Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis should be read together with our consolidated financial statements and the condensed notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the section entitled "Risk Factors" of our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (SEC). Forward-looking statements include, but are not limited to, statements concerning the following:
•information concerning our possible or assumed future cash flows, revenue, sources of revenue and results of operations, operating and other expenses;
•our 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 (POCs) and the possibility of a future impact on our manufacturing facilities in California and Texas;
•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;
•market share expectations, unit sales, business strategies, financing plans, expansion of our business, competitive position, industry environment, and potential growth opportunities;
•our expectations regarding the market size, market growth and the growth potential for our business;
•our ability to grow our business and enter new markets;
•our expectations regarding the average selling prices and manufacturing costs of our products, including our expectations 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 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. facilities and our expectations with respect to our contract manufacturer in Europe;
•our expectations regarding tariffs being imposed by the U.S. on certain imported materials and products;
•our ability to successfully acquire and integrate companies and assets;
•our expectations regarding the impact and implementation of trade regulations on our supply chain;
•our expectations regarding excess tax benefits or deficiencies from stock-based compensation and our assessments and estimates of our effective tax rate;
•our expectations of future accounting pronouncements or changes in our accounting policies;
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•our internal control environment;
•the effects of seasonal trends on our results of operations and estimated hiring plans;
•our expectation that our existing capital resources and the cash to be generated from expected product sales and rentals will be sufficient to meet our projected operating and investing requirements for at least the next twelve months; and
•the effects of competition.
Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the sections entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events, or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.
“Inogen,” “Inogen One,” “Inogen One G3,” “G4,” “G5,” “Live Life in Moments, not Minutes,” “Never Run Out of Oxygen,” “Oxygen Therapy on Your Terms,” “Oxygen.Anytime.Anywhere,” “Reclaim Your Independence,” “Intelligent Delivery Technology,” “Inogen At Home,” the Inogen design, “TIDAL ASSIST,” “TAV,” and “SIDEKICK” are registered trademarks with the United States Patent and Trademark Office of Inogen, Inc. We own trademark registrations for the mark “Inogen” in Argentina, Australia, Canada, Chile, China, Columbia, Ecuador, South Korea, Malaysia, Mexico, Europe (European Union Registration), the United Kingdom, Iceland, India, Israel, Japan, Kuwait, New Zealand, Norway, Paraguay, Peru, Turkey, Singapore, South Africa, Switzerland, 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. We own trademark registrations for the marks “印诺真” and “艾诺根” in China. We own trademark registrations for the mark “Inogen One” in Australia, Canada, China, South Korea, Mexico, Europe (European Union Registration), and the United Kingdom. We own a trademark registration for the mark “Satellite Conserver” in Canada. We own a trademark registration for the mark “Inogen At Home” in Europe (European Union Registration) and the United Kingdom. We own trademark registrations for the mark “G4” in Europe (European Union Registration) and the United Kingdom. We own trademark registrations for the mark “G5” in Europe (European Union Registration) and the United Kingdom. We own a trademark application for the Inogen design in Bolivia. We own a trademark registration for the Inogen design in China. We own a trademark registration for the mark “إنوجن” in Saudi Arabia. Other service marks, trademarks, and trade names referred to in this Quarterly Report on Form 10-Q are the property of their respective owners.
In this Quarterly Report on Form 10-Q, “we,” “us” and “our” refer to Inogen, Inc. and its subsidiary.
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying condensed notes to those statements included elsewhere in this document.
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The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Inogen’s financial condition, results of operations and cash flows by focusing on changes in certain key measures from year-to-year. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying condensed notes. The MD&A is organized in the following sections:
•Critical accounting policies and estimates
•COVID-19 pandemic and related PHE
•Liquidity and capital resources
•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. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with U.S. GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates and such differences could be material to the financial position and results of operations.
Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:
•revenue recognition; and
•acquisitions and related acquired intangible assets and goodwill.
There have been no material changes in our critical accounting policies and estimates in the preparation of our consolidated financial statements during the three and nine months ended September 30, 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 significant and potentially will continue to have unexpected adverse effects on businesses and healthcare institutions around the world, and has and may continue to negatively impact our consolidated operating results. While it is not possible at this time to estimate how the COVID-19 pandemic might play out, it could have an impact on our business moving forward. The continuous emergence of new coronavirus variants associated with high levels of transmissibility and variable degree of disease severity, coupled with limited effectiveness of vaccines in preventing the infection spread, results in uncertainty regarding the market demand for supplemental oxygen therapy.
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 third quarter of 2022, which we believe was partially due to Medicare and commercial payors reducing some of the administrative burden for oxygen therapy as well as 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.
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Overall business-to-business demand was lower in 2020 and 2021 because of the COVID-19 pandemic and related PHE due to lower patient travel, physician offices limiting patient interactions for COPD patient referrals, home medical equipment (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 during the early periods of the COVID-19 pandemic due to the temporary closure and reduced operating capacity of certain respiratory assessment centers and continued tender delays in certain markets. 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. However, supply constraints, primarily due to limited semiconductor chip availability, negatively impacted sales in 2021 and have continued to do so in 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.
We have seen reduced semiconductor chip availability in 2021 and thus far in 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 into 2023 as the semiconductor chip shortage is being experienced across many industries, placing additional pressure on existing supplies. In addition, the uncertainty related to COVID-19 extended lockdowns in China could further impact our operations in 2022 as it relates to manufacturing and finishing of semiconductors. 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 has continued thus far through 2022, and we expect this to have an increased impact on our cost of goods sold through the remainder of 2022 and into 2023. Even though we paid significant costs in the second half of 2021 and thus far through 2022 associated with acquiring chips on the open market, a portion 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 resumed 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 for the remainder of 2022 and into 2023, and we may have to suspend manufacturing again in the future due to these shortages. As a result, in the interim, it is possible that we may be supply constrained and challenged 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 through 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 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. 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, 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.
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For additional information on risk factors that could impact our results, please refer to the sections entitled "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K.
Overview
We are a medical technology company that primarily develops, manufactures and markets innovative POCs used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions. Long-term oxygen therapy is defined as the provision of oxygen therapy for use at home in patients who have chronic low blood oxygen levels (hypoxemia). Traditionally, these patients have relied on stationary oxygen concentrator for use in the home and oxygen tanks or cylinders for mobile use, which we call the delivery model. The tanks and cylinders must be delivered regularly and have a finite amount of oxygen, which requires patients to plan activities outside of their homes around delivery schedules and a finite oxygen supply. Additionally, patients must attach long, cumbersome tubing to their stationary concentrators simply to enable mobility within their homes. Our proprietary Inogen One® systems concentrate the air around the patient to offer a single source of supplemental oxygen anytime, anywhere with a portable device weighing as little as approximately 2.8 pounds with a single battery. Our Inogen One systems range from 2.6 to 6.5 hours of battery life with a single battery and can be plugged into an outlet 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 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, 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. Our goal is to design, build and market oxygen solutions that redefine how long-term oxygen therapy is delivered.
To accomplish this goal and to grow our revenue, we intend to:
•Expand our domestic direct-to-consumer sales and prescriber sales teams and increase productivity. We have restarted our sales capacity expansion efforts with new sales representatives hired and expect sales representative headcount to increase for the year ending 2022 as compared to 2021. As part of our growth plans, we expect 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.
•Expand our domestic direct-to-consumer marketing efficiently and optimize pricing. We have 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 2023. We raised prices as of September 1, 2021 and March 1, 2022 to partially offset rising product costs.
•Expand our rental revenues. We are evolving our operating model to focus the enhanced prescriber sales team on rental opportunities with our direct-to-consumer sales team focusing mainly on cash sales. We believe the new specialized operating model will drive higher rental setups as we expand prescriber and payor awareness of our products and services.
Due to the COVID-19 pandemic and related PHE, Medicare and commercial payors have reduced some of the administrative burden for oxygen therapy, which also contributed to increased rental setups in the second quarter of 2020 through the third quarter of 2022. We believe this change will continue to contribute to increased rental setups during the remainder of the COVID-19 pandemic and related PHE. We have also seen increased reimbursement rates in some areas for Medicare beneficiaries, which have increased rental revenue during the COVID-19 pandemic and related PHE and are expected to continue to do so for the remainder of the COVID-19 pandemic and related PHE. CMS has finalized additional changes to the administrative requirements to dispense and bill for oxygen therapy, which is discussed in more detail in the Reimbursement section below. These changes may reduce the administrative burden and increase patient access to our products; however, we still need additional clarity on how it will be implemented.
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•Expand our domestic HME provider and reseller sales. We are also focused on building our domestic business-to-business partnerships, including relationships with distributors, key accounts, resellers, our private label partner, traditional HME providers, and charitable organizations. We offer patient-preferred, low service cost products and services to help providers convert their businesses to a non-delivery POC business model. Supplemental oxygen is a treatment prescribed by healthcare professionals for some patients with hypoxemia, which in some cases may be caused or exacerbated by COVID-19.
However, in spite of the increased demand, starting in the third quarter of 2021 through the second quarter of 2022, we have seen supply constraints associated with the semiconductor chip shortage that led to a significant decline in this channel, specifically in the first quarter of 2022 as we were forced to temporarily halt production from early January 2022 to early February 2022 due to these supply constraints. We were able to fulfill an increased amount of demand beginning in the third quarter of 2022 and anticipate the ability to fulfill most outstanding orders in the domestic business-to-business channel by the end of 2022 and return to normalized demand in the first half of 2023.
•Increase international business-to-business adoption. Although our main growth opportunity remains POC adoption in the United States given what we still believe is a relatively low penetration rate, we believe there is a sizable international market opportunity, particularly in Europe where there is existing oxygen reimbursement for respiratory conditions. In order to take advantage of these international markets, we have partnered with distributors who serve those markets and key customers in them. We additionally have an Inogen base of operations for sales and customer service in the Netherlands, and use a contract manufacturer, Foxconn, located in the Czech Republic to support the majority of our European sales volumes. We have sold our products in a total of 59 international countries and overseas regions.
Current Inogen products have been commercialized in the European Union and United Kingdom under Medical Device Directive (MDD) certificates, which expired 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 and the Swiss Medic Submission under MDD have been received and will be updated to MDR following the receipt of the corresponding certification in the EU. Derogation requests have also been filed in most EU countries. France granted permission in June 2022 for continuous commercialization of G4 and G5 POCs under MDR Articles 94/97 until the end of October 2022. Derogations were also received from Austria, Denmark and Portugal. Due to the expected reduced availability in the second half of 2022 due to the delay in MDR approval, we placed intentional focus on fulfilling European orders in our international business-to-business sales channel until May 18, 2022 when the MDD certificates expired. Until we obtain the necessary certificate(s), we expect international sales within the EU to be negatively impacted.
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 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 half of 2022 prior to the expiration of our MDD certificates, 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 developing or emerging markets, where limited oxygen therapy treatment and reimbursement exists today. However, growth may also be limited by regulatory and reimbursement clearances, currency fluctuations, capital expenditure constraints, ongoing restructuring challenges, and tender uncertainty.
•Invest in our oxygen product offerings to develop innovative products and expand clinical evidence. We incurred $16.6 million and $14.1 million in the twelve months ended December 31, 2021 and 2020, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future. We incurred $4.6 million and $3.8 million for the three months ended September 30, 2022 and 2021, respectively, and $16.0 million and $11.9 million for the nine months ended September 30, 2022 and 2021, respectively, in research and development costs.
We launched our fifth-generation POC, the Inogen One G5 in 2019. The Inogen One G5 weighs 4.7 pounds and produces 1,260 ml per minute of oxygen output, with very quiet operation at 38 dBA and our longest battery life at 6.5 hours for a single battery and up to 13 hours for a double battery. We estimate that the Inogen One G5 is suitable for over 90% of
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ambulatory long-term oxygen therapy patients based on our analysis of the patients who have contacted us and their clinical needs. The Inogen One G5 represented more than 84% of total domestic POC units sold in the nine months ended September 30, 2022, 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 clinical, economic and patient reported outcomes associated with the use of our products as part of our efforts to drive payor and prescriber advocacy for our products.
•Expand our product offerings. We are primarily focused on creating innovative, evidence-based chronic respiratory care solutions to strengthen and build preference and advocacy for our respiratory therapies and brand across patients, prescribers, and payors. We plan to do this with an expanded, high quality, connected, and innovative product portfolio that strengthens our differentiation. We are also committed to pursuing complementary acquisition opportunities to strengthen our technology, product offerings, and channel access.
In August 2019, we acquired New Aera. New Aera’s patented and 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 have only sold this product across our domestic direct-to-consumer channel and in our domestic business-to-business channel in 2022, and we expect limited contributions to revenue in its existing configuration.
We have been developing and refining the manufacturing of our Inogen One systems since 2004. While nearly all of our manufacturing and assembly processes were originally outsourced, assembly of the compressors, sieve beds, concentrators and certain manifolds were brought in-house in order to improve quality control and reduce cost. In support of our European sales, we use a contract manufacturer located in the Czech Republic to manufacture high volume products and perform product repairs to improve delivery to our European accounts. We expect to maintain our assembly operations for our products at our facilities in Texas and California. In 2022, we are focused on securing supply for components to make our products in spite of the higher costs of semiconductor chips, reducing the cost of our Inogen One G5 product (excluding semiconductor chips) and increasing the robustness of our supply chain to reduce potential component constraints as we grow our business.
We also use lean manufacturing practices to maximize manufacturing efficiency. We rely on third-party manufacturers to supply several components of our products. 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, and means our ability to maintain production is dependent on these single source suppliers, which may put us at an increased risk of supply disruption, as we have seen from the production halt we implemented in early January 2022 through early February 2022. In order to help mitigate against the risks related to a single source of supply, for certain components we qualify alternative suppliers and develop contingency plans for responding to disruptions. However, a continued reduction or halt in supply from one of these single-source suppliers, any dual-sourced suppliers or any other limited source suppliers with similar sub-component suppliers could limit or prevent our ability to manufacture our products or devices until one or more sufficient replacement 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.”
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Historically, we have generated a majority of our revenue from sales and rentals to customers in the United States. For the three months ended September 30, 2022 and 2021, approximately 14.3% and 23.5%, respectively, and 27.8% and 21.1% for the nine months ended September 30, 2022 and 2021, respectively, of our total revenue was from sales to customers outside the United States, primarily in Europe. Approximately 48.3% and 71.0% of the non-U.S. revenue for the three months ended September 30, 2022 and 2021, respectively, and 70.5% and 71.9% for the nine months ended September 30, 2022 and 2021, respectively, were invoiced in Euros with the remainder invoiced in United States dollars. We have sold our products in a total of 59 international countries and overseas regions outside the United States through our wholly-owned subsidiary, distributors or directly to large “house” accounts, which include gas companies, HME oxygen providers, and resellers. In those instances, we sell to and bill the distributor or “house” accounts directly, leaving responsibility for the patient billing, support and clinical setup to the local provider.
Sales revenue
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 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 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.
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 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. Approximately 6-10% of consumers who purchase a system return the system during this 30-day return period.
Our business-to-business efforts are focused on selling to distributors, HME oxygen providers, our private label partner, resellers, and charitable organizations who are based inside and outside of the United States. This process involves interactions with various key customer stakeholders including sales, purchasing, product testing, and clinical personnel. Businesses that have patient demand that can be met with our products place purchase orders to secure product deployment. This may be influenced based on outside factors, including the result of tender offerings, changes in insurance plan coverage or reimbursement rates, business restructuring activities toward a non-delivery model, capital constraints, and overall changes in the net oxygen therapy patient populations, and is presently being impacted by the COVID-19 pandemic and related PHE. Products are shipped freight on board (FOB) Inogen dock domestically, and based on financial history and profile, businesses may either prepay or receive extended payment terms. Products are shipped both FOB Inogen dock and Delivery Duty Paid (DDP) for certain international shipments depending on the shipper used. DDP shipments are Inogen’s property until title has transferred which is upon duty being paid and delivered to the customer. As a result of these factors, product purchases can be subject to changes in demand by customers.
We sold approximately 54,200 systems in the three months ended September 30, 2022 and 44,600 systems for the same period in 2021. We sold approximately 127,000 systems in the nine months ended September 30, 2022 and 146,400 systems for the same period in 2021. The decline over nine months was caused by supply chain constraints, the delay in MDR approval, and associated temporary suspension of manufacturing at all three locations in the first quarter of 2022.
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Rental revenue
Our rental process involves numerous interactions with the individual patient, their physician and the physician’s staff. The process includes an in-depth analysis and review of our product, the patient’s diagnosis and prescribed oxygen therapy, and their medical history to confirm the appropriateness of our product for the patient’s oxygen therapy and compliance with Medicare and private payor billing requirements, which often necessitates additional physician evaluation and/or testing for oxygen. Once the product is deployed, the patient receives instruction on product use and may receive a clinical titration from our licensed staff to confirm the product meets the patient’s medical oxygen needs prior to billing. As a result, the period of time from initial contact with a patient to billing can vary significantly and be up to one month or longer. However, during the COVID-19 PHE, CMS has reduced the paperwork requirements for Medicare oxygen therapy patients, as discussed in more detail in the Reimbursement section below. CMS has also adopted additional changes to the administrative requirements to dispense and bill for oxygen therapy, which is discussed in more detail in the Reimbursement section below, which may reduce the administrative burden and increase patient access to our products.
Rental revenue increased in the three months ended September 30, 2022 compared to the three months ended September 30, 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 and 2022 while the COVID-19 PHE continued. The 50/50 blended rate for HME providers in rural and non-contiguous, non-competitive bid areas was extended permanently as part of the final rule published in December 2021. We plan to add new rental patients on service in future periods through multiple strategies, including expanding our prescriber sales 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 includes 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. Medicare has noted a certain percentage of beneficiaries, approximately 25%, based on their review of Medicare claims, reach the 36th month of eligible reimbursement and enter the post-36 month capped rental period. The percentage of capped patients may fluctuate over time as new patients come on service, patients come off of service before and during the capped rental period, and existing patients enter the capped rental period.
We had approximately 44,600 and 40,400 oxygen rental patients as of September 30, 2022 and September 30, 2021, respectively. Management focuses on patients on service as a leading indicator of likely future rental revenue; however, actual rental revenue recognized is subject to a variety of other factors, including reimbursement levels by payor, patient location, the number of capped patients, write-offs for uncollectable balances, and rental revenue adjustments.
Reimbursement
Medicare and private insurance rentals represented 14.0% and 13.0% of our total revenue in the three months ended September 30, 2022 and 2021, respectively, and 14.5% and 11.8% in the nine months ended September 30, 2022 and 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. In cases where we rent our long-term oxygen therapy solutions directly to patients, we bill third-party payors, such as Medicare or private insurance, for monthly rentals on behalf of our patients. We process and coordinate all physician paperwork necessary for reimbursement of our solutions. A common medical criterion for long-term oxygen therapy reimbursement is insufficient blood oxygen saturation level. Our sales and rental intake teams are trained on how to verify benefits, review medical records and process physician paperwork. Additionally, an independent internal review is performed, and our products are not deployed until after physician paperwork is processed and reimbursement eligibility is verified and communicated to the patient.
33
We rely significantly on reimbursement from Medicare and private payors, including Medicare Advantage plans and Medicaid, for our rental revenue. For the three months ended September 30, 2022 and 2021, approximately 76.6% and 81.6%, respectively, and for the nine months ended September 30, 2022 and 2021, approximately 77.8% and 82.6%, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs. The U.S. list price for our stationary oxygen rentals Healthcare Common Procedure Coding System (HCPCS E1390) is $260 per month and the U.S. list price for our oxygen generating portable equipment (OGPE) rentals (HCPCS E1392) is $70 per month. The average Medicare reimbursement rates in former competitive bidding areas (CBAs) in the prior five 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 are also subject to adjustments during the year due to legislative rulings. Competitive bidding contracts were scheduled to go into effect on January 1, 2021; however, on October 27, 2020, CMS announced that competitive bidding contracts would not be awarded for most product categories, including oxygen, due to the payment amounts not achieving the expected savings and the current COVID-19 pandemic and related PHE. Effective April 1, 2021, rates were adjusted to remove a percentage reduction that was put in place to meet the budget neutrality requirement previously mandated by section 1834(a)(9)(D)(ii) of the Social Security Act. See the table below for average Medicare rates in former CBAs, using a simple average of rates in each CBA.
|
|
|
|
|
|
|
|
|
Average Medicare reimbursement rates in former CBAs |
|
E1390 |
|
|
E1392 |
|
As of January 1, 2022 |
|
$ |
85.31 |
|
|
$ |
41.81 |
|
As of April 1, 2021 |
|
$ |
81.25 |
|
|
$ |
39.82 |
|
As of January 1, 2021 |
|
$ |
73.88 |
|
|
$ |
36.20 |
|
As of January 1, 2020 |
|
$ |
73.98 |
|
|
$ |
36.25 |
|
As of January 1, 2019 |
|
$ |
72.92 |
|
|
$ |
35.72 |
|
As of January 1, 2018 |
|
$ |
77.03 |
|
|
$ |
36.06 |
|
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 are 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. 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 |
|
E1390 |
|
|
E1392 |
|
As of January 1, 2022 |
|
$ |
151.15 |
|
|
$ |
48.39 |
|
As of April 1, 2021 |
|
$ |
143.48 |
|
|
$ |
47.13 |
|
As of January 1, 2021 (retroactively revised March 1, 2021) |
|
$ |
136.84 |
|
|
$ |
44.99 |
|
As of January 1, 2020 |
|
$ |
136.71 |
|
|
$ |
44.93 |
|
As of January 1, 2019 |
|
$ |
134.71 |
|
|
$ |
44.32 |
|
As of January 1, 2018 |
|
$ |
76.31 |
|
|
$ |
41.91 |
|
34
Rates in non-former CBAs that are not defined as rural are set based on the rates in former CBAs. See the table below for average Medicare rates in these non-former CBAs, non-rural areas, using a simple average of rates in each state. 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. Note that the 2022 rates listed below include Coronavirus Aid, Relief, and Economic Security (CARES Act) increased rates due to the COVID-19 PHE. When 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 |
|
E1390 |
|
|
E1392 |
|
As of January 1, 2022 |
|
$ |
115.14 |
|
|
$ |
43.69 |
|
As of April 1, 2021 |
|
$ |
109.39 |
|
|
$ |
42.12 |
|
As of January 1, 2021 (retroactively revised March 1, 2021) |
|
$ |
104.07 |
|
|
$ |
40.06 |
|
As of January 1, 2020 |
|
$ |
74.84 |
|
|
$ |
36.87 |
|
As of January 1, 2019 |
|
$ |
72.32 |
|
|
$ |
35.64 |
|
As of January 1, 2018 |
|
$ |
69.31 |
|
|
$ |
38.10 |
|
There have been significant U.S. reimbursement and policy changes that impact oxygen therapy associated with the COVID-19 PHE declared by the U.S. Department of Health and Human Services (HHS) on January 31, 2020. The CARES Act allows HHS to waive certain Medicare telehealth payment requirements during the COVID-19 PHE to allow beneficiaries in all areas to receive telehealth services, including at their homes, starting March 6, 2020. The Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074) also granted HHS the authority to waive certain requirements with respect to telehealth services. Under this authority, CMS clarified that HHS would not conduct audits to determine whether there was a prior physician-patient relationship for telehealth claims submitted during the COVID-19 PHE. The CARES Act included the extension of the 50/50 blended rate for home medical equipment (HME) in rural and non-contiguous, non-competitively bid areas and established a new 75/25 blended rate for all other non-competitively bid areas through the duration of the COVID-19 PHE. The 75/25 blended rate was retroactive to March 6, 2020. While the duration of the current emergency is impossible to predict, the Zika virus PHE lasted approximately 360 days, and the H1N1 flu PHE lasted approximately 450 days.
The 2% Medicare sequestration payment cut that was suspended by Congress, starting in 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 payment cut has now resumed with a 1% reduction to rates from April 1, 2022 until June 30, 2022, and the full 2% Medicare sequestration payment cut resumed starting July 1, 2022 and is now expected to continue through September 30, 2030.
On March 11, 2021, the American Rescue Plan Act of 2021 (ARP) entered into federal law. The ARP, among other things, increased spending without offsets to other federal programs. The Statutory Pay-as-You-Go (PAYGO) Act of 2010 requires deficit neutrality overall in the laws enacted by Congress and imposes automatic spending reductions at the end of the year if such laws increase the deficit when they are added together. Any legislation enacted after February 12, 2010, that affects direct spending and/or revenues is subject to Statutory PAYGO. The Congressional Budget Office previously estimated that a Statutory PAYGO sequester in fiscal year 2022 resulting from the ARP passage would cause a 4% reduction in Medicare spending. In December 2021, Congress deferred action on waiving Statutory PAYGO and has delayed implementation of this payment reduction until 2023. We cannot currently determine if, or to what extent, our business, results of operations, financial condition or liquidity will ultimately be impacted by mandated sequestration triggers under the PAYGO Act, or if or when the mandated sequestration will occur. Medicare’s service reimbursement programs accounted for 77.8% and 82.6% of rental revenue for the nine months ended September 30, 2022 and 2021, respectively, and based on total revenue were 11.2% and 9.7% for the nine months ended September 30, 2022 and 2021, respectively.
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 for coverage of home oxygen, among other respiratory products, are waived. In addition, the prior Administration 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. In addition, CMS increased Medicare contractors’ ability to waive replacement product requirements, paused the national prior authorization program for certain DMEPOS, automatically extended expiring accreditations, granted contractors the flexibility to grant appeals extensions, and medical review suspension. Both the IFR and temporary regulatory changes show significant flexibility from CMS to improve access to oxygen and other DMEPOS items during this COVID-19 PHE. These changes were retroactive to early March 2020. In August 2020, CMS resumed medical review of claims and the prior authorization program for certain DMEPOS.
35
CMS also issued a final rule in December 2021 (CMS-1738-P) to establish payment amounts for DMEPOS products and services covered under Medicare that will be effective after the COVID-19 PHE. 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; (2) for contiguous non-CBAs defined as rural areas; and (3) for non-rural non-CBAs within the contiguous United States. 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 by law to implement 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. As of January 1, 2017 (when the last round of competitive bidding was in effect), we believe we had access to over 90% of the Medicare oxygen therapy market based on our analysis of the 103 CBAs that we won out of the 130 total CBAs. These 130 CBAs represented approximately 36% of the Medicare market with the remaining approximately 64% of the market not subject to competitive bidding per Medicare’s data on 2018 traditional Medicare fee-for-service beneficiaries in CBAs compared to the total Medicare fee-for-service beneficiaries. As of January 1, 2019, we can choose to accept Medicare oxygen patients throughout the United States. As of July 2018, we are operating in all 50 states in the U.S. We did not sell or rent to patients in Hawaii due to the licensure requirements from inception to June 2018.
We cannot guarantee that we will be offered contracts in any subsequent rounds of competitive bidding. In all five rounds of competitive bidding in which we have participated, we have gained access to certain CBAs and been excluded from other CBAs.
In September 2021, CMS published a Decision Memo which revised the Home Use of Oxygen national coverage determination and removed the national coverage determination for Home Oxygen Use to Treat Cluster Headaches. This allows the Medicare Administrative Contractors to make coverage determinations regarding the use of home oxygen and oxygen equipment for cluster headaches. CMS also expanded patient access to oxygen and oxygen equipment in the home by allowing oxygen use for acute or short-term needs instead of limiting coverage to chronic hypoxemia, removed the requirement for alternative treatment measures before dispensing of oxygen therapy, and removed the limited list of conditions for which oxygen may be covered to respiratory-related diseases, to allow the physician flexibility to make that determination. 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 removed from the national coverage determination the oxygen certificate of medical necessity requirement, effective January 2023. 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. CMS issued guidance on February 10, 2022 to the Medicare Administrative Contractors detailing that the implementation date of the revised national coverage policy would be June 14, 2022. On May 23, 2022, CMS issued revised guidance delaying the implementation date of the new national coverage policy to January 3, 2023. On July 8, 2022, CMS made a minor amendment to NCD 240.2 to conform with the specific time period specified in Section 1834(a)(5)(E) of the Social Security Act. However, we do not yet have visibility on the details of how the Medicare Administrative Contractors will further define the coverage criteria and documentation requirements implementing the new national coverage policy.
Medicare revenue, including patient co-insurance and deductible obligations, represented 10.7% and 10.6% of our total revenue in the three months ended September 30, 2022 and 2021, respectively, and 11.2% and 9.7% of our total revenue in the nine months ended September 30, 2022 and 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. The supplier that billed Medicare for the 36th month of service continues to be responsible for the patient’s oxygen therapy needs for months 37 through 60, and there is generally no additional reimbursement for OGPE for these later months. Medicare does not separately reimburse suppliers for oxygen tubing, cannulas and supplies that may be required for the patient. The supplier is required to keep the equipment provided in working order and in some cases, Medicare will reimburse for repair costs. At the end of the five-year useful life of the equipment, the patient may request replacement equipment and, if he or she can be re-qualified for the Medicare benefit, a new maximum 36-month payment cycle out of the next 60 months of service would begin. The supplier may not arbitrarily issue new equipment. We have analyzed the potential impact to revenue associated with patients in the capped rental period and have deferred $0 associated with the capped rental period for the three and nine months ended September 30, 2022 and 2021, respectively. Our capped patients as a percentage of total patients
36
on service was approximately 9.2% as of September 30, 2022 and 8.3% as of September 30, 2021. The increase in percentage of capped patients in the comparative periods was primarily due to a higher number of patients that entered the capped period. The percentage of capped patients may fluctuate over time as new patients come on service, patients come off of service before and during the capped rental period, and existing patients enter the capped rental period.
Our obligations to service Medicare patients over the rental period include supplying working equipment that meets each patient’s oxygen needs pursuant to his/her doctor’s prescription and supplying all disposables required for the patient to operate the equipment, including cannulas, filters, replacement batteries, carts and carry bags, as needed. If the equipment malfunctions, we must repair or replace the equipment. We determine what equipment the patient receives, and we can deploy used assets in working order as long as the prescription requirements are met. We must also procure a 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. The patient can choose to receive oxygen supplies and services from another supplier at any time, but the supplier may only transition the patient to another supplier in certain circumstances.
We have contracts with Medicaid, Medicare Advantage, government and private payors that qualify us as an in-network provider for these payors. As a result, patients can rent or purchase our systems at the same patient obligation as other in-network oxygen suppliers. We had 97 contracts as of September 30, 2022. Private payors typically provide reimbursement at a rate similar to Medicare allowables for in-network plans. We anticipate that private payor reimbursement levels will generally be reset in accordance with Medicare payment amounts.
We believe that we are well positioned to respond to the changing reimbursement environment because our product offerings are innovative, patient-focused and cost-effective. We have historically been able to reduce our costs through scalable manufacturing, better sourcing, continuous innovation, and reliability improvements, as well as innovations that reduce our product service costs by minimizing exchanges. As a result of design changes, supplier negotiations, bringing manufacturing and assembly largely in-house and our commitment to driving efficient manufacturing processes, we have 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 the sections entitled “Risk Factors” in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q filed with the SEC.
Basis of presentation
The following describes the line items set forth in our consolidated statements of comprehensive loss.
Revenue
We classify our revenue in two main categories: sales revenue and rental revenue. There will be fluctuations in mix between business-to-business sales, direct-to-consumer sales and rental revenue from period-to-period. Product selling prices and gross margins may fluctuate as we introduce new products, 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 for the remainder of 2022 and into 2023. 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
Our sales revenue is primarily derived from the sale of our Inogen One systems, Inogen At Home systems, TAV systems, and related accessories to individual consumers, our private label partner, HME providers, distributors, resellers, and charitable organizations worldwide. Sales revenue is classified into two areas: business-to-business sales and direct-to-consumer sales. Generally, our direct-to-consumer sales have higher gross margins than our business-to-business sales.
Rental revenue
Our rental revenue is primarily derived from the rental of our Inogen One and Inogen At Home systems to patients through reimbursement from Medicare, private payors and Medicaid, which typically also includes a patient responsibility component for patient co-insurance and deductibles. Rental revenue increased in the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021, primarily due to higher patients on service and higher Medicare reimbursement
37
rates. We expect our rental revenue to increase in future periods as we scale the sales teams, secure additional insurance contracts, and increase new rental setups. In addition, for the duration of the COVID-19 PHE, we expect to benefit from higher Medicare reimbursement rates and reduced administrative requirements for oxygen therapy enacted due to the COVID-19 PHE. We also expect that our rental revenue will be impacted by the number of our sales representatives, reimbursement rate changes, including the impact of COVID-19 PHE changes, the level of and response from potential customers to direct-to-consumer marketing spend, product launches, the number of billable patients and denial rates, and other uncontrollable factors such as changes in the market and competition.
Cost of revenue
Cost of sales revenue
Cost of sales revenue consists primarily of costs incurred in the production process, including component materials, assembly labor and overhead, warranty 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 as well as temporary labor. Cost of sales revenue also includes manufacturing freight in, depreciation expense, facilities costs and materials. Provisions for warranty obligations are included in cost of sales revenue and are provided for at the time of revenue recognition.
Supply chain disruptions began negatively impacting our cost of sales revenue starting in the third quarter of 2021 and are expected to continue to do so through the remainder of 2022 and into 2023. The supply chain constraints are primarily associated with semiconductor chips used in our batteries and printed circuit boards which are components of our POCs. In addition to the semiconductor chip limitations, we are continuing to see supply chain constraints for other components used in our products.
We expect this to have an increased impact on our material costs for the remainder of 2022 and into 2023 until supply and demand get closer to equilibrium. 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.
Recent United States policies related to global trade and tariffs may also increase our average unit cost. The current economic environment has introduced greater uncertainty with respect to potential trade regulations, including changes to United States policies related to global trade and tariffs. We continue to monitor the Section 301 tariffs being imposed by the United States on certain imported Chinese materials and products in addition to potential retaliatory responses from other nations. In 2021 and the nine months ended September 30, 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, changes in average selling prices and manufacturing cost per unit.
Cost of rental revenue
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 remain relatively flat in the fourth quarter of 2022.
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, engineering, and medical affairs employees. 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.
38
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, 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
Our sales and marketing expense primarily supports our direct-to-consumer sales and rental strategy and consists mainly of personnel-related expenses, including wages, bonuses, commissions, benefits, and stock-based compensation for sales, marketing, customer service, rental intake, and clinical service employees. It also includes expenses for media and advertising, printing, informational kits, dues and fees, credit card fees, recruiting, training, sales promotional activities, travel and entertainment expenses as well as allocated facilities costs.
We continue to recruit to add new sales representatives, while maintaining our hiring standards and being mindful of the supply constraints. Going forward, except as otherwise limited by the impact of the COVID-19 pandemic and related PHE, our plan is to continue to expand sales capacity while focusing on increased productivity, improved sales personnel and lead distribution systems, and improved training. We expect to continue to invest in sales and marketing expense in future periods, including expanding our sales and sales support team which includes our prescriber sales team, increasing our rental infrastructure, 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, legal, human resources, and information technology 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. 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. 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 foreign currency gains and (losses), as well as interest income earned on cash equivalents and marketable securities.
Income taxes
We account for income taxes in accordance with Accounting Standards Codification (ASC) 740—Income Taxes. Under ASC 740, income taxes are recognized for the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our consolidated financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.
We account for uncertainties in income tax in accordance with ASC 740-10—Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The accounting for stock-based compensation will increase or decrease our effective tax rate based upon the difference between our stock-based compensation expense and the deductions taken on our U.S. tax return, which depends upon the stock price at the time of employee option exercise or award vesting. We recognize excess tax benefits or deficiencies on a discrete basis, and we anticipate our effective tax rate will vary from year-to-year depending on our stock price in each period.
39
Results of operations
Comparison of three months ended September 30, 2022 and 2021
Revenue
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Sales revenue |
|
$ |
90,672 |
|
|
$ |
80,974 |
|
|
$ |
9,698 |
|
|
|
12.0 |
% |
|
|
86.0 |
% |
|
|
87.0 |
% |
Rental revenue |
|
|
14,717 |
|
|
|
12,131 |
|
|
|
2,586 |
|
|
|
21.3 |
% |
|
|
14.0 |
% |
|
|
13.0 |
% |
Total revenue |
|
$ |
105,389 |
|
|
$ |
93,105 |
|
|
$ |
12,284 |
|
|
|
13.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Sales revenue increased $9.7 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 12.0% from the comparable period. The increase was primarily attributable to increased sales in the domestic business-to-business channel, partially offset by lower sales in our direct-to-consumer channel and in our international business-to-business channel due to the limited ability to ship product into Europe until the EU MDR approval is received. We sold approximately 54,200 oxygen systems during the three months ended September 30, 2022 compared to approximately 44,600 oxygen systems sold during the three months ended September 30, 2021, an increase of 21.5%. The increase in the number of systems sold resulted from an increase in sales in the domestic business-to-business channel, primarily due to our improved supply chain.
Rental revenue increased $2.6 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 21.3% from the comparable period. The increase in rental revenue was primarily related to higher rental patients on service and higher Medicare reimbursement rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
Revenue by region and category |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Business-to-business domestic sales |
|
$ |
42,546 |
|
|
$ |
22,793 |
|
|
$ |
19,753 |
|
|
|
86.7 |
% |
|
|
40.4 |
% |
|
|
24.5 |
% |
Business-to-business international sales |
|
|
15,078 |
|
|
|
21,834 |
|
|
|
(6,756 |
) |
|
|
-30.9 |
% |
|
|
14.3 |
% |
|
|
23.5 |
% |
Direct-to-consumer domestic sales |
|
|
33,048 |
|
|
|
36,347 |
|
|
|
(3,299 |
) |
|
|
-9.1 |
% |
|
|
31.3 |
% |
|
|
39.0 |
% |
Direct-to-consumer domestic rentals |
|
|
14,717 |
|
|
|
12,131 |
|
|
|
2,586 |
|
|
|
21.3 |
% |
|
|
14.0 |
% |
|
|
13.0 |
% |
Total revenue |
|
$ |
105,389 |
|
|
$ |
93,105 |
|
|
$ |
12,284 |
|
|
|
13.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Domestic business-to-business sales increased 86.7% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily due to supply chain remediation efforts and improved average selling prices.
International business-to-business sales decreased 30.9% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, mostly driven by the limited ability to ship product into Europe, until EU MDR approval is received. In the three months ended September 30, 2022, sales in Europe as a percentage of total international sales revenue decreased to 57.0% versus 88.2% in the comparative period in 2021.
Domestic direct-to-consumer sales decreased 9.1% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to lower volume, partially offset by increased average selling prices versus the comparative period in the prior year.
Domestic direct-to-consumer rentals increased 21.3% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to an increase in patients on service and increased Medicare reimbursement rates due to the inflation adjustment effective January 1, 2022.
40
Cost of revenue and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Cost of sales revenue |
|
$ |
55,891 |
|
|
$ |
40,437 |
|
|
$ |
15,454 |
|
|
|
38.2 |
% |
|
|
53.0 |
% |
|
|
43.5 |
% |
Cost of rental revenue |
|
|
6,700 |
|
|
|
4,981 |
|
|
|
1,719 |
|
|
|
34.5 |
% |
|
|
6.4 |
% |
|
|
5.3 |
% |
Total cost of revenue |
|
$ |
62,591 |
|
|
$ |
45,418 |
|
|
$ |
17,173 |
|
|
|
37.8 |
% |
|
|
59.4 |
% |
|
|
48.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit - sales revenue |
|
$ |
34,781 |
|
|
$ |
40,537 |
|
|
$ |
(5,756 |
) |
|
|
-14.2 |
% |
|
|
33.0 |
% |
|
|
43.5 |
% |
Gross profit - rental revenue |
|
|
8,017 |
|
|
|
7,150 |
|
|
|
867 |
|
|
|
12.1 |
% |
|
|
7.6 |
% |
|
|
7.7 |
% |
Total gross profit |
|
$ |
42,798 |
|
|
$ |
47,687 |
|
|
$ |
(4,889 |
) |
|
|
-10.3 |
% |
|
|
40.6 |
% |
|
|
51.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage - sales revenue |
|
|
38.4 |
% |
|
|
50.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage- rental revenue |
|
|
54.5 |
% |
|
|
58.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage |
|
|
40.6 |
% |
|
|
51.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales revenue increased $15.5 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 38.2% from the comparable period. The increase in cost of sales revenue was primarily attributable to increased sales volumes as well as higher material and warranty costs. The third quarter of 2022 included $6.6 million of higher material costs associated with open-market purchases of semiconductor chips used in its batteries and POCs.
Cost of rental revenue increased $1.7 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 34.5% 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 servicing costs and rental asset depreciation expense. Cost of rental revenue included $2.8 million of rental asset depreciation for the three months ended September 30, 2022 compared to $2.3 million for the three months ended September 30, 2021.
Gross margin on sales revenue decreased to 38.4% for the three months ended September 30, 2022 from 50.1% for the three months ended September 30, 2021. The decrease was primarily due to increased mix of domestic business-to-business sales, which have a lower gross margin than direct-to-consumer and international business-to-business sales, and higher material and warranty costs. The decrease was partially offset by higher average selling prices. Total worldwide business-to-business sales revenue accounted for 63.6% of total sales revenue in the three months ended September 30, 2022 versus 55.1% in the three months ended September 30, 2021.
Rental revenue gross margin decreased to 54.5% for the three months ended September 30, 2022 from 58.9% for the three months ended September 30, 2021, primarily due to increased loss on rental units, depreciation expense, and servicing costs per patient on service, partially offset by higher Medicare reimbursement rates.
Research and development expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Research and development expense |
|
$ |
4,581 |
|
|
$ |
3,754 |
|
|
$ |
827 |
|
|
|
22.0 |
% |
|
|
4.3 |
% |
|
|
4.0 |
% |
Research and development expense increased $0.8 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 22.0% over the comparable period, primarily due to a $0.4 million increase in personnel-related expenses and a $0.3 million increase in product development expenses.
Sales and marketing expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Sales and marketing expense |
|
$ |
33,734 |
|
|
$ |
28,301 |
|
|
$ |
5,433 |
|
|
|
19.2 |
% |
|
|
32.0 |
% |
|
|
30.4 |
% |
41
Sales and marketing expense increased $5.4 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 19.2% from the comparable period, due to increases of $2.4 million of consulting fees, primarily for the deployment of the prescriber sales team, $1.5 million in dues, fees and licenses, $1.2 million in media and advertising costs, and $0.6 million in personnel-related expenses. In the three months ended September 30, 2022, we spent $10.6 million in media and advertising costs versus $9.4 million in the comparative period in 2021.
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
General and administrative expense |
|
$ |
14,775 |
|
|
$ |
9,258 |
|
|
$ |
5,517 |
|
|
|
59.6 |
% |
|
|
14.0 |
% |
|
|
10.0 |
% |
General and administrative expense increased $5.5 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 59.6% from the comparable period. The increase was primarily attributable to a $2.9 million increase in personnel-related expenses, $1.8 million decrease in the benefit from the change in fair value of the New Aera earnout liability, and a $0.3 million increase in consulting fees.
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Interest income |
|
$ |
868 |
|
|
$ |
21 |
|
|
$ |
847 |
|
|
|
4033.3 |
% |
|
|
0.8 |
% |
|
|
0.0 |
% |
Other expense |
|
|
(12 |
) |
|
|
(466 |
) |
|
|
454 |
|
|
|
-97.4 |
% |
|
|
0.0 |
% |
|
|
-0.5 |
% |
Total other income (expense), net |
|
$ |
856 |
|
|
$ |
(445 |
) |
|
$ |
1,301 |
|
|
|
292.4 |
% |
|
|
0.8 |
% |
|
|
-0.5 |
% |
Total other income (expense), net increased $1.3 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, an increase of 292.4% from the comparable period, primarily attributable due to an increase of $0.8 million in interest income due to the higher interest rate environment and a decrease of $0.5 million in net foreign currency losses.
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Income tax expense (benefit) |
|
$ |
70 |
|
|
$ |
(6,245 |
) |
|
$ |
6,315 |
|
|
|
101.1 |
% |
|
|
0.1 |
% |
|
|
-6.7 |
% |
Effective income tax rate |
|
|
-0.7 |
% |
|
|
-105.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense increased $6.3 million for the three months ended September 30, 2022 from the three months ended September 30, 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 September 30, 2022 increased compared to the three months ended September 30, 2021, primarily due to the recording of a valuation allowance on the use of deferred tax assets.
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Net income (loss) |
|
$ |
(9,506 |
) |
|
$ |
12,174 |
|
|
$ |
(21,680 |
) |
|
|
-178.1 |
% |
|
|
-9.0 |
% |
|
|
13.1 |
% |
Net income (loss) decreased $21.7 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, a decrease of 178.1% from the comparable period. The decrease was primarily related to higher operating expense, a decrease in gross profit, and the change in fair value of the New Aera earnout liability.
42
Comparison of nine months ended September 30, 2022 and 2021
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Sales revenue |
|
$ |
247,365 |
|
|
$ |
248,359 |
|
|
$ |
(994 |
) |
|
|
-0.4 |
% |
|
|
85.5 |
% |
|
|
88.2 |
% |
Rental revenue |
|
|
41,785 |
|
|
|
33,241 |
|
|
|
8,544 |
|
|
|
25.7 |
% |
|
|
14.5 |
% |
|
|
11.8 |
% |
Total revenue |
|
$ |
289,150 |
|
|
$ |
281,600 |
|
|
$ |
7,550 |
|
|
|
2.7 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Sales revenue decreased $1.0 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, a decrease of 0.4% 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 an increase in international business-to-business sales as well as improved average selling prices and sustained demand. We sold approximately 127,000 oxygen systems during the nine months ended September 30, 2022 compared to approximately 146,400 oxygen systems sold during the nine months ended September 30, 2021, a decrease of 13.3%. 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 $8.5 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 25.7% from the comparable period. The increase in rental revenue was primarily related to higher rental patients on service and higher Medicare reimbursement rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands) |
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
Revenue by region and category |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Business-to-business domestic sales |
|
$ |
58,859 |
|
|
$ |
81,094 |
|
|
$ |
(22,235 |
) |
|
|
-27.4 |
% |
|
|
20.3 |
% |
|
|
28.8 |
% |
Business-to-business international sales |
|
|
80,460 |
|
|
|
59,377 |
|
|
|
21,083 |
|
|
|
35.5 |
% |
|
|
27.8 |
% |
|
|
21.1 |
% |
Direct-to-consumer domestic sales |
|
|
108,046 |
|
|
|
107,888 |
|
|
|
158 |
|
|
|
0.1 |
% |
|
|
37.4 |
% |
|
|
38.3 |
% |
Direct-to-consumer domestic rentals |
|
|
41,785 |
|
|
|
33,241 |
|
|
|
8,544 |
|
|
|
25.7 |
% |
|
|
14.5 |
% |
|
|
11.8 |
% |
Total revenue |
|
$ |
289,150 |
|
|
$ |
281,600 |
|
|
$ |
7,550 |
|
|
|
2.7 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Domestic business-to-business sales decreased 27.4% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 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 35.5% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 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 MDD certificate expiration. In the nine months ended September 30, 2022, sales in Europe as a percentage of total international sales revenue increased to 87.7% versus 85.2% in the comparative period in 2021.
Domestic direct-to-consumer sales increased 0.1% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to increased average selling prices versus the comparative period in the prior year.
Domestic direct-to-consumer rentals increased 25.7% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to an increase in patients on service and increased Medicare reimbursement rates due to the inflation adjustment effective January 1, 2022.
43
Cost of revenue and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Cost of sales revenue |
|
$ |
146,052 |
|
|
$ |
129,637 |
|
|
$ |
16,415 |
|
|
|
12.7 |
% |
|
|
50.5 |
% |
|
|
46.0 |
% |
Cost of rental revenue |
|
|
19,036 |
|
|
|
14,068 |
|
|
|
4,968 |
|
|
|
35.3 |
% |
|
|
6.6 |
% |
|
|
5.0 |
% |
Total cost of revenue |
|
$ |
165,088 |
|
|
$ |
143,705 |
|
|
$ |
21,383 |
|
|
|
14.9 |
% |
|
|
57.1 |
% |
|
|
51.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit - sales revenue |
|
$ |
101,313 |
|
|
$ |
118,722 |
|
|
$ |
(17,409 |
) |
|
|
-14.7 |
% |
|
|
35.0 |
% |
|
|
42.2 |
% |
Gross profit - rental revenue |
|
|
22,749 |
|
|
|
19,173 |
|
|
|
3,576 |
|
|
|
18.7 |
% |
|
|
7.9 |
% |
|
|
6.8 |
% |
Total gross profit |
|
$ |
124,062 |
|
|
$ |
137,895 |
|
|
$ |
(13,833 |
) |
|
|
-10.0 |
% |
|
|
42.9 |
% |
|
|
49.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage - sales revenue |
|
|
41.0 |
% |
|
|
47.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage- rental revenue |
|
|
54.4 |
% |
|
|
57.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage |
|
|
42.9 |
% |
|
|
49.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales revenue increased $16.4 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 12.7% from the comparable period. The increase in cost of sales revenue was primarily attributable to higher material and warranty cost per unit and labor and overhead per unit. The first nine months of 2022 included $18.1 million of higher material costs associated with open-market purchases of semiconductor chips used in our batteries and POCs.
Cost of rental revenue increased $5.0 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 35.3% 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 servicing costs and rental asset depreciation expense. Cost of rental revenue included $8.2 million of rental asset depreciation for the nine months ended September 30, 2022 compared to $6.3 million for the nine months ended September 30, 2021.
Gross margin on sales revenue decreased to 41.0% for the nine months ended September 30, 2022 from 47.8% for the nine months ended September 30, 2021. The decrease was primarily due to higher material and warranty cost per unit and increased labor and overhead costs caused by lower labor and overhead absorption, mainly 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 56.3% of total sales revenue in the nine months ended September 30, 2022 versus 56.6% in the nine months ended September 30, 2021.
Rental revenue gross margin decreased to 54.4% for the nine months ended September 30, 2022 from 57.7% for the nine months ended September 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Research and development expense |
|
$ |
16,009 |
|
|
$ |
11,892 |
|
|
$ |
4,117 |
|
|
|
34.6 |
% |
|
|
5.5 |
% |
|
|
4.2 |
% |
Research and development expense increased $4.1 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 34.6% over the comparable period, primarily due to a $2.6 million increase in product development expenses and a $1.3 million increase in personnel-related expenses.
Sales and marketing expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Sales and marketing expense |
|
$ |
92,161 |
|
|
$ |
83,109 |
|
|
$ |
9,052 |
|
|
|
10.9 |
% |
|
|
31.9 |
% |
|
|
29.5 |
% |
44
Sales and marketing expense increased $9.1 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 10.9% from the comparable period, due to an increase of $6.2 million of consulting fees, mainly for the deployment of the prescriber sales team, $2.7 million in dues, fees and licenses, $1.2 million of media and advertising costs, $0.6 million in credit card and financing fees, and $0.5 million of travel and entertainment expense, partially offset by a decrease in personnel-related expenses of $1.5 million. In the nine months ended September 30, 2022, we spent $26.9 million in media and advertising costs versus $25.7 million in the comparative period in 2021.
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
General and administrative expense |
|
$ |
42,646 |
|
|
$ |
26,981 |
|
|
$ |
15,665 |
|
|
|
58.1 |
% |
|
|
14.7 |
% |
|
|
9.6 |
% |
General and administrative expense increased $15.7 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 58.1% from the comparable period. The increase was primarily attributable to a $8.2 million decrease in the benefit from the change in the fair value of the New Aera earnout liability and a $5.8 million increase in personnel-related expenses.
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Interest income |
|
$ |
1,122 |
|
|
$ |
107 |
|
|
$ |
1,015 |
|
|
|
948.6 |
% |
|
|
0.4 |
% |
|
|
0.0 |
% |
Other expense |
|
|
(1,167 |
) |
|
|
(472 |
) |
|
|
(695 |
) |
|
|
147.2 |
% |
|
|
-0.4 |
% |
|
|
-0.2 |
% |
Total other income (expense), net |
|
$ |
(45 |
) |
|
$ |
(365 |
) |
|
$ |
320 |
|
|
|
87.7 |
% |
|
|
0.0 |
% |
|
|
-0.2 |
% |
Total other income (expense), net increased $0.3 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, an increase of 87.7% from the comparable period, primarily attributable to an increase of $1.0 million in interest income due to the higher interest rate environment, partially offset by an increase of $0.7 million in net foreign currency losses.
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Income tax expense (benefit) |
|
$ |
363 |
|
|
$ |
(996 |
) |
|
$ |
1,359 |
|
|
|
136.4 |
% |
|
|
0.1 |
% |
|
|
-0.4 |
% |
Effective income tax rate |
|
|
-1.4 |
% |
|
|
-6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense increased $1.4 million for the nine months ended September 30, 2022 from the nine months ended September 30, 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 nine months ended September 30, 2022 increased compared to the nine months ended September 30, 2021, primarily due to the recording of a valuation allowance on the use of deferred tax assets.
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Change 2022 vs. 2021 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
|
2022 |
|
|
2021 |
|
Net income (loss) |
|
$ |
(27,162 |
) |
|
$ |
16,544 |
|
|
$ |
(43,706 |
) |
|
|
-264.2 |
% |
|
|
-9.4 |
% |
|
|
5.9 |
% |
Net income (loss) decreased $43.7 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, a decrease of 264.2% from the comparable period. The decrease in net income was primarily related to a
45
decrease in gross profit, higher operating expense, and the decrease in the benefit from the change in fair value of the New Aera earnout liability.
Contractual obligations
We obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of September 30, 2022, we had purchase obligations with outside vendors and suppliers of approximately $141.7 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.
Liquidity and capital resources
As of September 30, 2022, we had cash and cash equivalents of $209.6 million, which consisted of highly liquid investments with a maturity of three months or less. For the nine months ended September 30, 2022 and 2021, we received $1.7 million and $15.6 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, 2022 consisted of net cash used in operating activities of $22.0 million and capital expenditures of $14.1 million including additional rental equipment and other property, plant and equipment.
The COVID-19 pandemic and related PHE have not materially impacted our liquidity position to date, and we believe our current cash and cash equivalents provide us with a certain degree of stability and liquidity during this time of uncertainty. We believe that our current cash, cash equivalents and the cash to be generated from expected product sales and rentals will be sufficient to meet our projected operating and investing requirements for at least the next twelve months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future funding requirements will depend on many factors, including market acceptance of our products; the cost of our research and development activities; payments from customers; the cost, timing, and outcome of litigation or disputes involving intellectual property rights, our products, employee relations, cyber security incidents, or otherwise; the cost and timing of acquisitions; the cost and timing of regulatory clearances or approvals; the cost and timing of establishing additional sales, marketing, and distribution capabilities; and the effect of competing technological and market developments. In the future, we may acquire businesses or technologies from third parties, and we may decide to raise additional capital through debt or equity financing to the extent we believe this is necessary to successfully complete these acquisitions. Our future capital requirements will also depend on many additional factors, including those set forth in the risk factors included in Item 1A. "Risk Factors" in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q filed with the SEC.
If we require additional funds in the future, we may not be able to obtain such funds on acceptable terms, or at all. In the future, we may also attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Any future indebtedness we incur may result in terms that could be unfavorable to equity investors. There can be no assurances that we will be able to raise additional capital, which would adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected.
46
The following tables show a summary of our cash flows and working capital for the periods and as of the dates indicated: