What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-04 · 291 added, 191 removed, 533 unchanged (47% of the section changed)

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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 ability to develop new products, improve our existing products and increase the value of our products, including the integration of TAV technology into our existing products;

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 therapies, and our supply chain, including supply constraints and cost inflation related to semiconductor chips used in our batteries and printed circuit boards which are components of our portable oxygen concentrators;

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 acquisition of New Aera, Inc.

our ability to successfully acquire and integrate companies and assets;

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

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We own trademark registrations for the marks “印诺真” and “艾诺根” in China.

We own trademark registrations for the mark “Inogen One” in Australia, Canada, China, South Korea, Mexico, and Europe (European Union Registration).

We own trademark registrations for the mark “Inogen One” in Australia, Canada, China, South Korea, Mexico, Europe (European Union Registration), and the United Kingdom.

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

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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

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

GAAP that we believe to be reasonable under the circumstances.

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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.

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three and six months ended June 30 , 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 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.

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, shipment, or cost 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.

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

However, the COVID-19 pandemic and related PHE adversely impacted our consolidated operating results 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.

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

We experienced lower direct-to-consumer sales starting toward the end of the first quarter of 2020, which we believe was primarily associated with 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.

Starting in the first quarter of 2021 and continuing into the second quarter of 2021, consumer demand for our products improved, 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 demand in the first half of 2021, we continue to believe that future shelter-in-place orders, reduced travel, lower consumer confidence, or the impacts of new variants could reduce consumer demand in future periods.

In the business-to-business channel, there have been certain surges in demand for oxygen concentrators by our home medical equipment (HME) providers worldwide during the COVID-19 pandemic and related PHE in specific markets with significant COVID-19 case rates.

However, overall business-to-business demand has been lower because of the COVID-19 pandemic and related PHE 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.

However, in the second quarter of 2021, business-to-business sales improved versus the comparative period in the prior

year due to a smaller impact of the COVID-19 pandemic and related PHE as consumer confidence, vaccination rates, and COPD patient referral volumes improved in our core markets of the United States and Europe.

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.

Additionally, while we planned for sales and marketing expansion in 2021, we have seen lower hiring in our direct-to-consumer sales force primarily due to increased competition for sales professionals in 2021, along with reduced hiring of new sales representatives in 2020 due to the COVID-19 pandemic.

The labor shortage trend for sales professionals may continue in the rest of 2021, limiting our ability to grow in future periods.

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

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

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

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

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

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

We intend to continue to follow government and public health authorities’ guidelines and implement our employee safety measures to help ensure that we are able to continue manufacturing and shipping our products during the COVID-19 pandemic and related PHE.

However, the COVID-19 pandemic and related PHE have caused and could continue to cause disruption to our supply chain that could impact our operations, reduce our growth, and increase our cost of goods sold.

For example, we have seen and expect to continue to see higher semiconductor chip demand and reduced semiconductor chip availability in 2021 and into 2022, which have and we expect will continue to impact our ability to produce and sell systems and batteries, which we expect will have an impact on our revenue and profitability in those periods.

This semiconductor chip shortage is being experienced across many industries, placing additional pressure on existing supplies.

We have attempted to mitigate the impact of this increased supply shortage, but it has and will likely continue to negatively impact our ability to manufacture product as these chips are used across all of our portable oxygen concentrators, in both our batteries and printed circuit boards.

We are continuing to work with our OEM partners and exploring other open-market avenues to procure necessary semiconductor chips, but it is a product in extremely high demand, so we expect increasing challenges in terms of supply constraint and pricing inflation moving forward.

The acquisition costs for these chips from third parties has trended significantly higher in the third quarter of 2021 than the standard purchase price and is expected to continue to increase for any available supply if and to the extent supply continues to be limited.

As a result, we expect these increased costs will increase our cost of goods sold starting in the third quarter of 2021 and continuing until chip supply meets demand.

We believe based on our assessment and industry feedback that the supply constraints may continue through the second quarter of 2022.

As a result, in the interim we expect to be supply constrained and unable to meet all customer demand for our products, which we expect to negatively impact our total revenue and cost of goods sold during such period.

To partially offset these rising costs, we are planning to implement price increases across our products which will be effective as of September 1, 2021.

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

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

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

with outlets available.

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

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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.

We continue to look to add new sales representatives, while maintaining our hiring standards and being mindful of the supply constraints.

Our rate of hiring increased in the second quarter of 2021, with headcount up slightly as of June 30, 2021 as compared to December 31, 2020.

We expect minimal net new hires in the near term due to the size and quality of the candidate pool.

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.

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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.

We believe there was an increased demand in our products in the first half 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 confidence.

As a result, we have seen increased demand which led to improved sales representative productivity and increased average revenue per order in the first half 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 and average revenue per order increased in the second quarter of 2021 as compared to the second quarter of 2020, when we saw a significant impact to our business associated with the COVID-19 pandemic and related PHE.

We 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.

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 increased marketing efforts 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 as patient interest increased, so media and advertising costs increased to $8.7 million in the second quarter of 2021 compared to $7.2 million in the second quarter of 2020.

While there was an approximate 18% reduction in average direct-to-consumer sales representatives in the second quarter of 2021 as compared to the same period in the prior year, lead utilization and pricing both increased in the comparative periods as consumer interest and ambulation increased.

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.

To partially offset rising product costs, we are planning to implement price increases across our products which is expected to be effective as of September 1, 2021.

We also plan to perform a pricing trial in 2022 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;

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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.

In the second quarter of 2021, we saw improved rental intake team

productivity compared to the second 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.

CMS has proposed additional changes to the administrative requirements to dispense and bill for oxygen therapy, which is discussed in more detail in the Reimbursement section below .

These proposed changes may reduce the administrative burden and increase patient access to our products.

Expand our domestic HME provider and reseller sales.

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

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

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

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

Domestic HME provider demand increased in the fourth quarter of 2020 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.

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

While there have been surges in demand for oxygen concentrators by our HME providers during the COVID-19 pandemic and related PHE in specific markets with significant COVID-19 case rates, domestic business-to-business demand in 2020 was lower because of the COVID-19 pandemic and related PHE 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 half 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 and increased patient ambulation and consumer confidence.

However, in spite of the increased demand, we expect supply constraints associated with the semiconductor chip shortage to continue to limit growth in this channel in the near-term.

Increase international business-to-business adoption.

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

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

As in the United States, while there was an initial surge in demand for oxygen concentrators by our international HME customers early in the COVID-19 pandemic, international demand declined in the second 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 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 or overseas regions and a contract manufacturing partner, Foxconn, located in the Czech Republic to support European sales volumes.

As in the United States, there have been surges in demand for oxygen concentrators by our international HME customers during the COVID-19 pandemic in specific markets with significant COVID-19 case rates.

However, 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.

We experienced increased demand during the second quarter of 2021, which we believe is due to improving COVID-19 vaccination rates and increased ambulation of patients in Europe, increased operational capacity of certain European respiratory assessment centers, and increased sales in India associated with the spike in COVID-19 cases in that market.

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.

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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 incurred $4.1 million and $3.3 million for the three months ended June 30, 2021 and June 30, 2020, respectively, and $8.1 million and $6.9 million for the six months ended June 30, 2021 and June 30, 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.

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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.

The Inogen One G5 represented more than 80 % of total domestic POC units sold in the six months ended June 3 0 , 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.

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We plan to only sell this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 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.

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 second 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.

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 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.

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.

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 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 TAV, thereby eliminating reimbursements for the ventilator, in violation of the Administrative Procedures Act .

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

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

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

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

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

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

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

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

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

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

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

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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 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.

In the three months ended June 30, 2021 and June 30, 2020, approximately 21.5% and 19.3%, respectively, and 19.9% and 21.2% for the six months ended June 30, 2021 and June 30, 2020, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

Approximately 67.4% and 77.2% of the non-U.S.

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.

revenue for the three months ended June 30, 2021 and June 30, 2020, respectively, and 72.4% and 72.2% for the six months ended June 30, 2021 and June 30, 2020, respectively, was

invoiced in E uros with the remainder invoiced in U n ited States dollars.

W e s ell our products in 58 international countries or overseas regions 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 $ 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.

Our total revenue was $101.6 million and $71.7 million for the three months ended June 30, 2021 and June 30, 2020, respectively, and $188.5 million and $160.2 million for the six months ended June 30, 2021 and June 30, 2020, respectively.

The increase in total revenue in the three months and six months ended June 30, 2021 compared to the three months and six months ended June 30, 2020 was primarily due to an increase in direct-to-consumer sales and worldwide business-to-business sales, primarily associated with reduced impact of the COVID-19 pandemic and related PHE, and an increase in rental revenue.

We generated net income of $5.1 million and $2.6 million for the three months ended June 30, 2021 and June 30, 2020, respectively, $4.4 million and $1.0 million for the six months ended June 30, 2021 and June 30,2020, respectively.

We generated Adjusted EBITDA of $12.4 million and $10.0 million in the three months ended June 30, 2021 and June 30, 2020, respectively, and $17.8 million and $14.1 million for the six months ended June 30, 2021 and June 30, 2020, respectively, (see “Non-GAAP financial measures” for reconciliations between U.S.

GAAP and non-GAAP results).

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

As of June 30, 2021, our retained earnings were $80.0 million.

Sales revenue

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

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

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 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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Approximately 6-10% of consumers who purchase a system return the system during this 30-day return period.

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

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

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

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

This may be influenced based on outside factors, including the result of tender offerings, changes in insurance plan coverage 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.

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

We sold approximately 52,400 systems in the three months ended June 30, 2021 and 42,500 systems for the same period in 2020.

We sold approximately 101,800 systems in the six months ended June 30, 2021 compared to 95,900 systems for the same period in 2020.

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

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

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

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

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

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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 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 .

CMS has also proposed additional changes to the administrative requirements to dispense and bill for oxygen therapy, which is discussed in more detail in the Reimbursement section below, which may reduce the administrative burden and increase patient access to our products.

Rental revenue increased in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, 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 .

In addition, as part of the various stimulus bills in 2020 (also discussed in more detail in the Reimbursement section below), the 2% Medicare sequestration reduction was 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 increased 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.

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

We had approximately 37,100 and 26,400 oxygen rental patients as of June 30, 2021 and June 30, 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 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.

Medicare and private insurance rentals represented 11.1% and 8.5% of our total revenue in the three months ended June 30, 2021 and June 30, 2020, respectively, and 11.2% and 7.1% in the six months ended June 30, 2021 and June 30, 2020, respectively.

The increased rental revenue as a percentage of total revenue was primarily due to 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 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.

For the three months ended June 30, 2021 and June 30, 2020, approximately 82.5% and 80.0%, respectively, and for the six months ended June 30, 2021 and June 30, 2020, approximately 83.1% and 79.2%, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

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

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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.

These rates are typically updated annually

each January as they are subject to Consumer Price Index (CPI) and budget neutrality adjustments but a re also subject to adjustments during the year due to legislative rulings .

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

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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.

In addition, the administration has issued a number of regulatory waivers to increase the flexibility in durable medical equipment, prosthetics, orthotics and supplies (DMEPOS) suppliers’ ability to service patients quickly and without the normal requirements.

For example, the patient’s signature for proof of delivery has been waived when signatures cannot be collected during the COVID-19 PHE.

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

Medicare revenue, including patient co-insurance and deductible obligations, represented 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.

In July 2021, CMS announced a proposed change to the Home Use of Oxygen national coverage determination and proposed removing the national coverage determination for Home Oxygen Use to Treat Cluster Headaches.

If approved, this would allow the Medicare Administrative Contractors to make coverage determinations regarding the use of home oxygen and oxygen equipment for cluster headaches.

CMS also proposed to expand patient access to oxygen and oxygen equipment in the home by allowing oxygen use for acute or short-term needs instead of limiting coverage to chronic hypoxemia, removing the requirements for alternative treatment measures before dispensing of oxygen therapy, and removing the limited list of conditions for which oxygen may be covered to respiratory-related diseases, and allow the physician flexibility to make that determination.

In addition, CMS proposes to define exercise more broadly to include functional performance of the patient and to give more flexibility on pulse oximetry readings to reduce racial disparities in care.

Lastly, CMS proposed to reduce provider burden by removing the oxygen certificate of medical necessity requirement.

CMS is seeking comments to their proposed decisions and will respond to public comments in the final decision memorandum.

We believe these proposed changes would both expand coverage for patients who would benefit from oxygen therapy, reduce administrative burdens, and give more decision-making authority on proper patient care to the physicians.

However, we cannot guarantee these changes will be finalized, and do not yet have visibility on how the Medicare Administrative Contractors will change their coverage determinations.

Medicare revenue, including patient co-insurance and deductible obligations, represented 9.1% and 6.8% of our total revenue in the three months ended June 30, 2021 and June 30, 2020, respectively, and 9.3% and 5.6% of our total revenue in the six months ended June 30, 2021 and June 30, 2020, respectively.

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

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The supplier may not arbitrarily issue new equipment.

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

We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three and six months ended June 30, 2021 and June 30, 2020, respectively.

Our capped patients as a percentage of total patients on service was approximately 8.7% as of June 30, 2021 and 17.2% as of June 30, 2020.

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

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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 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.

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

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

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

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 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 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 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.

We have contracts with Medicaid, Medicare Advantage, government and private payors that qualify us as an in-network provider for these payors.

As a result, patients can rent or purchase our systems at the same patient obligation as other in-network oxygen suppliers.

W e had 91 contracts a s of June 3 0 , 20 21.

Based on our patient population, we believe at least 4 2 % of all oxygen therapy patients are covered by Medicare Advantage, government, and other private payors.

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Basis of presentation

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

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

We classify our revenue in two main categories:

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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.

We also expect the semiconductor chip shortage to negatively impact our total revenue during such period.

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.

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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 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.

Rental revenue increased in the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 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.

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

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

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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.

At the same time, recent United States policies related to global trade and tariffs may also increase our average unit cost.

However, we have experienced and expect to continue experiencing supply chain disruptions in 2021, primarily associated with semiconductor chips used in our batteries and printed circuit boards which are components of our portable oxygen concentrators.

As a result, we expect these increased costs will increase our cost of goods sold starting in the third quarter of 2021 and continuing until chip supply meets demand.

We believe based on our assessment and industry feedback that the supply constraints may continue through the second quarter of 2022.

As a result, in the interim we expect to be supply constrained and unable to meet all customer demand for our products.

Recent United States policies related to global trade and tariffs may also increase our average unit cost.

The current economic environment has introduced greater uncertainty with respect to potential trade regulations, including changes to United States policies related to global trade and tariffs.

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 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.

In 2020 and the six months ended June 30, 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 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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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.

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

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

We expect increased research and development costs associated with the New Aera acquisition to incorporate the TAV technology into our oxygen concentrator and new non-invasive ventilator product portfolios as well as intangible amortization costs.

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

improvements.

We expect increased research and development costs associated with the New Aera acquisition to incorporate the TAV technology into our oxygen concentrator as well as intangible amortization costs.

Sales and marketing

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

Sales and marketing expense decreased in the three months ended March 31, 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.

Sales and marketing expense increased in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, primarily associated with higher personnel-related expense and higher advertising expense.

Our average direct-to-consumer sales representative headcount was down approximately 18% in the three months ended June 30, 2021 from the comparative period in the prior year as attrition outpaced hiring, primarily due to increased competition for skilled labor and sales professionals in 2021, along with the reduced hiring of new sales representatives in 2020 due to the COVID-19 pandemic.

We continue to look to add new sales representatives, while maintaining our hiring standards and being mindful of the supply constraints.

Our rate of hiring increased in the second quarter of 2021, with headcount up slightly as of June 30, 2021 as compared to December 31, 2020.

We expect minimal net new hires in the near term due to the size and quality of the candidate pool 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.

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 which includes 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.

General and administrative

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

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

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

In addition, general and administrative expense includes changes in the fair value of the New Aera earnout liability, as discussed below.

We expect general and administrative expense to increase in future periods as the number of administrative personnel grows and we continue to introduce new products, broaden our customer base and grow our business.

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

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

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

Other income (expense), net

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Results of operations

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

Comparison of three months ended June 30, 2021 and June 30, 2020

Three months ended

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Total revenue

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.

Sales revenue increased $24.7 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 37.6% from the comparable period.

The increase was primarily attributable to increased direct-to-consumer sales and increased worldwide business-to-business sales, primarily due to increased consumer demand and the reduced impact of the COVID-19 pandemic and related PHE.

We sold approximately 52,400 oxygen systems during the three months ended June 30, 2021 compared to approximately 42,500 oxygen systems sold during the three months ended June 30, 2020, or an increase of 23.3%.

The increase in the number of systems sold resulted mainly from an increase in sales in the direct-to-consumer and worldwide business-to-business channels, primarily due to the reduced impact of the COVID-19 pandemic and related PHE.

Rental revenue increased $5.2 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 85.2% 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.

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Total revenue

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.

Domestic business-to-business sales increased 27.8% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

The increase was primarily due to greater demand for portable oxygen concentrators (POCs) for both traditional long-term oxygen therapy patients and COVID-19 patients upon hospital discharge, as well as higher reseller demand.

International business-to-business sales increased 57.3% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily driven by improving COVID-19 vaccination rates and increased ambulation of patients in Europe and the increased operational capacity of certain European respiratory assessment centers.

In addition, the international business-to-business sales in the second quarter of 2021 included $2.0 million in sales to our distributor in India, versus no sales in the second quarter of 2020.

In the three months ended June 30, 2021, sales in Europe as a percentage of total international sales revenue decreased to 81.3% versus 87.2% in the comparative period in 2020.

Domestic direct-to-consumer sales increased 35.6% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to increased demand for POCs due to higher COVID-19 vaccination rates within our patient population and the relaxation of closure orders related to the COVID-19 PHE leading to increased ambulation, and improved consumer confidence.

This increased demand was partially offset by lower average inside sales representative headcount, which was down approximately 18.0% from the comparative period primarily due to increased competition for skilled labor and sales professionals in 2021, along with the reduced hiring of new sales representatives in 2020 due to the COVID-19 pandemic.

Domestic direct-to-consumer rentals increased 85.2 % for the three months ended June 3 0 , 202 1 compared to the three months ended June 3 0 , 20 20 , primarily due to a n 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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Total gross margin percentage

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.

Cost of sales revenue increased $10.5 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 29.1% from the comparable period.

The increase in cost of sales revenue was primarily attributable to increased sales and related bill of material costs, and higher labor and overhead costs per unit and material costs per unit.

Cost of rental revenue increased $1.8 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 63.0% 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 40.5% 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.

Cost of rental revenue included $2.1 million of rental asset depreciation for the three months ended June 30, 2021 compared to $1.2 million for the three months ended June 30, 2020.

Sales revenue gross margin percentage increased to 48.4% for the three months ended June 30, 2021 from 45.0% for the three months ended June 30, 2020.

The increase was primarily related to higher average selling pricings due to an increased mix of domestic direct-to-consumer sales, which have a higher gross margin than our business-to-business sales.

These increases were partially offset by higher labor and overhead costs and bill of material costs per unit.

Total worldwide business-to-business sales revenue accounted for 54.7% of total sales revenue in the three months ended June 30, 2021 versus 54.0% in the three months ended June 30, 2020.

Rental revenue gross margin percentage increased to 58.6% for the three months ended June 30, 2021 from 53.0% for the three months ended June 30, 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 and depreciation expense per patient on service.

Research and development expense

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Research and development expense

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.

Research and development expense increased $0.8 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 25.3% over the comparable period, primarily due to a $0.7 million increase in personnel-related expense.

Sales and marketing expense

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Sales and marketing expense

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.

Sales and marketing expense increased $7.2 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 32.7% from the comparable period, primarily attributable to increases of $4.0 million in personnel-related expense, $1.5 million in advertising costs, $0.8 million in credit card fees, and $0.4 million in other marketing expenses.

In the three months ended June 30, 2021, we spent $8.7 million in media and advertising costs versus $7.2 million in the comparative period in 2020.

General and administrative expense

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General and administrative expense

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.

General and administrative expense decreased $4.5 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or a decrease of 46.3% from the comparable period.

The decrease was primarily attributable to a $9.0 million decrease in the change in fair value of the New Aera earnout liability and $1.1 million in lower consulting fees, partially offset by increases of $3.0 million in personnel-related expense, $0.8 million in officer transition costs, $0.6 million reimbursement from the CARES Act Provider Relief Fund due to the COVID-19 PHE in the comparable period, and $0.5 million in legal fees.

The change in fair value of the New Aera earnout liability was a benefit of $8.1 million in the second quarter of 2021 compared to an expense of $0.9 million in the second quarter of 2020.

The reduction in fair value of the earnout liability in the second quarter of 2021 was associated with the reduced expected revenue from the TAV technology due to the negative Medicare reimbursement coding outlook based on the recent court decision to dismiss our legal case against CMS with regards to non-invasive ventilation coding.

Other income (expense)

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Interest income

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

Total other income, net

Total other income, net decreased $5.5 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or a decrease of 94.3% from the comparable period.

The decrease was primarily attributable to $5.6 million in other income from the CARES Act Provider Relief Fund due to lost revenues from the COVID-19 PHE received in the second quarter of 2020 and not received in the second quarter of 2021.

Income tax expense

Three months ended

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(amounts in thousands)

Benefit for income taxes

Income tax expense

Effective income tax rate

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.

Income tax expense increased $6.0 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, primarily resulting from the reduction in the fair value of the New Aera earnout liability, partially offset by an increase in excess tax benefits recognized from stock-based compensation.

Our effective tax rate in the three months ended June 3 0 , 20 2 1 in creased compared to the three months en ded June 3 0 , 20 20 , primarily due to the reduction in the fair value of the New Aera earnout liability, partially offset by an increase in excess tax benefits recognized from stock-based compensation .

Three months ended

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(amounts in thousands)

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.

Net income increased $2.5 million for the three months ended June 30, 2021 from the three months ended June 30, 2020, or an increase of 97.8% from the comparable period.

The increase in net income was primarily related to an increase in gross profit and the reduction in the fair value of the New Aera earnout liability, partially offset by higher operating expense.

Comparison of six months ended June 30, 2021 and June 30, 2020

Six months ended

Change 2021 vs.

(amounts in thousands)

Sales revenue

Rental revenue

Total revenue

Sales revenue increased $18.6 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 12.5% from the comparable period.

The increase was primarily attributable to increased direct-to-consumer sales and worldwide business-to-business sales, primarily due to increased consumer demand and the reduced impact of the COVID-19 pandemic and related PHE.

We sold approximately 101,800 oxygen systems during the six months ended June 30, 2021 compared to approximately 95,900 oxygen systems sold during the six months ended June 30, 2020, or an increase of 6.2%.

Rental revenue increased $9.7 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 84.7% 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.

Six months ended

(amounts in thousands)

Change 2021 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 increased 18.7% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

The increase was primarily due to increased demand from our HME partners for oxygen concentrators for both traditional long-term oxygen therapy patients and in response to the COVID-19 pandemic and related PHE due to greater demand for POCs for COVID-19 patients at hospital discharge.

International business-to-business sales increased 10.6% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, mostly driven by the reduced impact of the COVID-19 pandemic with increased vaccination rates and increased operating capacity of certain European respiratory assessment centers, and in response to the COVID-19 pandemic and related PHE due to greater demand for POCs for COVID-19 patients at hospital discharge in certain markets with high case rates of COVID-19 like India.

In the six months ended June 30, 2021, sales in Europe as a percentage of total international sales revenue decreased to 83.5% versus 85.6% in the comparative period in 2020.

Domestic direct-to-consumer sales in creased 8.9 % for the six months ended June 3 0 , 20 21 compared to the six months ended June 3 0 , 20 20 , primarily due to increased demand for POCs 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 in the comparative periods.

This was partially offset by lower average inside sales representative headcount, which was down approximately 18.0 % from the comparative period in 2020.

Domestic direct-to-consumer rentals increased 84.7% for the six months ended June 30, 2021 compared to the six months ended June 30, 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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Change 2021 vs.

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Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Total gross profit

Gross margin percentage - sales revenue

Gross margin percentage- rental revenue

Total gross margin percentage

Cost of sales revenue increased $6.0 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 7.2% from the comparable period.

The increase in cost of sales revenue was primarily attributable to higher sales and related bill of material costs, and higher labor and overhead per unit and material cost per unit.

Cost of rental revenue increased $3.2 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 54.9% from the comparable period.

Cost of rental revenue included $3.9 million of rental asset depreciation for the six months ended June 30, 2021 compared to $2.5 million for the six months ended June 30, 2020.

Sales revenue gross margin percentage increased to 46.7% for the six months ended June 30, 2021 from 44.1% for the six months ended June 30, 2020.

The increase was primarily related to higher average selling prices due to an increased mix of domestic direct-to-consumer sales, which have a higher gross margin than our business-to-business sales.

This increase was partially offset by higher labor and overhead per unit and material cost per unit due to higher component cost in the comparative periods.

Total worldwide business-to-business sales revenue accounted for 57.3% of total sales revenue in the six months ended June 30, 2021 versus 55.8% in the six months ended June 30, 2020.

Rental revenue gross margin percentage increased to 57.0% for the six months ended June 30, 2021 from 48.7% for the six months ended June 30, 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

Six months ended

Change 2021 vs.

(amounts in thousands)

Research and development expense

Research and development expense increased $1.2 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 18.0% over the comparable period, primarily due to a $0.8 million increase in personnel-related expenses and $0.3 million in product development expenses.

Sales and marketing expense

Six months ended

Change 2021 vs.

(amounts in thousands)

Sales and marketing expense

Sales and marketing expense increased $5.6 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 11.3% from the comparable period, primarily attributable to an increase of $5.1 million of personnel-related expenses, $0.9 million in credit card fees, and $0.4 million of other marketing expenses, partially offset by a decrease of $0.9 million in media and advertising costs.

In the six months ended June 30, 2021, we spent $16.3 million in media and advertising costs versus $17.2 million in the comparative period in 2020.

General and administrative expense

Six months ended

Change 2021 vs.

(amounts in thousands)

General and administrative expense

General and administrative expense decreased $1.8 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or a decrease of 9.1% from the comparable period.

The decrease was primarily attributable to a $7.8 million decrease in the change in fair value of the New Aera earnout liability and $1.5 million in lower consulting fees, partially offset by increases of $2.7 million in personnel-related expenses, $2.0 million in CEO transition costs, $0.8 million in officer transition costs, $0.7 million in legal fees, $0.6 million reimbursement from the CARES Act Provider Relief Fund due to the COVID-19 PHE received in the comparable period, and $0.3 million in dues, fees and licenses.

Other income (expense)

Six months ended

Change 2021 vs.

(amounts in thousands)

Interest income

Other income (expense)

Total other income, net

Total other income, net decreased $6.3 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or a decrease of 98.7% from the comparable period.

The decrease was primarily attributable to $5.6 million in other income from the CARES Act Provider Relief Fund due to lost revenues from the COVID-19 PHE received in the comparable period last year and not received this year, and 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 six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Income tax expense

Six months ended

Change 2021 vs.

(amounts in thousands)

Income tax expense

Effective income tax rate

Income tax expense increased $4.4 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, primarily resulting from the reduction in the fair value of the New Aera earnout liability, partially offset by an increase in excess tax benefits recognized from stock-based compensation.

Our effective tax rate in the six months ended June 30, 2021 increased compared to the six months ended June 30, 2020, primarily due to the reduction in the fair value of the New Aera earnout liability, partially offset by an increase in excess tax benefits recognized from stock-based compensation.

Six months ended

Change 2021 vs.

(amounts in thousands)

Net income increased $3.4 million for the six months ended June 30, 2021 from the six months ended June 30, 2020, or an increase of 341.0% from the comparable period.

The increase in net income was primarily related to an increase in gross profit and the reduction in the fair value of the New Aera earnout liability, partially offset by higher operating expense.

Contractual obligations

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

As of March 31, 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.

As of June 30, 2021, we had purchase obligations with outside vendors and suppliers of approximately $65.1 million of which the timing varies depending on demand, current supply on hand and other factors.

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

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Liquidity and capital resources

As of March 31, 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.

As of June 30, 2021, we had cash and cash equivalents of $238.9 million, which consisted of highly liquid investments with a maturity of three months or less.

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

For the six months ended June 30, 2021 and June 30, 2020, we received $10.9 million and $1.3 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 six months ended June 30, 2021 consisted of capital expenditures of $11.7 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.

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

However, our liquidity assumptions may prove to

be incorrect, and we could utilize our available financial resources sooner than we currently expect.

Our future funding requirements will depend on many factors, including market acceptance of our products;

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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.

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

Three months ended

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(amounts in thousands)

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Cash provided by operating activities

Cash provided by investing activities

Cash (used in) provided by investing activities

Cash provided by financing activities

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

Net cash provided by operating activities for the three months ended March 31, 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.

Net cash provided by operating activities for the six months ended June 30, 2021 consisted primarily of our net income of $4.4 million as well as non-cash expense items, such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $10.3 million, stock-based compensation expense of $5.8 million, provision for sales returns and doubtful accounts of

$5.3 million, decrease in deferred tax assets of $5.3 million , provision for rental revenue adjustments of $ 2.1 million, provision for inventory obsolescence and other inventory losses of $ 0.9 million , and net loss on disposal of rental equipment and other fixed assets of $ 0.6 million ;

partially offset b y the change in fair value of earnout liability of $7.8 million and net changes in operating assets and liabilities resulting in a net use of cash of $ 6.6 million .

Net cash provided by operating activities for the six months ended June 30, 2020 consisted primarily of our net income of $1.0 million as well as non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $8.9 million, provision for sales returns and doubtful accounts of $5.7 million, stock-based compensation expense of $4.1 million, provision for rental revenue adjustments of $1.5 million, decrease in deferred tax assets of $0.7 million, and provision for inventory obsolescence and other inventory losses of $0.6 million.

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

Investing activities

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.

Net cash (used in) 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 maturities of marketable securities.

For the six months ended June 30, 2021, we invested $11.7 million in the production and purchase of rental assets and other property, equipment, and intangible assets, partially offset by $8.2 million we received in maturities of marketable securities.

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

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

For the 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.

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

For the three months ended March 31, 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.

For the six months ended June 30, 2021, net cash provided by financing activities consisted of $10.9 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.5 million.

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

Sources of funds

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 cash provided by operating activities in the six months ended June 30, 2021 was $20.1 million compared to $14.1 million in the six months ended June 30, 2020.

As of June 30, 2021, we had cash and cash equivalents of $238.9 million.

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

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We may need to raise additional funds to support our investing operations, and such funding may not be available to us on acceptable terms, or at all.

If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.

If we are unable to raise additional funds when needed, our operations and ability to execute our business

strategy could be adversely affected.

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

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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 loss excluding interest income, interest expense, taxes and depreciation and amortization.

We define EBITDA as net income 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 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.

Below, we have provided a reconciliation of EBITDA and Adjusted EBITDA to our net income, 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 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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Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by certain expenses.

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

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

GAAP results.

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

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

GAAP measure, for each of the periods indicated:

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Three months ended

Six months ended

Non-GAAP EBITDA and Adjusted EBITDA

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Interest income

Benefit for income taxes

Provision for income taxes

Depreciation and amortization

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis