business-to-business international sales increased slightly by 1.4% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, mostly due to increased sales to our partners in Canada and Australia and increased demand associated with the COVID-19 PHE late in the quarter, partially offset by a decline in sales to our partners in Europe primarily due to tender uncertainty in certain European regions.

In the three months ended March 31, 2020, sales in Europe as a percentage of total international sales revenue decreased to 84.6% versus 86.5% in the comparative period in 2019, primarily because of the increase in sales in Canada and Australia and reduced sales in Europe.

Domestic direct-to-consumer sales decreased 8.9% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a decline in average sales representative headcount and government mandated shelter-in-place initiatives, partially offset by increased productivity of inside sales representatives.

Domestic business-to-business sales decreased 27.3% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

The decrease was primarily the result of decreased demand from our HME partners for oxygen concentrators in response to the COVID-19 PHE due to physician offices limiting patient interactions that traditionally have led to new oxygen patient referrals, lower retail sales, HME providers minimizing patient interactions in response to the COVID-19 PHE which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

International b usiness-to-business sales decre ased 38.5 % for the three months ended June 3 0 , 20 20 compared to the three months ended June 3 0 , 201 9 , mostly due to decreased demand from our HME partners for oxygen concentrators due to the temporary closure of certain European respiratory assessment centers due to the COVID-19 pandemic and continued tender delays in certain European markets.

In addition, like in the United States, HME provider s turned their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients .

In the three months ended June 3 0 , 20 20 , sales in Europe as a percentage of total international sales revenue decreased to 87.2 % versus 88.2 % in the comparative period in 201 9 , primarily because of the reduced sales in Europe.

Domestic direct-to-consumer sales decreased 30.9% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to the impact of the COVID-19 PHE with government mandated shelter-in-place initiatives, reduced consumer travel, and lower consumer confidence, which decreased demand and associated close rates in the second quarter of 2020 compared to the same period in the prior year.

Average sales representative headcount was relatively flat in the comparative periods.

Cost of revenue and gross profit

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Total gross margin percentage

Cost of sales revenue increased $5.1 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or an increase of 12.0% over the comparable period.

The increase in cost of sales revenue was primarily attributable to labor and overhead expenses, product and sales channel mix, as well as higher cost per unit associated with the Inogen One G5 during the period.

Cost of rental revenue decreased $0.7 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or a decrease of 19.4% from the comparable period.

The decrease in cost of rental revenue was primarily attributable to a 6.1% decrease in total patients on service and reduced rental asset depreciation expense and servicing costs.

Cost of rental revenue included $1.3 million of rental asset depreciation for the three months ended March 31, 2020 compared to $1.7 million for the three months ended March 31, 2019.

Sales revenue gross margin percentage decreased to 43.3% for the three months ended March 31, 2020 from 50.4% for the three months ended March 31, 2019.

The decrease in sales gross margin percentage was primarily related to higher cost of goods sold associated with certain manufacturing inefficiencies in the period that contributed to higher labor and overhead expenses, lower average selling prices, and increased business-to-business sales mix which has a lower gross margin.

Total worldwide business-to-business sales revenue accounted for 57.3% of total sales revenue in the three months ended March 31, 2020 versus 54.1% in the three months ended March 31, 2019.

Rental revenue gross margin percentage increased to 43.8% for the three months ended March 31, 2020 from 30.8% for the three months ended March 31, 2019, primarily due to higher rental revenue per patient on service and lower depreciation and servicing costs per patient on service.

Cost of sales revenue decreased $11.1 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or a decrease of 23.6% from the comparable period.

The decrease in cost of sales revenue was primarily attributable to lower sales and related bill of material costs and lower total labor and overhead expense, partially offset by higher cost per unit associated with the Inogen One G5 during the period.

Cost of rental revenue decreased $0.8 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or a decrease of 21.0% from the comparable period.

The decrease in cost of rental revenue was primarily attributable to reduced rental asset depreciation expense and servicing costs.

Cost of rental revenue included $1.2 million of rental asset depreciation for the three months ended June 30, 2020 compared to $1.6 million for the three months ended June 30, 2019.

Sales revenue gross margin percentage decreased to 45.0% for the three months ended June 30, 2020 from 50.7% for the three months ended June 30, 2019.

The decrease was primarily related to increased mix toward domestic business-to-business sales, which have a lower gross margin than our international business-to-business and direct-to-consumer sales, lower mix of accessory sales, and increased overhead costs per unit due to lower sales volumes.

In addition, average selling prices were down in the second quarter of 2020 versus the same period in the prior year across all sales channels.

Domestic business-to-business sales revenue accounted for 32.9% of total sales revenue in the three months ended June 30, 2020 versus 30.9% in the three months ended June 30, 2019.

Rental revenue gross margin percentage increased to 53.0% for the three months ended June 30, 2020 from 30.4% for the three months ended June 30, 2019, primarily due to higher rental revenue per patient on service and lower depreciation and servicing costs per patient on service.

Research and development expense

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Research and development expense

Research and development expense increased $1.9 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or an increase of 116.0% over the comparable period, primarily due to $1.9 million in intangible amortization costs related to the New Aera acquisition.

Research and development expense increased $1.8 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or an increase of 124.1% over the comparable period, primarily due to $1.9 million in intangible amortization costs related to the New Aera acquisition.

Sales and marketing expense

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Sales and marketing expense

Sales and marketing expense de creased $ 1.0 million for the three months ended March 31, 20 20 from the three months ended March 31, 201 9 , or a de crease of 3.7 % from the comparable period.

The de crease was primarily attributable to a de crease of $1.4 million of lower personnel-related expenses associated with the decline in average sales representative headcount , partially offset by an increase of $0.4 million in dues , fees and license costs .

In the three months ended March 31, 20 20 , we spent $ 10.0 million in media and advertising costs versus $ 10.2 million in the comparative period in 201 9 .

Sales and marketing expense decreased $5.7 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or a decrease of 20.4% from the comparable period, primarily attributable to decreases of $4.4 million of lower advertising expense, $0.7 million of lower personnel-related expenses and $0.4 million in credit card processing fees.

In the three months ended June 30, 2020, we spent $7.2 million in media and advertising costs versus $11.6 million in the comparative period in 2019.

General and administrative expense

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General and administrative expense

General and administrative expense increased $0.1 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or an increase of 1.0% from the comparable period.

The increase was primarily attributable to $0.6 million in professional and consulting fees, partially offset by a $1.0 million of benefit related to the change in fair value of the New Aera earnout liability and $0.2 million in lower personnel-related expenses.

Other income (expense), net

General and administrative expense increased $0.9 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or an increase of 10.0% from the comparable period.

The increase was primarily related to $1.1 million in consulting fees and $0.9 million for the change in fair value of the New Aera earnout liability, partially offset by the $0.6 million reimbursement from the CARES Act Provider Relief Fund due to the COVID-19 PHE, $0.5 million in lower legal fees, and $0.5 million in lower personnel-related expenses.

Other income (expense)

Three months ended

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Interest income

Other income (expense)

Total other income, net

Total other income, net decreased $0.7 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or a decrease of 59.5% from the comparable period.

The decrease was primarily attributable to a decrease of $0.8 million in interest income on cash equivalents and marketable securities.

Income tax expense (benefit)

Total other income, net increased $4.3 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or an increase of 281.8% from the comparable period.

The increase was primarily attributable to $5.6 million in other income from the CARES Act Provider Relief Fund due to lost revenues from the COVID-19 PHE, partially offset by a decrease of $1.2 million in interest income on marketable securities due to the lower interest rate environment.

Income tax expense

Three months ended

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(amounts in thousands)

Income tax expense (benefit)

Income tax expense

Effective income tax rate

Income tax expense decreased $0.9 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, primarily attributable to a loss before income tax expense (benefit).

Our effective tax rate in the three months ended March 31, 2020 decreased compared to the three months ended March 31, 2019, primarily due to the decrease in excess tax benefits recognized from stock-based compensation, partially offset by the changes in income before income tax expense (benefit), increase in favorable permanent differences and research and development credits.

In the three months ended March 31, 2020, excess tax deficiencies recognized from stock-based compensation decreased our income tax benefit by $0.2 million and our effective tax rate by 14.1%, as compared to the tax rate without such deficiencies.

For comparison, in the three months ended March 31, 2019, excess tax benefits recognized from stock-based compensation decreased our income tax expense by $0.6 million and our effective tax rate by 10.4%, as compared to the tax rate without such benefits.

Net income (loss)

Income tax expense decreased $2.6 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, primarily attributable to a 74.2% decrease in income before income tax expense.

Our effective tax rate in the three months ended June 3 0 , 20 20 in creased compared to the three months en ded June 3 0 , 201 9 , primarily due to changes in income before income tax expense.

In the three months ended June 3 0 , 20 20 , excess tax deficiencies recognized from stock-based compensation in creased our income tax expense by $ 0.3 million and our effective tax rate by 7.3 %, as compared to the tax rate without such deficiencies .

For comparison, in the three months ended June 3 0 , 201 9 , excess tax deficiencies recognized from stock-based compensation in c reased our income tax expense by $ 0.

2 million and our effective tax rate by 1.4 %, as compared to the tax rate without such deficiencies .

Three months ended

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(amounts in thousands)

Net income (loss)

Net income (loss) decreased $6.9 million for the three months ended March 31, 2020 from the three months ended March 31, 2019, or a decrease of 130.0% from the comparable period.

The decrease in net income was primarily related to lower gross margin.

Net income decreased $7.6 million for the three months ended June 30, 2020 from the three months ended June 30, 2019, or a decrease of 74.6% from the comparable period.

The decrease in net income was primarily related to lower sales revenue and gross margin as well as a higher effective tax rate, partially offset by lower operating expenses.

Comparison of six months ended June 30, 2020 and June 30, 2019

Six months ended

Change 2020 vs.

(amounts in thousands)

Sales revenue

Rental revenue

Total revenue

Sales revenue decreased $31.9 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or a decrease of 17.7% from the comparable period.

The decrease was primarily attributable to reduced direct-to-consumer sales and reduced domestic and international business-to-business sales, primarily due to the impact of the COVID-19 PHE and Inogen One G5 supply constraints in the first quarter of 2020.

We sold approximately 95,900 oxygen systems during the six months ended June 30, 2020 compared to approximately 106,900 oxygen systems sold during the six months ended June 30, 2019, or a decrease of 10.3%.

The decrease in the number of systems sold resulted mainly from a decrease in sales across all channels primarily due to the COVID-19 PHE and the Inogen One G5 supply constraints in the first quarter of 2020.

Rental revenue increased $0.8 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, or an increase of 8.0% from the comparable period.

The increase in rental revenue was primarily related to higher Medicare reimbursement rates, higher billable patients, and a 1.9% increase in rental patients on service from the comparative period in the prior year.

Six months ended

(amounts in thousands)

Change 2020 vs.

Revenue by region and category

Business-to-business domestic sales

Business-to-business international sales

Direct-to-consumer domestic sales

Direct-to-consumer domestic rentals

Total revenue

Domestic business-to-business sales decreased 11.8% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The decrease was primarily due to decreased demand from our HME partners for oxygen concentrators in response to the COVID-19 PHE due to physician offices limiting patient interactions that traditionally have led to new oxygen patient referrals, lower retail sales, HME providers minimizing patient interactions in response to the COVID-19 PHE which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

In addition, lower Inogen One G5 availability early in the period and uncertainty around competitive bidding Round 2021 contributed to lower sales in the period.

International b usiness-to-business sales de creased 19.9 % for the six months ended June 3 0 , 2020 compared to the six months ended June 3 0 , 2019, mostly driven by the temporary closure of certain European respiratory assessment centers due to the COVID-19 pandemic and continued tender delays in certain European markets.

In addition, like in the United States, HME providers turned their focus to supplying stationary oxygen concentrators with higher flow characteristics in responses to the COVID-19 pandemic .

In the six months ended June 3 0 , 2020, sales in Europe as a percentage of total international sales revenue decreased to 85.6 % versus 8 7 .

4 % in the comparative period in 2019, primarily because of r educed sales in Europe.

Domestic direct-to-consumer sales decreased 20.5% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to the impact of the COVID-19 PHE with government mandated shelter-in-place initiatives, reduced consumer travel, and lower consumer confidence, which decreased demand and associated close rates in the period compared to the same period in the prior year.

In addition, sales declined associated with a decline in average sales representative headcount.

Cost of revenue and gross profit

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Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Total gross profit

Gross margin percentage - sales revenue

Gross margin percentage- rental revenue

Total gross margin percentage

Cost of sales revenue decreased $6.1 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or a decrease of 6.8% from the comparable period.

Cost of rental revenue decreased $1.5 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or a decrease of 20.1% from the comparable period.

The decrease in cost of rental revenue was primarily attributable to reduced rental asset depreciation expense and servicing costs.

Cost of rental revenue included $2.5 million of rental asset depreciation for the six months ended June 30, 2020 compared to $3.3 million for the six months ended June 30, 2019.

Sales revenue gross margin percentage decreased to 44.1% for the six months ended June 30, 2020 from 50.6% for the six months ended June 30, 2019.

The decrease was primarily related to increased domestic business-to-business sales mix which has a lower gross margin, higher cost of goods sold associated with certain manufacturing inefficiencies in the period that contributed to higher labor and overhead costs per unit, and lower average selling prices.

Total domestic business-to-business sales revenue accounted for 33.0% of total sales revenue in the six months ended June 30, 2020 versus 30.8% in the six months ended June 30, 2019.

Rental revenue gross margin percentage increased to 48.7% for the six months ended June 30, 2020 from 30.6% for the six months ended June 30, 2019, primarily due to higher rental revenue per patient on service and lower depreciation and servicing costs per patient on service.

Research and development expense

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(amounts in thousands)

Research and development expense

Research and development expense increased $ 3.8 million for the six months ended June 3 0 , 20 20 from the six months ended June 3 0 , 201 9 , or an increase of 119.8 % over the comparable period, primarily due to $ 3.9 million in intangible amortization costs related to the New Aera acquisition.

Sales and marketing expense

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Sales and marketing expense

Sales and marketing expense decreased $6.7 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or a decrease of 12.0% from the comparable period, primarily attributable to decreases of $4.6 million of advertising costs, $2.1 million of personnel-related expenses partially associated with the decline in average sales representative headcount, and $0.5 million in credit card processing fees, partially offset by an increase of $0.6 million in dues, fees and license costs.

In the six months ended June 30, 2020, we spent $17.2 million in media and advertising costs versus $21.8 million in the comparative period in 2019.

General and administrative expense

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(amounts in thousands)

General and administrative expense

General and administrative expense increased $1.0 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or an increase of 5.3% from the comparable period.

The increase was primarily attributable to $1.8 million in professional and consulting fees as well as $0.3 million in facilities costs, partially offset by $0.6 million in lower personnel-related costs, $0.6 million reimbursement from the CARES Act Provider Relief Fund due to the COVID-19 PHE, and $0.3 million in lower legal fees.

Other income (expense)

Six months ended

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(amounts in thousands)

Interest income

Total other income, net

Total other income, net increased $3.6 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or an increase of 131.3% from the comparable period.

The increase was primarily attributable to $5.6 million in other income from the CARES Act Provider Relief Fund due to lost revenues from the COVID-19 PHE, partially offset by a decrease of $2.0 million in interest income on marketable securities due to the lower interest rate environment.

Income tax expense

Six months ended

Change 2020 vs.

(amounts in thousands)

Income tax expense

Effective income tax rate

Income tax expense decreased $3.4 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, primarily attributable to a 90.7% decrease in income before income tax expense for the year.

Our effective tax rate in the six months ended June 30, 2020 increased compared to the six months ended June 30, 2019, primarily due to the decrease in excess tax benefits recognized from stock-based compensation, partially offset by the changes in

income before income tax expense , increase in favorable permanent differences and research and development credits.

In the six months ended June 3 0 , 20 20 , excess tax deficiencies recognized from stock-based compensation in creased our income tax expense by $ 0.5 million and our effective tax rate by 26.9 %, as compared to the tax rate without such deficiencies .

For comparison, in the six months ended June 3 0 , 201 9 , excess tax benefits recognized from stock-based compensation decreased our income tax expense by $ 0.

4 million and our effective tax rate by 2.3 %, as compared to the tax rate without such benefits.

Six months ended

Change 2020 vs.

(amounts in thousands)

Net income decreased $14.5 million for the six months ended June 30, 2020 from the six months ended June 30, 2019, or a decrease of 93.6% from the comparable period.

The decrease in net income was primarily related to lower sales revenue and gross margin as well as a higher effective tax rate, partially offset by lower operating expenses.

Contractual obligations

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Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier.

As of March 31, 2020, we had purchase obligations with outside vendors and suppliers of approximately $61.4 million of which the timing varies depending on demand, current supply on hand and other factors.

As of June 30, 2020, we had purchase obligations with outside vendors and suppliers of approximately $68.2 million of which the timing varies depending on demand, current supply on hand and other factors.

The obligations normally do not extend beyond twelve-month time frames.

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Liquidity and capital resources

As of March 31, 2020, we had cash and cash equivalents of $208.4 million, which consisted of highly-liquid investments with a maturity of three months or less.

As of June 30, 2020, we had cash and cash equivalents of $214.1 million, which consisted of highly-liquid investments with a maturity of three months or less.

Since inception, we have received net proceeds of $91.7 million from the issuance of redeemable convertible preferred stock and convertible preferred stock and $52.5 million ($49.7 million net proceeds) in connection with the sale of common stock in our initial public offering.

Since 2013, we have received $52.4 million from proceeds related to stock option exercises and our employee stock purchase plan.

For the three months ended March 31, 2020 and March 31, 2019, we received $1.1 million and $3.2 million, respectively, in proceeds related to these stock programs.

Our principal uses of cash for liquidity and capital resources in the three months ended March 31, 2020 consisted of capital expenditures of $2.2 million including additional rental equipment and other property, plant and equipment.

For the six months ended June 30, 2020 and June 30, 2019, we received $1.3 million and $3.4 million, respectively, in proceeds related to these stock programs.

Our principal uses of cash for liquidity and capital resources in the six months ended June 30, 2020 consisted of capital expenditures of $5.6 million including additional rental equipment and other property, plant and equipment.

The COVID-19 PHE did not yet materially impact our liquidity position to date, and we believe our current cash and cash equivalents provide us with a certain degree of stability and liquidity during this time of uncertainty.

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the cost of our research and development activities;

payments from customers;

from customers;

the cost, timing, and outcome of litigation or disputes involving intellectual property rights, our products, employee relations, cyber security incidents, or otherwise;

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If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.

If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other

operating restrictions that could adversely impact our ability to conduct our business.

Any future indebtedness we incur may result in terms that could be unfavorable to equity investors.

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The following tables show a summary of our cash flows and working capital for the periods and as of the dates indicated:

Three months ended

Six months ended

(amounts in thousands)

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Summary of consolidated cash flows

Cash provided by (used in) operating activities

Cash provided by operating activities

Cash provided by (used in) investing activities

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Effect of exchange rates on cash

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

(amounts in thousands)

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These cash flows received are partially offset by our use of cash for operating expenses to support the growth of our business.

Net cash provided by operating activities for the three months ended March 31, 2020 consisted primarily of non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $4.5 million, provision for sales returns and doubtful accounts of $3.6 million, stock-based compensation expense of $2.8 million, provision for rental revenue adjustments of $0.8 million, and provision for inventory obsolescence and other inventory losses of $0.3 million, partially offset by the net changes in operating assets and liabilities of $8.8 million, our net loss of $1.6 million, change in fair value of the earnout liability of $1.0 million and a $0.2 million increase in deferred tax assets.

Net cash used in operating activities for the three months ended March 31, 2019 consisted primarily of the net changes in operating assets of $20.0 million.

This was partially offset by net cash provided by operating activities including net income of $5.3 million and a decrease in deferred tax assets of $0.8 million as well as non-cash expense items such as provision for sales returns and doubtful accounts of $4.4 million, stock-based compensation expense of $3.6 million, depreciation of equipment and leasehold improvements and amortization of our intangibles of $2.8 million, provision for rental revenue adjustments of $0.6 million, and provision for inventory obsolescence and other inventory losses of $0.5 million.

Net cash provided by operating activities for the six months ended June 30, 2020 consisted primarily of our net income of $1.0 million as well as non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $8.9 million, provision for sales returns and doubtful accounts of $5.7 million, stock-based compensation expense of $4.1 million, provision for rental revenue adjustments of $1.5 million, decrease in deferred tax assets of $0.7 million, and provision for

inventory obsolescence and other inventory losses of $0.6 million .

T he net changes in operating assets and liabilities resulted in a net use of cash of $ 8.7 million .

Net cash provided by operating activities for the six months ended June 30, 2019 consisted primarily of our net income of $15.5 million as well as non-cash expense items such as provision for sales returns and doubtful accounts of $8.9 million, depreciation of equipment and leasehold improvements and amortization of our intangibles of $5.6 million, stock-based compensation expense of $5.4 million, a decrease in deferred tax assets of $4.1 million, provision for rental revenue adjustments of $1.2 million, and provision for inventory obsolescence and other inventory losses of $0.4 million.

The net changes in operating assets and liabilities resulted in a net use of cash of $24.6 million.

Investing activities

Net cash provided by (used in) investing activities for each of the periods presented included cash used for acquisitions and in the production and purchase of rental assets, manufacturing tooling, and computer equipment and software to support our expanding business as well as net (purchases) maturities of marketable securities.

For the three months ended March 31, 2020, we received $11.1 million in maturities of marketable securities, partially offset by investments of $2.2 million in the production and purchase of rental assets and other property, equipment and leasehold improvements.

For the three months ended March 31, 2019, we invested $19.0 million in corporate bonds and U.S.

Treasury securities with maturities greater than three months that were classified as marketable securities, partially offset by $13.8 million in maturities of available-for-sale investments.

For the six months ended June 30, 2020, we received $11.1 million in maturities of marketable securities, partially offset by $4.6 million in purchases of marketable securities.

In addition, we invested $5.8 million in the production and purchase of rental assets and other property, equipment, and intangible assets.

For the six months ended June 30, 2019, we invested $38.6 million in corporate bonds and U.S.

Treasury securities with maturities greater than three months that were classified as marketable securities, partially offset by $40.2 million in maturities of marketable securities.

In addition, we invested $3.4 million in the production and purchase of rental assets and other property, equipment, and leasehold improvements.

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Historically, we have funded our operations through our sales and rental revenue, the issuance of preferred and common stock, and the incurrence of indebtedness.

For the three months ended March 31, 2020, net cash provided by financing activities consisted of $1.1 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.2 million.

For the three months ended March 31, 2019, net cash provided by financing activities consisted of $3.2 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.7 million.

For the six months ended June 30, 2020, net cash provided by financing activities consisted of $1.3 million from purchases under our employee stock purchase program and the proceeds received from stock options that were exercised, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.2 million.

For the six months ended June 30, 2019, net cash provided by financing activities consisted of $3.4 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.8 million.

Sources of funds

Our cash provided by (used in) operating activities in the three months ended March 31, 2020 was $0.1 million compared to ($1.8) million in the three months ended March 31, 2019.

As of March 31, 2020, we had cash and cash equivalents of $208.4 million.

Our cash provided by operating activities in the six months ended June 30, 2020 was $14.1 million compared to $16.6 million in the six months ended June 30, 2019.

As of June 30, 2020, we had cash and cash equivalents of $214.1 million.

Our principal uses of cash are funding our new rental asset deployments and other capital purchases, operations, and other working capital requirements and, from time-to-time, the acquisition of businesses.

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We may seek to raise additional funds through equity, equity-linked or debt financings.

If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations.

raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations.

Any additional equity financing may be dilutive to our stockholders.

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GAAP results.

The following table presents a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), the most comparable U.S.

The following table present s a reconciliation of EBITDA and Adjusted EBITDA to our net income , the most comparable U.S.

GAAP measure, for each of the periods indicated:

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Three months ended

Six months ended

Non-GAAP EBITDA and Adjusted EBITDA

Net income (loss)

Non-GAAP adjustments:

Interest income

Provision (benefit) for income taxes

Provision for income taxes

Depreciation and amortization

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis