INOGEN INC: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

INOGEN INC: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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 about our possible or assumed future cash flows, income, sources of income and results of operations, operating expenses and others;

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 the delay in the approval of the European Medical Device Regulation, and coverage and reimbursement from the government and third-party payers;

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 product launches and product enhancements, 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 size of the market, the growth of the market and the growth potential of 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 regard to our European Union and U.S facilities and our expectations regarding our contract manufacturer in Europe;

our expectations regarding the fees imposed by the U.S on certain imported materials and products;

our ability to successfully acquire and integrate businesses and assets;

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

our expectations regarding excessive tax benefits or deficiencies of 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;

                                       25
--------------------------------------------------------------------------------

our internal control environment;

the effects of seasonal trends on our estimated operating results and 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 "?????" in Japan. We own trademark
registrations for the marks "???" and "???" 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 "?????" 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 Inogene, Inc. and its subsidiary.

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

                                       26
--------------------------------------------------------------------------------


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 PHEs

•
Overview

•
Basis of presentation

•
Results of operations

•

Liquidity and capital resources

•
Sources of funds

•
Use of funds

•
Non-GAAP financial measures

Critical Accounting Policies and Estimates


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


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.

                                       27
--------------------------------------------------------------------------------


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.

                                       28
--------------------------------------------------------------------------------


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 achieve this goal and increase 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.

                                       29
--------------------------------------------------------------------------------

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

                                       30
--------------------------------------------------------------------------------


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."

                                       31
--------------------------------------------------------------------------------


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.

                                       32
--------------------------------------------------------------------------------

rental income


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.

Refund


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 coinsurance 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 revenues 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 items established in our consolidated statements of comprehensive loss are described below.


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 income


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 the gross rental 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 tasks necessary to improve our technologies and support the 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

                                    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% in the three months ended
September 30, 2022 compared to the three months ended September 30, 2021primarily due to lower volume, partially offset by higher average sales prices compared to the prior year comparative period.

Domestic direct-to-consumer rentals increased 21.3% in the three months ended
September 30, 2022 compared to the three months ended September 30, 2021primarily due to an increase in patients in service and higher Medicare reimbursement rates due to current inflation adjustment 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.

Gross rental income margin decreased to 54.5% in the three months ended
September 30, 2022 58.9% for the three months ended September 30, 2021primarily due to higher losses on rental units, depreciation expense, and service costs per patient in service, partially offset by higher Medicare reimbursement rates.

Research and development expenses

                                     Three months ended
                                        September 30,             Change 2022 vs. 2021              % of Revenue
(amounts in thousands)                2022          2021           $                %            2022          2021

Research and development expenses $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 expenses

                                    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 adminsitrative expenses


                                       Three months ended
                                          September 30,             Change 2022 vs. 2021             % of Revenue
(amounts in thousands)                  2022          2021            $                %           2022         2021

General and adminsitrative expenses $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 (expenses)


                                       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, 2021mainly due to the recording of a valuation provision in 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
--------------------------------------------------------------------------------

Nine months ended comparison 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% in the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021mainly due to the increase in average sales prices compared to the comparative period of the previous year.

Domestic direct-to-consumer rentals increased 25.7% in the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021primarily due to an increase in patients in service and higher Medicare reimbursement rates due to current inflation adjustment 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.

Gross rental income margin decreased to 54.4% in the nine months ended
September 30, 2022 of 57.7% for the nine months ended September 30, 2021primarily due to higher cost of service and depreciation expense per patient in service, partially offset by higher Medicare reimbursement rates.

Research and development expenses

                                     Nine months ended
                                       September 30,             Change 2022 vs. 2021              % of Revenue
(amounts in thousands)               2022          2021            $                %           2022          2021

Research and development expenses $16,009 $11,892 $4,117

34.6% 5.5% 4.2%

Research and development expenses increased $4.1 million for the nine months ended September 30, 2022 of the nine months ended September 30, 2021an increase of 34.6% during the comparable period, mainly 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 adminsitrative expenses


                                       Nine months ended
                                         September 30,             Change 2022 vs. 2021              % of Revenue
(amounts in thousands)                 2022          2021            $                %           2022          2021

General and adminsitrative expenses $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 of the nine months ended September 30, 2021an increase of 87.7% with respect to the comparable period, mainly attributable to an increase of $1.0 million in interest income due to the higher interest rate environment, partially offset by an increase in $0.7 million in net losses in foreign currency.

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, 2021mainly due to the recording of a valuation provision in 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 expenses and decrease in benefit from the change in fair value of New Aera’s profit 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 main 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 $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 dates indicated:

© Edgar Online, source glimpses

Leave a Comment