Inogen Inc 10-Q

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward - Looking Statements The following discussion and analysis should be read together with our consolidated financial statements and the condensed notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the section entitled “Risk Factors” and this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements include, but are not limited to, statements concerning the following: • information concerning our possible or assumed future cash flows, revenue, sources of revenue and results of operations, operating and other expenses; • our assessment and expectations regarding the impact of the COVID-19 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, CMS proposed changes to Home Use of Oxygen national coverage determination, 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 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; • market share expectations, unit sales, business strategies, financing plans, expansion of our business, competitive position, industry environment, and potential growth opportunities; • our expectations regarding the market size, market growth and the growth potential for our business; • our ability to grow our business and enter new markets; • our expectations regarding the average selling prices and manufacturing costs of our products, including our expectations to continue to reduce average unit costs for our systems; • our expectations regarding our sales and marketing strategy channels; • our expectations with respect to our European and U.S. facilities and our expectations with respect to our contract manufacturer in Europe; • our expectations regarding tariffs being imposed by the U.S. on certain imported materials and products; • our ability to successfully acquire and integrate companies and assets; • our expectations regarding the impact and implementation of trade regulations on our supply chain; • our expectations regarding excess tax benefits or deficiencies from stock-based compensation; • our expectations of future accounting pronouncements or changes in our accounting policies; • our assessments and estimates of our effective tax rate; • our internal control environment; • the effects of seasonal trends on our results of operations and estimated hiring plans; 28 • our expectation that our existing capital resources 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; and • the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in Part II, Item 1A, “Risk Factors,” elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. “Inogen,” “Inogen One,” “Inogen One G2,” “Inogen One G3,” “G4,” “G5,” “Live Life in Moments, not Minutes,” “Never Run Out of Oxygen,” “Oxygen Therapy on Your Terms,” “Oxygen.Anytime.Anywhere,” “Reclaim Your Independence,” “Intelligent Delivery Technology,” “Inogen At Home,” the Inogen design, “TIDAL ASSIST,” “TAV,” and “SIDEKICK” are registered trademarks with the United States Patent and Trademark Office of Inogen, Inc. We own a pending application for “Inogen” with the United States Patent and Trademark Office. We own trademark registrations for the mark “Inogen” in Argentina, Australia, Canada, Chile, China, Columbia, Ecuador, South Korea, Mexico, Europe (European Union Registration), the United Kingdom, Iceland, India, Israel, Japan, Kuwait, New Zealand, Norway, Paraguay, Peru, Turkey, Singapore, and Switzerland. We own pending applications for the mark “Inogen” in Brazil, India, Malaysia, South Africa and Uruguay. We own a trademark registration for the mark “イノジェン” in Japan. 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, Europe (European Union Registration), and the United Kingdom. We own a trademark registration for the mark “Satellite Conserver” in Canada. We own a trademark registration for the mark “Inogen At Home” in Europe (European Union Registration) and the United Kingdom. We own trademark registrations for the mark “G4” in Europe (European Union Registration) and the United Kingdom. We own trademark registrations for the mark “G5” in Europe (European Union Registration) and the United Kingdom. We own a trademark application for the Inogen design in Bolivia. We own a trademark registration for the Inogen design in China. We own a trademark registration for the mark “إنوجن” in Saudi Arabia. Other service marks, trademarks, and trade names referred to in this Quarterly Report on Form 10-Q are the property of their respective owners. In this Quarterly Report on Form 10-Q, “we,” “us” and “our” refer to Inogen, Inc. and its subsidiary. The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying condensed notes to those statements included elsewhere in this document. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. 29 Critical accounting policies and estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with U.S. GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and such differences could be material to the financial position and results of operations. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to: • revenue recognition; • product warranty; and • 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 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, 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. Given the COVID-19 impact to the respiratory system, oxygen therapy is prescribed by healthcare professionals for treatment and recovery for certain patients with COVID-19. We also believe stationary oxygen concentrators, and, secondarily, portable oxygen concentrators (POCs) could provide relief to global hospital systems by allowing appropriate patients to be treated in the home, such as patients early in the disease progression or those in recovery post hospital discharge, thus making room for more severe patients who need treatment in the hospital. However, the COVID-19 pandemic and related PHE adversely impacted our consolidated operating results 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 30 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 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. Our ability to continue to operate without any significant negative operational impacts will in part depend on our ability to protect our employees and our supply chain. As the COVID-19 pandemic and related PHE has developed, we have taken numerous steps to help ensure the health and safety of our employees and their families. We follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing facilities. Employees whose tasks can be done offsite have been allowed to work from home and most of our total personnel continue to work from home. We have also worked closely with local and national officials to keep our manufacturing facilities open due to the essential nature of our products. During 2020 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. Overview We are a medical technology company that primarily develops, manufactures and markets innovative POCs used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions. Long-term oxygen therapy is defined as the provision of oxygen therapy for use at home in patients who have chronic low blood oxygen levels (hypoxemia). Traditionally, these patients have relied on stationary oxygen concentrator for use in the home and oxygen tanks or cylinders for mobile use, which we call the delivery model. The tanks and cylinders must be delivered regularly and have a finite amount of oxygen, which requires patients to plan activities outside of their homes around delivery schedules and a finite oxygen supply. Additionally, patients must attach long, cumbersome tubing to their stationary concentrators simply to enable mobility within their homes. 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 31 with outlets available. We believe our Inogen One systems reduce the patient’s reliance on stationary concentrators and scheduled deliveries of tanks with a finite supply of oxygen, thereby improving patient quality of life and fostering mobility. We believe that we were the first oxygen therapy manufacturer to employ a direct-to-consumer marketing strategy, meaning we advertise directly to patients, process their physician paperwork, and provide clinical support as needed, which we believe has contributed to our market leadership position in the POC market. While other manufacturers have also begun direct-to-consumer marketing campaigns to drive patient sales, we believe we are the only POC manufacturer that employs a direct-to-consumer rental strategy in the United States, meaning we bill Medicare or insurance on the consumer’s behalf. We derive the majority of our revenue from the sale and rental of our Inogen One systems and related accessories to patients, insurance carriers, home healthcare providers, resellers, charitable organizations, and distributors, including our private label partner. We sell multiple configurations of our Inogen One and Inogen At Home systems with various batteries, accessories, warranties, power cords and language settings. We also rent our products to Medicare beneficiaries and patients with other insurance coverage to support their long-term oxygen needs as prescribed by a physician as part of a care plan. Our goal is to design, build and market oxygen solutions that redefine how long-term oxygen therapy is delivered. To accomplish this goal and to grow our revenue, we intend to: • Expand our domestic direct-to-consumer sales and physician-based sales teams and increase productivity. During the year ended December 31, 2020, the number of inside sales representatives decreased to 300 from 329 as of December 31, 2019. In 2021, we 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. 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. We also plan to expand our physician sales team to drive increased physician referrals for rental patients and direct-to-consumer sales. This specialized sales team consisted of 24 sales representatives and 5 support personnel as of December 31, 2020. We believe there was an increased demand in our products in the first 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. 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. 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; however, these may be delayed due to the COVID-19 pandemic and related PHE. As this is a dynamic situation, we plan to continue to monitor the progression of the COVID-19 pandemic and related PHE in the United States and may adjust our marketing plan accordingly. • Expand our rental revenues through a dedicated rental intake team. During the year ended December 31, 2020, we expanded our rental intake team to focus exclusively on new rental additions to drive overall sales productivity and simplify training. We ended 2020 with 34 patient intake representatives and administrative personnel and plan to continue to improve the productivity of the rental intake team in 2021, which we believe will lead to increased patients on service and growth in rental revenue in future periods. In the second quarter of 2021, we saw improved rental intake team 32 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 second 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. We are also focused on building our domestic business-to-business partnerships, including relationships with distributors, key accounts, resellers, our private label partner, traditional HME providers, and charitable organizations. We offer patient-preferred, low service cost products and services to help providers convert their businesses to a non-delivery POC business model. 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 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. We expect to begin sales in the Chinese market as early as 2022 although this could be delayed due to regulatory clearance delays, other impacts of the COVID-19 pandemic or government actions, by the United States or China that impose barriers or restrictions that would impact our ability to access the Chinese market. Over time, as the U.S. and European markets mature, our growth will depend on our ability to drive POC adoption in emerging markets, where limited oxygen therapy treatment exists today. However, growth may also be limited by currency fluctuations, capital expenditure constraints, ongoing restructuring challenges, and tender uncertainty. • Invest in our oxygen product offerings to develop innovative products and expand clinical evidence . We incurred $14.1 million and $9.4 million in 2020 and 2019, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future. We incurred $4.1 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 33 battery. We estimate that the Inogen One G5 is suitable for over 90% of ambulatory long-term oxygen therapy patients based on our analysis of the patients who have contacted us and their clinical needs. We expect the Inogen One G5 to obsolete the Inogen One G3 ® over the short-term. Manufacturing cost for our Inogen One G5 was at parity with our Inogen One G3 starting in the third quarter of 2020, and we still expect the Inogen One G5 to be our lowest cost to manufacture over time. The Inogen One G5 represented more than 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. We believe home oxygen providers will also find features such as remote troubleshooting, equipment health checks, and location tracking to help drive operational efficiencies when transitioning away from the oxygen tank delivery model. We plan to also invest in clinical studies to evaluate expected improvements in health and economic outcomes associated with the use of our products as part of our efforts to drive payor and prescriber advocacy for our products. • Expand our product offerings. In August 2019, we acquired New Aera. New Aera’s patented and Food and Drug Administration (FDA)-cleared Tidal Assist ® Ventilator (TAV ® ) system is designed to deliver increased air flow and pressure from an approximately 4-ounce pocket-size unit, features a state-of-the-art nasal pillow interface, and is compatible with certain oxygen concentrators, oxygen cylinders, wall gas, and certain medical air sources. TAV therapy with oxygen has been clinically demonstrated during periods of exercise to reduce breathlessness, increase exercise endurance, and improve oxygen saturation for patients suffering from certain chronic lung disease compared to oxygen therapy alone. We began a limited launch of the TAV product in December 2019 in our domestic direct-to-consumer channel and in our domestic business-to-business channel. We plan to only sell this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 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 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. We have been developing and refining the manufacturing of our Inogen One systems since 2004. While nearly all of our manufacturing and assembly processes were originally outsourced, assembly of the compressors, sieve beds, concentrators and certain manifolds were brought in-house in order to improve quality control and reduce cost. In support of our European sales, we use a contract manufacturer located in the Czech Republic to manufacture high volume products and perform product repairs to improve delivery to our European accounts. We expect to maintain our assembly operations for our products at our facilities in Texas and California. In 2021, we are focused on reducing the cost of our Inogen One G5 product, expanding manufacturing of the TAV product and increasing the robustness of our supply chain to reduce potential component constraints as we grow our business. We also use lean manufacturing practices to maximize manufacturing efficiency. We rely on third-party manufacturers to supply several components of our products. We typically enter into master service agreements for these components that specify quantity and quality requirements and delivery terms. In certain cases, these agreements can be terminated by either party upon relatively short notice. We have elected to source certain key components from single sources of supply, including our batteries, motors, valves, TAV-compatible stationary concentrators, columns, and some molded plastic components. We believe that maintaining a single source of supply allows us to control production costs and inventory levels and to manage component quality. 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. For additional discussion of potential risks related to our manufacturing and raw materials, please see the risk factor entitled “ We obtain some of the components, subassemblies and completed products included in our products from a single source or a limited group of manufacturers or suppliers, and the partial or complete loss of one or more of these manufacturers or suppliers could cause significant production delays, an inability to meet customer demand, substantial loss in revenue, and an adverse effect on our financial condition and results of operations. ” Historically, we have generated a majority of our revenue from sales and rentals to customers in the United States. In the three months ended 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 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 34 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 $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 June 30, 2021, our retained earnings were $80.0 million. Sales revenue Our future financial performance will be driven in part by the growth in sales of our Inogen One systems, and, to a lesser extent, sales of batteries, other accessories, our Inogen At Home stationary oxygen concentrators and our TAV products. We plan to grow our system sales in the coming years through multiple strategies including: hiring additional sales representatives, improving productivity, investing in consumer and physician awareness and advocacy through increased sales and marketing efforts, expanding our clinical evidence, expanding our sales infrastructure and efforts outside of the United States, expanding our business-to-business sales through key partnerships, and enhancing our product offerings through additional product launches, although, as mentioned above, these plans have been and may continue to be impacted by the COVID-19 pandemic and related PHE. While we believe most HME providers are still in the process of converting their business model to a non-delivery model and purchase POCs, growth has been challenged and we expect it could continue to be challenged due to the COVID-19 pandemic and related PHE, their ongoing restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and potential changes in reimbursement rates. As our product offerings grow, we solicit feedback from our customers and focus our research and development efforts on continuing to improve patient preference and reduce the total cost of the product in order to further drive sales of our products. Our direct-to-consumer sales process involves numerous interactions with the individual patient, their physician and the physician’s staff, and includes an in-depth analysis and review of our product, the patient’s diagnosis and prescribed oxygen 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. Product is not deployed until both the prescription and payment are received. Once a full system is deployed, the patient has 30 calendar days to return the product, subject to the payment of a minimal processing and handling fee. 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 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 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. Products are shipped both FOB Inogen dock and Delivery Duty Paid (DDP) for certain international shipments depending on the shipper used. DDP shipments are Inogen’s property until title has transferred which is upon duty being paid and delivered to the customer. As a result of these factors, product purchases can be subject to changes in demand by customers. 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. 35 Rental revenue 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 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. As a result, the period of time from initial contact with a patient to billing can vary significantly and be up to one month or longer. However, due to the COVID-19 PHE, CMS has reduced the paperwork requirements for Medicare oxygen therapy patients, as discussed in more detail in the Reimbursement section below, effective in early March 2020. 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 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 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. In this scenario, the ratio of billable patients to total patients on service is critical to maintaining rental revenue growth as patients on service increases. Medicare has noted a certain percentage of beneficiaries, approximately 25%, based on their review of Medicare claims, reach the 36 th month of eligible reimbursement and enter the capped rental period. 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 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; however, actual rental revenue recognized is subject to a variety of other factors, including reimbursement levels by payor, patient location, the number of capped patients, write-offs for uncollectable balances, and rental revenue adjustments. Reimbursement 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. We process and coordinate all physician paperwork necessary for reimbursement of our solutions. A common medical criterion for long-term oxygen therapy reimbursement is insufficient blood oxygen saturation level. Our team in sales and rental intake are trained on how to verify benefits, review medical records and process physician paperwork. Additionally, an independent internal review is performed, and our products are not deployed until after physician paperwork is processed and reimbursement eligibility is verified and communicated to the patient. 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 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. The U.S. list price for our stationary oxygen rentals Healthcare Common Procedure Coding System (HCPCS E1390) is $260 per month and the U.S. list price for our oxygen generating portable equipment (OGPE) rentals (HCPCS E1392) is $70 per month. The average Medicare reimbursement rates in former competitive bidding areas (CBAs) in 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 36 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 ; however, on October 27, 2020, CMS announced that competitive bidding contracts would not be awarded for most product categories, including oxygen, due to the payment amounts not achieving the expected savings and the current COVID-19 pandemic and related PHE. Effective April 1, 2021, rates were adjusted to remove a percentage reduction that was put in place to meet the budget neutrality requirement previously mandated by section 1834(a)(9)(D)(ii) of the Social Security Act. See the table below for average Medicare rates in former CBAs, using a simple average of rates in each CBA. Average Medicare reimbursement rates in former CBAs E1390 E1392 As of April 1, 2021 $ 81.25 $ 39.82 As of January 1, 2021 $ 73.88 $ 36.20 As of January 1, 2020 $ 73.98 $ 36.25 As of January 1, 2019 $ 72.92 $ 35.72 As of January 1, 2018 $ 77.03 $ 36.06 In addition to regional pricing, CMS imposed different pricing on “frontier states” and rural areas. CMS defines frontier states as states where more than 50% of the counties in the state have a population density of 6 people or less per square mile and rural states are defined as states where more than 50% of the population lives in rural areas per census data. Current frontier states include MT, ND, SD and WY; rural states include ME, MS, VT and WV; and non-contiguous United States areas include AK, HI, Guam and Puerto Rico. Effective June 1, 2018, for frontier and rural states, frontier and rural zip codes in non-frontier/rural states and non-contiguous United States areas, the single payment amount was 50/50 blended reimbursement rates based on an average of the pre-competitive bidding reimbursement rates and the current average reimbursement rates to account for higher servicing costs in these areas. The Medicare reimbursement rates in rural areas is outlined in the table below, and include areas that are considered non-contiguous (Alaska, Hawaii, Puerto Rico, and the Virgin Islands). We estimate that approximately 20% of our patients are eligible to receive the higher reimbursement rates based on the geographic locations of our current patient population. Effective March 1, 2021, CMS announced that the rates as of January 1, 2021, were incorrectly calculated, and retroactively adjusted the rates, which are reflected in the table below. The Medicare rates announced previously were a simple average of $136.24 for HCPCS code E1390 and $44.69 for HCPCS code E1392, which were increased to $136.84 and $44.99, respectively. Effective April 1, 2021, rates will be adjusted to remove a percentage reduction that was put in place to meet the budget neutrality requirement previously mandated by section 1834(a)(9)(D)(ii) of the Social Security Act. See the table below for average Medicare rates in rural areas, using a simple average of rates in each state. Average Medicare reimbursement rates in rural areas E1390 E1392 As of April 1, 2021 $ 143.48 $ 47.13 As of January 1, 2021 (retroactively revised March 1, 2021) $ 136.84 $ 44.99 As of January 1, 2020 $ 136.71 $ 44.93 As of January 1, 2019 $ 134.71 $ 44.32 As of January 1, 2018 $ 76.31 $ 41.91 Rates in non-former CBAs that are not defined as rural are set based on the rates in former CBAs. See the table below for average Medicare rates in these non-former CBAs, non-rural areas, using a simple average of rates in each state. Effective March 1, 2021, CMS announced that the rates as of January 1, 2021 were incorrectly calculated, and retroactively adjusted the rates, which are reflected in the table below. The Medicare rates announced previously were a simple average of $103.18 for HCPCS code E1390 and $39.62 for HCPCS code E1392, which were increased to $104.07 and $40.06, respectively. Effective April 1, 2021, rates will be adjusted to remove a percentage reduction that was put in place to meet the budget neutrality requirement previously mandated by section 1834(a)(9)(D)(ii) of the Social Security Act. Note that the 2021 rates listed below include Coronavirus Aid, Relief, and Economic Security (CARES Act) increased rates due to the COVID-19 PHE, which may not be in place for all of 2021. Average Medicare reimbursement rates in non-former CBAs, non-rural areas E1390 E1392 As of April 1, 2021 $ 109.39 $ 42.12 As of January 1, 2021 (retroactively revised March 1, 2021) $ 104.07 $ 40.06 As of January 1, 2020 $ 74.84 $ 36.87 As of January 1, 2019 $ 72.32 $ 35.64 As of January 1, 2018 $ 69.31 $ 38.10 37 There have been significant U.S. reimbursement and policy changes that impact oxygen therapy associated with the COVID-19 PHE declared by the U.S. Department of Health and Human Services (HHS) on January 31, 2020. The CARES Act allows HHS to waive certain Medicare telehealth payment requirements during the COVID-19 PHE to allow beneficiaries in all areas to receive telehealth services, including at their home, starting March 6, 2020. The Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074) also granted HHS the authority to waive certain requirements with respect to telehealth services. Under this authority, CMS clarified that HHS would not conduct audits to determine whether there was a prior physician-patient relationship for telehealth claims submitted during the COVID-19 PHE. The CARES Act included the extension of the 50/50 blended rate for home medical equipment (HME) in rural and non-contiguous, non-competitively bid areas and established a new 75/25 blended rate for all other non-competitively bid areas through the duration of the COVID-19 PHE. The 75/25 blended rate was retroactive to March 6, 2020. While the duration of the current emergency is impossible to predict, the Zika virus PHE lasted approximately 360 days, and the H1N1 flu PHE lasted approximately 450 days. The CARES Act and the Consolidated Appropriations Act of 2021 also included a temporary pause of the 2% percent Medicare sequestration reduction that went into effect in 2013. The CARES Act implemented the relief effective May 1, 2020 through December 31, 2020. The Consolidated Appropriations Act of 2021 was signed into law on December 27, 2020 and extended the suspension period to March 31, 2021. The CARES Act also extended the end date of the Medicare sequestration reduction by one year, through 2030, in order to offset the 2020 suspension. On April 6, 2020, an Interim Final Rule (IFR) was published in the Federal Register for policy and regulatory revisions in response to the COVID-19 PHE. This IFR included that for the duration of the COVID-19 PHE, the face-to-face requirements and clinical indications of coverage for home oxygen, among other respiratory products, is waived. 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. In addition, CMS increased Medicare contractors’ ability to waive replacement product requirements, paused the national prior authorization program for certain DMEPOS, automatically extended expiring accreditations, granted contractors the flexibility to grant appeals extensions, and medical review suspension. Both the IFR and temporary regulatory changes show significant flexibility from CMS to improve access for oxygen and other DMEPOS items during this COVID-19 PHE. These changes were retroactive to early March 2020. However, in July 2020, CMS released a COVID-19 Provider Burden Relief FAQs document that stated that CMS would resume full operations for the prior authorization program for certain DMEPOS effective August 3, 2020. CMS also issued a proposed rule on November 4, 2020 (CMS-1738-P) to establish payment amounts going forward for DMEPOS products and services covered under Medicare. We believe that Medicare rates will not change for the length of the COVID-19 PHE, except for any net change for inflation and budget neutrality adjustments, as outlined above. CMS is proposing three different fee schedule adjustment methodologies for non-CBAs after the termination of the COVID-19 PHE: (1) for non-contiguous non-CBAs; (2) for contiguous non-CBAs defined as rural areas; and (3) for non-rural non-CBAs within the contiguous United States. Proposed adjustment methodologies (1) and (2) contemplate utilizing the 50/50 blended rates as a permanent construct, but proposed adjustment methodology (3) contemplates setting the fee schedule amounts to 100% of the Medicare rates. This could reduce Medicare rates after the PHE is over in the current areas that are considered non-rural but not covered by a former CBA, as those areas are currently receiving a 75/25 blended reimbursement rate. There was a 60-day comment period on this proposed rule, and we expected this rule to be finalized in the first half of 2021. This may be delayed due to the fact that on April 26, 2021, CMS published a notice stating that the Biden Administration published a “Regulatory Freeze Pending Review” memorandum advising all agencies, unless otherwise excepted by the Director of Office of Management and Budget, not to issue any rule until an appointee by the new Administration reviews and approves the rule. Pending this review and approval, CMS is continuing the rules already in effect until May 11, 2022. In January 2021, CMS announced the pivotal bid amounts for the competitive bidding round 2021. As a reminder, the bids for oxygen were based on the HCPCS code E1390, which is for stationary oxygen, and there were 130 regions bid. The simple average of the 2018 single payment amounts for these regions for this code was $73.98. The simple average of the pivotal bid amounts for these regions for this code was $122.61, or an average increase of 65.7%. If CMS would have implemented these rate changes, the simple average payment amounts in these regions for POCs (codes E1390 and E1392) would have been $157.60, which is significantly higher than the simple average payment amounts of $110.07 and $121.07 per month being paid as of January 1, 2021 and April 1, 2021 for these regions. In April 2021, CMS announced a delay of the 2018 IFR final rule (CMS-1687-RCN) and the 2020 DMEPOS proposed rule (CMS-1738-P discussed above). CMS is required to publish a final rule no later than three years after the publication of a proposed or interim final rule, except under exceptional circumstances. The 2018 IFR that resumed the 50/50 blended rates in rural areas between June and December 2018 was published on May 11, 2018. In accordance with the requirement, CMS is required to publish the final rule to the 2018 IFR by May 11, 2021, but CMS announced that there will be a delay in the final rule publication, and they extended the 2018 IFR until May 11, 2022. In addition, in the 2020 DMEPOS proposed rule, CMS stated that they solicited comments on the 2018 IFR, but have not yet responded to the comments received, and will do so in the final rule, expected to be published by May 11, 2022. 38 CMS is required to propose future rounds of competitive bidding, which could change reimbursement rates, negatively impact the premium for POCs over other oxygen modalities, or limit beneficiary access to our technologies. Cumulatively in previous rounds of competitive bidding, we were offered contracts for a substantial majority of the CBAs and product categories for which we submitted bids. As of January 1, 2017 (when the last round of competitive bidding was in effect), we believe we had access to over 90% of the Medicare oxygen therapy market based on our analysis of the 103 CBAs that we won out of the 130 total CBAs. These 130 CBAs represented approximately 36% of the Medicare market with the remaining approximately 64% of the market not subject to competitive bidding per Medicare’s data on 2018 traditional Medicare fee-for-service beneficiaries in CBAs compared to the total Medicare fee-for-service beneficiaries. As of January 1, 2019, we can choose to accept Medicare oxygen patients throughout the United States. As of July 2018, we are operating in all 50 states in the U.S. We did not sell or rent to patients in Hawaii due to the licensure requirements from inception to June 2018. We cannot guarantee that we will be offered contracts in any subsequent rounds of competitive bidding. In all five rounds of competitive bidding in which we have participated, we have gained access to certain CBAs and been excluded from other CBAs. 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. The supplier that billed Medicare for the 36th month of service continues to be responsible for the patient’s oxygen therapy needs for months 37 through 60, and there is generally no additional reimbursement for OGPE for these later months. Medicare does not separately reimburse suppliers for oxygen tubing, cannulas and supplies that may be required for the patient. The supplier is required to keep the equipment provided in working order and in some cases, Medicare will reimburse for repair costs. At the end of the five-year useful life of the equipment, the patient may request replacement equipment and, if he or she can be re-qualified for the Medicare benefit, a new maximum 36-month payment cycle out of the next 60 months of service would begin. The supplier may not arbitrarily issue new equipment. We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three and 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. 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. Our obligations to service Medicare patients over the rental period include supplying working equipment that meets each patient’s oxygen needs pursuant to his/her doctor’s prescription and certificate of medical necessity form and supplying all disposables required for the patient to operate the equipment, including cannulas, filters, replacement batteries, carts and carry bags, as needed. If the equipment malfunctions, we must repair or replace the equipment. We determine what equipment the patient receives, and we can deploy used assets in working order as long as the prescription requirements are met. We must also procure a recertification of the certificate of medical necessity from the patient’s doctor to confirm the patient’s need for continued oxygen therapy one year after the patient first receives oxygen therapy and one year after each new 36-month reimbursement period begins. The patient can choose to receive oxygen supplies and services from another supplier at any time, but the supplier may only transition the patient to another supplier in certain circumstances. 39 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. Private payors typically provide reimbursement at a rate similar to Medicare allowables for in-network plans. We anticipate that private payor reimbursement levels will generally be reset in accordance with Medicare payment amounts. We believe that we are well positioned to respond to the changing reimbursement environment because our product offerings are innovative, patient-focused and cost-effective. We have historically been able to reduce our costs through scalable manufacturing, better sourcing, continuous innovation, and reliability improvements, as well as innovations that reduce our product service costs by minimizing exchanges. As a result of design changes, supplier negotiations, bringing manufacturing and assembly largely in-house and our commitment to driving efficient manufacturing processes, we have reduced our overall POC system cost by approximately 59% from 2009 to 2020. We intend to continue to seek ways to reduce our cost of revenue through manufacturing and design improvements. For additional discussion of the impact of the recent Medicare reimbursement proposals, see “Risk Factors” herein. Basis of presentation The following describes the line items set forth in our consolidated statements of comprehensive income. Revenue We classify our revenue in two main categories: sales revenue and rental revenue. There will be fluctuations in mix between business-to-business sales, direct-to-consumer sales and rental revenue from period-to-period. Product selling prices and gross margins may fluctuate as we introduce new products, reduce our product costs, have changes in purchase volumes, and as currency variations occur. For example, the gross margin for our Inogen One G4 system is higher than our Inogen One G3 system due to lower manufacturing costs and similar average selling prices. Thus, to the extent our sales of our Inogen One G4 systems are higher than sales of our Inogen One G3 systems, our overall gross margins should improve and, conversely, to the extent our sales of our Inogen One G3 systems are higher than sales of our Inogen One G4 systems, our overall gross margins should decline. Quarter-over-quarter results may vary due to seasonality in both the international and domestic markets. We believe our sales may be impacted by seasonal factors. For example, we typically experience higher total sales in the second and third quarters, as a result of consumers traveling and vacationing during warmer weather in the spring and summer months, but this may vary year-over-year. In particular, due to the COVID-19 pandemic and related PHE, we have seen and expect to continue to see a disruption in our normal seasonal trends 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. Sales revenue Our sales revenue is primarily derived from the sale of our Inogen One systems, Inogen At Home systems, TAV systems, and related accessories to individual consumers, our private label partner, HME providers, distributors, resellers, and charitable organizations worldwide. Sales revenue is classified into two areas: business-to-business sales and direct-to-consumer sales. Generally, our direct-to-consumer sales have higher gross margins than our business-to-business sales. Rental revenue Our rental revenue is primarily derived from the rental of our Inogen One and Inogen At Home systems to patients through reimbursement from Medicare, private payors and Medicaid, which typically also includes a patient responsibility component for patient co-insurance and deductibles. Rental revenue increased in the three and 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 and reduced administrative requirements 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- 40 consumer marketing spend, product launches, the number of billable patients and denial rates, and other uncontrollable factors such as changes in the market and competition. Cost of revenue Cost of sales revenue Cost of sales revenue consists primarily of costs incurred in the production process, including component materials, assembly labor and overhead, warranty expense, provisions for slow-moving and obsolete inventory, rework and delivery costs for items sold. Labor and overhead expenses consist primarily of personnel-related expenses, including wages, bonuses, benefits, and stock-based compensation for manufacturing, logistics, repair, manufacturing engineering, and quality assurance employees and temporary labor. Cost of sales revenue also includes manufacturing freight in, depreciation expense, facilities costs and materials. Provisions for warranty obligations are included in cost of sales revenue and are provided for at the time of revenue recognition. We continue to make progress towards reducing the average unit costs of our products as a result of our ongoing efforts to develop lower-cost systems, negotiate with our suppliers, improve our manufacturing processes, and increase production volume and yields. 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. 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. 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 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. 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. Cost of rental revenue Cost of rental revenue consists primarily of depreciation expense; service costs for rental patients, including rework costs, material, labor, freight, and consumable disposables; and logistics costs. We expect rental gross margin percentage to increase over time, primarily associated with higher rental revenue per patient on service and lower costs per patient on service. We expect the average cost of rental revenue per patient on service to decline in future periods as a result of our ongoing efforts to reduce average unit cost of our systems as well as reductions in depreciation, service costs, and logistics costs. Operating expense Research and development Our research and development expense consists primarily of personnel-related expenses, including wages, bonuses, benefits and stock-based compensation for research and development and engineering employees, facility costs, laboratory supplies, product development materials, consulting fees and related costs, clinical study costs, and testing costs for new product launches as well as enhancements to existing products. We have made substantial investments in research and development since our inception. Our research and development efforts have focused primarily on the tasks required to enhance our technologies and to support development and commercialization of new and existing products. We plan to continue to invest in research and development activities to stay at the forefront of patient preference in oxygen therapy. 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 41 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 Our sales and marketing expense primarily supports our direct-to-consumer sales and rental strategy and consists mainly of personnel-related expenses, including wages, bonuses, commissions, benefits, and stock-based compensation for sales, marketing, customer service, rental intake, and clinical service employees. It also includes expenses for media and advertising, printing, informational kits, dues and fees, credit card fees, recruiting, training, sales promotional activities, travel and entertainment expenses as well as allocated facilities costs. 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, 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 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 Our other income (expense), net consists primarily of interest income earned on cash equivalents and marketable securities as well as foreign currency gains and (losses). Income taxes We account for income taxes in accordance with Accounting Standards Codification (ASC) 740— Income Taxes . Under ASC 740, income taxes are recognized for the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our consolidated financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. We account for uncertainties in income tax in accordance with ASC 740-10— Accounting for Uncertainty in Income Taxes . ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. 42 The accounting for stock-based compensation will increase or decrease our effective tax rate based upon the difference between our stock-based compensation expense and the deductions taken on our U.S. tax return, which depends upon the stock price at the time of employee option exercise or award vesting. We recognize excess tax benefits or deficiencies on a discrete basis, and we anticipate our effective tax rate will vary from year-to-year depending on our stock price in each period. Results of operations Comparison of three months ended June 30, 2021 and June 30, 2020 Revenue Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Sales revenue $ 90,304 $ 65,612 $ 24,692 37.6 % 88.9 % 91.5 % Rental revenue 11,259 6,079 5,180 85.2 % 11.1 % 8.5 % Total revenue $ 101,563 $ 71,691 $ 29,872 41.7 % 100.0 % 100.0 % 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. Three months ended (amounts in thousands) June 30, Change 2021 vs. 2020 % of Revenue Revenue by region and category 2021 2020 $ % 2021 2020 Business-to-business domestic sales $ 27,558 $ 21,564 $ 5,994 27.8 % 27.1 % 30.1 % Business-to-business international sales 21,823 13,874 7,949 57.3 % 21.5 % 19.3 % Direct-to-consumer domestic sales 40,923 30,174 10,749 35.6 % 40.3 % 42.1 % Direct-to-consumer domestic rentals 11,259 6,079 5,180 85.2 % 11.1 % 8.5 % Total revenue $ 101,563 $ 71,691 $ 29,872 41.7 % 100.0 % 100.0 % 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. 43 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 Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Cost of sales revenue $ 46,565 $ 36,082 $ 10,483 29.1 % 45.8 % 50.3 % Cost of rental revenue 4,663 2,860 1,803 63.0 % 4.6 % 4.0 % Total cost of revenue $ 51,228 $ 38,942 $ 12,286 31.5 % 50.4 % 54.3 % Gross profit - sales revenue $ 43,739 $ 29,530 $ 14,209 48.1 % 43.1 % 41.2 % Gross profit - rental revenue 6,596 3,219 3,377 104.9 % 6.5 % 4.5 % Total gross profit $ 50,335 $ 32,749 $ 17,586 53.7 % 49.6 % 45.7 % Gross margin percentage - sales revenue 48.4 % 45.0 % Gross margin percentage- rental revenue 58.6 % 53.0 % Total gross margin percentage 49.6 % 45.7 % 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 $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 Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Research and development expense $ 4,123 $ 3,290 $ 833 25.3 % 4.1 % 4.6 % 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. 44 Sales and marketing expense Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Sales and marketing expense $ 29,317 $ 22,086 $ 7,231 32.7 % 28.9 % 30.8 % 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 Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 General and administrative expense $ 5,224 $ 9,724 $ (4,500 ) -46.3 % 5.1 % 13.6 % 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) Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Interest income $ 29 $ 176 $ (147 ) -83.5 % 0.0 % 0.2 % Other income 304 5,700 (5,396 ) -94.7 % 0.3 % 8.0 % Total other income, net $ 333 $ 5,876 $ (5,543 ) -94.3 % 0.3 % 8.2 % 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 June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Income tax expense $ 6,902 $ 945 $ 5,957 630.4 % 6.8 % 1.3 % Effective income tax rate 57.5 % 26.8 % 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. 45 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 . Net income Three months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Net income $ 5,102 $ 2,580 $ 2,522 97.8 % 5.0 % 3.6 % 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 Revenue Six months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Sales revenue $ 167,385 $ 148,752 $ 18,633 12.5 % 88.8 % 92.9 % Rental revenue 21,110 11,428 9,682 84.7 % 11.2 % 7.1 % Total revenue $ 188,495 $ 160,180 $ 28,315 17.7 % 100.0 % 100.0 % 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%. 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 COVID-19 pandemic and related PHE. 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) June 30, Change 2021 vs. 2020 % of Revenue Revenue by region and category 2021 2020 $ % 2021 2020 Business-to-business domestic sales $ 58,301 $ 49,118 $ 9,183 18.7 % 30.9 % 30.7 % Business-to-business international sales 37,543 33,957 3,586 10.6 % 19.9 % 21.2 % Direct-to-consumer domestic sales 71,541 65,677 5,864 8.9 % 38.0 % 41.0 % Direct-to-consumer domestic rentals 21,110 11,428 9,682 84.7 % 11.2 % 7.1 % Total revenue $ 188,495 $ 160,180 $ 28,315 17.7 % 100.0 % 100.0 % 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. 46 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 Six months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Cost of sales revenue $ 89,200 $ 83,200 $ 6,000 7.2 % 47.3 % 52.0 % Cost of rental revenue 9,087 5,865 3,222 54.9 % 4.8 % 3.6 % Total cost of revenue $ 98,287 $ 89,065 $ 9,222 10.4 % 52.1 % 55.6 % Gross profit - sales revenue $ 78,185 $ 65,552 $ 12,633 19.3 % 41.5 % 40.9 % Gross profit - rental revenue 12,023 5,563 6,460 116.1 % 6.4 % 3.5 % Total gross profit $ 90,208 $ 71,115 $ 19,093 26.8 % 47.9 % 44.4 % Gross margin percentage - sales revenue 46.7 % 44.1 % Gross margin percentage- rental revenue 57.0 % 48.7 % Total gross margin percentage 47.9 % 44.4 % 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. 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 $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 June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Research and development expense $ 8,138 $ 6,895 $ 1,243 18.0 % 4.3 % 4.3 % 47 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 June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Sales and marketing expense $ 54,808 $ 49,249 $ 5,559 11.3 % 29.1 % 30.7 % 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 June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 General and administrative expense $ 17,723 $ 19,501 $ (1,778 ) -9.1 % 9.4 % 12.2 % 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 June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Interest income $ 86 $ 728 $ (642 ) -88.2 % 0.0 % 0.4 % Other income (expense) (6 ) 5,640 (5,646 ) -100.1 % 0.0 % 3.5 % Total other income, net $ 80 $ 6,368 $ (6,288 ) -98.7 % 0.0 % 3.9 % 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 June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Income tax expense $ 5,249 $ 847 $ 4,402 519.7 % 2.8 % 0.5 % Effective income tax rate 54.6 % 46.1 % 48 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. Net income Six months ended June 30, Change 2021 vs. 2020 % of Revenue (amounts in thousands) 2021 2020 $ % 2021 2020 Net income $ 4,370 $ 991 $ 3,379 341.0 % 2.3 % 0.6 % 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 We obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. 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. Except as indicated above, there have been no other material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K filed with the SEC on February 24, 2021. Off-balance sheet arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose. However, from time-to-time, we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims including certain real estate leases, supply purchase agreements, and directors and officers. The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted thus no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented. Liquidity and capital resources 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 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 49 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; the cost of our research and development activities; payments from customers; the cost, timing, and outcome of litigation or disputes involving intellectual property rights, our products, employee relations, cyber security incidents, or otherwise; the cost and timing of acquisitions; the cost and timing of regulatory clearances or approvals; the cost and timing of establishing additional sales, marketing, and distribution capabilities; and the effect of competing technological and market developments. In the future, we may acquire businesses or technologies from third parties, and we may decide to raise additional capital through debt or equity financing to the extent we believe this is necessary to successfully complete these acquisitions. Our future capital requirements will also depend on many additional factors, including those set forth in the section of this Quarterly Report on Form 10- Q entitled “Risk Factors.” If we require additional funds in the future, we may not be able to obtain such funds on acceptable terms, or at all. In the future, we may also attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. 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. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected. The following tables show a summary of our cash flows and working capital for the periods and as of the dates indicated: Six months ended (amounts in thousands) June 30, Change 2021 vs. 2020 Summary of consolidated cash flows 2021 2020 $ % Cash provided by operating activities $ 20,129 $ 14,070 $ 6,059 43.1 % Cash (used in) provided by investing activities (3,422 ) 851 (4,273 ) -502.1 % Cash provided by financing activities 10,340 1,036 9,304 898.1 % Effect of exchange rates on cash (159 ) 92 (251 ) -272.8 % Net increase in cash and cash equivalents $ 26,888 $ 16,049 $ 10,839 67.5 % (amounts in thousands) June 30, December 31, Working capital 2021 2020 Cash and cash equivalents $ 238,850 $ 211,962 Marketable securities 11,106 19,257 Accounts receivable, net 36,946 29,717 Inventories, net 27,225 24,815 Income tax receivable 1,982 2,048 Prepaid expenses and other current assets 11,457 17,898 Total current assets 327,566 305,697 Accounts payable and accrued expenses 31,543 33,712 Accrued payroll 12,108 7,091 Warranty reserve – current 6,210 5,740 Operating lease liability – current 3,562 1,931 Deferred revenue – current 8,013 6,994 Income tax payable 404 1,242 Total current liabilities 61,840 56,710 Net working capital $ 265,726 $ 248,987 Operating activities We derive operating cash flows from cash collected from the sales and rental of our products and services. 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 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 50 $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 (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. We expect to continue investing in property, equipment and leasehold improvements as we expand our operations. Our business is inherently capital intensive. For example, we expend significant manufacturing and production expense in connection with the development and production of our oxygen concentrator products and, in connection with our rental business, we incur expense in the deployment of rental equipment to our patients. Investments will continue to be required in order to grow our sales and rental revenue and continue to supply and replace rental equipment to our rental patients on service. Financing activities 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 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 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. Use of funds 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. Over the past several years, our revenue has increased from year-to-year and, as a result, our cash flows from customer collections have increased as have our profits. Our annual cash provided by operating activities has generally increased over time and has been a significant source of capital to the business, which we expect to continue in the future. 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 51 strategy could be adversely affected. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders. Non-GAAP financial measures EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with U.S. GAAP. 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 income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. 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. GAAP. 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. We use EBITDA and Adjusted EBITDA as key performance measures because we believe they facilitate operating performance comparisons from period-to-period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets and intangible assets, the impact of stock-based compensation expense and the impact of the change in fair value of the earnout liability. Because EBITDA and Adjusted EBITDA facilitate internal comparisons of our historical operating performance on a more consistent basis, we also use EBITDA and Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities. Our uses of EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: • EBITDA and Adjusted EBITDA do not reflect our cash expenditures for capital equipment or other contractual commitments; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect capital expenditure requirements for such replacements; • EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not include changes in fair value of earnout liability related to our acquisitions; and • other companies, including companies in our industry, may calculate EBITDA and Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure. In evaluating EBITDA and Adjusted EBITDA, we anticipate that in the future we will incur expenses within these categories similar to this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by certain expenses. When evaluating our financial results, EBITDA and Adjusted EBITDA should be considered alongside other financial performance measures, including U.S. GAAP results. 52 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: (amounts in thousands) Three months ended June 30, Six months ended June 30, Non-GAAP EBITDA and Adjusted EBITDA 2021 2020 2021 2020 Net income $ 5,102 $ 2,580 $ 4,370 $ 991 Non-GAAP adjustments: Interest income (29 ) (176 ) (86 ) (728 ) Provision for income taxes 6,902 945 5,249 847 Depreciation and amortization 5,241 4,480 10,339 8,942 EBITDA (non-GAAP) 17,216 7,829 19,872 10,052 Stock-based compensation 3,239 1,277 5,755 4,061 Change in fair value of earnout liability (8,082 ) 932 (7,817 ) (20 ) Adjusted EBITDA (non-GAAP) $ 12,373 $ 10,038 $ 17,810 $ 14,093 53