What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-25 · 232 added, 199 removed, 432 unchanged (50% of the section changed)

4 unchanged sentences

Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K.

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

COVID-19 pandemic and related PHE

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 pandemic and related 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 pandemic and related 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 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 pandemic and related PHE adversely impacted our consolidated operating results in the second, third and fourth quarters of 2020.

We experienced lower direct-to-consumer sales starting toward the end of the first quarter of 2020 and through the fourth quarter of 2020.

We believe the social distancing, self-quarantine and related mandates and behaviors emanating from the COVID-19 pandemic and related 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 (HME) providers worldwide early in the COVID-19 pandemic and related PHE, total business-to-business demand declined in the second, third and fourth quarters of 2020 due to lower retail sales, lower patient travel, physician offices limiting patient interactions for chronic obstructive pulmonary disease (COPD) patient referrals, HME providers minimizing patient interactions in response to the COVID-19 pandemic and related 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 and reduced operating capacity of certain respiratory assessment centers and continued tender delays in certain markets due to the COVID-19 pandemic.

The COVID-19 pandemic and related 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 pandemic and related 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, this was negatively impacted due to the COVID-19 pandemic and related PHE, which reduced the close rates on patients who contact us resulting in less efficient marketing spend, reduced the number of oxygen therapy patients who respond to our marketing campaigns, reduced the number of sales representatives hired, or impacted the 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 operational impacts will in part depend on our ability to protect our employees and our supply chain.

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

We follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing facilities.

Employees whose tasks can be done offsite have been allowed to work from home and most of our total personnel continue to work from home.

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

During 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 pandemic and

However, the COVID-19 pandemic and related PHE could result in an unforeseen disruption to our supply chain that could impact our operations.

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

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).

Traditionally, these patients have relied on stationary oxygen concentrator systems for use in the home and oxygen tanks or cylinders for mobile use, which we call the delivery model.

Traditionally, these patients have relied on stationary oxygen concentrator for use in the home and oxygen tanks or cylinders for mobile use, which we call the delivery model.

The tanks and cylinders must be delivered regularly and have a finite amount of oxygen, which requires patients to plan activities outside of their homes around delivery schedules and a finite oxygen supply.

1 unchanged sentence

Our proprietary Inogen One ® systems concentrate the air around the patient to offer a single source of supplemental oxygen anytime, anywhere with a portable device weighing as little as approximately 2.8 pounds with a single battery.

Our Inogen One systems range from 2.6 to 6.5 hours of battery life with a single battery and can be plugged into an outlet when at home, in a car, or in a public place with outlets available.

We believe our Inogen One systems reduce the patient’s reliance on stationary concentrators and scheduled deliveries of tanks with a finite supply of oxygen, thereby improving patient quality of life and fostering mobility.

We believe that we were the first oxygen therapy manufacturer to employ a direct-to-consumer marketing strategy, meaning we advertise directly to patients, process their physician paperwork, and provide clinical support as needed, which we believe has contributed to our market leadership position in the portable oxygen concentrator market.

While other manufacturers have also begun direct-to-consumer marketing campaigns to drive patient sales, we believe we are the only portable oxygen concentrator manufacturer that employs a direct-to-consumer rental strategy in the United States, meaning we bill Medicare or insurance on the consumer’s behalf.

We derive the majority of our revenue from the sale and rental of our Inogen One systems and related accessories to patients, insurance carriers, home healthcare providers, resellers, and distributors, including our private label partner.

While other manufacturers have also begun direct-to-consumer marketing campaigns to drive patient sales, we believe we are the only POC manufacturer that employs a direct-to-consumer rental strategy in the United States, meaning we bill Medicare or insurance on the consumer’s behalf.

We derive the majority of our revenue from the sale and rental of our Inogen One systems and related accessories to patients, insurance carriers, home healthcare providers, resellers, charitable organizations, and distributors, including our private label partner.

We sell multiple configurations of our Inogen One and Inogen At Home systems with various batteries, accessories, warranties, power cords and language settings.

3 unchanged sentences

Expand our domestic direct-to-consumer sales and physician-based sales teams and increase productivity.

During the year ended December 31, 2019, the number of inside sales representatives decreased to 329 from 446 as of December 31, 2018, however overall sales representative productivity improved during the period.

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.

Going forward, we plan to continue to hire at a steady pace to expand sales capacity while focusing on increasing productivity, improved sales personnel and lead distribution systems, improved training, and emphasizing 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.

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

During the year ended December 31, 2020, the number of inside sales representatives decreased to 300 from 329 as of December 31, 2019.

In 2021, we plan to restart our sales capacity expansion efforts, selectively hiring new sales representatives across all three of our facilities.

However, we expect fewer hires in the first half of 2021 due to the continued impacts of the COVID-19 pandemic and related PHE.

Going forward, except as otherwise limited by the impact of the COVID-19 pandemic and related PHE, our plan is to continue to hire to expand sales capacity while focusing on increased productivity, improved sales personnel and lead distribution systems, and improved training.

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 24 sales representatives and 5 support personnel as of December 31, 2020.

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 after the COVID-19 pandemic and related PHE ends.

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

Expand our domestic direct-to-consumer marketing, drive better lead utilization, and optimize pricing.

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.

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

We also plan 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.

Expand our domestic home medical equipment 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, and traditional HME providers.

We offer patient-preferred, low service cost products and financing programs to help providers convert their businesses to a non-delivery portable oxygen concentrator business model.

While HME providers have been adopting our products, we expect growth could be challenged due to difficulties in their ongoing efforts to restructure from the delivery business model to the non-delivery portable model, lack of access to available credit, provider capital expenditure constraints, and pending competitive bidding Round 2021 and the lack of visibility to who will win contracts and any change in reimbursement rates.

While we continued marketing efforts at a reduced level to continue to drive patient awareness of our products and patient inquiries about their ability to switch from their current oxygen products to our technology, media and advertising costs declined to $34.2 million in 2020 compared to $40.3 million in 2019, primarily associated with reductions due to the COVID-19 pandemic and related PHE and an increased focus on new rental setups.

We plan to increase marketing spend to drive consumer and physician awareness of our products in 2021;

however, during the COVID-19 pandemic and related PHE we expect to have lower marketing spend than in a typical year due to the lower return on those investments.

We also plan to perform a pricing trial in 2021 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 HME providers, however, these may be delayed due to the COVID-19 pandemic and related PHE.

As this is a dynamic situation, we plan

to continue to monitor the progression of the COVID-19 pandemic and related PHE in the United States and may adjust our marketing plan accordingly.

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 modest growth in rental revenue for the year.

During the year ended December 31, 2020, we expanded our rental intake team to focus exclusively on new rental additions to drive overall sales productivity and simplify training.

We ended 2020 with 34 patient intake representatives and administrative personnel and plan to continue to scale the rental intake team in 2021, which we believe will lead to increased patients on service and growth in rental revenue in future periods.

We also have increased focus on rentals from our direct-to-consumer inside and physician-based sales team, which should drive higher rental setups.

Due to the COVID-19 PHE, Medicare and commercial payors have reduced some of the administrative burden for oxygen therapy, which also contributed to increased rental setups in the second, third and fourth quarters of 2020.

We believe this change will continue to contribute to increased rental setups during the remainder of the COVID-19 pandemic and related PHE.

We have also seen increased reimbursement rates in some areas for Medicare beneficiaries, which have increased rental revenue during the COVID-19 pandemic and related PHE and are expected to continue to do so for the remainder of the COVID-19 pandemic and related PHE.

Expand our domestic HME provider and reseller sales.

We offer patient-preferred, low service cost products and services to help providers convert their businesses to a non-delivery POC business model.

While HME providers have been adopting our products over time, recent growth has been challenged due to difficulties in their ongoing efforts to restructure from the delivery business model to the non-delivery portable model, lack of access to available credit, provider capital expenditure constraints, and reimbursement rate changes.

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

While there was an initial surge in demand for oxygen concentrators by our HME providers early in the COVID-19 pandemic and related PHE, domestic business-to-business demand declined in the second and third quarters of 2020 due to lower retail sales, lower patient travel, physician offices limiting patient interactions for COPD patient referrals, HME providers minimizing patient interactions in response to the COVID-19 pandemic and related 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.

Domestic HME provider demand increased in the fourth quarter of 2020, primarily due to increased demand for POCs as hospital systems and stationary oxygen concentrator supply were strained to keep up with the rapid increase in COVID-19 cases.

Increase international business-to-business adoption.

Although our main growth opportunity remains portable oxygen concentrator adoption in the United States given what we still believe is a relatively low penetration rate, we are aware of the large international market opportunity.

In order to take advantage of these international opportunities, 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.

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 as early as 2021.

Although our main growth opportunity remains POC adoption in the United States given what we still believe is a relatively low penetration rate, we believe there is a large international market opportunity.

In order to take advantage of these international markets, we have built out an infrastructure over the past few years, which includes sales in 58 international countries and a contract manufacturing partner, Foxconn, located in the Czech Republic to support European sales volumes.

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, third and fourth quarters of 2020 primarily due to the temporary closures and reduced operating capacity of certain European respiratory assessment centers due to the COVID-19 pandemic, continued tender delays in certain European markets, and decreased sales in other markets, primarily Canada.

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.

and European markets mature, our growth will depend on our ability to drive portable oxygen concentrator adoption in emerging markets, where limited oxygen therapy treatment exists today.

and European markets mature, our growth will depend on our ability to drive POC adoption in emerging markets, where limited oxygen therapy treatment exists today.

However, growth may also be limited by currency fluctuations, capital expenditure constraints, ongoing restructuring challenges, and tender uncertainty.

Invest in our oxygen product offerings to develop innovative products .

We expended $9.4 million, $7.0 million and $5.3 million in 2019, 2018 and 2017, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

We launched our fifth-generation portable oxygen concentrator, 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.

We incurred $14.1 million, $9.4 million and $7.0 million in 2020, 2019 and 2018, 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 in 2019.

Some international markets require additional regulatory or reimbursement clearances to release the product, and we are in the process of obtaining additional clearances to access additional markets.

1 unchanged sentence

We estimate that the Inogen One G5 is suitable for over 90% of ambulatory long-term oxygen therapy patients based on our analysis of the patients who have contacted us and their clinical needs.

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 55% of total domestic units sold in the fourth quarter of 2019, 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 the Inogen One G5 to obsolete the Inogen One G3 ®

over the short- term.

Manufacturing cost for our Inogen One G5 was at parity with our Inogen One G3 starting 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 6 9 % of total domestic POC units sold in 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.

Expand our product offerings.

In August 2019, we acquired New Aera, Inc.

In August 2019, we acquired New Aera.

New Aera’s patented and FDA-cleared Tidal Assist ® Ventilator (TAV ® ) system is designed to deliver increased air flow and pressure from an approximately 4-ounce pocket-size unit, features a state-of-the-art nasal pillow interface, and is compatible with certain oxygen concentrators, oxygen cylinders, wall gas, and certain medical air sources.

TAV therapy with oxygen has been clinically demonstrated during periods of exercise to reduce breathlessness, increase exercise endurance, and improve oxygen saturation for patients suffering from certain chronic lung disease compared to oxygen therapy alone.

We began a limited launch of the TAV product in December 2019, and we plan to integrate this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 2020, although we expect limited contributions to revenue in 2020.

We plan to incorporate the TAV technology directly into our Inogen One portable oxygen concentrators 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.

We began a limited launch of the TAV product in December 2019 in our domestic direct-to-consumer channel and in our domestic business-to-business channel.

We plan to only sell this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 2021, although we expect limited contributions to revenue in 2021.

The COVID-19 pandemic and related PHE also had an impact on sales of this product in the second, third and fourth quarters 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.

In addition, we plan to use this technology as a platform to expand our total addressable market into the high-growth non-invasive ventilation (NIV) market, where we believe there is a significant worldwide untreated market opportunity.

We believe this market could undergo disruption similar to oxygen given the pending reimbursement changes due to the inclusion of this category in competitive bidding R ound 2021 and the immobile nature of legacy NIV product offerings.

We believe this market could undergo disruption similar to oxygen given the immobile nature of legacy NIV product offerings.

The monthly Medicare reimbursement rate is significantly higher for NIV products than oxygen therapy at a minimum of $934 a month.

Also, effective January 1, 2019, a new Medicare H ealthcare C ommon P rocedure C oding S ystem (HCPCS) code has been added to allow billing for a multi-function ventilator that includes both ventilation and oxygen.

We are targeting to launch a product for this purpose in 2021.

Also, effective January 1, 2019, a new Medicare HCPCS code has been added to allow billing for a multi-function ventilator that includes both ventilation and oxygen.

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

2 unchanged sentences

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.

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.

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

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

On September 21, 2020, we filed a lawsuit against defendants, Alex M.

Azar, Secretary of the Department of Health and Human Services (HHS), in his official capacity, Seema Verma, Administrator of the Centers for Medicare and Medicaid Services (CMS), in her official capacity and Palmetto GBA, LLC.

The lawsuit seeks to invalidate the defendants’ arbitrary and capricious decision to retract a valid HCPCS code to our TAV, thereby eliminating reimbursements for the ventilator, in violation of the Administrative Procedures Act.

Further, CMS’s failure to provide notice and the opportunity to comment on a change in HCPCS code verification for the Sidekick TAV and similar devices constitutes a violation of the procedural right provided under the Social Security Act, and our due process rights.

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) 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 or other reimbursement policy changes under Medicare or other third-party payors could negatively affect our business and financial condition .”

We have been developing and refining the manufacturing of our Inogen One systems since 2004.

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 have an office in the Netherlands for sales, customer service, and repairs, and use a contract manufacturer located in the Czech Republic to manufacture high volume products 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.

In 2020, we are focused on reducing the cost of our Inogen One G5 product, expanding manufacturing of the TAV product, and increasing the robustness of our supply chain to reduce potential component constraints as we grow our business.

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 Texas and California.

In 2020, we focused on reducing the cost of our Inogen One G5 product, expanding manufacturing of the TAV product and

increasing the robustness of our supply chain to reduce potential component constraints as we grow our business , and expect to continue this focus in 202 1 .

We also use lean manufacturing practices to maximize manufacturing efficiency.

2 unchanged sentences

In certain cases, these agreements can be terminated by either party upon relatively short notice.

We have elected to source certain key components from single sources of supply, including our batteries, motors, valves, columns, and some molded plastic components.

We have elected to source certain key components from single sources of supply, including our batteries, motors, valves, TAV-compatible stationary concentrators, columns, and some molded plastic components.

We believe that maintaining a single source of supply allows us to control production costs and inventory levels and to manage component quality.

1 unchanged sentence

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 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.

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.

4 unchanged sentences

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 $ 361.9 million , $ 358.1 million and $2 49 .

4 million for the years ended December 31, 2019, 201 8 and 201 7 , respectively.

The increase in total revenue in the year ended December 31, 2019 compared to the prior year was primarily due to growth in sales revenue associated with the increases in direct-to-consumer and international business-to-business sales , partially offset by a decline in domestic business-to-business sales.

The increase in total revenue in the year ended December 30, 2018 compared to the prior year was primarily due to growth in sales revenue associated with the increases in direct-to-consumer and business-to-business sales.

We generated net income of $ 21 .

0 million, $ 51.8 million and $2 1.0 million in the years ended December 31, 2 01 9 , 201 8 and 201 7 , respectively.

Our total revenue was $308.5 million, $361.9 million and $358.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The decrease in total revenue in the year ended December 31, 2020 compared to the prior year 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 pandemic and related PHE, partially offset by an increase in rental revenue.

We generated net income (loss) of $(5.8) million, $21.0 million and $51.8 million in the years ended December 31, 2020, 2019 and 2018, respectively.

We generated Adjusted EBITDA of $21.6 million, $43.3 million and $61.3 million in the years ended December 31, 2020, 2019 and 2018, respectively (see “Non-GAAP financial measures” for reconciliations between U.S.

GAAP and non-GAAP results).

As of December 31, 201 9 , our retained earnings w ere $ 81.4 million.

As of December 31, 2020, our retained earnings were $75.6 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.

While HME providers continue to convert and purchase portable oxygen concentrators, 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.

hiring additional sales representatives, improving productivity, investing in consumer and physician awareness through increased sales and 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 have been and may continue to be impacted by the COVID-19 pandemic and related PHE.

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 pandemic and related PHE, their ongoing restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and potential changes 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.

Our direct-to-consumer sales process involves numerous interactions with the individual patient, their physician and the physician’s staff, and includes an in-depth analysis and review of our product, the patient’s diagnosis and prescribed oxygen or NIV therapy, including procuring an oxygen prescription, although, as discussed above, this process has been disrupted due to the COVID-19 pandemic and related PHE and we expect that such disruption will continue for the duration of the COVID-19 pandemic and related PHE.

The patient may consider whether to finance the product through an Inogen-approved third party or purchase the equipment.

2 unchanged sentences

Approximately 6-9% of consumers who purchase a system return the system during this 30-day return period.

Our business-to-business efforts are focused on selling to distributors, HME oxygen and NIV providers, our private label partner and resellers, who are based inside and outside of the United States.

Our business-to-business efforts are focused on selling to distributors, HME oxygen and NIV providers, our private label partner, resellers, and charitable organizations who are based inside and outside of the United States.

This process involves interactions with various key customer stakeholders including sales, purchasing, product testing, and clinical personnel.

Businesses that have patient demand that can be met with our products place purchase orders to secure product deployment.

This may be influenced based on outside factors, including the result of tender offerings, changes in insurance plan coverage, business restructuring activities toward a non-delivery model, capital constraints, and overall changes in the net long-term oxygen and NIV therapy patient populations.

This may be influenced based on outside factors, including the result of tender offerings, changes in insurance plan coverage or reimbursement rates, business restructuring activities toward a non-delivery model, capital constraints, and overall changes in the net oxygen and NIV therapy patient populations, and is presently being impacted by the COVID-19 pandemic and related PHE.

Products are shipped freight on board (FOB) Inogen dock domestically, and based on financial history and profile, businesses may either prepay or receive extended payment terms.

6 unchanged sentences

Our direct-to-consumer rental process involves numerous interactions with the individual patient, their physician and the physician’s staff.

The process includes an in-depth analysis and review of our product, the patient’s diagnosis and prescribed oxygen or NIV therapy, and their medical history to confirm the appropriateness of our product for the patient’s oxygen therapy and compliance with Medicare and private payor billing requirements, which often necessitates additional physician evaluation and/or testing as well as a Certificate of Medical Necessity for oxygen.

The process includes an in-depth analysis and review of our product, the patient’s diagnosis and prescribed oxygen or NIV therapy, and their medical history to confirm the appropriateness of our product for the patient’s oxygen therapy or NIV therapy and compliance with Medicare and private payor billing requirements, which often necessitates additional physician evaluation and/or testing as well as a Certificate of Medical Necessity for oxygen.

Once the product is deployed, the patient receives instruction on product use and may receive a clinical titration from our licensed staff to confirm the product meets the patient’s medical oxygen needs prior to billing.

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.

R ental revenue declined slightly in 20 19 as compared to 2018 in spite of the minor change that we made in the second quarter of 2019 to reduce our intake criteria for new rental patients .

We expect rental revenue to increase modestly in 2020 as we scale the rental intake team , increase new rental setups , and benefit from the Medicare reimbursement rates for oxygen therapy increasing 1.5% to 3.5% , effective January 1, 20 20 .

We plan to add new rental patients on service in future periods through multiple strategies, including expanding our rental intake team, expanding our direct-to-consumer marketing efforts, investing in patient and physician awareness, and securing additional insurance contracts.

However, insurance reimbursement rates may decline associated with Round 2021 competitive bidding or due to changes in reimbursement from non-Medicare payors.

In addition, patients may come off our services due to death, a change in their condition, a change in location, a change in healthcare provider or other factors.

In each case, we maintain rental asset ownership and can redeploy assets as appropriate following such events.

Given the length and uncertainty of our patient acquisition cycle and potential returns we have experienced in the past and likely will experience in the future, fluctuations in our net new patient setups will occur on a period-to-period basis and we may experience net patient decreases in future periods.

At this time, we do not plan to offer our Inogen One G5 or Inogen One G4 systems to our rental patients but will continue to use the Inogen One G3 system as the primary ambulatory solution deployed in our rental fleet.

Eventually, we do plan to use the Inogen One G5 system in our rental fleet once production of the Inogen One G3 system is discontinued.

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 2020 compared to 2019, primarily due to a greater number of patients on service, higher Medicare reimbursement rates, higher billable patients as a percent of total patients on service, and lower rental revenue adjustments.

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

We plan to add new rental patients on service in future periods through multiple strategies, including expanding our rental intake team and physician-based sales teams, expanding our direct-to-consumer marketing efforts, investing in patient and physician awareness, and securing additional insurance contracts.

A portion of rentals include a capped rental period during which no additional reimbursement is allowed unless additional criteria are met.

6 unchanged sentences

Reimbursement

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

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

A discussion of third-party reimbursement is contained in Item 1, Third-party reimbursement in this Annual Report on Form 10-K.

2 unchanged sentences

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.

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.

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 reimbursements 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.

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

We do not offer our TAV non-invasive ventilator for reimbursement as we do not have HCPCS coding for this product.

Basis of presentation

The following describes the line items set forth in our consolidated statements of comprehensive income.

The following describes the line items set forth in our consolidated statements of comprehensive income (loss).

We classify our revenue in two main categories:

7 unchanged sentences

Sales revenue

Our sales revenue is primarily derived from the sale of our Inogen One systems, Inogen At Home systems, TAV systems, and related accessories to individual consumers, our private label partner, HME providers, distributors and resellers worldwide.

Sales revenue is classified into two areas:

3 unchanged sentences

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 2019 in spite of the minor change that we made in the second quarter of 2019 to loosen our intake criteria for new rental patients that we made in the second half of 2019, primarily due to lower net rental setups due to reduced sales capacity, an additional 3.9% reduction in Medicare reimbursement rates for our products effective January 1, 2019 and the adoption of ASU No.

2018-19 that required reclassification of rental bad debt expense to be charged against rental revenue.

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

We also expect that our rental revenue will be impacted by the number of sales representatives, the number of rental intake representatives, reimbursement rate changes including the impact of 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.

Rental revenue increased in 2020, primarily due to higher patients on service, higher billable patients as a percent of total patients on service, higher Medicare reimbursement rates, and lower revenue adjustments.

We expect our rental revenue to increase in future periods as we scale the rental intake and sales teams and increase new rental setups.

In addition, for the duration of the COVID-19 PHE, we expect to benefit from higher Medicare reimbursement rates for oxygen therapy enacted due to the COVID-19 PHE.

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, the level of and response from potential customers to direct-to-consumer marketing spend, product launches, the number of billable patients and denial rates, and other uncontrollable factors such as changes in the market and competition.

Cost of revenue

Cost of sales revenue

Cost of sales revenue consists primarily of costs incurred in the production process, including component materials, assembly labor and overhead, warranty, provisions for slow-moving and obsolete inventory, rework and delivery costs for items sold.

Cost of sales revenue consists primarily of costs incurred in the production process, including component materials, assembly labor and overhead, warranty expense, provisions for slow-moving and obsolete inventory, rework and delivery costs for items sold.

Labor and overhead expenses consist primarily of personnel-related expenses, including wages, bonuses, benefits, and stock-based compensation for manufacturing, logistics, repair, manufacturing engineering, and quality assurance employees and temporary labor.

Cost of sales revenue also includes manufacturing freight in, depreciation expense, facilities costs and materials.

We provide a 3-year, 5-year or lifetime warranty on Inogen One systems sold and a 3-year and lifetime warranty on Inogen At Home systems sold.

The TAV system has a 1-year and a 3-year warranty.

We establish a reserve for the cost of future warranty repairs based on historical warranty repair costs incurred as well as historical failure rates.

Provisions for warranty obligations, which are included in cost of sales revenue, are provided for at the time of revenue recognition.

Provisions for warranty obligations are included in cost of sales revenue and are provided for at the time of revenue recognition.

We continue to make progress towards reducing the average unit costs of our products as a result of our ongoing efforts to develop lower-cost systems, negotiate with our suppliers, improve our manufacturing processes, and increase production volume and yields.

2 unchanged sentences

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 2020 and 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.

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 2021.

5 unchanged sentences

and logistics costs.

We expect rental gross margin percentage to increase in 2020 compared to 2019, primarily associated with higher rental revenue per patient.

We expect the average cost of rental revenue per patient to decline in future periods as a result of our ongoing efforts to reduce average unit cost of our systems, as well as reductions in depreciation, service costs, and logistics costs.

We expect rental gross margin percentage to increase over time, primarily associated with higher rental revenue per patient on service and lower costs per patient on service.

We expect the average cost of rental revenue per patient on service to decline in future periods as a result of our ongoing efforts to reduce average unit cost of our systems as well as reductions in depreciation, service costs, and logistics costs.

Operating expense

Research and development

Our research and development expense consists primarily of personnel-related expenses, including wages, bonuses, benefits and stock-based compensation for research and development and engineering employees, facility costs, laboratory supplies, product development materials, consulting fees and related costs, and testing costs for new product launches as well as enhancements to existing products.

Our research and development expense consists primarily of personnel-related expenses, including wages, bonuses, benefits and stock-based compensation for research and development and engineering employees, facility costs, laboratory supplies, product development materials, consulting fees and related costs, clinical study costs, and testing costs for new product launches as well as enhancements to existing products.

We have made substantial investments in research and development since our inception.

1 unchanged sentence

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 2021 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.

2 unchanged sentences

Our sales and marketing expense primarily supports our direct-to-consumer sales and rental strategy and consists mainly of personnel-related expenses, including wages, bonuses, commissions, benefits, and stock-based compensation for sales, marketing, customer service, rental intake, and clinical service employees.

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

Sales and marketing expense increased throughout 2019 as compared to 2018, primarily due to an increase in marketing expenses, partially offset by reduced personnel-related expenses for lower sales representative headcount.

The increase in marketing expense was primarily due to higher cost per generated lead.

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

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.

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 2020 compared to 2019, primarily associated with lower advertising expense.

Our average direct-to-consumer sales representative headcount in 2020 was down sequentially from 2019 as attrition outpaced hiring in the period.

We expect minimal direct-to-consumer sales representative hiring in the first half of 2021 due to the COVID-19 pandemic and related PHE, and plan to focus on sales representative efficiencies, including improved sales representative productivity and lead utilization, while we continue to monitor the impact of the COVID-19 pandemic and related PHE.

Due to the COVID-19 pandemic and related PHE, we have also reduced and expect to continue to reduce marketing spend.

However, we still expect an 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 including our physician-based sales team, increasing our rental infrastructure, increasing media spend to drive consumer awareness, and rising patient support costs as our patient and customer base increases.

We also expect increased sales and marketing costs in 2021 associated with the expanded launch of the TAV product following the limited launch in 2020.

General and administrative

Our general and administrative expense consists primarily of personnel-related expenses, including wages, bonuses, benefits, and stock-based compensation for employees in our compliance, finance, medical billing, order intake, human resources, and information technology departments as well as facilities costs, sales bad debt expense, and board of directors’ expenses, including stock-based compensation.

Our general and administrative expense consists primarily of personnel-related expenses, including wages, bonuses, benefits, and stock-based compensation for employees in our compliance, finance, medical billing, order intake, human resources, and information technology (IT) departments as well as facilities costs, sales bad debt expense, and board of directors’ expenses, including

stock-based compensation.

In addition, general and administrative expense includes professional services, such as legal, patent registration and defense costs, insurance, consulting and accounting services, including audit and tax services, and travel and entertainment expenses.

1 unchanged sentence

We expect general and administrative expense to increase in absolute dollars as we continue to invest in corporate infrastructure to support our growth including personnel-related expenses, professional services fees and compliance costs associated with operating as a public company.

Those costs include increases in our accounting, human resources, and IT personnel, as well as increases in additional consulting, legal and accounting fees, facilities costs, insurance costs, and board of directors ’ compensation.

Those costs include increases in our accounting, medical billing, human resources, and IT personnel, as well as increases in additional consulting, legal and accounting fees, facilities costs, insurance costs, and board of directors’ compensation.

Other income (expense), net

8 unchanged sentences

tax return, which depends upon the stock price at the time of employee option exercise or award vesting.

We recognize excess tax benefits or deficiencies on a discrete basis, and we anticipate our effective tax rate will vary from quarter-to-quarter depending on our stock price in each period.

We recognize excess tax benefits or deficiencies on a discrete basis, and we anticipate our effective tax rate will vary from year-to-year depending on our stock price in each period.

Results of operations

6 unchanged sentences

Total revenue

Sales revenue increased $4.5 million for the year ended December 31, 2019 from the year ended December 31, 2018, or an increase of 1.3% over the comparable year.

The increase was primarily attributable to a 2,500-unit increase in the number of oxygen systems sold.

We sold approximately 201,100 oxygen systems during the year ended December 31, 2019 compared to approximately 198,600 oxygen systems sold during the year ended December 31, 2018, or an increase of 1.3%.

The increase in the number of systems sold resulted mainly from an increase in direct-to-consumer sales in the United States, primarily due to increased marketing expenditures and increased sales representative productivity, partially offset by a decline in sales representative headcount.

In addition, international business-to-business sales increased slightly, primarily from our partners in Canada, South America, 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 business-to-business sales, primarily due to reduced orders from a national provider who is a customer of our private label partner, partially offset by increased orders from other providers.

This national provider accounted for revenue of $2.5 million for the year ended December 31, 2019, down from $22.9 million for the year ended December 31, 2018.

Rental revenue decreased $ 0.7 million for the year ended December 31, 201 9 from the year ended December 31, 201 8 , or a decrease of 3.2 % from the comparable year .

The decrease in rental revenue was primarily related to a 5.9% decline in rental patients on service from the comparative period , an additional 3.9% reduction in Medicare reimbursement rates for our products effective January 1, 2019 and the adoption of Accounting Standards Update (ASU) No.

2018-19 that require d reclassification of rental bad debt expense to be charged against rental revenue .

Sales revenue decreased $60.4 million for the year ended December 31, 2020 from the year ended December 31, 2019, or a decrease of 17.7% from the comparable year.

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 pandemic and related PHE and Inogen One G5 supply constraints in the first quarter of 2020.

We sold approximately 178,900 oxygen systems during the year ended December 31, 2020 compared to approximately 201,100 oxygen systems sold during the year ended December 31, 2019, or a decrease of 11.0%.

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

Rental revenue increased $6.9 million for the year ended December 31, 2020 from the year ended December 31, 2019, or an increase of 32.3% from the comparable year.

The increase in rental revenue was primarily related to higher rental patients on service, higher billable patients as a percent of total patients on service, higher Medicare reimbursement rates, and lower rental revenue adjustments.

(amounts in thousands)

8 unchanged sentences

Domestic business-to-business sales decreased 9.4% for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The decrease was primarily the result of decreased demand from our private label partner due to reduced orders from the large national provider referenced above, partially offset by increased demand from traditional HME providers.

Business-to-business international sales increased slightly by 0.8% for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to increased sales to our partners in Canada, South America, and Australia, partially offset by a decline in sales to our partners in Europe primarily due to unfavorable currency exchange rates and tender uncertainty in certain European regions.

In the year ended December 31, 2019, sales in Europe as a percentage of total international sales revenue decreased to 86.4% versus 88.3% in the comparative period in 2018, primarily because of the increase in sales in Canada, South America, and Australia and reduced sales in Europe.

Domestic direct-to-consumer sales increased 9.9% for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to increased marketing expenditures and increased productivity of inside sales representatives, partially offset by a decline in sales representative headcount.

The decrease was primarily due to decreased demand from our HME partners for oxygen concentrators in response to the COVID-19 pandemic and related PHE due to lower retail sales, lower patient travel, physician offices limiting patient interactions that traditionally have led to new oxygen patient referrals, HME providers minimizing patient interactions in response to the COVID-19 pandemic and related 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 year and uncertainty around competitive bidding Round 2021 for most of 2020 contributed to lower sales in the year.

International business-to-business sales decreased 20.3% for the year ended December 31, 2020 compared to the year ended December 31, 2019, mostly driven by the temporary closures and reduced operating capacity 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 year ended December 31, 2020, sales in Europe as a percentage of total international sales revenue decreased slightly to 85.8% versus 86.4% in the comparative period in 2019.

Domestic direct-to-consumer sales decreased 22.1% for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the impact of the COVID-19 pandemic and related PHE on reduced consumer travel and mobility as well as lower consumer confidence, which decreased demand and associated sales representative productivity in the period compared to the same period in the prior year.

In addition, sales declined associated with an approximate 4% decline in average direct-to-consumer sales representative headcount in the comparative periods.

Domestic direct-to-consumer rentals increased 32.3% for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase in patients on service, higher billable patients as a percent of total patients on service, increased Medicare reimbursement rates, and lower rental revenue adjustments.

Cost of revenue and gross profit

11 unchanged sentences

Total gross margin percentage

Cost of sales revenue increased $12.0 million for the year ended December 31, 2019 from the year ended December 31, 2018, or an increase of 7.3% over the comparable year.

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 sales revenue decreased $19.2 million for the year ended December 31, 2020 from the year ended December 31, 2019, or a decrease of 10.9% from the comparable year.

The decrease in cost of sales revenue was primarily attributable to lower sales and related bill of material costs, partially offset by higher material and overhead cost per unit.

Cost of rental revenue decreased $0.6 million for the year ended December 31, 2020 from the year ended December 31, 2019, or a decrease of 4.0% from the comparable year.

The decrease in cost of rental revenue was primarily attributable to a 5.9% decrease in total patients on service and reduced rental asset depreciation expense and logistics costs, partially offset by increased servicing costs per patient on service.

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

Cost of rental revenue included $5.7 million of rental asset depreciation for the year ended December 31, 2020 compared to $6.3 million for the year ended December 31, 2019.

Sales revenue g ross margin percentage de creased to 48.3 % for the year ended December 31, 201 9 from 51.2 % for the year ended December 31, 201 8 .

The de crease in sales gross margin percentage was primarily related to higher cost of goods sold .

Sales revenue gross margin percentage decreased to 44.1% for the year ended December 31, 2020 from 48.3% for the year ended December 31, 2019.

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

Total worldwide business-to-business sales revenue accounted for 56.6% of total sales revenue in the year ended December 31, 2020 versus 54.1% in the year ended December 31, 2019.

Rental revenue gross margin percentage increased to 34.1% for the year ended December 31, 2019 from 29.7% for the year ended December 31, 2018, primarily due to higher rental revenue per patient on service and lower depreciation and logistics costs, partially offset by increased servicing costs per patient on service.

Rental revenue gross margin percentage increased to 52.1% for the year ended December 31, 2020 from 34.1% for the year ended December 31, 2019, primarily due to higher Medicare reimbursement rates, higher billable patients as a percent of total patients on service, lower revenue adjustments and lower depreciation and servicing costs per patient on service.

Research and development expense

3 unchanged sentences

Research and development expense

Research and development expense increased $2.4 million for the year ended December 31, 2019 from the year ended December 31, 2018, or an increase of 33.7% over the comparable period, primarily due to $2.9 million in intangible amortization costs related to the New Aera acquisition, partially offset by a $0.8 million decrease in personnel-related expenses.

Research and development expense increased $4.7 million for the year ended December 31, 2020 from the year ended December 31, 2019, or an increase of 49.8% over the comparable period, primarily due to $4.9 million in intangible amortization costs primarily related to the New Aera acquisition, partially offset by a $0.4 million decrease in product development expenses.

Sales and marketing expense

3 unchanged sentences

Sales and marketing expense

Sales and marketing expense increased $9.9 million for the year ended December 31, 2019 from the year ended December 31, 2018, or an increase of 10.4% over the comparable period.

The increase was primarily attributable to increases of $9.5 million in media spending, $1.3 million of dues, fees and license costs, $0.5 million in facilities costs, and $0.4 million in incentives and giveaways.

These increases were partially offset by $2.4 million of lower personnel-related expenses.

Sales and marketing expense decreased $8.0 million for the year ended December 31, 2020 from the year ended December 31, 2019, or a decrease of 7.6% from the comparable period, primarily attributable to decreases of $6.1 million of advertising costs, $0.8 million of personnel-related expenses mainly associated with lower commissions and customer service expense, $0.8 million of credit card fees, $0.7 million in incentives and giveaways, and $0.5 million of travel and entertainment expenses, partially offset by an increase of $0.7 million in dues, fees, and license costs and $0.4 million in facilities costs.

In the year ended December 31, 2020, we spent $34.2 million in media and advertising costs versus $40.3 million in the comparative period in 2019.

4 unchanged sentences

General and administrative expense

General and administrative expense decreased $0.9 million for the year ended December 31, 2019 from the year ended December 31, 2018, or a decrease of 2.4% from the comparable period.

The decrease was primarily attributable to decreases of $3.2 million in personnel-related expenses, $1.5 million in bad debt expense and $0.3 million in general office expense.

These decreases were partially offset by $1.2 million in legal fees, $0.8 million in acquisition-related expenses for the New Aera transaction, $0.8 million of expense related to the change in fair value of the New Aera earnout liability, $0.6 million in license fees, $0.4 million in depreciation expense, and $0.3 million in lower net proceeds received from sale of assets.

Bad debt expense, expressed as a percentage of total revenue, decreased to 0.0% in the year ended December 31, 2019 from 0.5% in the year ended December 31, 2018, primarily due to the adoption of ASU 2018-19.

Other income (expense), net

General and administrative expense increased $1.5 million for the year ended December 31, 2020 from the year ended December 31, 2019, or an increase of 4.0% from the comparable period.

The increase was primarily attributable to $1.4 million in consulting fees, $0.4 million in facilities costs, $0.4 million in personnel-related expenses, and $0.4 million in directors and officers insurance costs, partially offset by $1.1 million in lower legal fees and $0.9 million reimbursement from the CARES Act Provider Relief Fund from the COVID-19 pandemic and related PHE.

Other income (expense)

Years ended December 31,

2 unchanged sentences

Interest income

Other expense

Other income (expense)

Total other income, net

Total other income , net increased $ 1.9 million for the year ended December 31, 201 9 from the year ended December 31, 201 8 , or an increase of 74.9 % over the comparable period .

The increase was primarily attributable to increases of $ 1.2 million in interest income on cash equivalents and marketable securities and $ 0.2 million in interest income on the lease asset, partially offset by a decrease of $ 0.5 million in other expense primarily related to net foreign currency losses arising from increased transactions in Euros at a lower U.S.

dollar exchange rate to the Euro compared to the comparable period .

Income tax expense (benefit)

Total other income, net increased $2.3 million for the year ended December 31, 2020 from the year ended December 31, 2019, or an increase of 50.5% from the comparable period.

The increase was primarily attributable to $5.3 million in other income from the CARES Act Provider Relief Fund due to lost revenues from the COVID-19 pandemic and related PHE and a $0.7 million increase in net foreign currency gains, partially offset by a decrease of $3.8 million in interest income on marketable securities due to the lower interest rate environment and lower invested balances in marketable securities in 2020 compared to 2019.

Income tax expense

Years ended December 31,

1 unchanged sentence

(amounts in thousands)

Income tax expense (benefit)

Income tax expense

Effective income tax rate

Income tax expense increased $14.7 million for the year ended December 31, 2019 from the year ended December 31, 2018, primarily attributable to $20.7 million of lower excess tax benefits recognized from stock-based compensation, partially offset by a $6.0 million decrease in the income tax provision expense, primarily resulting from a 40.0% decrease in income before income tax expense (benefit) and research and development credits.

Our effective tax rate in the year ended December 31, 2019 increased compared to the year ended December 31, 2018, 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) and research and development credits.

In the year ended December 31, 2019, excess tax benefits recognized from stock-based compensation decreased our income tax expense by $0.5 million and our effective tax rate by 2.0%, as compared to the tax rate without such benefits.

For comparison, in the year ended December 31, 2018, excess tax benefits recognized from stock-based compensation decreased our income tax expense by $21.2 million and our effective tax rate by 52.5%, as compared to the tax rate without such benefits.

Income tax expense decreased $2.8 million for the year ended December 31, 2020 from the year ended December 31, 2019, primarily resulting from a decrease in income before income tax expense, partially offset by the change in net tax expense (benefit) for research and development credits and the change in the shortfall related to stock-based compensation expense.

Our effective tax rate in the year ended December 31, 2020 decreased compared to the year ended December 31, 2019, primarily due to the increase in excess tax deficiencies recognized from stock-based compensation and state income taxes.

Net income (loss)

Years ended December 31,

1 unchanged sentence

(amounts in thousands)

Net income decreased $30.9 million for the year ended December 31, 2019 from the year ended December 31, 2018, or a decrease of 59.6% from the comparable period.

The decrease in net income was primarily related to lower gross margin, an increase in operating expenses and a higher effective tax rate.

Net income (loss)

Net income (loss) decreased $26.8 million for the year ended December 31, 2020 from the year ended December 31, 2019, or a decrease of 127.8% from the comparable period.

The decrease in net income (loss) was primarily related to lower sales revenue and gross margin, partially offset by lower operating expenses and other income from the CARES Act Provider Relief Fund.

We believe our sales may be impacted by seasonal factors.

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.

In particular, due to the COVID-19 pandemic and related PHE, we have seen and expect to continue to see a disruption in our normal seasonal trends, as, due to the mandates and behaviors emanating from the COVID-19 pandemic and related 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 2020 that we have seen in prior years.

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

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

The following tables set forth our unaudited quarterly consolidated statements of comprehensive income data for each of the eight quarters in the period ended December 31, 201 9 .

The following tables set forth our unaudited quarterly consolidated statements of comprehensive income (loss) data for each of the eight quarters in the period ended December 31, 20 20 .

We have prepared the quarterly statements of income data on a basis consistent with the audited consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.

15 unchanged sentences

Diluted common shares

Due to net loss for period Q4 December, dilutive loss per share is the same as basic.

Due to net loss for periods Q1 March, Q3 September, and Q4 December, diluted loss per share is the same as basic.

(amounts in thousands, except share and per share amounts)

1 unchanged sentence

Total revenue

Income before benefit for income taxes

Benefit for income taxes

Net income per share attributable to

Income (loss) before provision (benefit) for income

Provision (benefit) for income taxes

Net income (loss)

Net income (loss) per share attributable to

common stockholders:

Weighted-average number of shares used in

calculating net income per share attributable

calculating net income (loss) per share attributable

to common stockholders:

1 unchanged sentence

Diluted common shares

Due to net loss for period Q4 December, diluted loss per share is the same as basic.

Comparison of years ended December 31, 2019 and 2018

3 unchanged sentences

As of December 31, 2020, we had cash and cash equivalents of $212.0 million, which consisted of highly liquid investments with a maturity of three months or less.

In addition, we held marketable securities of $11.1 million in available-for-sale corporate bonds and U.S.

Treasury securities, which had maturities greater than three months.

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 $51.1 million from proceeds related to stock option exercises and our employee stock purchase plan.

For the years ended December 31, 2019, 2018 and 2017, we received $5.9 million, $19.5 million and $14.0 million, respectively, in proceeds related to these stock programs.

Our principal uses of cash for liquidity and capital resources in the year ended December 31, 2019 consisted of payment for the New Aera acquisition of $70.4 million (net of cash acquired) and capital expenditures of $6.5 million including additional rental equipment, intangible assets, and other property, plant and equipment.

We believe that our current cash, cash equivalents, marketable securities, and the cash to be generated from expected product sales and rentals will be sufficient to meet our projected operating and investing requirements for at least the next twelve months.

In addition, we held marketable securities of $19.3 million in available-for-sale corporate bonds, U.S.

Treasury securities, and agency mortgage-backed securities, which had maturities greater than three months.

For the years ended December 31, 2020, 2019 and 2018, we received $2.4 million, $5.9 million and $19.5 million, respectively, in proceeds related to stock option exercises and our employee stock purchase plan.

Our principal uses of cash for liquidity and capital resources in the year ended December 31, 2020 consisted of capital expenditures of $17.6 million including additional rental equipment, other property, plant and equipment, and intangible assets.

The COVID-19 pandemic and related 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.

We believe that our current cash, cash equivalents and the cash to be generated from expected product sales and rentals will be sufficient to meet our projected operating and investing requirements for at least the next twelve months.

However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect.

45 unchanged sentences

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 year ended December 31, 2020 consisted primarily of our non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $18.6 million, provision for sales returns and doubtful accounts of $10.5 million, stock-based compensation expense of $8.2 million, provision for rental revenue adjustments of $2.6 million, provision for inventory obsolescence and other inventory losses of $1.3 million, change in fair value of earnout liability of $1.1 million, net loss on disposal of rental equipment and other fixed assets of $0.9 million and our net loss of $5.8 million.

The net changes in operating assets and liabilities resulted in no effect on cash flows from operating activities.

Net cash provided by operating activities for the year ended December 31, 2019 consisted primarily of our net income of $21.0 million as well as non-cash expense items such as provision for sales returns and doubtful accounts of $17.2 million, depreciation of equipment and leasehold improvements and amortization of our intangibles of $13.8 million, stock-based compensation expense of $9.1 million, deferred tax assets of $2.9 million, provision for rental revenue adjustments of $2.2 million, provision for inventory obsolescence and other inventory losses of $1.0 million, change in fair value of earnout liability of $0.8 million and net loss on disposal of rental equipment and other fixed assets of $0.6 million.

3 unchanged sentences

The net changes in operating assets and liabilities resulted in a net use of cash of $25.6 million.

Net cash provided by operating activities for the year ended December 31, 2017 consisted primarily of our net income of $21.0 million and non-cash expense items such as provision for sales returns and doubtful accounts of $13.8 million, depreciation of our equipment and leasehold improvements and amortization of our intangibles of $12.3 million, stock-based compensation expense of $9.6 million, provision for rental revenue adjustments of $5.1 million, deferred income tax of $7.9 million and loss on disposal of rental equipment and other fixed assets of $1.1 million.

The net changes in operating assets and liabilities resulted in a net use of cash of $10.6 million.

Investing activities

Net cash 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 year ended December 31, 20 20 , we invested $22.8 million in corporate bonds , U.S.

Treasury securities and agency mortgage-backed securities with maturities greater than three months that were classified as marketable securities, partially offset by $14.5 million in maturities of available-for-sale investments .

In addition, we invested $ 17.6 million in the production and purchase of rental assets and other property, equipment, and intangible assets.

For the year ended December 31, 2019, we acquired New Aera for a net cash payment of $70.4 million and invested $58.7 million in corporate bonds and U.S.

4 unchanged sentences

In addition, we invested $13.0 million in the production and purchase of rental assets, intangible assets and other property, equipment, and leasehold improvements, partially offset from gross proceeds received from the sale of former rental assets of $0.7 million.

For the year ended December 31, 2017, we had $46.9 million of purchases that we invested in available-for-sale certificates of deposits, corporate bonds, agency mortgage-backed securities, and U.S.

treasury securities with maturities greater than three months that were classified as marketable securities, partially offset by $37.0 million in maturities of available-for-sale investments.

In addition, we invested $10.2 million in the production and purchase of rental assets, intangibles assets and other property, equipment, leasehold improvements, and acquired MedSupport for a net cash payment of $4.5 million, partially offset by gross proceeds from the sale of former assets of $0.2 million.

We expect to continue investing in property, equipment and leasehold improvements as we expand our operations.

4 unchanged sentences

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 year ended December 31, 2020, net cash provided by financing activities consisted of $2.4 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 $0.4 million.

For the year ended December 31, 2019, net cash provided by financing activities consisted of $5.9 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 $0.9 million.

For the year ended December 31, 2018, net cash provided by financing activities consisted of $19.5 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 $1.2 million.

For the year ended December 31, 2017, net cash provided by financing activities consisted of $14.0 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program.

Sources of funds

10 unchanged sentences

Non-GAAP financial measures

EBITDA, Adjusted EBITDA, and non-GAAP net income are financial measures that are not calculated in accordance with U.S.

We define EBITDA as net income excluding interest income, interest expense, taxes and depreciation and amortization.

EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with U.S.

We define EBITDA as net income (loss) excluding interest income, interest expense, taxes and depreciation and amortization.

Adjusted EBITDA also excludes stock-based compensation and change in fair value of earnout liability.

Non-GAAP net income, which we previously referred to as “Adjusted Net Income,” excludes certain tax adjustments.

Below, we have provided a reconciliation of EBITDA, Adjusted EBITDA and non-GAAP net income to our net income, the most directly comparable financial measure calculated and presented in accordance with U.S.

EBITDA, Adjusted EBITDA and non-GAAP net income should not be considered alternatives to net income or any other measure of financial performance calculated and presented in accordance with U.S.

Our EBITDA, Adjusted EBITDA and non-GAAP net income may not be comparable to similarly titled measures of other organizations because other organizations may not calculate EBITDA, Adjusted EBITDA and non-GAAP net income in the same manner as we calculate these measures.

We include EBITDA, Adjusted EBITDA and non-GAAP net income in this Annual Report on Form 10-K because they are important measures upon which our management assesses our operating performance.

We use EBITDA, Adjusted EBITDA and non-GAAP net income as key performance measures because we believe they facilitate operating performance comparisons from period-to-period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and intangible assets, the impact of stock-based compensation expense and the impact of the change in fair value of the earnout liability.

Because EBITDA, Adjusted EBITDA and non-GAAP net income facilitate internal comparisons of our historical operating performance on a more consistent basis, we also use EBITDA, Adjusted EBITDA and non-GAAP net income for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities.

In addition, we believe EBITDA, Adjusted EBITDA and non-GAAP net income and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

Our uses of EBITDA, Adjusted EBITDA and non-GAAP net income have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S.

Below, we have provided a reconciliation of EBITDA and Adjusted EBITDA to our net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S.

EBITDA and Adjusted EBITDA should not be considered alternatives to net income (loss) or any other measure of financial performance calculated and presented in accordance with U.S.

Our EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate EBITDA and Adjusted EBITDA in the same manner as we calculate these measures.

We include EBITDA and Adjusted EBITDA in this Annual Report on Form 10-K because they are important measures upon which our management assesses our operating performance.

We use EBITDA and Adjusted EBITDA as key performance measures because we believe they facilitate operating performance comparisons from period-to-period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and intangible assets, the impact of stock-based compensation expense and the impact of the change in fair value of the earnout liability.

Because EBITDA and Adjusted EBITDA facilitate internal comparisons of our historical operating performance on a more consistent basis, we also use EBITDA and Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities.

In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

Our uses of EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S.

Some of these limitations are:

3 unchanged sentences

Adjusted EBITDA does not include changes in fair value of earnout liability related to our acquisitions;

Non-GAAP net income does not reflect the tax adjustments recorded based on U.S.

other companies, including companies in our industry, may calculate EBITDA, Adjusted EBITDA and non-GAAP net income measures differently, which reduces their usefulness as a comparative measure.

In evaluating EBITDA, Adjusted EBITDA and non-GAAP net income, we anticipate that in the future we will incur expenses within these categories similar to this presentation.

Our presentation of EBITDA, Adjusted EBITDA and non-GAAP net income should not be construed as an inference that our future results will be unaffected by certain expenses.

When evaluating our performance, EBITDA, Adjusted EBITDA and non-GAAP net income should be considered alongside other financial performance measures, including U.S.

other companies, including companies in our industry, may calculate EBITDA and Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

In evaluating EBITDA and Adjusted EBITDA, we anticipate that in the future we will incur expenses within these categories similar to this presentation.

Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by certain expenses.

When evaluating our performance, EBITDA and Adjusted EBITDA should be considered alongside other financial performance measures, including U.S.

GAAP results.

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

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

GAAP measure, for each of the periods indicated:

2 unchanged sentences

Non-GAAP EBITDA and Adjusted EBITDA

Net income (loss)

Non-GAAP adjustments:

6 unchanged sentences

Adjusted EBITDA (non-GAAP)

(amounts in thousands)

Years ended December 31,

Non-GAAP net income

Non-GAAP adjustment:

tax reform (TCJA) (1)

Non-GAAP net income

On December 22, 2017, the TCJA was enacted into law, which significantly changed existing U.S.

tax law and included numerous provisions that impact our financial results.

During the fourth quarter of 2017, we recorded an estimated one-time net charge due to the impact of changes in the tax rate, primarily on deferred tax assets.

There were no related charges during the years ended December 31, 2018 and December 31, 2019.

Contractual obligations

6 unchanged sentences

Purchase obligations (3)

We lease manufacturing and office space in Richardson, TX, Goleta, CA, Smyrna, TN, Huntsville, AL, Aurora, CO, Cleveland, OH and Breukelen, Netherlands with terms that expire between 2020 and 2024 and miscellaneous office and processing equipment in Texas, California and Ohio with terms expiring between 2020 and 2023.

This table does not include lease payments for additional operating leases for our new corporate headquarters in California and commercial and industrial space in Texas that have not yet commenced as of December 31, 2019, which have combined total minimum lease payments of $27.2 million.

These operating leases will commence in 2020 with a lease term of 10-11 years.

We lease manufacturing and office space in Richardson, TX, Plano, TX, Goleta, CA, Smyrna, TN, Huntsville, AL, Aurora, CO, Cleveland, OH and Breukelen, Netherlands with terms that expire between 2021 and 2031 and miscellaneous office and processing equipment in Texas, California and Ohio with terms expiring between 2021 and 2025.

This table does not include lease payments for additional operating leases for our new corporate headquarters in California, industrial space in Texas, and office equipment in Ohio that have not yet commenced as of December 31, 2020, which have combined total minimum lease payments of $21.4 million.

These operating leases will commence in 2021 with a lease term of 10-11 years for the facilities and 5 years for the office equipment.

These obligations are for software licenses and maintenance agreements.

6 unchanged sentences

See Note 7 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Critical accounting policies and significant estimates

Critical accounting policies and estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S.

6 unchanged sentences

revenue recognition;

product warranty;

acquisitions and related acquired intangible assets and goodwill.

10 unchanged sentences

Accordingly, revenue is recognized net of allowances for estimated returns and incentives.

We also offer a lifetime warranty for direct-to-consumer sales of our portable oxygen concentrators.

For a fixed price, we agree to provide a fully functional portable oxygen concentrator for the remaining life of the patient.

Lifetime warranties are only offered to patients upon the initial sale of portable oxygen concentrators directly from us and are non-transferable.

Lifetime warranties are considered to be a distinct performance obligation that are accounted for separately from its sale of portable oxygen concentrators with a standard warranty of three years .

For a fixed price, we also offer a lifetime warranty for direct-to-consumer sales for our oxygen concentrators.

The revenue is allocated to the distinct lifetime warranty performance obligation based on a relative stand-alone selling price (SSP) method.

1 unchanged sentence

To determine the selling price of the lifetime warranty, we use the best estimate of the SSP for the distinct performance obligation as the lifetime warranty is neither separately priced nor is the selling price available through third-party evidence.

To calculate the selling price associated with the lifetime warranties, management considers the profit margins of service revenue, the average estimated cost of lifetime warranties and the price of extended warranties.

To estimate the selling price associated with the lifetime warranties, management considers the profit margins of service revenue, the average estimated cost of lifetime warranties and the price of extended warranties.

Revenue from the distinct lifetime warranty is deferred after the delivery of the equipment and recognized based on an estimated mortality rate over five years, which is the estimated performance period of the contract based on the average patient life expectancy.

25 unchanged sentences

Accounts receivable are reduced by an allowance for doubtful accounts which provides for those accounts from which payment is not expected to be received, although product was delivered and revenue was earned.

Upon determination that an account is uncollectable, it is written-off and charged to the allowance.

Upon determination that an account is uncollectable, it is written-

off and charged to the allowance.

Amounts billed but not earned due to the timing of the billing cycle are deferred and recognized in revenue on a straight-line basis over the monthly billing period.

4 unchanged sentences

Revenue recognized is at full estimated allowable reimbursement rates.

Rental revenue is earned for that month if the patient is on service on the first day of the 30-day period commencing on the recurring date of service for a particular claim, regardless if there is a change in condition/death after that date.

Rental revenue is earned for that month if the patient is on service on the first day of the 30-day period commencing on the recurring date of service for a particular claim regardless of whether there is a change in condition or death after that date.

In the event that a third-party payor does not accept the claim for payment, the consumer is ultimately responsible for payment for the products and services.

3 unchanged sentences

As a result, we create an unbilled rental revenue accrual based on these earned revenues not billed based on a percentage of unbilled amounts and historical trends and estimates of future collectability.

Product Warranty

We generally provide a warranty against defects in material and workmanship.

We provide a 3-year, 5-year or lifetime warranty on Inogen One systems sold and a 3-year and lifetime warranty on Inogen At Home systems sold.

The TAV system has a 1-year and a 3-year warranty.

We also offer a lifetime warranty for direct-to-consumer sales for our oxygen concentrators.

For a fixed price, we agree to provide a fully functional oxygen concentrator for the remaining life of the patient.

Lifetime warranties are only offered to patients upon the initial sale of oxygen concentrators directly from us and are non-transferable.

Our products are subject to regulatory and quality standards.

We establish an accrued liability for the estimated warranty costs at the time of revenue recognition, with a corresponding provision to cost of goods sold.

We evaluate the liability quarterly.

Warranty costs are primarily estimated based on product return rates, historical warranty repair costs incurred and historical failure rates.

We may make further adjustments to the warranty reserve when deemed appropriate, giving additional consideration to length of time the product version has been sold and future expectations of performance based on new features and capabilities.

Actual warranty costs could differ materially from the estimated amounts.

Acquisitions and related acquired intangible assets and goodwill

23 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis