What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-04 · 302 added, 370 removed, 422 unchanged (61% of the section changed)

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information concerning our possible or assumed future cash flows, revenue, sources of revenue and results of operations, operating and other expenses;

our assessment and expectations regarding the impact of the COVID-19 public health emergency (PHE) on our business;

our assessment and expectations regarding reimbursement rates, future rounds of competitive bidding, Centers for Medicare and Medicaid Services (CMS) changes associated with the COVID-19 PHE impacting respiratory care, and future changes in rental revenue;

our assessment and expectations regarding the impact of the COVID-19 pandemic and related public health emergency (PHE) on our business;

our assessment and expectations regarding reimbursement rates, future rounds of competitive bidding, Centers for Medicare and Medicaid Services (CMS) changes associated with the COVID-19 pandemic and related PHE impacting respiratory care, and future changes in rental revenue;

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

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

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

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

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

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on certain imported materials and products;

our ability to successfully acquire and integrate companies and assets, including our recent acquisition of New Aera, Inc.

our ability to successfully acquire and integrate companies and assets, including our acquisition of New Aera, Inc.

our expectations regarding the impact and implementation of trade regulations on our supply chain;

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“Inogen,” “Inogen One,” “Inogen One G2,” “Inogen One G3,” “G4,” “G5,” “Live Life in Moments, not Minutes,” “Never Run Out of Oxygen,” “Oxygen Therapy on Your Terms,” “Oxygen.Anytime.Anywhere,” “Reclaim Your Independence,” “Intelligent Delivery Technology,” “Inogen At Home,” the Inogen design, “TIDAL ASSIST,” “TAV,” and “SIDEKICK” are registered trademarks with the United States Patent and Trademark Office of Inogen, Inc.

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

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

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

We own a pending application for “Inogen” with the United States Patent and Trademark Office.

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

We own pending applications for the mark “Inogen” in Brazil, India, Malaysia, South Africa and Uruguay.

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

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We own a trademark registration for the mark “Satellite Conserver” in Canada.

We own a trademark registration for the mark “Inogen At Home” in Europe (European Union Registration).

We own a trademark registration for the mark “Inogen At Home” in Europe (European Union Registration) and the United Kingdom.

We own trademark registrations for the mark “G4” in Europe (European Union Registration) and the United Kingdom.

We own trademark registrations for the mark “G5” in Europe (European Union Registration) and the United Kingdom.

We own trademark applications for the Inogen design in Bolivia and China.

We own a trademark application for the Inogen design in Bolivia.

We own a trademark registration for the Inogen design in China.

We own a trademark registration for the mark “إنوجن” in Saudi Arabia.

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In this Quarterly Report on Form 10-Q, “we,” “us” and “our” refer to Inogen, Inc.

and its subsidiaries.

and its subsidiary.

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying condensed notes to those statements included elsewhere in this document.

Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q.

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.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements.

Generally, we base our estimates on historical experience and on various other assumptions in accordance with U.S.

Generally, we base our estimates on historical experience and on various other assumptions in accordance with

GAAP that we believe to be reasonable under the circumstances.

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

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three and nine mo nths ended September 3 0 , 20 20 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 201 9 , as filed with the SEC on February 2 5 , 20 20 .

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our critical accounting policies and estimates include those related to:

revenue recognition;

product warranty;

acquisitions and related acquired intangible assets and goodwill.

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three months ended March 31 , 2021 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 24, 2021.

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 PHE could have on our business, the continued rapid spread of COVID-19, both across the United States and throughout much of the world, and the measures taken by the governments of countries and local authorities affected has adversely impacted and will likely continue to adversely impact our business operations, demand for our products, the manufacture or shipment of our products, and our financial condition and operating results.

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

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

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

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

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

However, the COVID-19 pandemic and related PHE adversely impacted our consolidated operating results starting in the second quarter of 2020 continuing through the first quarter of 2021.

We experienced lower direct-to-consumer sales starting toward the end of the first quarter of 2020 and continuing through the first quarter of 2021;

however, we did see increased consumer interest in the first quarter of 2021 compared to each of the last three quarters of 2020, which we believe was due to increased vaccination rates, increased interest in POCs to enable patient mobility, stimulus payments, and increased consumer confidence.

While we observed this increase in consumer interest in the first quarter of 2021, we continue to 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.

On the business-to-business side, 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 quarter of 2020 continuing through the first quarter of 2021 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 PHE has also and could continue to lead to volatility in consumer access to our products due to government actions impacting our ability to produce and ship products or impacting consumers’ movements and access to our products.

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

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

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

The 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 planned for sales and marketing expansion in 2021, we have seen lower hiring in our direct-to-consumer sales force, which did not offset attrition in the first quarter of 2021, and this trend may continue in the rest of 2021, primarily due to the COVID-19 pandemic and related PHE.

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

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 instructed to work from home and most of our total personnel continue to work from home.

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 the nine months ended September 30, 2020, we were able to broadly maintain our operations.

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

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

During 2020 and the first quarter of 2021, we were able to broadly maintain our operations.

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 II, Item 1A of this Quarterly Report on Form 10-Q.

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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.

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

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, except as otherwise limited by the impact of the COVID-19 PHE, our long-term plan is to continue to hire to expand sales capacity while focusing on increased productivity, improved sales personnel and lead distribution systems, 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 20 employees as of December 31, 2019.

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

As a result of the COVID-19 PHE, we slowed down sales representative additions in the second and third quarters of 2020 and plan to have minimal hires for the remainder of 2020.

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

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

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

In 2021, we expect hiring will continue to be challenging due to the continued impacts of the COVID-19 pandemic and related PHE, so we do not plan to increase our sales force and instead hope to offset attrition with replacement hiring.

In the first quarter of 2021, our direct-to-consumer hiring did not offset attrition, so sales representative headcount was down from 300 as of December 31, 2020.

Going forward, except as otherwise limited by the impact of the COVID-19 pandemic and related PHE, our plan is to continue 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 sales 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 believe there was an increased demand in our products in the first quarter of 2021 as compared to the fourth quarter of 2020 associated with increased vaccination rates of our patient population and the relaxation of closure orders related to the COVID-19 pandemic and related PHE leading to increased ambulation, additional stimulus payments and improving consumer

As a result, we have seen increased demand which led to improved sales representative productivity and increased average revenue per order in the first quarter of 2021 versus each of the last three quarters of 2020, which saw declines associated with the COVID-19 pandemic and related PHE.

Sales representative productivity was flat and average revenue per order increased slightly in the first quarter of 2021 as compared to the first quarter of 2020.

W e plan to continue to monitor the COVID-19 pandemic and related PHE given the relatively short timeframe of these improved results 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.

Media and advertising costs declined to $7.7 million in the third quarter of 2020 compared to $9.0 million in the third quarter of 2019, primarily associated with reductions due to the COVID-19 PHE and increased focus on new rental setups.

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

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

However, due to the COVID-19 PHE, we revised these plans as discussed in our Quarterly Report on Form 10-Q for the periods ended March 31, 2020 and June 30, 2020, and we are continuing to reduce marketing spend during the COVID-19 PHE due to the lower return on those investments and to conserve cash.

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

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

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 $7.6 million in the first quarter of 2021 compared to $10.0 million in the first quarter of 2020, primarily associated with a reduction in direct-to-consumer sales representatives, which were down approximately 18% in the comparative periods, 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, 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 improve the productivity of the rental intake team in 2021, which we believe will lead to increased patients on service and growth in rental revenue in future periods.

In the first quarter of 2021, we saw improved rental intake team productivity compared to the fourth quarter of 2020 and versus the first quarter of 2020.

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

Due to the COVID-19 pandemic and related 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 quarter of 2020 through the first quarter of 2021.

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

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

While HME providers have been adopting our products in prior quarters, 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 pending any change in reimbursement rates associated with the published durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) Proposed Rule CMS-1738-P.

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 PHE, 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 PHE which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

Expand our rental revenues through a dedicated rental intake team.

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

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

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

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

We have also seen increased reimbursement rates in some areas for Medicare beneficiaries, which should also increase rental revenue during the COVID-19 PHE.

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 and the first quarter of 2021, primarily due to increased demand for POCs as hospital systems and stationary oxygen concentrator supply were strained to keep up with the increase in COVID-19 cases.

Increase international business-to-business adoption.

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In order to take advantage of these international markets, we have built out an infrastructure over the past few years, which includes sales in 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 and third 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 and Australia.

As in the United States, while there was an initial surge in demand for oxygen concentrators by our international HME customers early in the COVID-19 pandemic, international demand declined in the second quarter of 2020 continuing through the first quarter of 2021 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.

We expect to begin sales in the Chinese market as early as 202 2 although this could be delayed due to regulatory clearance delays, other impacts of the COVID-19 pandemic or government actions, by the United States or China that impose barriers or restrictions that would impact our ability to access the Chinese market.

Over time, as the U.S.

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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 incurred $3.5 million and $2.6 million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $10.4 million and $5.8 million for the nine months ended September 30, 2020 and September 30, 2019, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

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

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.

Invest in our oxygen product offerings to develop innovative products and expand clinical evidence .

We incurred $14.1 million and $9.4 million in 2020 and 2019, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

We incurred $4.0 million and $3.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively, in research and development costs.

We launched our fifth-generation POC, the Inogen One G5 in 2019.

The Inogen One G5 weighs 4.7 pounds and produces 1,260 ml per minute of oxygen output, with very quiet operation at 38 dBA and our longest battery life at 6.5 hours for a single battery and up to 13 hours for a double battery.

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.

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

The Inogen One G5 represented more than 68% of total domestic POC units sold in the nine months ended September 30, 2020, showing the strong demand for this product from both patients and providers.

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 81% of total domestic POC units sold in the three months ended March 31, 2021, 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.

We plan to also invest in clinical studies to evaluate expected improvements in health and economic outcomes associated with the use of our products as part of our efforts to drive payor and prescriber advocacy for our products.

Expand our product offerings.

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.

New Aera’s patented and Food and Drug Administration (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 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 the remainder of 2020, although we expect limited contributions to revenue in 2020.

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

We plan to only sell this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 2021, and 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 quarter of 2020 continuing through the first quarter of 2021, 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 NIV market, where we believe there is a significant worldwide untreated market opportunity.

Device modifications to facilitate compatibility may require FDA premarket review before product commercialization.

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 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 Healthcare Common Procedure Coding System (HCPCS) code has been added to allow billing for a multi-function ventilator that includes both ventilation and oxygen.

Also, effective January 1, 2019, a new Medicare HCPCS code was 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.

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

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

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

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 Tidal Assist Ventilator, 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 Tidal Assist Ventilator and similar devices constitutes a violation of the procedural right provided under the Medicare Act, and our due process rights.

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

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 could negatively affect our business and financial condition .”

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.

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

In 2020, we are focused on reducing the cost of our Inogen One G5 product, expanding manufacturing of the TAV product and our oxygen concentrator products, and increasing the robustness of our supply chain to reduce potential component constraints as we grow our business, and expect to continue this focus into 2021.

In 2021, 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.

We also use lean manufacturing practices to maximize manufacturing efficiency.

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

In the three months ended September 30, 2020 and September 30, 2019, approximately 19.6% and 20.2%, respectively, and 20.7% and 21.5% for the nine months ended September 30, 2020 and September 30, 2019, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

In the three months ended March 31, 2021 and March 31, 2020, approximately 18.1% and 22.7%, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

Approximately 79.3% and 68.7% of the non-U.S.

revenue for the three months ended September 30, 2020 and September 30, 2019, respectively, and 75.6% and 71.2% for the nine months ended September 30, 2020 and September 30, 2019, respectively, was invoiced in Euros with the remainder invoiced in United States dollars.

revenue for the three months ended March 31, 2021 and March 31, 2020, respectively, was invoiced in Euros with the remainder invoiced in United States dollars.

We sell our products in 58 countries outside the United States through our wholly-owned subsidiary, distributors or directly to large “house” accounts, which include gas companies, HME oxygen providers, and resellers.

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

Our total revenue was $74.3 million and $91.8 million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $234.5 million and $283.0 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

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

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

We generated net income (loss) of $(1.7) million and $6.9 million for the three months ended September 30, 2020 and September 30, 2019, respectively, and $(0.7) million and $22.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

We generated Adjusted EBITDA of $4.6 million and $12.8 million in the three months ended September 30, 2020 and September 30, 2019, respectively, and $18.7 million and $40.8 million for the nine months ended September 30, 2020 and September 30, 2019, respectively, (see “Non-GAAP financial measures” for reconciliations between U.S.

Our total revenue was $ 86.9 million and $ 88.5 million for the three months ended March 3 1 , 20 2 1 and March 3 1 , 20 20 , respectively .

The decrease in total revenue in the three months ended March 3 1 , 20 2 1 compared to the three months ended March 3 1 , 20 20 was primarily due to a decline in direct-to-consumer sales and international business-to-business sales , primarily associated with the COVID-19 pandemic and related PHE , partially offset by an increase in rental revenue and domestic business-to-business sales .

We generated net losses of $ 0.

7 million and $ 1.6 million for the three months ended March 3 1 , 20 2 1 and March 31, 202 0 , respectively .

We generated Adjusted EBITDA of $ 5.4 million and $ 4.1 million in the three months ended March 3 1 , 20 2 1 and March 3 1 , 20 20 , respectively , (see “Non-GAAP financial measures” for reconciliations between U.S.

GAAP and non-GAAP results).

As of September 30, 2020, our retained earnings were $80.7 million.

As of March 3 1 , 20 2 1 , our retained earnings were $ 74.

Sales revenue

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

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 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 PHE, their ongoing restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and pending changes in reimbursement rates associated with the published DMEPOS Proposed Rule CMS-1738-P.

hiring additional sales representatives, improving productivity, investing in consumer and physician awareness and advocacy through increased sales and marketing efforts, expanding our clinical evidence, 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 PHE and we expect that such disruption will continue for the duration of the COVID-19 PHE.

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.

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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 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 PHE .

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.

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

We sold approximately 42,200 systems in the three months ended September 30, 2020 and 51,600 systems for the same period in 2019.

We sold approximately 138,100 systems in the nine months ended September 30, 2020 compared to 158,500 systems for the same period in 2019.

We sold approximately 49,400 systems in the three months ended March 31, 2021 and 53,400 systems for the same period in 2020.

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

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

Rental revenue increased in the three months ended September 30, 2020 as compared to the three months ended September 30, 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 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.

Rental revenue in creased in the three months ended March 3 1 , 202 1 as compared to the three months ended March 3 1 , 20 20 , primarily due to a greater number of patients on service , higher Medicare reimbursement rates , and higher billable patients as a percent of total patients on service .

Medicare reimbursement rates for oxygen therapy have increased, as detailed in the Reimbursement section below .

In addition, as part of the various stimulus bills in 2020 ( also discussed in more detail in the Reimbursement section below), the 2 % Medicare sequest ration reduction w as temporarily paused , 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 , which increase d the rates in 2021 while the COVID-19 PHE continues .

The 50/50 blended rate for HME providers in rural and non-contiguous, non-competitive bid areas was extended for the duration of the COVID-19 PHE and has been proposed to be extended permanently as part of the proposed rule published on November 4, 2020, which is expected to be finalized by May 11, 2022 .

We p lan 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 advocacy, expanding clinical evidence , 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.

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

We had approximately 29,500 and 25,600 oxygen rental patients as of September 30, 2020 and September 30, 2019, respectively.

We had approximately 34,700 and 24,600 oxygen rental patients as of March 31, 2021 and March 31, 2020, respectively.

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

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Reimbursement

Medicare and private insurance rentals represented 10.1% and 5.9% of our total revenue in the three months ended September 30, 2020 and September 30, 2019, respectively, and 8.1% and 5.6% in the nine months ended September 30, 2020 and September 30, 2019, respectively.

Medicare and private insurance rentals represented 11.3% and 6.0% of our total revenue in the three months ended March 31, 2021 and March 31, 2020, respectively, primarily due to decreased sales revenue, increased rental patients on service, and increased reimbursement rates.

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

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

For the three and nine months ended September 3 0 , 20 20 , approximately 82.8 % and 80.6 %, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

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

For the three months ended March 31, 2021 and March 31, 2020, approximately 83.9% and 78.2%, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

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

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

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

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

The average Medicare reimbursement rates in former competitive bidding areas (CBAs) in the prior four years are outlined in the table below for E1390 and E1392, which are the two primary codes that we bill to Medicare and other payors for our oxygen product rentals.

These rates are typically updated annually each January as they are subject to Consumer Price Index (CPI) and budget neutrality adjustments, but are also subject to adjustments during the year due to legislative rulings.

Competitive bidding contracts were scheduled to go into effect on January 1, 2021;

however, on October 27, 2020, CMS announced that competitive bidding contracts would not be awarded for most product categories, including oxygen, due to the payment amounts not achieving the expected savings and the current COVID-19 pandemic and related PHE.

Effective April 1, 2021, rates were adjusted to remove a percentage reduction that was put in place to meet the budget neutrality requirement previously mandated by section 1834(a)(9)(D)(ii) of the Social Security Act.

See the table below for average Medicare rates in former CBAs, using a simple average of rates in each CBA.

Average Medicare reimbursement rates in former CBAs

As of April 1, 2021

As of January 1, 2021

As of January 1, 2020

As of January 1, 2019

As of January 1, 2018

In addition to regional pricing, CMS imposed different pricing on “frontier states” and rural areas.

CMS defines frontier states as states where more than 50% of the counties in the state have a population density of 6 people or less per square mile and rural states are defined as states where more than 50% of the population lives in rural areas per census data.

Current frontier states include MT, ND, SD and WY;

rural states include ME, MS, VT and WV;

and non-contiguous United States areas include AK, HI, Guam and Puerto Rico.

Effective June 1, 2018, for frontier and rural states, frontier and rural zip codes in non-frontier/rural states and non-contiguous United States areas, the single payment amount was 50/50 blended reimbursement rates based on an average of the pre-competitive bidding reimbursement rates and the current average reimbursement rates to account for higher servicing costs in these areas.

The Medicare reimbursement rates in rural areas is outlined in the table below, and include areas that are considered non-contiguous (Alaska, Hawaii, Puerto Rico, and the Virgin Islands).

We estimate that approximately 20% of our patients are eligible to receive the higher reimbursement rates based on the geographic locations of our current patient population.

Effective March 1, 2021, CMS announced that the rates as of January 1, 2021, were incorrectly calculated, and retroactively adjusted the rates, which are reflected in the table below.

The Medicare rates announced previously were a simple average of $136.24 for HCPCS code E1390 and $44.69 for HCPCS code E1392, which were increased to $136.84 and $44.99, respectively.

Effective April 1, 2021, rates will be adjusted to remove a percentage reduction that was put in place to meet the budget neutrality requirement previously mandated by section 1834(a)(9)(D)(ii) of the Social Security Act.

See the table below for average Medicare rates in rural areas, using a simple average of rates in each state.

Average Medicare reimbursement rates in rural areas

As of April 1, 2021

As of January 1, 2021 (retroactively revised March 1, 2021)

As of January 1, 2020

As of January 1, 2019

As of January 1, 2018

Rates in non-former CBAs that are not defined as rural are set based on the rates in former CBAs.

See the table below for average Medicare rates in these non-former CBAs, non-rural areas, using a simple average of rates in each state.

Effective March 1, 2021, CMS announced that the rates as of January 1, 2021 were incorrectly calculated, and retroactively adjusted the rates, which are reflected in the table below.

The Medicare rates announced previously were a simple average of $103.18 for HCPCS code E1390 and $39.62 for HCPCS code E1392, which were increased to $104.07 and $40.06, respectively.

Note that the 2021 rates listed below include Coronavirus Aid, Relief, and Economic Security (CARES Act) increased rates due to the COVID-19 PHE, which may not be in place for all of 2021.

Average Medicare reimbursement rates in non-former CBAs, non-rural areas

As of April 1, 2021

As of January 1, 2021 (retroactively revised March 1, 2021)

As of January 1, 2020

As of January 1, 2019

As of January 1, 2018

There have been significant U.S.

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

The CARES Act allows the U.S.

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

6074 also granted authority to waive certain requirements.

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

Department of Health and Human Services (HHS) on January 31, 2020.

The CARES Act allows HHS to waive certain Medicare telehealth payment requirements during the COVID-19 PHE to allow beneficiaries in all areas to receive telehealth services, including at their home, starting March 6, 2020.

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

6074) also granted HHS the authority to waive certain requirements with respect to telehealth services.

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

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

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

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

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

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

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

This relief is effective May 1, 2020 through December 31, 2020, and the CARES Act also extends the end date of the Medicare sequestration reduction by one year, through 2030, in order to offset the 2020 suspension.

The CARES Act and the Consolidated Appropriations Act of 2021 also included a temporary pause of the 2% percent Medicare sequestration reduction that went into effect in 2013.

The CARES Act implemented the relief effective May 1, 2020 through December 31, 2020.

The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020 and extended the suspension period to March 31, 2021.

The CARES Act also extended the end date of the Medicare sequestration reduction by one year, through 2030, in order to offset the 2020 suspension.

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

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

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

In addition, the administration has issued a number of regulatory waivers to increase the flexibility in DMEPOS suppliers’ ability to service patients quickly and without the normal requirements.

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These changes were retroactive to early March 2020.

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

Effective January 1, 2019, Medicare beneficiaries may receive durable medical equipment from any Medicare-enrolled supplier until new contracts are in effect under competitive bidding.

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

Pricing in former CBAs is subject to annual CPI adjustments beginning in 2019.

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

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

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

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

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

On October 27, 2020, CMS announced that competitive bidding contracts that were scheduled to go into effect on January 1, 2021 will not be awarded for most product categories, including oxygen, due to the payment amounts not achieving the expected savings and the current COVID-19 PHE.

CMS also issued a proposed rule (CMS-1738-P) to establish payment amounts going forward for DMEPOS products and services covered under Medicare.

We believe that Medicare rates will not change for the length of the COVID-19 PHE, except for the 2% Medicare sequestration that will go back into effect on January 1, 2021, and any net change for inflation and budget neutrality adjustments that typically occur annually each January but have not yet been announced.

CMS is proposing to set Medicare rates after the COVID-19 PHE at the 50/50 blended rates in the non-contiguous and rural areas as a permanent construct, but Medicare rates in all other areas would be set at the adjusted payment amount.

This would reduce Medicare rates after the PHE is over in the current areas that are considered non-rural but not covered by a former CBA, as those areas are currently receiving a 75/25 blended reimbursement rate.

There is a 60-day comment period on this proposed rule, so we expect this rule to be finalized in the first quarter of 2021.

In addition to regional pricing, CMS imposed different pricing on “frontier states” and rural areas.

Current frontier states include MT, ND, SD and WY;

rural states include ME, MS, VT and WV;

and non-contiguous United States areas include AK, HI, Guam and Puerto Rico.

Effective June 1, 2018 through December 31, 2020, for frontier and rural states, frontier and rural zip codes in non-frontier/rural states and non-contiguous United States areas, the single payment amount will be 50/50 blended reimbursement rates based on an average of the pre-competitive bidding reimbursement rates and the current average reimbursement rates to account for higher servicing costs in these areas.

In 2019, this rate was $134.71 a month for E1390 and $44.32 a month for E1392, and this rate increased by 1.5% effective January 1, 2020 to $136.71 a month for E1390 and $44.93 a month for E1392.

We estimate that approximately 15% of our patients are eligible to receive the higher reimbursement rates based on the geographic locations of our current patient population.

CMS could propose future rounds of competitive bidding, which could reduce reimbursement rates, negatively impact the premium for POCs over other oxygen modalities, or limit beneficiary access to our technologies.

However, in July 2020, CMS released a COVID-19 Provider Burden Relief FAQs document that stated that CMS would resume full operations for the prior authorization program for certain DMEPOS effective August 3, 2020.

CMS also issued a proposed rule on November 4, 2020 (CMS-1738-P) to establish payment amounts going forward for DMEPOS products and services covered under Medicare.

We believe that Medicare rates will not change for the length of the COVID-19 PHE, except for any net change for inflation and budget neutrality adjustments, as outlined above.

CMS is proposing three different fee schedule adjustment methodologies for non-CBAs after the termination of the COVID-19 PHE:

(1) for non-contiguous non-CBAs;

(2) for contiguous non-CBAs defined as rural areas;

and (3) for non-rural non-CBAs within the contiguous United States.

Proposed adjustment methodologies (1) and (2) contemplate utilizing the 50/50 blended rates as a permanent construct, but proposed adjustment methodology (3) contemplates setting the fee schedule amounts to 100% of the Medicare rates.

This could reduce Medicare rates after the PHE is over in the current areas that are considered non-rural but not covered by a former CBA, as those areas are currently receiving a 75/25 blended reimbursement rate.

There was a 60-day comment period on this proposed rule, and we expected this rule to be finalized in the first half of 2021.

This may be delayed due to the fact that on April 26, 2021, CMS published a notice stating that the Biden Administration published a “Regulatory Freeze Pending Review” memorandum advising all agencies, unless otherwise excepted by the Director of Office of Management and Budget, not to issue any rule until an appointee by the new Administration reviews and approves the rule.

Pending this review and approval, CMS is continuing the rules already in effect until May 11, 2022.

In January 2021, CMS announced the pivotal bid amounts for the competitive bidding round 2021.

As a reminder, the bids for oxygen were based on the HCPCS code E1390, which is for stationary oxygen, and there were 130 regions bid.

The simple average of the 2018 single payment amounts for these regions for this code was $73.98.

The simple average of the pivotal bid amounts for these regions for this code was $122.61, or an average increase of 65.7%.

If CMS would have implemented these rate changes, the simple average payment amounts in these regions for POCs (codes E1390 and E1392) would have been $157.60, which is significantly higher than the simple average payment amounts of $110.07 and $121.07 per month being paid as of January 1, 2021 and April 1, 2021 for these regions.

In April 2021, CMS announced a delay of the 2018 IFR final rule (CMS-1687-RCN) and the 2020 DMEPOS proposed rule (CMS-1738-P discussed above).

CMS is required to publish a final rule no later than three years after the publication of a proposed or interim final rule, except under exceptional circumstances.

The 2018 IFR that resumed the 50/50 blended rates in rural areas between June and December 2018 was published on May 11, 2018.

In accordance with the requirement, CMS is required to publish the final rule to the 2018 IFR by May 11, 2021, but CMS announced that there will be a delay in the final rule publication, and they extended the 2018 IFR until May 11, 2022.

In addition, in the 2020 DMEPOS proposed rule, CMS stated that they solicited comments on the 2018 IFR, but have not yet responded to the comments received, and will do so in the final rule, expected to be published by May 11, 2022.

CMS is required to propose future rounds of competitive bidding, which could change reimbursement rates, negatively impact the premium for POCs over other oxygen modalities, or limit beneficiary access to our technologies.

Cumulatively in previous rounds of competitive bidding, we were offered contracts for a substantial majority of the CBAs and product categories for which we submitted bids.

As of January 1, 2017, we believe we had access to over 90% of the Medicare oxygen therapy market based on our analysis of the 103 CBAs that we won out of the 130 total CBAs.

These 130 CBAs represented approximately 36% of the Medicare market with the remaining approximately 64% of the market not subject to competitive bidding per Medicare’s data on 2018 traditional Medicare fee-for-service beneficiaries in CBAs as compared to the total Medicare fee-for-service beneficiaries.

As of January 1, 2017 (when the last round of competitive bidding was in effect), we believe we had access to over 90% of the Medicare oxygen therapy market based on our analysis of the 103 CBAs that we won out of the 130 total CBAs.

These 130 CBAs represented approximately 36% of the Medicare market with the remaining approximately 64% of the market not subject to competitive bidding per Medicare’s data on 2018 traditional Medicare fee-for-service beneficiaries in CBAs compared to the total Medicare fee-for-service beneficiaries.

As of January 1, 2019, we can choose to accept Medicare oxygen patients throughout the United States.

As of July 2018, we are operating in all 50 states in the U.S.

We cannot guarantee that we will be offered contracts in subsequent rounds of competitive bidding.

We did not sell or rent to patients in Hawaii due to the licensure requirements from inception to June 2018.

We cannot guarantee that we will be offered contracts in any subsequent rounds of competitive bidding.

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

Medicare revenue, including patient co-insurance and deductible obligations, represented 8.4% and 6.5% of our total revenue in the three and nine months ended September 30, 2020, respectively.

Medicare revenue, including patient co-insurance and deductible obligations, represented 9.5 % of our total revenue in the three months ended March 3 1 , 20 2 1 and 4.7 % in the three months ended March 31, 2020.

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

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The supplier may not arbitrarily issue new equipment.

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

Our capped patients as a percentage of total patients on service was approximately 13.8% as of September 30, 2020 and 20.2% as of September 30, 2019.

We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three months ended March 31, 2021 and March 31, 2020.

Our capped patients as a percentage of total patients on service was approximately 9.8% as of March 31, 2021 and 19.5% as of March 31, 2020.

The decrease in percentage of capped patients in the comparative periods was primarily due to the increase in new patients coming on service, which substantially exceeded the number of patients that entered the capped period.

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If the equipment malfunctions, we must repair or replace the equipment.

We determine what equipment the patient receives, as long as that equipment meets the physician’s prescription, and we can deploy used assets in working order as long as the prescription requirements are met.

We determine what equipment the patient receives, and we can deploy used assets in working order as long as the prescription requirements are met.

We must also procure a recertification of the certificate of medical necessity from the patient’s doctor to confirm the patient’s need for continued oxygen therapy one year after the patient first receives oxygen therapy and one year after each new 36-month reimbursement period begins.

The patient can choose to receive oxygen supplies and services from another supplier at any time, but the supplier may only transition the patient to another supplier in certain circumstances.

Average Medicare reimbu rsement rates for NIV HCPCS code E0466 were a monthly, non-capped rental with rates of $1,042.26 a month in 2019, and increased 0.9% effective January 1, 2020 to $1,051.64 a month, excluding Puerto Rico where the monthly Medicare reimbursement rate for E0466 was $1,827.24 per month in 2019 and increased to $1,843.69 a month effective January 1, 2020.

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

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

Average Medicare reimbursement rates for NIV HCPCS code E0466 are listed in the table below and were a monthly non-capped rental.

These rates exclude Puerto Rico, where rates have ranged from $1,786.16 to $1,847.38 over the periods presented.

Average Medicare reimbursement rates for NIV (excludes Puerto Rico)

As of January 1, 2021

As of January 1, 2020

As of January 1, 2019

As of January 1, 2018

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

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

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

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In September 2020, we filed a lawsuit against Palmetto GBA, LLC and Alex Azar and Seema Verma in their official capacities at the Department of Health and Human Services and the Centers for Medicare and Medicaid Services, respectively.

The lawsuit seeks to invalidate the retraction of a valid HCPCS code to Inogen’s TAV system and claims a violation of our procedural rights provided under the Medicare Act, the Administrative Procedure Act, and our due process rights due to CMS’ failure to provide notice and the opportunity to comment on a change in HCPCS code verification for the TAV product.

The lawsuit seeks to invalidate the retraction of a valid HCPCS code to Inogen’s TAV system and claims a violation of our procedural rights provided under the Social Security Act, the Administrative Procedure Act, and our due process rights due to CMS’ failure to provide notice and the opportunity to comment on a change in HCPCS code verification for the TAV product.

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

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

In addition, the Medicare Evidence Development & 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 chronic obstructive pulmonary disease (COPD).

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

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

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

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

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

As of March 3 1 , 20 2 1 , we had 91 contracts with Medicaid, Medicare Advantage, government and private payors.

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

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Basis of presentation

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

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

We classify our revenue in two main categories:

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

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

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

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

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 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, and we did not see the typical seasonal increases in direct-to-consumer sales in 2020 that we have seen in prior years.

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

Sales revenue

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

Rental revenue increased in the three and nine months ended September 30, 2020, primarily due to higher Medicare reimbursement rates, higher patients on service, higher billable patients as a percent of total patients on service and lower revenue adjustments.

We expect our rental revenue to increase in future periods as we scale the rental intake and sales teams, increase new rental setups, and, for the duration of the COVID-19 PHE, benefit from the 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, 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 the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to higher patients on service, higher billable patients as a percent of total patients on service, and higher Medicare reimbursement rates.

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.

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

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

In 2020 and the three months ended March 31, 2021, the impact of the Chinese tariffs on our financial results was minimal as we have received some exemptions, negotiated cost sharing and price reductions with suppliers, and re-allocated purchases.

Assuming the Chinese tariffs stay at the current levels, we currently expect the overall financial impact to our business to be minimal to the average unit cost for 2021.

We expect the TAV system to have a higher sales gross margin than our existing oxygen therapy products.

We expect the TAV system to have a higher sales gross margin than our existing oxygen therapy products assuming we are successful in obtaining reimbursement coding under HCPCS code E0466.

For these reasons, we expect sales gross margin percentage to fluctuate over time based on the sales channel mix, product mix, and changes in average selling prices and cost per unit.

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and logistics costs.

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

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.

Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products.

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

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

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

Sales and marketing expense decreased slightly in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Our average sales representative headcount in the third quarter of 2020 was up approximately 8% compared to the third quarter of 2019, but it was down sequentially from the second quarter of 2020 as attrition outpaced hiring in the period.

We expect minimal direct-to-consumer sales representative hiring in the fourth quarter of 2020 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 PHE.

Due to the COVID-19 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, 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 2020 and 2021 associated with the expanded launch of the TAV product following the limited launch in December 2019.

Sales and marketing expense decreased in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily associated with lower advertising expense.

Our average direct-to-consumer sales representative headcount in the first quarter of 2021 was down from the first quarter of 2020 as attrition outpaced hiring in the periods, similar to the trends seen in 2020 compared to 2019.

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 the remainder of 2021 associated with the expanded launch of the TAV product following the limited launch in 2020.

General and administrative

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Our other income (expense), net consists primarily of interest income earned on cash equivalents and marketable securities as well as foreign currency gains and (losses).

We account for income taxes in accordance with ASC 740— Income Taxes .

We account for income taxes in accordance with Accounting Standards Codification (ASC) 740— Income Taxes .

Under ASC 740, income taxes are recognized for the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our consolidated financial statements or tax returns.

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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

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

Comparison of three months ended March 31, 2021 and March 31, 2020

Three months ended

September 30,

Change 2021 vs.

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Total revenue

Sales revenue decreased $19.6 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or a decrease of 22.7% from the comparable period.

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

We sold approximately 42,200 oxygen systems during the three months ended September 30, 2020 compared to approximately 51,600 oxygen systems sold during the three months ended September 30, 2019, or a decrease of 18.2%.

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

Rental revenue increased $2.2 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, or an increase of 40.1% from the comparable period.

The increase in rental revenue was primarily related to higher Medicare reimbursement rates, a 15.2% increase in rental patients on service, higher billable patients as a percent of total patients on service, and lower revenue adjustments.

Sales revenue decreased $6.1 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or a decrease of 7.3% from the comparable period.

The decrease was primarily attributable to reduced direct-to-consumer sales and reduced international business-to-business sales, primarily due to the impact of the COVID-19 pandemic and related PHE, partially offset by increased domestic business-to-business sales.

We sold approximately 49,400 oxygen systems during the three months ended March 31, 2021 compared to approximately 53,400 oxygen systems sold during the three months ended March 31, 2020, or a decrease of 7.5%.

The decrease in the number of systems sold resulted mainly from a decrease in sales in the direct-to-consumer and international business-to-business channels, primarily due to the COVID-19 pandemic and related PHE.

Rental revenue increased $4.5 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or an increase of 84.2% from the comparable period.

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, and higher Medicare reimbursement rates.

Three months ended

(amounts in thousands)

September 30,

Change 2021 vs.

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Total revenue

Domestic business-to-business sales de creased 23.5% for the three months ended September 3 0 , 20 20 compared to the three months ended September 3 0 , 201 9 .

The de crease was primarily the result of de creased demand from our resellers and HME partners for oxygen concentrators .

We believe this decreased demand was primarily due to competitive bidding uncertainty and the continued impact of the COVID-19 PHE, including lower retail sales, reduced patient travel, physician offices limiting patient interactions that traditionally have led to new oxygen patient referrals, HME providers minimiz ing patient interactions in response to the COVID-19 PHE which includes replacing existing oxygen patient setups with POCs, and HME provider s turn ing their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

International business-to-business sales decreased 21.1% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, mostly due to decreased demand from our HME partners for oxygen concentrators due to the temporary 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 and Australia.

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

In the three months ended September 30, 2020, sales in Europe as a percentage of total international sales revenue increased to 90.2% versus 84.2% in the comparative period in 2019, primarily because of larger relative declines seen in other international markets outside of Europe, primarily Canada and Australia.

Domestic direct-to-consumer sales decreased 22.7% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to the impact of the COVID-19 PHE with government mandated shelter-in-place initiatives, reduced consumer travel, and lower consumer confidence, which decreased demand and associated sales representative productivity in the third quarter of 2020 compared to the same period in the prior year.

Average sales representative headcount was up approximately 8% compared to the third quarter of 2019.

Domestic direct-to-consumer rentals increased 40.1% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to increased reimbursement rates, an increase in patients on service, higher billable patients as a percent of total patients on service, and lower revenue adjustments.

Domestic business-to-business sales increased 11.6% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The increase was primarily due to increased demand from our HME partners for oxygen concentrators in response to the COVID-19 pandemic and related PHE due to greater demand for POCs for COVID-19 patients at hospital discharge, partially offset by lower reseller demand.

In addition, we believe the resolution of competitive bidding uncertainty in October 2020 also contributed to increased demand in our domestic business-to-business channel in the first quarter of 2021.

International business-to-business sales decreased 21.7% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, mostly driven by the continued impact of the COVID-19 pandemic with intermittent lockdowns in many European countries, along with reduced operating capacity of certain European respiratory assessment centers due to the COVID-19 pandemic.

In the three months ended March 31, 2021, sales in Europe as a percentage of total international sales revenue increased to 86.5% versus 84.6% in the comparative period in 2020.

Domestic direct-to-consumer sales decreased 13.8% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to lower average inside sales representative headcount, which was down approximately 18% from the comparative period.

However, there was increased demand for POCs in the first quarter of 2021 compared to the fourth quarter of 2020, which we believe was primarily due to higher vaccination rates within our patient population and the relaxation of closure orders related to the COVID-19 PHE leading to increased ambulation, additional stimulus payments, and improved consumer confidence.

This led to improved sales representative productivity and increased average revenue per order versus each of the last three quarters in 2020 when these metrics declined associated with the COVID-19 pandemic.

Compared to the first quarter of 2020, sales representative productivity was flat, and average revenue per order increased.

Domestic direct-to-consumer rentals increased 84.2% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily due to an increase in patients on service, higher billable patients as a percent of total patients on service, and increased Medicare reimbursement rates.

Cost of revenue and gross profit

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September 30,

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Total gross margin percentage

Cost of sales revenue decreased $7.1 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or a decrease of 15.8% from the comparable period.

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

Cost of rental revenue decreased $0.1 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or a decrease of 1.8% from the comparable period.

The decrease in cost of rental revenue was primarily attributable to reduced servicing costs.

Cost of rental revenue included $1.5 million of rental asset depreciation for the three months ended September 30, 2020 and for the three months ended September 30, 2019.

Sales revenue gross margin percentage decreased to 43.5 % for the three months ended September 3 0 , 20 20 from 48.2 % for the three months ended September 3 0 , 201 9 .

The decrease was primarily related to lower average selling prices , particularly in our direct-to-consumer channel where consumers bought product configurations with lower margin bundles, and increased material and overhead costs per unit, partially offset by lower warranty expense per unit.

Rental revenue gross margin percentage increased to 52.0% for the three months ended September 30, 2020 from 31.5% for the three months ended September 30, 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.

Cost of sales revenue decreased $4.5 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or a decrease of 9.5% from the comparable period.

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

Cost of rental revenue increased $1.4 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or an increase of 47.2% from the comparable period.

The increase in cost of rental revenue was primarily attributable to increased rental asset depreciation expense and servicing costs resulting from a 41.1% increase in the number of patients on service.

Cost of rental revenue included $1.9 million of rental asset depreciation for the three months ended March 31, 2021 compared to $1.3 million for the three months ended March 31, 2020.

Sales revenue gross margin percentage increased to 44.7% for the three months ended March 31, 2021 from 43.3% for the three months ended March 31, 2020.

The increase was primarily related to lower manufacturing cost per unit versus certain manufacturing inefficiencies we experienced in the comparable period of 2020.

These increases were partially offset by lower average selling prices due to an increased mix of domestic business-to-business sales, which have a lower gross margin than our direct-to-consumer sales.

Total worldwide business-to-business sales revenue accounted for 60.3% of total sales revenue in the three months ended March 31, 2021 versus 57.3% in the three months ended March 31, 2020.

Rental revenue gross margin percentage increased to 55.1% for the three months ended March 31, 2021 from 43.8% for the three months ended March 31, 2020, primarily due to higher billable patients as a percent of total patients on service and higher Medicare reimbursement rates, partially offset by higher service expense per patient on service.

Research and development expense

Three months ended

September 30,

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Research and development expense

Research and development expense increased $0.9 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or an increase of 33.2% over the comparable period, primarily due to an increase of $1.0 million in intangible amortization costs, which were mainly related to the New Aera acquisition.

Research and development expense increased $0.4 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or an increase of 11.4% over the comparable period, primarily due to a $0.3 million increase in product development expenses.

Sales and marketing expense

Three months ended

September 30,

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Sales and marketing expense

Sales and marketing expense decreased $1.2 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or a decrease of 4.8% from the comparable period, primarily attributable to decreases of $1.3 million of lower advertising expense, partially offset by $0.9 million of higher personnel-related expenses.

In the three months ended September 30, 2020, we spent $7.7 million in media and advertising costs versus $9.0 million in the comparative period in 2019.

Sales and marketing expense decreased $1.7 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or a decrease of 6.2% from the comparable period, primarily attributable to a decrease of $2.5 million of media and advertising costs, partially offset by an increase of $1.2 million in personnel-related expenses.

In the three months ended March 31, 2021, we spent $7.6 million in media and advertising costs versus $10.0 million in the comparative period in 2020.

General and administrative expense

Three months ended

September 30,

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General and administrative expense

General and administrative expense increased $0.1 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or an increase of 0.7% from the comparable period.

The increase was primarily related to $0.8 million in higher personnel-related expenses, partially offset by $0.5 million in lower legal fees and a $0.3 million benefit to general and administrative expense as a reduction to lost revenues classified in other income.

General and administrative expense increased $2.7 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or an increase of 27.8% from the comparable period.

The increase was primarily attributable to $1.8 million in CEO transition costs and $1.2 million in the fair value of the New Aera earnout liability, partially offset by $0.5 million in lower consulting fees.

Other income (expense)

Three months ended

September 30,

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Interest income

Other income (expense)

Total other income, net

Total other income, net de creased $ 0.6 million for the three months ended September 3 0 , 20 20 from the three months ended September 3 0 , 2019, or a de crease of 90.7 % from the comparable period.

The de crease was primarily attributable to $1.0 million in interest income on marketable securities due to the lower interest rate environment and $0.3 million in other income as a reduction to lost revenues from the CARES Act Provider Relief Fund that was reclassified to general and administrative expense , partially offset by an increase of $0.7 million in other income primarily related to net foreign currency gains .

Income tax expense (benefit)

Other expense

Total other income (expense), net

Total other income (expense), net decreased $0.7 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or a decrease of 151.4% from the comparable period.

The decrease was primarily attributable to a decrease of $0.5 million in interest income on marketable securities due to the lower interest rate environment and lower invested balances in marketable securities in the three months ended March 31, 2021 compared to the three months ended March 31, 2020, and by a $0.3 million increase in net foreign currency losses.

Benefit for income taxes

Three months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Income tax expense (benefit)

Benefit for income taxes

Effective income tax rate

Income tax expense (benefit) decreased $2.1 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, primarily attributable to a 121.9% decrease in income before income tax expense (benefit).

Our effective tax rate in the three months ended September 30, 2020 decreased compared to the three months ended September 30, 2019, primarily due to changes in income before income tax expense.

In the three months ended September 30, 2020, excess tax deficiencies recognized from stock-based compensation increased our income tax expense by $0.2 million and our effective tax rate by 9.6%, as compared to the tax rate without such deficiencies.

For comparison, in the three months ended September 30, 2019, excess tax deficiencies recognized from stock-based compensation increased our income tax expense by $0.1 million and our effective tax rate by 0.7%, as compared to the tax rate without such deficiencies.

Net income (loss)

Benefit for income taxes increased $1.6 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, primarily resulting from the increase in excess tax benefits recognized from stock-based compensation, and an increase in loss before benefit for income taxes.

Our effective tax rate in the three months ended March 31, 2021 increased compared to the three months ended March 31, 2020, primarily due to the increase in excess tax benefits recognized from stock-based compensation.

Three months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Net income (loss)

Net income (loss) decreased $8.6 million for the three months ended September 30, 2020 from the three months ended September 30, 2019, or a decrease of 124.8% from the comparable period.

The decrease in net income (loss) was primarily related to lower sales revenue and gross margin as well as lower interest income.

Comparison of nine months ended September 30, 2020 and September 30, 2019

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Sales revenue

Rental revenue

Total revenue

Sales revenue decreased $51.5 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or a decrease of 19.3% from the comparable period.

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

We sold approximately 138,100 oxygen systems during the nine months ended September 30, 2020 compared to approximately 158,500 oxygen systems sold during the nine months ended September 30, 2019, or a decrease of 12.9%.

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

Rental revenue increased $ 3.0 million for the nine months ended September 3 0 , 20 20 compared to the nine months ended September 3 0 , 201 9 , or a n in crease of 18.8 % from the comparable period.

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

Nine months ended

(amounts in thousands)

September 30,

Change 2020 vs.

Revenue by region and category

Business-to-business domestic sales

Business-to-business international sales

Direct-to-consumer domestic sales

Direct-to-consumer domestic rentals

Total revenue

Domestic business-to-business sales decreased 15.9% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The decrease was primarily due to decreased demand from our HME partners for oxygen concentrators in response to the COVID-19 PHE due to 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 PHE which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

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

International business-to-business sales decreased 20.2% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 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 nine months ended September 30, 2020, sales in Europe as a percentage of total international sales revenue increased to 87.0% versus 86.4% in the comparative period in 2019.

Domestic direct-to-consumer sales decreased 21.2% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to the impact of the COVID-19 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 a decline in average sales representative headcount.

Domestic direct-to-consumer rentals increased 18.8% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to an increase in patients on service, increased reimbursement rates, higher billable patients as a percent of total patients on service, and lower revenue adjustments.

Cost of revenue and gross profit

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Total gross profit

Gross margin percentage - sales revenue

Gross margin percentage- rental revenue

Total gross margin percentage

Cost of sales revenue decreased $13.2 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or a decrease of 9.8% from the comparable period.

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 $ 1.5 million for the nine months ended September 3 0 , 2020 from the nine months ended September 3 0 , 2019, or a decrease of 14.0 % from the comparable period.

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

Cost of rental revenue included $ 4.0 million of rental asset depreciation for the nine months ended September 3 0 , 2020 compared to $ 4.8 million for the nine months ended September 3 0 , 2019.

Sales revenue gross margin percentage decreased to 43.9% for the nine months ended September 30, 2020 from 49.8% for the nine months ended September 30, 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 domestic business-to-business sales revenue accounted for 33.5% of total sales revenue in the nine months ended September 30, 2020 versus 32.1% in the nine months ended September 30, 2019.

Rental revenue gross margin percentage increased to 50.0% for the nine months ended September 30, 2020 from 30.9% for the nine months ended September 30, 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

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Research and development expense

Research and development expense increased $4.6 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or an increase of 80.3% 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

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Sales and marketing expense

Sales and marketing expense decreased $7.9 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or a decrease of 9.8% from the comparable period, primarily attributable to decreases of $5.9 million of advertising costs, $1.4 million of personnel-related expenses mainly associated with lower commission expense, and $0.7 million in credit card processing fees, partially offset by an increase of $0.7 million in dues, fees and license costs.

In the nine months ended September 30, 2020, we spent $24.9 million in media and advertising costs versus $30.8 million in the comparative period in 2019.

General and administrative expense

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

General and administrative expense

General and administrative expense increased $1.0 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or an increase of 3.8% from the comparable period.

The increase was primarily attributable to $1.7 million in consulting fees, $0.4 million in facilities costs and $0.3 million in personnel-related expenses, partially offset by a $0.9 million reimbursement from the CARES Act Provider Relief Fund from the COVID-19 PHE and $0.8 million in lower legal fees.

Other income (expense)

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Interest income

Other income (expense)

Total other income, net

Total other income, net increased $3.0 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or an increase of 89.1% 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 PHE and a $0.7 million increase in net foreign currency gains, partially offset by a decrease of $3.0 million in interest income on marketable securities due to the lower interest rate environment.

Income tax expense

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Income tax expense

Effective income tax rate

Income tax expense decreased $5.6 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, primarily attributable to a decrease in income before income tax expense for the year.

Our effective tax rate in the nine months ended September 30, 2020 decreased compared to the nine months ended September 30, 2019, primarily due to the increase in excess tax deficiencies recognized from stock-based compensation, partially offset by the changes in income before income tax expense.

In the nine months ended September 30, 2020, excess tax deficiencies recognized from stock-based compensation increased our income tax expense by $0.7 million and decreased our effective tax rate by 904.0%, as compared to the tax rate without such deficiencies.

For comparison, in the nine months ended September 30, 2019, excess tax benefits recognized from stock-based compensation decreased our income tax expense by $0.4 million and our effective tax rate by 1.3%, as compared to the tax rate without such benefits.

Net income (loss)

Nine months ended

September 30,

Change 2020 vs.

(amounts in thousands)

Net income (loss)

Net income (loss) decreased $23.0 million for the nine months ended September 30, 2020 from the nine months ended September 30, 2019, or a decrease of 103.2% 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.

Net loss decreased $0.9 million for the three months ended March 31, 2021 from the three months ended March 31, 2020, or a decrease of 53.9% from the comparable period.

The decrease in net loss was primarily related to an increase in gross profit and an increase in excess tax benefits recognized from stock-based compensation, partially offset by higher operating expenses.

Contractual obligations

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

As of September 30, 2020, we had purchase obligations with outside vendors and suppliers of approximately $56.5 million of which the timing varies depending on demand, current supply on hand and other factors.

As of March 31, 2021, we had purchase obligations with outside vendors and suppliers of approximately $64.4 million of which the timing varies depending on demand, current supply on hand and other factors.

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

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Liquidity and capital resources

As of September 30, 2020, we had cash and cash equivalents of $214.0 million, which consisted of highly-liquid investments with a maturity of three months or less.

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

Since 2013, we have received $53.4 million from proceeds related to stock option exercises and our employee stock purchase plan.

For the nine months ended September 30, 2020 and September 30, 2019, we received $2.3 million and $4.8 million, respectively, in proceeds related to these stock programs.

Our principal uses of cash for liquidity and capital resources in the nine months ended September 30, 2020 consisted of capital expenditures of $11.8 million including additional rental equipment, other property, plant and equipment, and intangible assets.

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

As of March 31, 2021, we had cash and cash equivalents of $220.0 million, which consisted of highly liquid investments with a maturity of three months or less.

In addition, we held marketable securities of $13.1 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 three months ended March 31, 2021 and March 31, 2020, we received $4.8 million and $1.1 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 three months ended March 31, 2021 consisted of capital expenditures of $5.2 million including additional rental equipment, other property, plant and equipment, and intangible assets.

The COVID-19 pandemic and related PHE has not materially impacted 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.

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

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

Any future indebtedness we incur may result in

terms that could be unfavorable to equity investors.

There can be no assurances that we will be able to raise additional capital, which would adversely affect our ability to achieve our business objectives.

1 unchanged sentence

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

Nine months ended

Three months ended

(amounts in thousands)

September 30,

Change 2021 vs.

1 unchanged sentence

Cash provided by operating activities

Cash used in investing activities

Cash provided by investing activities

Cash provided by financing activities

Effect of exchange rates on cash

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

(amounts in thousands)

September 30,

Working capital

17 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 nine months ended September 30, 2020 consisted primarily of our non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $13.7 million, provision for sales returns and doubtful accounts of $8.3 million, stock-based compensation expense of $6.1 million, provision for rental revenue adjustments of $2.1 million, provision for inventory obsolescence and other inventory losses of $0.7 million, decrease in deferred tax assets of $0.4 million, net loss on disposal of rental equipment and other fixed assets of $0.4 million, and our net loss of $0.7 million.

The net changes in operating assets and liabilities resulted in a net use of cash of $10.0 million.

Net cash provided by operating activities for the nine months ended September 30, 2019 consisted primarily of our net income of $22.3 million as well as non-cash expense items such as provision for sales returns and doubtful accounts of $13.2 million, depreciation of equipment and leasehold improvements and amortization of our intangibles of $9.2 million, stock-based compensation expense of $6.9 million, deferred tax assets of $5.9 million, provision for rental revenue adjustments of $1.7 million, provision for inventory obsolescence and other inventory losses of $0.6 million, and net loss on disposal of rental equipment and other fixed assets of $0.4 million.

The net changes in operating assets and liabilities resulted in a net use of cash of $29.1 million.

Net cash provided by operating activities for the three months ended March 31, 2021 consisted primarily of our non-cash expense items, such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $5.1 million, provision for sales returns and doubtful accounts of $2.5 million, stock-based compensation expense of $2.5 million, provision for rental revenue adjustments of $1.0 million, provision for inventory obsolescence and other inventory losses of $0.5 million, change in fair value of earnout liability of $0.3 million, net loss on disposal of rental equipment and other fixed assets of $0.2 million;

partially offset by the net changes in operating assets and liabilities of $6.9 million, $1.5 million increase in deferred tax assets and our net loss of $0.7 million.

Net cash provided by operating activities for the three months ended March 31, 2020 consisted primarily of our non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $4.5 million, provision for sales returns and doubtful accounts of $3.6 million, stock-based compensation expense of $2.8 million, provision for rental revenue adjustments of $0.8 million, and provision for inventory obsolescence and other inventory losses of $0.3 million;

partially offset by the net changes in operating assets and liabilities of $8.8 million, our net loss of $1.6 million, change in fair value of the earnout liability of $1.0 million and a $0.2 million increase in deferred tax assets.

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 nine months ended September 30, 2020, we received $11.1 million in maturities of marketable securities, partially offset by $6.5 million in purchases of marketable securities.

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

For the three months ended March 31, 2021, we received $6.1 million in maturities of marketable securities.

In addition, we invested $5.2 million in the production and purchase of rental assets and other property, equipment, and intangible assets.

For the nine months ended September 30, 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.

Treasury securities with maturities greater than three months that were classified as marketable securities, partially offset by $ 57.9 million in maturities of marketable securities.

In addition, we invested $ 4 .

5 million in the production and purchase of rental assets and other property, equipment, and leasehold improvements , partially offset by gross proceeds received from the sale of former assets of $0.2 million.

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

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 nine months ended September 30, 2020, net cash provided by financing activities consisted of $2.3 million from purchases under our employee stock purchase program and the proceeds received from stock options that were exercised, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.3 million.

For the nine months ended September 30, 2019, net cash provided by financing activities consisted of $4.8 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.8 million.

For the three months ended March 31, 2021, net cash provided by financing activities consisted of $4.8 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 $0.4 million.

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

Sources of funds

Our cash provided by operating activities in the nine months ended September 30, 2020 was $20.8 million compared to $31.2 million in the nine months ended September 30, 2019.

As of September 30, 2020, we had cash and cash equivalents of $214.0 million.

Our cash provided by operating activities in the three months ended March 31, 2021 was $2.9 million compared to $0.5 million in the three months ended March 31, 2020.

As of March 31, 2021, we had cash and cash equivalents of $220.0 million.

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

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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.

We define EBITDA as net 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.

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.

Below, we have provided a reconciliation of EBITDA and Adjusted EBITDA to our net 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 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 Quarterly Report on Form 10-Q because they are important measures upon which our management assesses our operating performance.

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GAAP results.

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

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

GAAP measure, for each of the periods indicated:

1 unchanged sentence

Three months ended

September 30,

Nine months ended

September 30,

Non-GAAP EBITDA and Adjusted EBITDA

Net income (loss)

Non-GAAP adjustments:

Interest income

Provision (benefit) for income taxes

Benefit for income taxes

Depreciation and amortization

4 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-Q

Item 2. Management’s Discussion and Analysis