What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 266 added, 433 removed, 434 unchanged (62% of the section changed)

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

our expectations of the impact of the COVID-19 pandemic and related public health emergency (PHE) on sales, productivity, hiring, media expenditures, prescriber sales team and physician referrals, worldwide demand for oxygen therapies, and our supply chain, including supply constraints and cost inflation related to semiconductor chips used in our batteries and printed circuit boards which are components of our portable oxygen concentrators;

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

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

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

our assessment and expectations regarding reimbursement rates, future rounds of competitive bidding, Centers for Medicare and Medicaid Services (CMS) changes associated with the COVID-19 pandemic and related PHE impacting respiratory care, CMS changes to Home Use of Oxygen national coverage determination and how those changes are implemented, and future changes in rental revenue;

our expectations regarding regulatory approvals, including the period of time during which our sales in Europe will be suspended due to delayed European Medical Device Regulation approval, and government and third-party payor coverage and reimbursement;

our ability to develop new products, improve our existing products and increase the value of our products, including the potential integration of Tidal Assist ® Ventilator (TAV ® ) technology into our existing products;

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

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our expectations regarding the average selling prices and manufacturing costs of our products, including our expectations related to the impact of supply chain disruptions on our manufacturing costs and our ongoing efforts to reduce average unit costs for our systems;

our expectations regarding our sales and marketing channels including expectations related to our prescriber sales team, including the expansion of the sales team and implementation of healthcare intelligence platforms and tools through our partnership with Ashfield Healthcare, LLC (Ashfield) and its impact on clinician awareness, POC penetration, and sale team productivity;

our expectations regarding our sales and marketing channels related to our prescriber sales team, including the expansion of the sales team and concierge service representatives and implementation of healthcare data, insights and tools through our partnership with Ashfield Healthcare, LLC (Ashfield) and its impact on clinician awareness and coverage, POC penetration, and sales team productivity;

our expectations with respect to our European and U.S.

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

our expectations regarding excess tax benefits or deficiencies from stock-based compensation;

our expectations regarding excess tax benefits or deficiencies from stock-based compensation and our assessments and estimates of our effective tax rate;

our expectations of future accounting pronouncements or changes in our accounting policies;

our assessments and estimates of our effective tax rate;

our internal control environment;

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

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

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

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

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

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

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

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 c onsolidated f inancial s tatements and accompanying condensed n otes.

The MD&A is organized in the following sections:

Critical accounting policies and estimates

COVID-19 pandemic and related PHE

Basis of presentation

Results of operations

Liquidity and capital resources

Sources of funds

Non-GAAP financial measures

Critical accounting policies and estimates

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

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revenue recognition;

product warranty;

acquisitions and related acquired intangible assets and goodwill.

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three and nine months ended September 30 , 2021 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 24, 2021.

There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three months ended March 31 , 2022 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 24, 2022.

COVID-19 pandemic and related PHE

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

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

While it is not possible at this time to estimate the overall impact that the COVID-19 pandemic and related PHE could have on our business, the continued spread of COVID-19, both across the United States and throughout 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.

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

Starting in the first quarter of 2021 and continuing into the second quarter of 2021, consumer demand for our products improved, which we believe was due to increased vaccination rates, increased interest in POCs to enable patient mobility, stimulus payments, and increased consumer confidence.

While we observed this increase in consumer demand in the first half of 2021, we saw consumer demand slightly decline in the third quarter of 2021 compared to the second quarter of 2021, which we believe was primarily associated with traditional seasonality in consumer buying patterns and the impact of the delta variant, and we continue to believe that future shelter-in-place orders, reduced travel, lower consumer confidence, or the impacts of new variants could reduce consumer demand in future periods.

However, overall business-to-business demand has been lower because of the COVID-19 pandemic and related PHE due to lower retail sales, lower patient travel, physician offices limiting patient interactions for chronic obstructive pulmonary disease (COPD) patient referrals, HME providers minimizing patient interactions in response to the COVID-19 pandemic and related PHE, which includes replacing existing oxygen patient setups with POCs, and HME providers turning their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients.

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

I n the second quarter of 2021, business-to-business sales improved versus the comparative period in the prior year due to a smaller impact of the COVID-19 pandemic and related PHE as consumer confidence, vaccination rates, and COPD patient referral volumes improved in our core markets of the United States and Europe.

In the third quarter of 2021, business-to-business demand remained high versus the comparative period in the prior year for the same reasons as experienced in the second quarter of 2021, but supply constraints, primarily due to limited semiconductor chip availability , negatively impacted sales mainly in the domestic business-to-business channel, as discussed in more detail below.

During 2020 and through the nine months ended September 30, 2021, we were able to broadly maintain our operations.

However, the COVID-19 pandemic and related PHE have caused and could continue to cause disruption to our supply chain that could impact our operations, 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, which has impacted our ability to produce and sell systems and batteries.

We expect availability issues to continue for the remainder of 2021 and into 2022, which has impacted and will continue to impact our ability to produce and sell systems and batteries until resolved.

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 as these chips are used across all of our portable oxygen concentrators, in both our batteries and printed circuit boards and, if we are not able to obtain sufficient components, we could be forced to further slowdown or temporarily halt production.

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

We saw inflated costs related to the acquisition of semiconductor chips begin to negatively impact our cost of goods sold in the third quarter of 2021, and we expect this to have an increased impact on our material costs in the fourth quarter of 2021 and continuing into 2022 until supply and demand get closer to equilibrium.

Even though we paid significant costs in the third quarter of 2021 associated with these chips, 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 the second quarter of 2022.

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

Thus far, we have been able to manage through these challenges with increased inventory levels and heightened supplier management and communications, but we cannot be certain we will be able to continue to do so through the remainder of the shortages.

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

To partially offset these rising costs, we implemented a price increase across our products which was effective as of September 1, 2021.

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.

We expect that these hiring and retention challenges, as well as challenges related to maintaining our current workforce, will continue throughout the remainder of 2021 and into 2022.

These hiring and retention challenges may negatively affect our ability to grow our business and keep our best employees.

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

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 the first quarter of 2022, 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 and the first quarter of 2022 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 for a period of approximately six weeks 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 per unit.

For example, we have seen 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 the remainder of 2022 and possibly into 2023 as the semiconductor chip shortage is being experienced across many industries, placing additional pressure on existing supplies.

In addition, gas required for manufacturing of semiconductors and manufacturing capacity constraints as a result of the war in Ukraine as well as the COVID-19 extended lockdown in China are expected to impact our operations into the second half of 2022.

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, and 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 price increases, to help offset some of the increased cost.

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, which continued through the first quarter of 2022, and we expect this to have an increased impact on our cost of goods sold for the remainder of 2022 and into 2023 .

Even though we paid significant costs in the second half of 2021 and the first quarter of 2022 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 the remainder of 2022 and into 2023 .

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, we temporarily suspended manufacturing operations at our Texas and California locations as well as Foxconn, our Czech Republic-based original equipment manufacturer (OEM), beginning January 3, 2022 until early February 2022 when we resume d production and restarted our manufacturing operations at all three locations.

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 in 2022 , and we may have to suspend manufacturing again in the future due to these shortages .

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

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

In response 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 demand to fluctuate for our products across all channels due to the global economic environment and changes to regular physician interactions and testing requirements.

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

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

The 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 and the first quarter of 2022.

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.

We believe that the recent “Executive Order o n Ensuring Adequate COVID Safety Protocols for Federal Contractors” applies to Inogen , due to our Medicare and Medicaid contracts, and that we therefore are required to implement a COVID vaccine mandate across our workforce.

This mandate policy, requiring all employees to be vaccinated, will continue our policy of keeping our people, families, patients and others safe, but may negatively affect our business if a substantial number of employees decide not to get vaccinated and are subsequently terminated either voluntarily or involuntarily.

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

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

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

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

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

We expect minimal net new inside 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 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 tools and lead distribution systems, and improved training.

We saw increased demand in the second and third quarters of 2021 versus the comparative periods in 2020, which led to improved sales representative productivity and increased average revenue per order in the period versus each of the last three quarters of 2020, which saw declines associated with the COVID-19 pandemic and related PHE.

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

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

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

H eadcount was up slightly as of September 30, 2021 compared to December 31, 2020.

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

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, and we have continued to see our inside direct-to-consumer sales representative headcount decline in the first quarter of 2022 due to attrition outpacing hiring.

In 2021 and continuing into the first quarter of 2022, hiring was challenging due to the continued impacts of the COVID-19 pandemic and related PHE.

We hope to offset attrition with replacement hiring through the remainder of 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.

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

They plan to add approximately 20 dedicated sales 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.

We expect to have these sales representatives hired and training completed during the first half of 2022, including the roll-out of new and enhanced sales processes, tools, and a field support team across our entire prescriber sales organization to help drive productivity and efficiency.

The combined sales organization 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, drive better lead utilization, and optimize pricing.

We increased marketing efforts to continue to drive patient awareness of our products and patient inquiries about their ability to switch from their current oxygen products to our technology as patient interest increased, so media and advertising costs increased to $9.4 million in the third quarter of 2021 compared to $7.7 million in the third quarter of 2020.

While there was an approximate 8% reduction in average direct-to-consumer sales representatives in the third quarter of 2021 compared to the same period in the prior year, lead utilization and pricing both increased in the comparative periods as we raised prices 10% as of September 1, 2021 to partially offset rising product costs and consumer interest and ambulation increased.

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

We also plan to perform a pricing trial in 2022 to optimize pricing in our direct-to-consumer sales channel as well as look for opportunities to improve the close rate of leads through product offerings, pricing, and partnerships with HME providers;

however, these may be delayed due to the COVID-19 pandemic and related PHE.

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

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 March 31, 2022, we had approximately 54 dedicated sales representatives and 12 concierge service representatives on our prescriber sales team.

Additionally, Ashfield has provided 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 maintained our marketing efforts to continue to drive patient awareness of our products and patient inquiries about their ability to switch from their current oxygen products to our technology as patient interest increased.

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

We raised prices as of September 1, 2021 and March 1, 2022 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.

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

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

In the nine months ended September 30, 2021, we saw improved rental intake team productivity compared to the same period in the prior year.

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

Due to the COVID-19 pandemic and related PHE, Medicare and commercial payors have reduced some of the administrative burden for oxygen therapy, which also contributed to increased rental setups in the second quarter of 2020 through the third quarter of 2021.

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.

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

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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.

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

While there have been surge s 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 nine months ended September 30, 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 quarter we saw supply constraints associated with the semiconductor chip shortage to continue to limit growth in this channel and expect this to continue in the near-term.

Supplemental oxygen is a treatment prescribed by healthcare professionals for some patients with hypoxemia, which in some cases may be caused or exacerbated by COVID-19.

In 2020, the COVID-19 pandemic and related PHE represented a period of isolation, with lower patient travel, fewer visits to physician offices (limiting patient interactions for COPD patient referrals) and HME providers minimizing patient interactions.

Domestic HME provider demand increased in the year ended December 31, 2021 and in the three months ended March 31, 2022, 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, starting in the third quarter of 2021 through the first quarter of 2022, we saw supply constraints associated with the semiconductor chip shortage that led to a significant decline in this channel, 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.

We expect these supply constraints to continue to impact the domestic business-to-business channel in the remainder of 2022.

Increase international business-to-business adoption.

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We additionally have an Inogen base of operations for sales and customer service in the Netherlands, and use a contract manufacturer, Foxconn, located in the Czech Republic to support the majority of our European sales volumes.

We have sales in 59 international countries or overseas regions.

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

Current Inogen products are commercialized in the European Union and United Kingdom 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 Device Regulation (MDR) is required for continued marketing in the European Union after May 18, 2022.

Our EU MDR Generic Device Group submission has been filed for our POCs and are under review.

In addition, United Kingdom Conformity Assessed has been filed and accepted.

The Swiss Medic Submissions has been filed and awaiting final steps.

Derogation requests have also been filed in Germany, France, Spain, Italy, Belgium and Netherlands.

Additional requests are in the process of preparation.

Due to the expected reduced availability of products in Europe in the second quarter and second half of 2022 due to the delay in MDR approval, we will place intentional focus on fulfilling European orders in our international business-to-business sales channel until May 18, 2022 when the MDR certificate expires.

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

However, international demand declined in the second quarter of 2020 continuing through the first quarter of 2021 primarily due to the temporary closures and reduced operating capacity of certain European respiratory assessment centers due to the COVID-19 pandemic, continued tender delays in certain European markets, and decreased sales in other markets, primarily Canada.

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

We experienced increased demand during the second and third quarters of 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.

However, international demand declined in the second quarter of 2020 and 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, tender delays in certain European markets, and decreased sales in other markets, primarily Canada.

In addition, during this period, providers turned their focus to supplying stationary oxygen concentrators with higher flow characteristics in response to the COVID-19 pandemic.

We experienced increased demand for the remainder of 2021 and during the first quarter of 2022, 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.

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 and reimbursement exists today.

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.

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We incurred $16.6 million and $14.1 million in 2021 and 2020, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.

We incurred $3.8 million and $3.5 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and $11.9 million and $10.4 million for the nine months ended September 30, 2021 and September 30, 2020, respectively, in research and development costs.

We incurred $5.4 million and $4.0 million for the three months ended March 31, 2022 and March 31, 2021, respectively, in research and development costs.

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

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

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

The Inogen One G5 represented more than 80% of total domestic POC units sold in the nine months ended September 30, 2021, showing the strong demand for this product from both patients and providers.

The Inogen One G5 represented more than 75 % of total domestic POC units sold in the three months ended March 3 1 , 202 2 , showing the strong demand for this product from both patients and providers.

Inogen Connect, our connectivity platform on our Inogen One G4 ® and Inogen One G5 products in the United States and Canada is compatible with Apple and Android platforms and includes patient features such as purity status, battery life, product support functions, notification alerts, and remote software updates.

We believe home oxygen providers will also find features such as remote troubleshooting, equipment health checks, and location tracking to help drive operational efficiencies when transitioning away from the oxygen tank delivery model.

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

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.

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In August 2019, we acquired New Aera.

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

New Aera’s patented and Food and Drug Administration (FDA)-cleared 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 2022, and we expect limited contributions to revenue in its existing configuration.

We continue to investigate opportunities to incorporate the TAV technology directly into our Inogen One POCs as we believe it will enhance patient preference and maintain our technology leadership position in the long-term oxygen therapy market.

Device modifications to facilitate compatibility may require FDA premarket review and approval commensurate with new products before product commercialization.

Additionally, securing the appropriate reimbursement rate would be a critical enabler for success.

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

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We rely on third-party manufacturers to supply several components of our products.

We typically enter into master service agreements for these components that specify quantity and quality requirements and delivery terms.

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

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

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.

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 or dual-sourced suppliers with similar sub-component suppliers could limit or prevent 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.

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 suppliers 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.

In the three months ended September 3 0 , 20 2 1 and September 3 0 , 20 20 , approximately 23.5 % and 19.

6 %, respectively, and 2 1.1 % and 2 0.7 % for the nine months ended September 30, 2021 and September 30, 2020, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

In the three months ended March 3 1 , 20 2 2 and March 3 1 , 20 2 1 , approximately 34.8 % and 18.1 %, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe.

Approximately 73.2 % and 79.3 % of the non-U.S.

revenue for the three months ended September 3 0 , 20 2 1 and September 3 0 , 20 20 , respectively, and 71.9 % and 75.6 % for the nine months ended September 30, 2021 and September 30, 2020, respectively, was invoiced in E uros with the remainder invoiced in U n ited States dollars.

W e s ell our products in 5 9 international countries or overseas regions outside the United States through our wholly - owned subsidiary, distributors or directly to large “house” accounts, which include gas companies, HME oxygen providers, and resellers.

revenue for the three months ended March 3 1 , 20 2 2 and March 3 1 , 20 2 1 , respectively, w ere invoiced in E uros with the remainder invoiced in U n ited States dollars.

W e have sold our products in a total of 5 9 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 $93.1 million and $74.3 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and $281.6 million and $234.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

The increase in total revenue in the three months and nine months ended September 30, 2021 compared to the three months and nine months ended September 30, 2020 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 (losses) of $12.2 million and $(1.7) million for the three months ended September 30, 2021 and September 30, 2020, respectively, $16.5 million and $(0.7) million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

We generated Adjusted EBITDA of $12.2 million and $4.6 million in the three months ended September 30, 2021 and September 30, 2020, respectively, and $30.0 million and $18.7 million for the nine months ended September 30, 2021 and September 30, 2020, respectively, (see “Non-GAAP financial measures” for reconciliations between U.S.

Our total revenue was $80.4 million and $86.9 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

The decrease in total revenue was primarily due to supply chain constraints that limited production capacity and resulted in lower sales in our domestic business-to-business channel.

We generated net losses of $14.2 million and $0.7 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

We generated Adjusted EBITDA of ($5.0) million and $5.4 million in the three months ended March 31, 2022 and March 31, 2021, respectively (see “Non-GAAP financial measures” for reconciliations between U.S.

GAAP and non-GAAP results).

As of September 30, 2021, our retained earnings were $92.1 million.

As of March 31, 2022, our retained earnings were $55.1 million.

Sales revenue

Our future financial performance will be driven in part by the growth in sales of our Inogen One systems, and, to a lesser extent, sales of batteries, other accessories, our Inogen At Home stationary oxygen concentrators and our TAV products.

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 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 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 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.

Product is not deployed until both the prescription and payment are received.

Product is not deployed until both the prescription and payment are secured.

Once a full system is deployed, the patient has 30 calendar days to return the product, subject to the payment of a minimal processing and handling fee.

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

We sold approximately 44 , 600 systems in the three months ended September 3 0 , 20 2 1 and 42 , 2 00 systems for the same period in 20 20 .

We sold approximately 146 , 400 systems in the nine months ended September 30, 2021 compared to 138 , 1 00 systems for the same period in 2020.

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

We sold approximately 30,400 systems in the three months ended March 31, 2022 and 49,400 systems for the same period in 2021.

While management focuses on system sales as an indicator of current business success, the decline in the current period was caused by supply chain constraints and associated temporary suspension of manufacturing at all three locations.

Rental revenue

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

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.

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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 the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to a greater number of patients on service, higher Medicare reimbursement rates, and higher billable patients as a percent of total patients on service.

Rental revenue increased in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to a greater number of patients on service and higher Medicare reimbursement rates.

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

In addition, as part of the various stimulus bills in 2020 (also discussed in more detail in the Reimbursement section below), the 2% Medicare sequestration reduction was temporarily paused, and Medicare reimbursement rates for non-rural, non-competitive bid areas through the duration of the COVID-19 PHE were increased to a 75/25 blended rate retroactive to March 6, 2020, which increased the rates in 2021 while the COVID-19 PHE continues.

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

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

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 teams, expanding our direct-to-consumer marketing efforts, investing in patient and physician awareness and advocacy, expanding clinical evidence, and securing additional insurance contracts.

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

This capped period begins after month 36 and continues until month 60.

In this scenario, the ratio of billable patients to total patients on service is critical to maintaining rental revenue growth as patients on service increases.

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

We had approximately 40,400 and 29,500 oxygen rental patients as of September 30, 2021 and September 30, 2020, respectively.

We had approximately 43,200 and 34,700 oxygen rental patients as of March 31, 2022 and March 31, 2021, respectively.

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

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Reimbursement

Medicare and private insurance rentals represented 13.0% and 10.1% of our total revenue in the three months ended September 30, 2021 and September 30, 2020, respectively, and 11.8% and 8.1% in the nine months ended September 30, 2021 and September 30, 2020, respectively.

Medicare and private insurance rentals represented 16.2% and 11.3% of our total revenue in the three months ended March 31, 2022 and March 31, 2021, respectively.

The increased rental revenue as a percentage of total revenue was primarily due to increased rental patients on service and increased reimbursement rates.

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

For the three months ended September 3 0 , 20 2 1 and September 3 0 , 2020 , approximately 81.6 % and 8 2 .

8 %, respectively, and for the nine months ended September 30, 2021 and September 30, 2020, approximately 82.6 % and 80.6 %, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

For the three months ended March 3 1 , 20 2 2 and March 3 1 , 202 1 , approximately 79.0 % and 83.9 %, respectively , of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs.

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

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

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

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

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

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

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

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Average Medicare reimbursement rates in former CBAs

As of January 1, 2022

As of April 1, 2021

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As of January 1, 2018

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

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

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

rural states include ME, MS, VT and WV;

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

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

Medicare payment rates are based upon whether the beneficiary resides in former or current CBAs, or in rural or non-rural non-CBAs, or in non-contiguous states.

Non-CBA payment rates are based on regional pricing, that are derived from (former) competitive bidding payment rates.

In rural areas and non-contiguous states, payment rates are higher, to account for higher servicing costs in those areas.

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

We estimate that approximately 18% of our patients are eligible to receive the higher reimbursement rates based on the geographic locations of our current patient population.

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

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

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

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

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

Therefore, Medicare payment rates are no longer affected by a budget neutrality adjustment, as of April 1, 2021.

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

Average Medicare reimbursement rates in rural areas

As of January 1, 2022

As of April 1, 2021

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

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

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

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

Note that the 2022 rates listed below include Coronavirus Aid, Relief, and Economic Security (CARES Act) increased rates due to the COVID-19 PHE, which may not be in place for all of 2022.

If the COVID-19 PHE is declared over, the rates in these non-former CBAs, non-rural areas are expected to adjust down to the former CBA rates listed in the table above.

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

As of January 1, 2022

As of April 1, 2021

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

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

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

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

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

House of Representatives bill H.R.

1868 was signed into law on April 14, 2021 and extended the suspension period to December 31, 2021, but increased the fiscal year 2030 sequestration cuts.

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

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

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

The 2% Medicare sequestration benefit that was in place since May 2020 due to the COVID-19 PHE was set to expire on December 31, 2021 but was extended by Congress through March 31, 2022.

The sequestration has now resumed with a 1% reduction to rates from April 1, 2022 until June 30, 2022, with the full 2% Medicare sequestration set to resume starting July 1, 2022 and expected to continue through September 30, 2030.

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

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

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

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

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These changes were retroactive to early March 2020.

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

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

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

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

In August 2020, CMS resumed medical review of claims and the prior authorization program for certain DMEPOS.

CMS also issued a final rule in December 2021 (CMS-1738-P) to establish payment amounts that will be effective after the COVID-19 PHE for DMEPOS products and services covered under Medicare.

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

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

(1) for non-contiguous non-CBAs;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The final payment methodology sets the fee schedule amounts to 100% of the Medicare (competitive bid derived) rates in all non-rural areas.

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

The final payment methodology establishes the fee schedule amounts to a 50/50 blended payment rate in rural areas , which is the same rate that is currently applicable in these areas.

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

At this point, CMS has not yet announced when a new round of competitive bidding will occur.

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

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In addition, CMS defined exercise more broadly to include functional performance of the patient and allow more flexibility on pulse oximetry readings to account for differences in skin pigmentation.

Lastly, CMS reduced provider burden by removing the oxygen certificate of medical necessity requirement.

Lastly, CMS removed from the national coverage determination the oxygen certificate of medical necessity requirement.

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

However, we do not yet have visibility on how the Medicare Administrative Contractors will change their coverage determinations.

Medicare revenue, including patient co-insurance and deductible obligations, represented 10.6 % and 8.4 % of our total revenue in the three months ended September 3 0 , 20 2 1 and September 30, 2020, respectively, and 9.7 % and 6 .

5 % of our total revenue in the nine months ended September 30, 2021 and September 30, 2020, respectively.

CMS issued guidance on February 10, 2022 to the Medicare Administrative Contractors detailing that the implementation date of the revised national coverage policy will be June 14, 2022.

However, we do not yet have visibility on the details of how the Medicare Administrative Contractors will change their coverage determinations or the effective date of the new national coverage determinations.

Medicare revenue, including patient co-insurance and deductible obligations, represented 12.8% and 9.5% of our total revenue in the three months ended March 31, 2022 and March 31, 2021, respectively.

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

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The supplier may not arbitrarily issue new equipment.

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

Our capped patients as a percentage of total patients on service was approximately 8.3% as of September 30, 2021 and 13.8% as of September 30, 2020.

We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three months ended March 31, 2022 and March 31, 2021, respectively.

Our capped patients as a percentage of total patients on service was approximately 8.1% as of March 31, 2022 and 9.8% as of March 31, 2021.

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

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

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

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

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

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

We had 92 contracts as of September 30, 2021.

Based on our patient population, we believe at least 42% of all oxygen therapy patients are covered by Medicare Advantage, government, and other private payors.

We had 95 contracts as of March 31, 2022.

Private payors typically provide reimbursement at a rate similar to Medicare allowables for in-network plans.

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We have historically been able to reduce our costs through scalable manufacturing, better sourcing, continuous innovation, and reliability improvements, as well as innovations that reduce our product service costs by minimizing exchanges.

As a result of design changes, supplier negotiations, bringing manufacturing and assembly largely in-house and our commitment to driving efficient manufacturing processes, we have reduced our overall POC system cost by approximately 59% from 2009 to 2020.

We intend to continue to seek ways to reduce our cost of revenue through manufacturing and design improvements.

As a result of design changes, supplier negotiations, bringing manufacturing and assembly largely in-house and our commitment to driving efficient manufacturing processes, we have historically reduced our overall POC system cost and intend to continue to seek ways to reduce our cost of revenue through manufacturing and design improvements.

For additional discussion of the impact of the recent Medicare reimbursement proposals, see “Risk Factors” herein.

Basis of presentation

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

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

We classify our revenue in two main categories:

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There will be fluctuations in mix between business-to-business sales, direct-to-consumer sales and rental revenue from period-to-period.

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

For example, the gross margin for our Inogen One G4 system is higher than our Inogen One G3 system due to lower manufacturing costs and similar average selling prices.

Thus, to the extent our sales of our Inogen One G4 systems are higher than sales of our Inogen One G3 systems, our overall gross margins should improve and, conversely, to the extent our sales of our Inogen One G3 systems are higher than sales of our Inogen One G4 systems, our overall gross margins should decline.

Quarter-over-quarter results may vary due to seasonality in both the international and domestic markets.

We believe our sales may be impacted by seasonal factors.

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

In particular, due to the COVID-19 pandemic and related PHE, we have seen and expect to continue to see a disruption in our normal seasonal trends due to the mandates and behaviors emanating from the COVID-19 pandemic and related PHE, including shelter-in-place orders, reduced travel, and lower consumer confidence, and we did not see the typical seasonal increases in direct-to-consumer sales in 2020 that we have seen in prior years, 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 during the fourth quarter of 2021 and the first half of 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.

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 the remainder of 2022.

Additionally, fluctuations in the channel mix could cause variability in our gross margins, as direct-to-consumer sales and rental revenue have higher margins than the business-to-business channels.

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

Seasonality and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 24, 2022.

Sales revenue

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

Rental revenue increased in the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, primarily due to higher patients on service, higher billable patients as a percent of total patients on service, and higher Medicare reimbursement rates.

Rental revenue increased in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to higher 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.

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

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

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

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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 in 2021 and through the first half of 2022, primarily associated with semiconductor chips used in our batteries and printed circuit boards which are components of our portable oxygen concentrators, which have driven up the cost of our products in 2021.

As a result, we saw these inflated costs begin to negatively impact our cost of goods sold in the third quarter of 2021, and we expect this to have an increased impact on our material costs in the fourth quarter of 2021 and continuing into 2022 until supply and demand get closer to equilibrium.

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

However, we have experienced and expect to continue experiencing supply chain disruptions through the remainder of 2022 and into 2023, primarily associated with semiconductor chips used in our batteries and printed circuit boards which are components of our POCs, which drove up the cost of our products in 2021 and the first quarter of 2022, and which we expect will continue to drive up the cost of our products in the remainder of 2022.

In addition, supply chain disruptions and increased cost of critical components are expected to continue into the second half of 2022 due to the war in Ukraine as well as the COVID-19 extended lockdown in China.

As a result, we saw these inflated costs negatively impact our cost of goods sold starting in the third quarter of 2021 through the first quarter of 2022, and we expect this to have an increased impact on our material costs in the remainder of 2022 until supply and demand get closer to equilibrium.

Even though we paid significant costs in the second half of 2021 and the first quarter of 2022 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 are likely to continue through the remainder of 2022 and into 2023.

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

While thus far we have been able to manage through these challenges with increased inventory levels and heightened supplier management and communications, we cannot be certain we will be able to continue to do so through the remainder of the shortages and we believe this is an increased risk to the business for the rest of 2021 and into the first half of 2022.

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 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 in the remainder of 2022 and into 2023, and we may be required to suspend manufacturing again in the future due to these shortages.

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

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

In 2020 and the nine months ended September 30, 2021, the impact of the Chinese tariffs on our financial results was minimal as we have received some exemptions, negotiated cost sharing and price reductions with suppliers, and re-allocated purchases.

In 2021 and the three months ended March 31, 2022, the impact of the China tariffs on our financial results was minimal as we have received some exemptions, negotiated cost sharing and price reductions with suppliers, and re-allocated purchases.

Assuming the Chinese tariffs stay at the current levels, we currently expect the overall financial impact to our business to be minimal to the average unit cost for 2022.

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.

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

Cost of rental revenue

Cost of rental revenue consists primarily of depreciation expense;

service costs for rental patients, including rework costs, material, labor, freight, and consumable disposables;

and logistics costs.

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

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

Cost of rental revenue consists primarily of depreciation expense, consumable disposables, logistics costs and service costs for rental patients, including rework costs, material, labor, and freight.

We expect rental gross margin percentage to decrease in 2022, primarily associated with lower rental revenue per patient on service and higher costs per patient on service.

Operating expense

Research and development

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

It also includes facility costs, laboratory supplies, product development materials, consulting fees, clinical studies costs, and testing costs for new product launches as well as enhancements to existing products.

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

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

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

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

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

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

We also 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 broadening our product portfolio.

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 in creased in the three month s ended September 3 0 , 202 1 compared to the three months ended September 3 0 , 20 20, primarily associated with higher personnel-related expense and higher advertising expense .

Our average direct-to-consumer sales representative headcount was down approximately 8 % in the three months ended September 30, 2021 from the comparative period in the prior year as attrition outpac ed hiring, primarily due to increased competition for skilled labor and sales professionals in 2021, along with the reduced hiring of new sales representatives in 2020 due to the COVID-19 pandemic.

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

H eadcount was up slightly as of September 30, 2021 compared to December 31, 2020.

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

Headcount was down slightly as of March 31, 2022 compared to December 31, 2021.

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.

W e still expect an increase in sales and marketing expense in future periods as we continue to invest in our business, including expanding our sales and sales support team which includes our 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.

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, 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.

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, legal, human resources, and information technology (IT) departments as well as facilities costs, 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.

General and administrative expense also includes changes in the fair value of the New Aera earnout liability.

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

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

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

General and administrative expense will 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.

Other income (expense), net

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

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

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

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Results of operations

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

Comparison of three months ended March 31, 2022 and March 31, 2021

Three months ended

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Total revenue

Sales revenue increased $14.2 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 21.2% from the comparable period.

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

We sold approximately 44,600 oxygen systems during the three months ended September 30, 2021 compared to approximately 42,200 oxygen systems sold during the three months ended September 30, 2020, or an increase of 5.7%.

The increase in the number of systems sold resulted mainly from an increase in sales in the direct-to-consumer and international business-to-business channels.

Rental revenue increased $4.6 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 61.3% from the comparable period.

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

Sales revenue decreased $9.7 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, a decrease of 12.6% from the comparable period.

The decrease was primarily attributable to supply chain constraints that mostly limited sales in our domestic business-to-business channel, partially offset by improved average selling prices and sustained demand.

We sold approximately 30,400 oxygen systems during the three months ended March 31, 2022 compared to approximately 49,400 oxygen systems sold during the three months ended March 31, 2021, a decrease of 38.5%.

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

Rental revenue increased $3.1 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 31.8% from the comparable period.

The increase in rental revenue was primarily related to higher rental patients on service and higher Medicare reimbursement rates.

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Total revenue

Domestic business-to-business sales decreased 1.1% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

The decrease was primarily due to supply chain constraints limiting product availability.

International business-to-business sales increased 49.7% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily driven by improving COVID-19 vaccination rates and increased ambulation of patients in Europe and the improving operational capacity of certain European respiratory assessment centers closer to normal levels.

In the three months ended September 30, 2021, sales in Europe as a percentage of total international sales revenue decreased to 88.2% versus 90.2% in the comparative period in 2020.

Domestic direct-to-consumer sales increased 24.6% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to increased demand for POCs due to higher COVID-19 vaccination rates and the relaxation of closure orders related to the COVID-19 PHE, leading to increased ambulation, and improved consumer confidence.

This increased demand was partially offset by lower average inside sales representative headcount, which was down approximately 8.0% from the comparative period as attrition outpaced hiring.

Domestic direct-to-consumer sales were also impacted by the reduced battery accessory sales in the period due to supply chain constraints.

Domestic direct-to-consumer rentals increased 61.3% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, primarily due to an increase in patients on service, higher billable patients as a percent of total patients on service, and increased Medicare reimbursement rates.

Domestic business-to-business sales decreased 83.4% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The decrease was primarily due to the supply chain constraints that limited our ability to meet all customer demand and strategic sales channel optimization decisions, partially offset by improved average selling prices and sustained demand.

International business-to-business sales increased 77.7% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, mostly driven by increased average selling prices and improved demand primarily in Europe as we placed intentional focus on fulfilling European orders in our international business-to-business sales channel prior to the EU MDR certificate expiration .

In the three months ended March 31, 2022, sales in Europe as a percentage of total international sales revenue increased to 98.2% versus 86.5% in the comparative period in 2021.

Domestic direct-to-consumer sales increased 12.2% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to increased average selling prices versus the comparative period in the prior year.

Inside sales representative productivity increased in the quarter despite lower average inside sales representative headcount, which was down approximately 6.9% from the comparative period in 2021.

Domestic direct-to-consumer rentals increased 31.8 % for the three months ended March 3 1 , 202 2 compared to the three months ended March 3 1 , 20 2 1 , primarily due to a n increase in patients on service and increased Medicare reimbursement rates due to the removal of the budget neutrality provision effective April 1, 2021 and inflation adjustment effective January 1, 2022 .

Cost of revenue and gross profit

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Total gross margin percentage

Cost of sales revenue increased $2.7 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 7.2% from the comparable period.

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

The third quarter of 2021 included $0.9 million of higher material costs associated with open-market purchases of semiconductor chips used in its batteries and POCs.

Cost of rental revenue increased $1.4 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 38.0% from the comparable period.

The increase in cost of rental revenue was primarily attributable to increased rental asset depreciation expense and servicing costs resulting from a 36.9% increase in the number of patients on service.

Cost of rental revenue included $2.3 million of rental asset depreciation for the three months ended September 30, 2021 compared to $1.5 million for the three months ended September 30, 2020.

Sales revenue gross margin percentage increased to 50.1% for the three months ended September 30, 2021 from 43.5% for the three months ended September 30, 2020.

The increase was primarily related to higher average selling prices.

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

Total worldwide business-to-business sales revenue accounted for 55.1% of total sales revenue in the three months ended September 30, 2021 versus 56.3% in the three months ended September 30, 2020.

Rental revenue gross margin percentage increased to 58.9% for the three months ended September 30, 2021 from 52.0% for the three months ended September 30, 2020, primarily due to higher billable patients as a percent of total patients on service, higher Medicare reimbursement rates, lower service expense per patient on service, partially offset by higher depreciation expense per patient on service.

Cost of sales revenue decreased $3.1 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, a decrease of 7.4% from the comparable period.

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

The first quarter of 2022 included $3.7 million of higher material costs associated with open-market purchases of semiconductor chips used in its batteries and POCs.

Cost of rental revenue increased $1.5 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 32.9% from the comparable period.

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

Cost of rental revenue included $2.6 million of rental asset depreciation for the three months ended March 31, 2022 compared to $1.9 million for the three months ended March 31, 2021.

Gross margin on sales decreased to 41.4% for the three months ended March 31, 2022 from 44.7% for the three months ended March 31, 2021.

The decrease was primarily due to higher cost of goods sold per unit in the quarter, related to increased material and labor and overhead costs caused by lower labor and overhead absorption due to the temporary manufacturing shutdown in early 2022 .

The decrease was partially offset by 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 business-to-business sales.

Total worldwide business-to-business sales revenue accounted for 49.0% of total sales revenue in the three months ended March 31, 2022 versus 60.3% in the three months ended March 31, 2021.

Rental revenue gross margin decreased to 54.7% for the three months ended March 31, 2022 from 55.1% for the three months ended March 31, 2021, primarily due to higher servicing costs and depreciation expense per patient on service, partially offset by higher Medicare reimbursement rates.

Research and development expense

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September 30,

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Research and development expense

Research and development expense increased $0.2 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 6.9% over the comparable period, primarily due to a $0.2 million increase in personnel-related expense.

Research and development expense increased $1.3 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 33.6% over the comparable period, primarily due to a $0.8 million increase in product development expenses and a $0.5 million increase in personnel-related expenses.

Sales and marketing expense

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Sales and marketing expense

Sales and marketing expense increased $5.4 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 23.7% from the comparable period, primarily attributable to increases of $2.0 million in personnel-related expense, $1.7 million in advertising costs, $0.7 million in credit card fees, and $0.4 million in other professional services.

In the three months ended September 30, 2021, we spent $9.4 million in media and advertising costs versus $7.7 million in the comparative period in 2020.

Sales and marketing expense increased $2.5 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 10.0% from the comparable period, primarily attributable to an increase of $2.2 million of consulting fees, primarily for the development of the physician sales team.

In the three months ended March 31, 2022, we spent $7.9 million in media and advertising costs versus $7.6 million in the comparative period in 2021.

General and administrative expense

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September 30,

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General and administrative expense

General and administrative expense increased $0.7 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 7.8% from the comparable period.

The increase was primarily attributable to increases of $1.4 million in personnel-related expense and $0.5 million in higher consulting fees, partially offset by a $1.9 million decrease in the change in fair value of the New Aera earnout liability.

The change in fair value of the New Aera earnout liability was a benefit of $2.0 million in the third quarter of 2021 compared to a benefit of $0.1 million in the third quarter of 2020.

General and administrative expense increased $2.7 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 21.5% from the comparable period.

The increase was primarily attributable to an increase of $1.6 million in personnel-related expenses, including recruiting and severance costs, and a $0.4 million increase in the change in fair value of the New Aera earnout liability.

Other income (expense)

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Other expense

Total other income (expense), net

Total other income (expense), net decreased $0.5 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or a decrease of 841.7% from the comparable period.

The decrease was primarily attributable to an increase of $0.7 million in other expense primarily related to net foreign currency losses, partially offset by a decrease of $0.3 million in other expense as a reduction to lost revenues from the CARES Act Provider Relief Fund that was reclassified to general and administrative expense in the comparative period.

Income tax benefit

Three months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Income tax benefit

Effective income tax rate

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

The income tax benefit for the period ended September 30, 2021 was based on the application of the discrete method.

Our effective tax rate for the three months ended September 30, 2021 decreased compared to the three months ended September 30, 2020, primarily due to the reduction in the fair value of the New Aera earnout liability and an increase in excess tax benefits recognized from stock-based compensation.

The effective tax rate for the period ended September 30, 2021 was based on the application of the discrete method.

Net income (loss)

Three months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Net income (loss)

Net income (loss) increased $13.9 million for the three months ended September 30, 2021 from the three months ended September 30, 2020, or an increase of 816.5% from the comparable period.

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

Comparison of nine months ended September 30, 2021 and September 30, 2020

Nine months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Sales revenue

Rental revenue

Total revenue

Sales revenue increased $32.8 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 15.2% from the comparable period.

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

We sold approximately 146,400 oxygen systems during the nine months ended September 30, 2021 compared to approximately 138,100 oxygen systems sold during the nine months ended September 30, 2020, or an increase of 6.0%.

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

Rental revenue increased $14.3 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 75.4% from the comparable period.

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

Nine months ended

(amounts in thousands)

September 30,

Change 2021 vs.

Revenue by region and category

Business-to-business domestic sales

Business-to-business international sales

Direct-to-consumer domestic sales

Direct-to-consumer domestic rentals

Total revenue

Domestic business-to-business sales increased 12.4% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

The increase was primarily due to increased demand from our HME partners for oxygen concentrators for both traditional long-term oxygen therapy patients and in response to the COVID-19 pandemic and related PHE due to greater demand for POCs for COVID-19 patients at hospital discharge, partially offset by supply chain constraints that limited sales primarily in the third quarter of 2021.

International business-to-business sales increased 22.3% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, mostly driven by the reduced impact of the COVID-19 pandemic with increased vaccination rates and increased operating capacity of certain European respiratory assessment centers, and in response to the COVID-19 pandemic and related PHE due to greater demand for POCs for COVID-19 patients at hospital discharge in certain markets with high case rates of COVID-19 like India.

In the nine months ended September 30, 2021, sales in Europe as a percentage of total international sales revenue decreased to 85.2% versus 87.0% in the comparative period in 2020.

Domestic direct-to-consumer sales in creased 13.7 % for the nine months ended September 3 0 , 20 21 compared to the nine months ended September 3 0 , 20 20 , primarily due to increased demand for POCs which we believe was primarily due to higher vaccination rates within our patient population and the relaxation of closure orders related to the COVID-19 PHE leading to increased ambulation, additional stimulus payments, and improved consumer confidence.

This led to improved sales representative productivity and increased average revenue per order in the comparative periods.

This was partially offset by lower average inside sales representative headcount, which was down approximately 15.0 % from the comparative period in 2020.

Domestic direct-to-consumer rentals increased 75.4% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to an increase in patients on service, higher billable patients as a percent of total patients on service, and increased Medicare reimbursement rates.

Cost of revenue and gross profit

Nine months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Cost of sales revenue

Cost of rental revenue

Total cost of revenue

Gross profit - sales revenue

Gross profit - rental revenue

Total gross profit

Gross margin percentage - sales revenue

Gross margin percentage- rental revenue

Total gross margin percentage

Cost of sales revenue increased $8.7 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 7.2% from the comparable period.

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

The nine months ended September 30, 2021 included $0.9 million of higher material costs associated with open-market purchases of semiconductor chips used in its batteries and POCs.

Cost of rental revenue increased $4.6 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 48.5% from the comparable period.

Cost of rental revenue included $6.3 million of rental asset depreciation for the nine months ended September 30, 2021 compared to $4.0 million for the nine months ended September 30, 2020.

Sales revenue gross margin percentage increased to 47.8% for the nine months ended September 30, 2021 from 43.9% for the nine months ended September 30, 2020.

The increase was primarily related to higher average selling prices, partially offset by higher labor and overhead per unit and material cost per unit due to higher component cost versus the comparative period.

Total worldwide business-to-business sales revenue accounted for 56.6% of total sales revenue in the nine months ended September 30, 2021 versus 56.0% in the nine months ended September 30, 2020.

Rental revenue gross margin percentage increased to 57.7% for the nine months ended September 30, 2021 from 50.0% for the nine months ended September 30, 2020, primarily due to higher billable patients as a percent of total patients on service and higher Medicare reimbursement rates, partially offset by higher service and depreciation expense per patient on service.

Research and development expense

Nine months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Research and development expense

Research and development expense increased $1.5 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 14.3% over the comparable period, primarily due to a $1.0 million increase in personnel-related expenses and $0.3 million in product development expenses.

Sales and marketing expense

Nine months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Sales and marketing expense

Sales and marketing expense increased $11.0 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 15.2% from the comparable period, primarily attributable to an increase of $7.3 million of personnel-related expenses, $1.6 million in credit card fees, $0.9 million of professional services, and $0.8 million in media and advertising costs.

In the nine months ended September 30, 2021, we spent $25.7 million in media and advertising costs versus $24.9 million in the comparative period in 2020.

General and administrative expense

Nine months ended

September 30,

Change 2021 vs.

(amounts in thousands)

General and administrative expense

General and administrative expense decreased $1.1 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or a decrease of 3.9% from the comparable period.

The decrease was primarily attributable to a $9.7 million decrease in the change in fair value of the New Aera earnout liability and $0.8 million in lower consulting fees, partially offset by increases of $5.8 million in personnel-related expenses, $2.0 million in CEO transition costs, $1.4 million in legal and consulting fees, $0.9 million reimbursement from the CARES Act Provider Relief Fund due to the COVID-19 PHE received in the comparable period, $0.8 million in officer transition costs, $0.4 million in dues, fees and licenses, and $0.4 million in insurance expense.

Other income (expense)

Nine months ended

September 30,

Change 2021 vs.

(amounts in thousands)

Interest income

Other income (expense)

Total other income (expense), net

Total other income (expense), net decreased $6.8 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or a decrease of 105.7% 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 this year, a $0.8 million increase in net foreign currency losses, and a decrease of $0.7 million in interest income on marketable securities due to the lower interest rate environment and lower invested balances in marketable securities in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Total other expense, net

Total other income (expense), net increased $0.2 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 59.7% from the comparable period, primarily attributable to an increase of $0.1 million in net foreign currency losses.

Income tax expense (benefit)

Nine months ended

September 30,

Three months ended

Change 2022 vs.

2 unchanged sentences

Effective income tax rate

Income tax expense (benefit) decreased $1.6 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, primarily due to higher excess tax benefits recognized from stock-based compensation, partially offset by an increase in the income tax provision expense.

The income tax benefit for the period ended September 30, 2021 was based on the application of the discrete method.

Our effective tax rate in the nine months ended September 30, 2021 increased compared to the nine months ended September 30, 2020, primarily due to higher excess tax benefits recognized from stock-based compensation, partially offset by t he changes in income (loss) before income tax expense (benefit) .

The effective tax rate for the period ended September 30, 2021 was based on the application of the discrete method.

Net income (loss)

Nine months ended

September 30,

Income tax expense (benefit) increased $1.9 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, primarily resulting from the recording of a valuation allowance on the use of deferred tax assets otherwise attributable to the current period loss.

Our effective tax rate for the three months ended March 31, 2022 decreased compared to the three months ended March 31, 2021, primarily due to the recording of a valuation allowance on the use of deferred tax assets .

Three months ended

Change 2022 vs.

(amounts in thousands)

Net income (loss)

Net income (loss) increased $17.3 million for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, or an increase of 2436.7% from the comparable period.

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

Net loss increased $13.5 million for the three months ended March 31, 2022 from the three months ended March 31, 2021, an increase of 1841.8% from the comparable period.

The increase in net loss was primarily related to a decrease in gross profit and higher operating expense.

Contractual obligations

2 unchanged sentences

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

As of September 30, 2021, we had purchase obligations with outside vendors and suppliers of approximately $65.7 million of which the timing varies depending on demand, current supply on hand and other factors.

As of March 31, 2022, we had purchase obligations with outside vendors and suppliers of approximately $122.9 million of which the timing varies depending on demand, current supply on hand and other factors.

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

Except as indicated above, there have been no other material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K filed with the SEC on February 24, 2022.

Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

However, from time-to-time, we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims including certain real estate leases, supply purchase agreements, and directors and officers.

The terms of such obligations vary by contract and in most instances a maximum dollar amount is not explicitly stated therein.

Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted thus no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.

Liquidity and capital resources

As of September 30, 2021, we had cash and cash equivalents of $241.6 million, which consisted of highly liquid investments with a maturity of three months or less.

In addition, we held marketable securities of $3.6 million in available-for-sale corporate bonds, U.S.

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

For the nine months ended September 30, 2021 and September 30, 2020, we received $15.6 million and $2.3 million, respectively, in proceeds related to stock option exercises and our employee stock purchase plan.

Our principal uses of cash for liquidity and capital resources in the nine months ended September 30, 2021 consisted of capital expenditures of $18.1 million including additional rental equipment, other property, plant and equipment, and intangible assets.

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

As of March 31, 2022, we had cash and cash equivalents of $213.4 million, which consisted of highly liquid investments with a maturity of three months or less.

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 three months ended March 31, 2022 and March 31, 2021, we received $0.9 million and $4.8 million, respectively, in proceeds related to stock option exercises and our employee stock purchase plan.

Our principal uses of cash for liquidity and capital resources in the three months ended March 31, 2022 consisted of cash used in operating activities of $18.1 million and capital expenditures of $4.1 million including additional rental equipment, other property, and plant and equipment.

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.

18 unchanged sentences

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

Nine months ended

Three months ended

(amounts in thousands)

September 30,

Change 2022 vs.

Summary of consolidated cash flows

Cash provided by operating activities

Cash used in investing activities

Cash provided by financing activities

Cash provided by (used in) operating activities

Cash provided by (used in) investing activities

Cash provided by (used in) financing activities

Effect of exchange rates on cash

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

(amounts in thousands)

September 30,

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

1 unchanged sentence

Operating activities

We derive operating cash flows from cash collected from the sales and rental of our products and services.

Historically, we derive operating cash flows from cash collected from the sales and rental of our products and services.

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

Net cash provided by operating activities for the nine months ended September 3 0 , 20 2 1 consisted primarily of our net income of $ 16.5 million as well as non-cash expense items , such as depreciation of equipment and leasehold improvements and amortization of our intangibles of $ 15.9 million, stock-based compensation expense of $ 8.5 million, provision for sales returns and doubtful accounts of $ 8.2 million, provision for rental revenue adjustments of $ 3.5 million, provision for inventory obsolescence and other inventory losses of $ 1.5 million , and net loss on disposal of rental equipment and other fixed assets of $ 0.9 million ;

partially offset b y the change in fair value of earnout liability of $ 9.8 million , an increase in deferred tax assets of $1.0 million, and net changes in operating assets and liabilities resulting in a net use of cash of $ 27.1 million .

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

Net cash used in operating activities for the three months ended March 31, 2022 consisted primarily of our net loss of $14.2 million, partially offset by non-cash expense items such as depreciation of equipment and leasehold improvements and amortization of intangibles of $5.8 million, provision for sales returns and doubtful accounts of $3.0 million, stock-based compensation expense of $2.7 million, provision for inventory obsolescence and other inventory losses of $0.9 million, net loss on disposal of rental equipment and other fixed assets of $0.7 million, and the change in fair value of earnout liability of $0.6 million.

The net changes in operating assets and liabilities resulted in a net use of cash of $17.5 million.

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

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

Investing activities

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

For the nine months ended September 30, 2021, we invested $18.1 million in the production and purchase of rental assets and other property, equipment, and intangible assets, partially offset by $15.7 million we received in maturities of marketable securities.

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

Net cash provided by (used in) investing activities generally includes the production and purchase of rental assets, property, plant and equipment, and intangibles to support our expanding business as well as maturities or purchases of marketable securities.

For the three months ended March 31, 2022, we invested $4.1 million in the production and purchase of rental assets and other property and equipment.

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

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

1 unchanged sentence

Our business is inherently capital intensive.

For example, we expend significant manufacturing and production expense in connection with the development and production of our oxygen concentrator products and, in connection with our rental business, we incur expense in the deployment of rental equipment to our patients.

We expend significant manufacturing and production expense in connection with the development and production of our oxygen concentrator products and, in connection with our rental business, we incur expense in the deployment and maintenance of rental equipment to our patients.

Investments will continue to be required in order to grow our sales and rental revenue and continue to supply and replace rental equipment to our rental patients on service.

1 unchanged sentence

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

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

For the three months ended March 31, 202 2 , net cash used in financing activities consisted of the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $ 1.

1 million , partially offset by $ 0 .

9 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program.

For the three months ended March 31, 2021, net cash provided by financing activities consisted of $4.8 million from the proceeds received from stock options that were exercised and purchases under our employee stock purchase program, partially offset by the payment of employment taxes related to the vesting of restricted stock awards and restricted stock units of $0.4 million.

Sources of funds

Our cash provided by operating activities in the nine months ended September 30, 2021 was $17.1 million compared to $20.8 million in the nine months ended September 30, 2020.

As of September 30, 2021, we had cash and cash equivalents of $241.6 million.

Our cash used in operating activities in the three months ended March 31, 2022 was $18.1 million compared to cash provided by operating activities of $2.9 million in the three months ended March 31, 2021.

As of March 31, 2022, we had cash and cash equivalents of $213.4 million.

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

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.

5 unchanged sentences

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

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

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

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

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

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

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

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

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

14 unchanged sentences

GAAP results.

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

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

GAAP measure, for each of the periods indicated:

1 unchanged sentence

Three months ended

September 30,

Nine months ended

September 30,

Non-GAAP EBITDA and Adjusted EBITDA

Net income (loss)

Non-GAAP adjustments:

7 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis