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;
•the impact of expense inflation on the components we use in our products, and the impact of inflation of the ability of our customers to afford our products;
•the potential for future supply chain constraints;
•our expectations regarding the effect of the COVID-19 pandemic and related public health emergency (PHE);
•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 with respect to our restructuring and cost reduction initiatives;
•our expectations regarding regulatory approvals and government and third-party payor coverage and reimbursement;
•the ability of our competitors to introduce products to the market that may be lower priced than ours, may have more product features than ours, or are otherwise more accepted by the market, including our home medical equipment partners;
•our ability to develop new products, improve our existing products and increase the value of our 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 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,” “Rove 4,” “Rove 6,” “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
•Recent accounting pronouncements
•Macroeconomic environment and COVID-19 pandemic
•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 months ended March 31, 2023 compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 24, 2023.
Recent accounting pronouncements
Information about recently adopted and proposed accounting pronouncements, if applicable, is included in Note 2 to the unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report under the heading “Recent Accounting Pronouncements” and is incorporated herein by reference.
Macroeconomic environment and COVID-19 pandemic
The global economy is experiencing increased inflationary pressures in part due to global supply chain disruptions, labor shortages and other impacts of the COVID-19 pandemic and current macroeconomic environment. The macroeconomic environment 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. Higher interest rates and capital costs and increased shipping costs are expected to impact demand for our products while the potential for continued supply chain disruptions and inflationary impact on material, labor and logistics could increase our cost of operations.
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We continued to see inflated costs related to the acquisition and availability of semiconductor chips negatively impact our cost of sales revenue in the first quarter of 2023, and we expect this to continue to impact our cost of sales revenue for the remainder of 2023. We incurred significant costs associated with acquiring chips on the open market and 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. Additionally, we are seeing cost inflation for other components used in our products.
We also have experienced, along with most other companies across many industries, the macroeconomic 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 2023. 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 for certain roles, including remote workplace opportunities, but we still expect to be challenged by the macroeconomic employment environment.
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 portable oxygen therapy solutions for patients with chronic respiratory conditions. Our leading portfolio of innovative portable oxygen concentrators (POCs) is optimized to deliver high output ratio-to-weight, meaningful sound suppression and among the longest run times in the industry so that we can meet the needs of patients across a variety of disease states. As of March 31, 2023, we had twenty-four pending patent applications and seventy-two issued patents relating to the design and construction of our respiratory devices. We are positioned in the market as both a medical technology company and as a home medical equipment provider that is accredited in all 50 states in the United States with a significant patient, prescriber and provider reach. Our products have been sold internationally through distributors and medical equipment companies outside of the United States and through direct patient and prescriber sales, as well as resellers and home medical equipment companies in the United States.
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, 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:
•Optimize our domestic direct-to-consumer sales and prescriber sales teams and increase productivity. We launched a prescriber sales force initiative in February 2022 to market directly to physicians, gaining the prescription at initiation and maximizing the number of months of billing for long-term oxygen treatment. Also, as part of our growth plans, we expect to continue to expand sales capacity by 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 the patient becomes dissatisfied with their current modality. We plan to optimize marketing spend to drive consumer and physician awareness of our products in 2023.
•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 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.
•Expand our domestic home medical equipment (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, and traditional HME providers. We offer patient-preferred, low total cost of ownership products 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.
•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
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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.
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 $5.3 million and $5.4 million in the three months ended March 31, 2023 and March 31, 2022, respectively, in research and development expenses, and we intend to continue to make such investments in the foreseeable future.
We launched the Rove 6, our latest portable oxygen concentrator, in December 2022. We have also received U.S. Food and Drug Administration 510(k) clearance for the Rove 4 that will be launched in 2023. The Rove 6 weighs 4.8 pounds and produces 1,260 ml per minute of oxygen output with very quiet operations at 37 dBA and long battery life at 6 hours and 15 minutes for a single battery and up to 12 hours and 45 minutes for a double battery, as well as improvements to provide ease-of-use and improvements to design in compliance to European Union medical device regulation (MDR) standards. We launched the Inogen One G5® in 2019. The Inogen One G5 is similar to the product specifications of the Rove 6. We estimate that the Rove 6 and Inogen One G5 are each suitable for over 90% of ambulatory long-term oxygen therapy patients based on our analysis of the patients who have contacted us and their clinical needs.
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 have also found 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 and indications for use. We are focused on expanding new products that drive benefits to patients, prescribers and our customers with a clinically-relevant pipeline. These products would include innovations that strengthen our offerings in chronic obstructive pulmonary disease, as well as future innovations that differentiate beyond devices to allow patients and clinicians to better manage respiratory disease with advanced portable oxygen concentrations with digital health value added services, broader use for hypercapnia and shortness-of-breath, and expansion to other related disease indications. We are also committed to exploring complementary acquisition opportunities to strengthen our technology, product offerings, and channel access.
Cost Reduction Initiatives
During the first quarter of 2023, we implemented certain operational efficiency and cost-savings initiatives intended to align our resources with our product strategy, reduce our operating expense, and manage our cash flows. These cost efficiency initiatives include targeted workforce reductions, centralizing manufacturing activities, and outsourcing. The efficiency and cost-savings initiatives are designed to reduce cost of revenue and operating expense and enable us to efficiently align our resources in areas providing the greatest benefit.
Sales revenue
Our future financial performance will be driven in part by the growth in sales of our portable oxygen concentrators, and, to a lesser extent, sales of batteries, other accessories, and our Inogen At Home stationary oxygen concentrators. We plan to grow our system sales in the coming years through multiple strategies including: improving sales force productivity, hiring additional sales representatives directly or through our contract sales organization, 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. While we believe HME providers are still in the process of converting their business model to a non-delivery model through the purchase of POCs, growth has been challenged due to the COVID-19 pandemic and related PHE, HME restructuring efforts, lack of access to available credit, provider capital expenditure constraints, and risk of potential changes in reimbursement rates.
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Our direct-to-consumer 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. 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, and resellers 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. As a result of these factors, product purchases can be subject to changes in demand by customers.
We sold approximately 26,900 systems in the three months ended March 31, 2023 and 30,400 systems for the same period in 2022. The decline in the current period was caused primarily by lower direct-to-consumer sales driven by fewer inside sales representatives as the transformation of this team was underway. Going forward, our plan is to optimize our sales capacity while focusing on increased productivity, improved sales personnel and lead distribution systems, and improved training.
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 March 31, 2023 compared to the three months ended March 31, 2022, 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. 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 rental patient population 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. The ratio of billable patients to total patients on service is critical to maintaining rental revenue growth as patients on service increase. 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 45,800 and 43,200 oxygen rental patients as of March 31, 2023 and March 31, 2022, 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 billable patients as a percentage of patients on service, reimbursement levels by payor, patient location, the number of capped patients, write-offs for uncollectable balances, and rental revenue adjustments.
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Reimbursement
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 March 31, 2023 and 2022, approximately 73.8% and 79.0%, respectively, of our rental revenue was derived from Medicare’s traditional fee-for-service reimbursement programs. For additional discussion of our reliance on third-party reimbursement and the impact of the recent Medicare reimbursement proposals, see the discussion in the subsection entitled "Third Party Reimbursement" in Item 1 of our Annual Report on Form 10-K and the section entitled “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on February 24, 2023.
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 based on revenue channel mix, as we introduce new products, our product costs change, we have changes in purchase volumes, and as currency variations occur. For example, the higher costs for semiconductor chips has had a negative impact on our gross margin, and we expect that will continue in 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, 2022, as filed with the SEC on February 24, 2023.
Sales revenue
Our sales revenue is primarily derived from the sale of our Rove, Inogen One, and Inogen At Home systems in addition to our 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 months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to higher patients on service and higher Medicare reimbursement rates. We expect our rental revenue to increase in future periods as we scale the sales teams, secure additional insurance contracts, and increase new rental setups. In addition, we expect to benefit from higher Medicare reimbursement rates through December 31, 2023 and reduced administrative requirements for oxygen therapy enacted during 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 and temporary labor. Cost of sales revenue also includes manufacturing freight in, depreciation expense, facilities costs and materials. Provisions for warranty obligations are included in cost of sales revenue and are provided for at the time of revenue recognition.
The impact of supply chain disruptions began negatively affecting our cost of sales revenue starting in the third quarter of 2021 and is expected to continue to do so through 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.
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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.
Rental gross margin percentage could fluctuate due to changes in depreciation expense, cost to service and maintain the rental fleet as well as the percentage of billable patients as a percentage of patients on service.
Operating expense
Research and development
Our research and development expense consists primarily of personnel-related expenses, including wages, bonuses, benefits and stock-based compensation for research and development, 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. Our research and development efforts have focused primarily on 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 continue to invest in our engineering and technology teams to support our new and enhanced product research and development efforts and manufacturing improvements. We will also focus research and development efforts on 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.
Going forward, our plan is to optimize our 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 by focusing on increased productivity driven by improved sales management discipline, insights-informed tools, and optimized patient lead generation as well as 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 one-time costs, such as restructuring, acquisition expenses or 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.
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Other income (expense), net
Our other income (expense), net consists primarily of foreign currency gains (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.
Results of operations
Comparison of three months ended March 31, 2023 and 2022
Revenue
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Three months ended |
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March 31, |
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Change 2023 vs. 2022 |
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% of Revenue |
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(amounts in thousands) |
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2023 |
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2022 |
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$ |
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% |
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2023 |
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|
2022 |
|
Sales revenue |
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$ |
55,887 |
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|
$ |
67,402 |
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|
$ |
(11,515 |
) |
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|
-17.1 |
% |
|
|
77.4 |
% |
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|
83.8 |
% |
Rental revenue |
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|
16,275 |
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12,983 |
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3,292 |
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25.4 |
% |
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22.6 |
% |
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16.2 |
% |
Total revenue |
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$ |
72,162 |
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$ |
80,385 |
|
|
$ |
(8,223 |
) |
|
|
-10.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Sales revenue decreased $11.5 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, a decrease of 17.1% from the comparable period. The decrease was primarily attributable to a decrease in domestic direct-to-consumer sales and lower international business-to-business sales, partially offset by higher domestic business-to-business sales. We sold approximately 26,900 oxygen systems during the three months ended March 31, 2023 compared to approximately 30,400 oxygen systems sold during the three months ended March 31, 2022, a decrease of 11.5%. The decrease in the number of systems sold resulted primarily due to lower direct-to-consumer sales as the transformation of this team was underway during the current year period.
Rental revenue increased $3.3 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, or an increase of 25.4% 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) |
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
Revenue by region and category |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Business-to-business domestic sales |
|
$ |
12,585 |
|
|
$ |
5,101 |
|
|
$ |
7,484 |
|
|
|
146.7 |
% |
|
|
17.4 |
% |
|
|
6.3 |
% |
Business-to-business international sales |
|
|
18,972 |
|
|
|
27,941 |
|
|
|
(8,969 |
) |
|
|
-32.1 |
% |
|
|
26.3 |
% |
|
|
34.8 |
% |
Direct-to-consumer domestic sales |
|
|
24,330 |
|
|
|
34,360 |
|
|
|
(10,030 |
) |
|
|
-29.2 |
% |
|
|
33.7 |
% |
|
|
42.7 |
% |
Direct-to-consumer domestic rentals |
|
|
16,275 |
|
|
|
12,983 |
|
|
|
3,292 |
|
|
|
25.4 |
% |
|
|
22.6 |
% |
|
|
16.2 |
% |
Total revenue |
|
$ |
72,162 |
|
|
$ |
80,385 |
|
|
$ |
(8,223 |
) |
|
|
-10.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Domestic business-to-business sales increased 146.7% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to our ability to meet all customer demand during the first three months of 2023 versus the comparative period in the prior period that had supply constraints and limited shipments.
29
International business-to-business sales decreased 32.1% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, mostly driven by intentional focus on fulfilling European orders in our international business-to-business sales channel prior to the EU MDR certificate expiration in the comparative period in 2022. In the three months ended March 31, 2023, sales in Europe as a percentage of total international sales revenue decreased to 81.8% versus 98.2% in the comparative period in 2022.
Domestic direct-to-consumer sales decreased 29.2% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily driven by lower volume due to lower sales representative headcount, partially offset by increased average selling prices versus the comparative period in the prior period.
Domestic direct-to-consumer rentals increased 25.4% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to an increase in rental patients on service and increased Medicare reimbursement rates due to the inflation adjustment effective January 1, 2023.
Cost of revenue and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Cost of sales revenue |
|
$ |
33,964 |
|
|
$ |
39,500 |
|
|
$ |
(5,536 |
) |
|
|
-14.0 |
% |
|
|
47.1 |
% |
|
|
49.1 |
% |
Cost of rental revenue |
|
|
7,465 |
|
|
|
5,879 |
|
|
|
1,586 |
|
|
|
27.0 |
% |
|
|
10.3 |
% |
|
|
7.4 |
% |
Total cost of revenue |
|
$ |
41,429 |
|
|
$ |
45,379 |
|
|
$ |
(3,950 |
) |
|
|
-8.7 |
% |
|
|
57.4 |
% |
|
|
56.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit - sales revenue |
|
$ |
21,923 |
|
|
$ |
27,902 |
|
|
$ |
(5,979 |
) |
|
|
-21.4 |
% |
|
|
30.4 |
% |
|
|
34.7 |
% |
Gross profit - rental revenue |
|
|
8,810 |
|
|
|
7,104 |
|
|
|
1,706 |
|
|
|
24.0 |
% |
|
|
12.2 |
% |
|
|
8.8 |
% |
Total gross profit |
|
$ |
30,733 |
|
|
$ |
35,006 |
|
|
$ |
(4,273 |
) |
|
|
-12.2 |
% |
|
|
42.6 |
% |
|
|
43.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage - sales revenue |
|
|
39.2 |
% |
|
|
41.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage- rental revenue |
|
|
54.1 |
% |
|
|
54.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage |
|
|
42.6 |
% |
|
|
43.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales revenue decreased $5.5 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, a decrease of 14.0% from the comparable period due primarily to lower sales volumes and improved manufacturing productivity, partially offset by increased premiums paid for components used to manufacture our batteries and motherboards used in our POCs. The first quarter of 2023 included $4.5 million of higher material costs associated with open-market purchases of semiconductor chips used in our batteries and POCs.
Cost of rental revenue increased $1.6 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, an increase of 27.0% from the comparable period. The increase in cost of rental revenue was primarily attributable to an increase in total patients on service, which led to increased rental asset depreciation and service costs. Cost of rental revenue included $3.1 million of rental asset depreciation for the three months ended March 31, 2023 compared to $2.6 million for the three months ended March 31, 2022.
Gross margin on sales revenue decreased to 39.2% for the three months ended March 31, 2023 from 41.4% for the three months ended March 31, 2022. The decrease was primarily due to a shift in channel mix, with a higher volume of units sold through the business-to-business channel versus the direct-to-consumer channel. Total worldwide business-to-business sales revenue accounted for 56.5% of total sales revenue in the three months ended March 31, 2023 versus 49.0% in the three months ended March 31, 2022. The decrease was partially offset by lower labor and overhead costs per unit and higher average selling prices.
Gross margin on rental revenue decreased to 54.1% for the three months ended March 31, 2023 from 54.7% for the three months ended March 31, 2022, primarily due to higher servicing costs per patient on service, partially offset by higher Medicare reimbursement rates.
30
Research and development expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Research and development expense |
|
$ |
5,344 |
|
|
$ |
5,364 |
|
|
$ |
(20 |
) |
|
|
-0.4 |
% |
|
|
7.4 |
% |
|
|
6.6 |
% |
Research and development expense slightly decreased for the three months ended March 31, 2023 from the three months ended March 31, 2022, with a decrease of 0.4% from the comparable period, primarily due to a $1.9 million decrease in amortization costs of intangible assets, partially offset by an increase of $1.3 million in product development expenses and $0.5 million of personnel-related expenses.
Sales and marketing expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Sales and marketing expense |
|
$ |
28,441 |
|
|
$ |
28,039 |
|
|
$ |
402 |
|
|
|
1.4 |
% |
|
|
39.4 |
% |
|
|
34.9 |
% |
Sales and marketing expense increased $0.4 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, an increase of 1.4% from the comparable period, primarily due to an increase of $1.3 million in professional fees and licenses and $0.9 million of consulting fees, partially offset by a decrease of $1.5 million of media and advertising costs. In the three months ended March 31, 2023, we spent $6.4 million in media and advertising costs versus $7.9 million in the comparative period in 2022.
General and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
General and administrative expense |
|
$ |
18,863 |
|
|
$ |
15,189 |
|
|
$ |
3,674 |
|
|
|
24.2 |
% |
|
|
26.1 |
% |
|
|
18.9 |
% |
General and administrative expense increased $3.7 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, an increase of 24.2% from the comparable period. The increase was primarily attributable to an increase of $1.8 million in restructuring and severance costs, $1.4 million in personnel-related expenses, and $0.6 million in acquisition-related expenses incurred as part of business development activities. These increases were partially offset by a $0.6 million decrease in the change in the fair value of the New Aera earnout liability.
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Interest income |
|
$ |
1,525 |
|
|
$ |
29 |
|
|
$ |
1,496 |
|
|
|
5158.6 |
% |
|
|
2.1 |
% |
|
|
0.0 |
% |
Other income (expense) |
|
|
237 |
|
|
|
(433 |
) |
|
|
670 |
|
|
|
-154.7 |
% |
|
|
0.3 |
% |
|
|
-0.5 |
% |
Total other income (expense), net |
|
$ |
1,762 |
|
|
$ |
(404 |
) |
|
$ |
2,166 |
|
|
|
536.1 |
% |
|
|
2.4 |
% |
|
|
-0.5 |
% |
31
Total other income (expense), net increased $2.2 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, an increase of 536.1% from the comparable period, primarily attributable due to an increase of $1.5 million in interest income due to the higher interest rate environment and an increase of $0.7 million in net foreign currency gains.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Income tax expense |
|
$ |
196 |
|
|
$ |
224 |
|
|
$ |
(28 |
) |
|
|
-12.5 |
% |
|
|
0.3 |
% |
|
|
0.3 |
% |
Effective income tax rate |
|
|
-1.0 |
% |
|
|
-1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense decreased slightly for the three months ended March 31, 2023 from the three months ended March 31, 2022. We continued to record a valuation allowance on the use of deferred tax assets in the current and prior periods. Income taxes in the current and prior periods were attributable to foreign taxes and minimum state taxes.
Our effective tax rate for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022, primarily due to lower foreign taxes and minimum state taxes.
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
Change 2023 vs. 2022 |
|
|
% of Revenue |
|
(amounts in thousands) |
|
2023 |
|
|
2022 |
|
|
$ |
|
|
% |
|
|
2023 |
|
|
2022 |
|
Net loss |
|
$ |
(20,349 |
) |
|
$ |
(14,214 |
) |
|
$ |
(6,135 |
) |
|
|
43.2 |
% |
|
|
-28.2 |
% |
|
|
-17.7 |
% |
Net loss increased $6.1 million for the three months ended March 31, 2023 from the three months ended March 31, 2022, or an increase of 43.2% from the comparable period. The increase in net loss was primarily related to a reduction in gross profit and higher operating expense.
Contractual obligations
We obtain individual components for our products from a wide variety of individual suppliers. Consistent with industry practice, we acquire components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. Where appropriate, the purchases are applied to inventory component prepayments that are outstanding with the respective supplier. As of March 31, 2023, we had purchase obligations with outside vendors and suppliers of approximately $111.4 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, 2023.
Liquidity and capital resources
As of March 31, 2023, we had cash and cash equivalents of $164.1 million, which consisted of highly liquid investments with a maturity of three months or less. In addition, we held marketable securities of $10.4 million, which had maturities of greater than three months. For the three months ended March 31, 2023 and 2022, we received $1.0 million and $0.9 million, respectively, in proceeds related to stock option exercises and our employee stock purchase plan.
Our principal uses of cash for liquidity and capital resources in the three months ended March 31, 2023 consisted of net cash used in operating activities of $6.3 million as well as net cash used in investing activities of $10.4 million for purchases of marketable securities and capital expenditures of $6.8 million for additional rental equipment and other property, plant and equipment.
32
We believe that our current cash, cash equivalents, and marketable securities 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.
The following tables show a summary of our cash flows and working capital for the periods and as of the dates indicated: