What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-24 · 210 added, 256 removed, 408 unchanged (53% of the section changed)

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

The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Inogen’s financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year.

The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes.

The MD&A is organized in the following sections:

COVID-19 pandemic and related PHE

Basis of presentation

Results of operations

Liquidity and capital resources

Sources of funds

Uses of funds

Non-GAAP financial measures

Critical accounting policies and estimates

COVID-19 pandemic and related PHE

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

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

While it is not possible at this time to estimate the overall impact that the COVID-19 pandemic and related public health emergency (PHE) could have on our business, the continued spread of COVID-19, both across the United States and throughout the world, and the measures taken by the governments of countries and local authorities affected has adversely impacted and could likely continue to adversely impact patient mobility, care accessibility, diagnosis rates, demand for our products, our business operations, including manufacturing, due to supply chain constraints, hiring and continued employment of our employees and contractors, shipment, 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 in the second, third and fourth quarters of 2020.

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

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

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

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

Given the COVID-19 impact to the respiratory system, we anticipate that it is possible that the demand for long-term oxygen therapy will increase due to new cases of chronic respiratory failure or exacerbation or progression of preexisting respiratory conditions will sustain or increase, although this is not based on clinical data.

We also believe stationary oxygen concentrators, and, secondarily, portable oxygen concentrators (POCs) could help meet the needs of global healthcare systems by allowing appropriate patients to use oxygen therapy at home to treat respiratory symptoms.

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 shelter-in-place orders, self-quarantine, reduced mobility and travel, and reduced access to clinicians for diagnosis and follow-up for chronic obstructive pulmonary disease (COPD) patients related to the mandates and behaviors emanating from the COVID-19 pandemic and PHE.

In periods with lower COVID-19 spread, we saw improved consumer demand for our products, which we believe was due to increasing vaccination rates and other effective containment measures, higher consumer confidence, mobility and interest in travel, versus lower demand in periods with higher COVID-19 spread.

Those impacts were in addition to our traditional seasonality in consumer buying patterns.

We continue to believe that potential future shelter-in-place orders, reduced travel, lower consumer confidence, or the impacts of new variants could reduce consumer demand in future periods.

Despite the COVID-19 pandemic and related PHE adverse impacts to direct-to-consumer sales, we experienced increased rental setups in the second quarter of 2020 through 2021, which we believe was due to Medicare and commercial payors reducing some of the administrative burden for oxygen therapy and our focus on the rental channel of the business.

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.

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 due to the tendency of hospitals to discharge COVID-19 impacted patients for treatment at home during rehabilitation due to space and labor shortages in hospitals.

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

Also, sales in Europe declined due to 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.

Similar to our direct-to-consumer sales channel, business-to-business sales improved in periods with lower COVID-19 spread, higher consumer confidence, interest in travel, and availability of effective vaccines.

In addition, this channel is impacted by COPD patient referral volumes in our core markets of the United States and Europe, which tends to improve in periods with lower COVID-19 spread due to a patient’s willingness to see their physician.

However, supply constraints, primarily due to limited semiconductor chip availability, negatively impacted sales in 2021 mainly in the domestic business-to-business channel, as discussed in more detail below.

During 2020 and 2021, we were able to broadly maintain our operations, but in the first quarter of 2022 we were forced to temporarily suspend production due to the semiconductor chip shortages discussed below.

As seen in this temporary production halt, the COVID-19 pandemic and related PHE have caused and could continue to cause disruption to our supply chain that could impact our operations, limit our growth, and increase our cost of goods sold.

For example, we have seen higher semiconductor chip demand and reduced semiconductor chip availability in 2021 and the first quarter of 2022, which has impacted our ability to produce and sell systems and batteries.

We expect availability issues to continue through 2022, which has impacted and will continue to impact our ability to produce and sell systems and batteries until supply stabilizes.

The 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, including with respect to the temporary production halt discussed below, as these chips are used across all of our portable oxygen concentrators, in both our batteries and printed circuit boards on our systems and, if we are not able to obtain sufficient components going forward, we could be forced to slowdown or temporarily halt production again.

We are continuing to focus our mitigation efforts on product redesign, seeking increased commitments on supply and shipment dates from our regular suppliers, sourcing from the open semiconductor channel, and using appropriate pricing actions such as the price increase we implemented on September 1, 2021 to help offset some of the increased cost, but we expect increasing challenges in terms of supply constraint and inflationary pressure moving forward.

We saw inflated costs related to the acquisition of semiconductor chips begin to negatively impact our cost of goods sold in the second half of 2021, and we expect this to have an increased impact on our cost of goods sold throughout 2022.

Even though we paid significant costs in the second half of 2021 associated with acquiring chips on the open market, most of these costs increased our prepaid expense and inventory given that these components were not yet in finished products that were sold during the period.

We believe based on our assessment and industry feedback that these supply shortages and increased costs are likely to continue through 2022.

In addition to the semiconductor chip limitations, we are continuing to see supply chain constraints and cost inflation for other components used in our products albeit to a lower degree.

Due to semiconductor chip shortages as of late December 2021, we temporarily suspended manufacturing operations beginning January 3, 2022, at our Texas and California locations as well as at Foxconn, our contract manufacturer in the Czech Republic.

We have since secured the required semiconductor supplies to resume production and restarted our manufacturing operations at all three locations in early February.

While we have been able to restart manufacturing operations at all locations, we are still seeing challenges in terms of available supply and we believe the supply shortages continue to represent an increased risk to the business for 2022.

Additionally, we have experienced, along with most other companies across many industries, the macro-economic impact of a challenging employment environment related to hiring and retaining employees and wage inflation.

We expect that these hiring, retention, and wage inflation challenges, as well as challenges related to maintaining our current workforce, will continue into 2022.

These hiring, retention, and cost challenges may negatively affect our ability to grow our business and keep our best employees or increase our cost of operations.

In response to these challenges, we have implemented more flexible workplace requirements depending on the role, such as increasing ability for remote work, but we still expect to be challenged by the macro-economic employment environment.

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

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

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

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

The COVID-19 pandemic and related PHE has caused demand to fluctuate for our products across all channels due to the global economic environment and changes to physician visits, interactions, testing requirements and diagnosis.

Additionally, while we planned for sales and marketing expansion in 2021, we saw lower hiring and increased attrition in our direct-to-consumer sales force primarily due to increased competition for sales professionals in 2021.

The labor shortage trend for qualified sales professionals may continue in 2022, 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.

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

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 follow recommended actions of government and health authorities to protect our employees, with particular measures in place for those working in our manufacturing facilities, and those with patient, prescriber, or customer face - to - face interactions.

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

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

During 2020, we were able to broadly maintain our operations.

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

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

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

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

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

Our Inogen One systems range from 2.6 to 6.5 hours of battery life with a single battery and can be plugged into an outlet as needed.

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 employ a direct-to-consumer market and rental strategy that we believe contributes to our leadership position in the POC market.

Our direct-to-consumer market and rental strategy means that we (i) advertise directly to consumers, process their physician paperwork, and provide clinical support as needed and (ii) bill Medicare or insurance on the patient’s behalf in the United States.

We believe that we are the only POC manufacturer offering patients both a purchase and a rental option to acquire an oxygen therapy device.

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

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

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

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

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

We expect minimal net new inside direct-to-consumer sales hires in the near term due to the size and quality of the candidate pool and expected attrition, but as part of our growth plans, we are increasing our focus on improving performance and productivity of our existing sales force.

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 driven by improved sales management discipline, insights-informed tools, and optimized patient lead generation.

During the year ended December 31, 2021, the number of inside direct-to-consumer sales representatives decreased to 292 from 300 as of December 31, 2020.

In 2021, hiring was challenging due to the continued impacts of the COVID-19 pandemic and related PHE.

We hope to offset attrition with replacement hiring in 2022 while we opportunistically increase the total inside direct-to-consumer sales representatives if and when required while maintaining our hiring standards and being mindful of the supply constraints.

We also plan to expand our prescriber sales team to drive increased physician referrals for patient rentals.

This specialized sales team consisted of 35 sales representatives and 6 support personnel as of December 31, 2021.

We have seen and believe we could continue to see a decline in sales in our direct-to-consumer channel until patient mobility and consumer confidence increases after the COVID-19 pandemic and related PHE ends.

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

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

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

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

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

We also plan to perform a pricing trial in 2021 to optimize pricing in our direct-to-consumer sales channel as well as look for opportunities to improve the close rate of leads through product offerings, pricing, and partnerships with HME providers, however, these may be delayed due to the COVID-19 pandemic and related PHE.

As this is a dynamic situation, we plan

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

Expand our rental revenues through a dedicated rental intake team.

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

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

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

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

In addition, we are using a third-party contract sales organization, Ashfield, that will only represent Inogen in the field, to enhance our go-to-market capabilities in the U.S.

As of January 2022, we had approximately 47 dedicated sales representatives, 10 sales representations with accepted offers that will be in the field early March 2022, and 12 concierge service representatives to our prescriber sales team.

Additionally, Ashfield will provide access to its best-in-class data-driven sales management disciplines, proprietary prescriber insights, and analytics to support our growth strategy and drive performance in the clinician sales channel.

The combined sales organization, Inogen and Ashfield, will benefit from access to Ashfield’s comprehensive offering of analytics tools, sales operations support, and personalized concierge services that will help drive productivity and efficiency.

Expand our domestic direct-to-consumer marketing efficiently and , optimize pricing.

We slightly increased marketing efforts in 2021 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 $35.2 million in 2021 compared to $34.2 million in 2020.

We plan to increase and optimize marketing spend to drive consumer and physician awareness of our products in 2022 and beyond.

W e raised prices as of September 1, 2021 to partially offset rising product costs .

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.

We are evolving our operating model to focus the enhanced prescriber sales team on rental opportunities with our direct-to-consumer sales team focusing mainly on cash sales.

We believe the new specialized operating model will drive higher rental setups as we expand prescriber and payor awareness of our products and services.

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 2021.

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

CMS has finalized additional changes to the administrative requirements to dispense and bill for oxygen therapy, which is discussed in more detail in the Third-party reimbursement section of Item 1 above.

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

however, we still need additional clarity on how it will be implemented.

Expand our domestic HME provider and reseller sales.

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

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

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

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

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

Supplemental oxygen is a treatment prescribed by healthcare professionals for patients with hypoxemia, which in some cases may be caused or exacerbated by 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 in the year ended December 31, 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, in the third and fourth quarters of 2021 we saw supply constraints associated with the semiconductor chip shortage that limited growth in this channel, and we expect this to continue in the near-term in 2022, specifically in the first quarter as we were forced to temporarily halt production from early January 2022 to early February 2022 due to these supply constraints.

Increase international business-to-business adoption.

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

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

As in the United States, while there was an initial surge in demand for oxygen concentrators by our international HME customers early in the COVID-19 pandemic, international demand declined in the second, third and fourth quarters of 2020 primarily due to the temporary closures and reduced operating capacity of certain European respiratory assessment centers due to the COVID-19 pandemic, continued tender delays in certain European markets, and decreased sales in other markets, primarily Canada.

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 sizable international market opportunity, particularly in Europe where there is existing oxygen reimbursement for respiratory conditions.

In order to take advantage of these international markets, we have partnered with distributors who serve those markets and key customers in them.

We additionally have an Inogen base of operations for sales and customer service in the Netherlands and use Foxconn to support the majority of our European sales volumes.

We have sold our products in a total of 59 international countries and overseas regions.

Current Inogen products are commercialized in the European Union under Medical Device Directive (MDD) certificates, expiring on May 18, 2022.

The extension of the existing certificates under the MDD or obtaining a new certificate under the European Medical Devices Regulation (MDR) is required for continued marketing in the European Union after May 18, 2022.

We are preparing the filing of the MDR submissions in the earlier part of 2022 and have verified our ability to meet most of the demand in terms of existing orders up to the MDD certificate expiration.

Additionally, we are in the process of applying for select European country level exemptions if supply is constrained and prevents us placing adequate supply into the EU supply chain before May 18, 2022.

We are also securing the necessary certification from the United Kingdom and Switzerland which we believe would be completed in Q1 2022.

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 2021, which we believe was 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 certain markets associated with spikes in COVID-19 cases in such instances.

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

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

Over time, as the U.S.

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

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

Invest in our oxygen product offerings to develop innovative products .

We incurred $14.1 million, $9.4 million and $7.0 million in 2020, 2019 and 2018, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

We launched our fifth-generation POC, the Inogen One G5, in our direct-to-consumer channel in 2019.

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

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

However, growth may also be limited by regulatory and reimbursement clearances, 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 $16.6 million, $14.1 million and $9.4 million in 2021, 2020 and 2019, respectively, in research and development costs, and we intend to continue to make such investments in the foreseeable future.

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

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

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

We expect the Inogen One G5 to obsolete the Inogen One G3 ®

over the 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.

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

The Inogen One G5 represented more than 80% of total domestic POC units sold in 2021, showing the strong demand for this product from both patients and providers.

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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 clinical, economic and patient reported 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.

We are primarily focused on creating innovative, evidence-based chronic respiratory care solutions to strengthen and build preference and advocacy for our respiratory therapies and brand across patients, prescribers, and payors.

We plan to do this with an expanded, high quality, connected, and innovative product portfolio that strengthens our differentiation.

We are also committed to pursuing complementary acquisition opportunities to strengthen our technology, product offerings, and channel access.

In August 2019, we acquired New Aera.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We plan to only sell this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 2022, and we expect limited contributions to revenue in its existing configuration.

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

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

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

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

In 2022, we are focused on securing supply for components to make our products in spite of the higher costs of semiconductor chips, reducing the cost of our Inogen One G5 product (excluding semiconductor chips), and increasing the robustness of our supply chain to reduce potential component constraints as we grow our business.

We also use lean manufacturing practices to maximize manufacturing efficiency.

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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 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.

In some cases, maintaining a single source of supply can allow us to control production costs and inventory levels and to manage component quality, but also may lead to supply availability risks , and means our ability to maintain production is dependent on these single source suppliers, which may put us at an increased risk of supply disruption, as we have seen from the production halt we implemented in early January 2022 through early February 2022.

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, a continued reduction or halt in supply from one of these single-source suppliers , any dual-sourced suppliers or any other limited source suppliers with similar sub-component suppliers could limit or prevent our ability to manufacture our products or devices until one or more sufficient replacement supplier s 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 in some cases those components are available in only limited supplies from limited manufacturers or suppliers, and the partial or complete loss of one or more of these manufacturers or suppliers could cause significant production delays or stoppages , 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.

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revenue for the years ended December 31, 2021, 2020 and 2019, respectively, was invoiced in Euros with the remainder invoiced in United States dollars.

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

We have sold our products in a total of 59 international countries and 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 $358.0 million, $308.5 million and $361.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The decrease in total revenue in the year ended December 31, 2020 compared to the prior year was primarily due to a decline in direct-to-consumer sales and domestic and international business-to-business sales, primarily associated with the COVID-19 pandemic and related PHE, partially offset by an increase in rental revenue.

The increase in total revenue in the year ended December 31, 2021 compared to the prior year was primarily due to an increase in direct-to-consumer sales and international 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 (loss) of $(6.3) million, $(5.8) million and $21.0 million in the years ended December 31, 2021, 2020 and 2019, respectively.

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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.

Our future financial performance will be driven in part by the growth in sales of our Inogen One POCs, 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 through increased sales and marketing efforts, expanding our sales infrastructure and efforts outside of the United States, expanding our business-to-business sales through key partnerships, and enhancing our product offerings through additional product launches, although, as mentioned above, these plans have been and may continue to be impacted by the COVID-19 pandemic and related PHE.

hiring additional sales representatives directly or through our contract sales organization, 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 strategic partnerships, and enhancing our product offerings through additional product launches, although, as mentioned above, these plans have been and may continue to be impacted by the COVID-19 pandemic and related PHE.

While we believe most HME providers are still in the process of converting their business model to a non-delivery model and purchase POCs, growth has been challenged and we expect it could continue to be challenged due to the COVID-19 pandemic and related PHE, their ongoing restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and potential changes in reimbursement rates.

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

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

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

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

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

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

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

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

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

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

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

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

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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 or NIV therapy, and their medical history to confirm the appropriateness of our product for the patient’s oxygen therapy or NIV therapy and compliance with Medicare and private payor billing requirements, which often necessitates additional physician evaluation and/or testing as well as a Certificate of Medical Necessity for oxygen.

Our 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 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.

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

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

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

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

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

However, during 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.

CMS has also adopted 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 2021 compared to 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 continued.

The 50/50 blended rate for HME providers in rural and non-contiguous, non-competitive bid areas was extended permanently as part of the final rule published in December 2021.

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

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

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For the years ended December 31, 2021, 2020 and 2019, approximately 81.9%, 81.5% and 81.1%, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

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

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

Basis of presentation

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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.

Product selling prices and gross margins may fluctuate as we introduce new products, our product costs change, we have changes in purchase volumes, and as currency variations occur.

For example, the higher costs for semiconductor chips has had a negative impact on our gross margin, and we expect that will continue in 2022.

Thus, to the extent that these higher costs continue, our overall gross margin should decline.

In addition, the gross margin of the sales to direct-to-consumer sales and rental customers are generally higher than business-to-business accounts, so to the extend our sales of direct-to-consumers sales and rental customers are higher than sales to our business-to-business customers, our overall gross margins should improve, and, conversely, to the extent our sales are higher to our business-to-business customers than our sales to direct-to-consumer sales and rental customers, our overall gross margins should decline.

Quarter-over-quarter results may vary due to seasonality in both the international and domestic markets, as discussed in Item 1.

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

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

Rental revenue increased in 2021, primarily due to higher patients on service, higher billable patients as a percent of total patients on service, and higher Medicare reimbursement rates.

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

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

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-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.

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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.

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

We continue to make progress towards reducing the average unit costs of our products (excluding the impact of the semiconductor chip cost increases) 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 through 2022, primarily associated with semiconductor chips used in our batteries and printed circuit boards which are components of our portable oxygen concentrators, which drove up the cost of our products in 2021 and which we expect will continue to drive up the cost of our products in 2022.

As a result, we saw these inflated costs negatively impact our cost of goods sold in the third and fourth quarter s of 2021, and we expect this to have an increased impact on our material costs in 202 2 until supply and demand get closer to equilibrium.

Even though we paid significant costs in the third and fourth quarter s of 2021 associated with these chips, most of these costs increased our prepaid expense and inventory given that these components were not yet sold in finished products during the period.

We believe based on our assessment and industry feedback that these supply shortages and are likely to continue through first half of 2022.

In addition to the semiconductor chip limitations, we are continuing to see supply chain constraints for other components used in our products.

As a result of the semiconductor chip shortages, we temporarily suspended manufacturing operations at our Texas and California locations from January 3, 2022 to February 7, 2022 and Foxconn, our Czech Republic-based OEM, suspended manufacturing due to the same supply constraints from January 3, 2022 to February 9, 2022.

While we were able to resume manufacturing operations, we are still seeing challenges in terms of available supply, and we believe this is an increased risk to the business in 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.

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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 2022.

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

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

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

Beginning in the third quarter of 2019, research and development expense also includes intangible amortization costs associated with the New Aera acquisition, which is expected to substantially increase our research and development expense in 2021 through 2028 by approximately $7.8 million per year and $4.9 million in 2029.

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

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 improvements.

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

We expect increased research and development costs associated with broadening our product portfolio including incorporating the TAV technology into our oxygen concentrator.

Sales and marketing

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

Sales and marketing expense decreased in 2020 compared to 2019, primarily associated with lower advertising expense.

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

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

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

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

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

Sales and marketing expense in creased in 20 2 1 compared to 20 20 , primarily associated with higher personnel-related expense , consulting costs, credit card/financing fees, and advertising expense .

Our average direct-to-consumer sales representative headcount was down approximately 12 % in the twelve months ended December 31, 2021 from the comparative period in the prior year as attrition outpaced hiring, primarily due to increased competition for sales professionals in 2021 .

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

Headcount was down slightly as of December 31, 2021 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 expected attrition, but as part of our growth plans, we are increasing our focus on improving productivity of our existing sales force.

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 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 prescriber sales team, increasing our rental infrastructure, increasing media spend to drive consumer awareness, and rising patient support costs as our patient and customer base increases.

General and administrative

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

stock-based compensation.

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

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

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

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

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

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

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

Other income (expense), net

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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

Result s of operations

Comparison of years ended December 31, 2021 and 2020

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Total revenue

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

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

Sales revenue increased $31.5 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 11.3% from the comparable year.

The increase was primarily attributable to increased direct-to-consumer sales and international business-to-business sales, primarily due to increased average selling prices and increased consumer demand, and the reduced impact of the COVID-19 pandemic and related PHE, partially offset by supply chain constraints limiting product availability.

We sold approximately 175,800 oxygen systems during the year ended December 31, 2021 compared to approximately 178,900 oxygen systems sold during the year ended December 31, 2020, or a decrease of 1.7%.

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

The decrease in the number of systems sold resulted mainly from a decrease in sales in the domestic business-to-business channels, primarily due to supply chain constraints.

Rental revenue increased $18.0 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 63.5% from the comparable year.

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

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

(amounts in thousands)

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Domestic business-to-business sales decreased 5.2% for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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

In addition, lower Inogen One G5 availability early in the year and uncertainty around competitive bidding Round 2021 for most of 2020 contributed to lower sales in the year.

International business-to-business sales decreased 20.3% for the year ended December 31, 2020 compared to the year ended December 31, 2019, mostly driven by the temporary closures and reduced operating capacity of certain European respiratory assessment centers due to the COVID-19 pandemic and continued tender delays in certain European markets.

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

In the year ended December 31, 2020, sales in Europe as a percentage of total international sales revenue decreased slightly to 85.8% versus 86.4% in the comparative period in 2019.

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

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

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

The decrease was primarily due to supply chain constraints that limited sales primarily in the second half of 2021.

International business-to-business sales increased 27.9% for the year ended December 31, 2021 compared to the year ended December 31, 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.

In the year ended December 31, 2021, sales in Europe as a percentage of total international sales revenue increased slightly to 86.8% versus 85.8% in the comparative period in 2020.

Domestic direct-to-consumer sales increased 15.9% for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to increased average selling prices and increased demand for POCs which we believe was primarily due to higher vaccination rates within our patient population and 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 12% from the comparative period in 2020.

Domestic direct-to-consumer rentals increased 63.5% for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to an increase in patients on service, increased Medicare reimbursement rates, and higher billable patients as a percent of total patients on service.

Cost of revenue and gross profit

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Total gross margin percentage

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

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

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

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

Cost of sales revenue increased $5.1 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 3.2% from the comparable year.

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

The year ended December 31, 2021 included $3.2 million of higher material costs associated with open-market purchases of semiconductor chips used in its batteries and POCs.

Cost of rental revenue increased $6.2 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 45.4% from the comparable year.

The increase in cost of rental revenue was primarily due to an increase in total patients on service, which led to increased rental asset depreciation expense and servicing costs.

Cost of rental revenue included $8.9 million of rental asset depreciation for the year ended December 31, 2021 compared to $5.7 million for the year ended December 31, 2020.

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

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

Sales revenue gross margin percentage increased to 48.1% for the year ended December 31, 2021 from 44.1% for the year ended December 31, 2020.

The increase was primarily related to higher average selling prices and decreased mix of domestic business-to-business sales, which have a lower gross margin than direct-to-consumer and international sales, partially offset by higher labor and overhead per unit and material cost per unit due to higher component cost versus the comparative year.

Total worldwide business-to-business sales revenue accounted for 54.8% of total sales revenue in the year ended December 31, 2021 versus 56.6% in the year ended December 31, 2020.

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

Rental revenue gross margin percentage increased to 57.4% for the year ended December 31, 2021 from 52.1% for the year ended December 31, 2020, primarily due to higher billable patients as a percent of total patients on service and higher Medicare reimbursement rates, partially offset by higher servicing costs and depreciation expense per patient on service.

Research and development expense

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Research and development expense

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

Research and development expense increased $2.5 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 17.7% over the comparable period, primarily due to a $1.7 million increase in personnel-related expenses and $0.6 million in product development expenses.

Sales and marketing expense

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Sales and marketing expense

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

Sales and marketing expense increased $15.3 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 15.7% from the comparable period, primarily attributable to an increase of $9.0 million of personnel-related expenses, $2.4 million of consulting fees, $2.1 million in credit card and financing fees, $1.0 million in media and advertising costs, and $0.4 million in travel and entertainment expenses.

In the year ended December 31, 2021, we spent $35.2 million in media and advertising costs versus $34.2 million in the comparative period in 2020.

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General and administrative expense

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

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

General and administrative expense decreased $0.8 million for the year ended December 31, 2021 from the year ended December 31, 2020, or a decrease of 2.0% from the comparable period.

The decrease was primarily attributable to a $12.6 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 $6.5 million in personnel-related expenses, $2.1 million in CEO transition costs, $1.2 million in legal and accounting fees, $1.1 million in officer transition costs, $0.9 million reimbursement from the CARES Act Provider Relief Fund due to the COVID-19 PHE received in the comparable period, $0.5 million in insurance expense, and $0.3 million in facilities costs.

Other income (expense)

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Other income (expense)

Total other income, net

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

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

Total other income (expense), net

Total other income (expense), net decreased $7.3 million for the year ended December 31, 2021 from the year ended December 31, 2020, or a decrease of 108.6% from the comparable period.

The decrease was primarily attributable to $5.3 million in other income from the CARES Act Provider Relief Fund due to lost revenues from the COVID-19 PHE received in the comparable period and not received the current year, a $1.3 million increase in net foreign currency losses, and a decrease of $0.8 million in interest income on marketable securities due to the lower interest rate environment and lower invested balances in marketable securities in the 2021 compared to 2020.

Income tax expense

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Effective income tax rate

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

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

Net income (loss)

Income tax expense increased $14.4 million for the year ended December 31, 2021 from the year ended December 31, 2020, primarily resulting from the recording of a valuation allowance on the use of deferred tax assets, 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 year ended December 31, 2021 increased compared to the year ended December 31, 2020, primarily due to the recording of a valuation allowance on the use of deferred tax assets, 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.

Years ended December 31,

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(amounts in thousands)

Net income (loss)

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

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

Net loss increased $0.5 million for the year ended December 31, 2021 from the year ended December 31, 2020, or an increase of 8.6% from the comparable period.

The increase in net loss was primarily related to the recording of a valuation allowance on the use of deferred tax assets and higher operating expense, partially offset by an increase in gross profit and the reduction in the fair value of the New Aera earnout liability.

We believe our sales may be impacted by seasonal factors.

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

In particular, due to the COVID-19 pandemic and related PHE, we have seen and expect to continue to see a disruption in our normal seasonal trends, as, due to the mandates and behaviors emanating from the COVID-19 pandemic and related PHE, including shelter-in-place orders, reduced travel, and lower consumer confidence, we did not see the typical seasonal increases in direct-to-consumer sales in 2020 that we have seen in prior years.

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

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

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

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

In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data.

This information should be read in conjunction with the audited consolidated financial statements and related notes included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.

The results of historical periods are not necessarily indicative of the results of operations for any future period.

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

Quarterly Results 2020

Total revenue

Income (loss) before provision (benefit) for income

Provision (benefit) for income taxes

Net income (loss)

Net income (loss) per share attributable to

common stockholders:

Weighted-average number of shares used in

calculating net income (loss) per share attributable

to common stockholders:

Basic common shares

Diluted common shares

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

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

Quarterly Results 2019

Total revenue

Income (loss) before provision (benefit) for income

Provision (benefit) for income taxes

Net income (loss)

Net income (loss) per share attributable to

common stockholders:

Weighted-average number of shares used in

calculating net income (loss) per share attributable

to common stockholders:

Basic common shares

Diluted common shares

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

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, but have seen seasonality in our direct-to-consumer sales in 2021 to be similar to historical periods excluding 2020, although this may not continue in future periods.

We also expect the semiconductor chip shortage to negatively impact our total revenue for 2022.

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.

Comparison of years ended December 31, 2020 and 2019

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As of December 31, 2021, we had cash and cash equivalents of $235.5 million, which consisted of highly liquid investments with a maturity of three months or less.

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

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

In addition, we held marketable securities of $10.0 million in available-for-sale corporate bonds which had maturities greater than three months.

For the years ended December 31, 2021, 2020 and 2019, we received $15.6 million, $2.4 million and $5.9 million, respectively, in proceeds related to stock option exercises and our employee stock purchase plan.

Our principal uses of cash for liquidity and capital resources in the year ended December 31, 2021 consisted of capital expenditures of $24.1 million including additional rental equipment, other property, plant and equipment, and intangible assets.

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

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

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

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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.

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.

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(amounts in thousands)

Working capital

Cash and cash equivalents

Marketable securities

Accounts receivable, net

Inventories, net

Income tax receivable

Prepaid expenses and other current assets

Summary of working capital

Total current assets

Accounts payable and accrued expenses

Accrued payroll

Warranty reserve - current

Operating lease liability - current

Deferred revenue - current

Income tax payable

Total current liabilities

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

Net cash provided by operating activities for the year ended December 31, 2021 consisted primarily of our non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $21.6 million, a decrease in deferred tax assets of $14.4 million, provision for sales returns and doubtful accounts of $11.1 million, stock-based compensation expense of $10.9 million, provision for inventory obsolescence and other inventory losses of $2.1 million, and net loss on disposal of rental equipment and other fixed assets of $1.5 million;

partially offset by the change in fair value of earnout liability of $11.6 million and our net loss of $6.3 million.

The net changes in operating assets and liabilities resulted in a net use of cash of $20.1 million.

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

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The net changes in operating assets and liabilities resulted in a net use of cash of $27.9 million.

Net cash provided by operating activities for the year ended December 31, 2018 consisted primarily of our net income of $51.8 million and non-cash expense items such as provision for sales returns and doubtful accounts of $17.5 million, stock-based compensation expense of $12.8 million, depreciation of equipment and leasehold improvements and amortization of our intangibles of $11.3 million, provision for rental revenue adjustments of $2.7 million, and loss on disposal of rental equipment and other fixed assets of $1.2 million.

These were partially offset by an increase in deferred tax assets of $11.6 million and gain on sale of former rental assets of $0.4 million.

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

Investing activities

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

Net cash used in investing activities for each of the periods presented included cash used for acquisitions and in the production and purchase of rental assets, manufacturing equipment and tooling, computer equipment and software, leasehold improvements and other property, plant and equipment to support our expanding business, partially offset by net maturities of marketable securities.

For the year ended December 31, 2021, we invested $23.9 million in the production and purchase of rental assets and other property, equipment, and intangible assets as well as $10.0 million in corporate bonds with maturities greater than three months that were classified as marketable securities, partially offset by $19.3 million in maturities of marketable securities.

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

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In addition, we invested $6.5 million in the production and purchase of rental assets and other property, equipment, leasehold improvements and intangible assets.

For the year ended December 31, 2018, we invested $76.2 million in corporate bonds and U.S.

Treasury securities with maturities greater than three months that were classified as marketable securities, partially offset by $63.5 million in maturities of available-for-sale investments.

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

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

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

For the year ended December 31, 2020, net cash provided by financing activities consisted of $2.4 million from purchases under our employee stock purchase program and the proceeds received from stock options that were exercised, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.4 million.

For the year ended December 31, 2021, net cash provided by financing activities consisted of $15.6 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 $0.6 million.

For the year ended December 31, 2019, net cash provided by financing activities consisted of $5.9 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.9 million.

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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.

Over the past several years our cash flows from customer collections have remained consistent and our annual cash provided by operating activities has generally 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.

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Interest income

Provision (benefit) for income taxes

Provision for income taxes

Depreciation and amortization

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Operating leases - properties and other (1)

Non-cancelable contractual obligations (2)

Purchase obligations (2)

We lease manufacturing and office space in Richardson, TX, Plano, TX, Goleta, CA, Smyrna, TN, Huntsville, AL, Aurora, CO, Cleveland, OH and Breukelen, Netherlands with terms that expire between 2022 and 2031 and miscellaneous office and processing equipment in Texas, California and Ohio with terms expiring between 2022 and 2031.

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

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

These obligations are for software licenses and maintenance agreements.

We obtain individual components for our products from a wide variety of individual suppliers.

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

As of December 31, 2020, we had noncurrent deferred tax liabilities of $14.4 million which were netted in noncurrent deferred tax assets on the balance sheet.

Additionally, as of December 31, 2020, we had gross unrecognized tax benefits of $1.9 million.

The table does not include any payments related to liabilities recorded for uncertain tax positions as we cannot make a reasonably reliable estimate as to the timing of any other payments.

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

For additional description of contractual obligations and commitments, see the section titled “Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Contingent consideration

In connection with our acquisition of New Aera, we have contingent obligations to pay up to $31.4 million in earnout payments in cash if certain future financial results are met.

See the section titled “Fair Value of Earnout Liability” in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion.

Critical accounting policies and estimates

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revenue recognition;

product warranty;

acquisitions and related acquired intangible assets and goodwill.

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

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

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

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

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

Revenue from the sale of our repair services is recognized when the performance obligations are satisfied, and collection of the receivables is probable.

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

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

off and charged to the allowance.

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

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

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

Product Warranty

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

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

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

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

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

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

Our products are subject to regulatory and quality standards.

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

We evaluate the liability quarterly.

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

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

Actual warranty costs could differ materially from the estimated amounts.

Acquisitions and related acquired intangible assets and goodwill

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Refer to Note 1 – Summary of significant accounting policies of the audited consolidated notes included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for further discussion.

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.

We do not believe that inflation has had a material effect on our business, financial condition or results of operations.

If our costs were to become subject to significant inflationary pressures, we might not be able to fully offset such higher costs through price increases.

Our inability or failure to do so could harm our business, financial condition and results of operations.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis