Welcome to Inogen's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. [Operator Instructions]. As a reminder, this conference is being recorded today, May 5, 2022. I'd now like to turn the conference over to Jason Somer, General Counsel. Please go ahead.

Thank you for participating in today's call. Joining me are CEO, Nabil Shabshab; and CFO, Kristin Caltrider. Earlier today, Inogen released financial results for the first quarter of 2022. This earnings release is currently available in the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2022 and beyond; expectations related to our financial results for the second quarter and full-year 2022; our expectations with respect to supply challenges and cost inflation related to semiconductor chips used in our batteries and concentrators; our expectations on European regulatory clearances and related impact on our international sales; our ability to create shareholder value by driving awareness of our products; expectations regarding our international and domestic sales channels; expectations related to our rental channel; expectations related to our prescriber sales channel or organization, including the expansion of the sales team and implementation of health care intelligence platforms and tools through our partnership with Ashfield Healthcare. Hiring expectations, expectations regarding reimbursement and regulatory changes; our expectations regarding the market for our products, and the impact of the COVID-19 pandemic on our business and supply and demand for our products in both the short term and the long-term. The forward-looking statements in this call are based on information currently available to us as of today's date. These forward-looking statements are only predictions that involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligations to update these forward-looking statements except as may be required by law. We have posted historical financial statements and our investor presentations in the Investor Relations section of our company website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. With that, I will turn the call over to Inogen's President and CEO, Nabil Shabshab. Nabil?

Thank you, Jason. Good afternoon and thank you for joining our first quarter 2022 conference call. We are pleased with the -- with our execution during the first quarter of 2022, whereby we continued to mitigate higher cost and supply chain headwinds while largely meeting stronger customer demand, hence, delivering results that exceeded our expectations. This accomplishment is significant in the context of the semiconductor shortages and the company navigating a month-long global manufacturing shutdown from January 3 through February 9, 2022. We have made steady progress on the execution of our strategy to expand and effectively increase our sales footprint specifically in the prescriber channel while driving increased productivity across all our commercial operations. We continue to work through supply chain challenges to meet the market demand, and we are investing behind our commercial strategy, R&D and clinical in support of long-term sustainable and durable growth and profitability. Now turning to the first quarter. Total revenue declined 7.5% to $80.4 million from $86.9 million in the same period in 2021 primarily driven by supply chain constraints that resulted in limited sales in our domestic business-to-business channel. We directed the available capacity primarily to the direct-to-consumer sales and rental channels and our international business-to-business channels to balance strategic imperatives while optimizing revenue and margin. In an effort to mitigate margin-related pressure, we have recently implemented an additional price increase in our domestic direct-to-consumer channel beginning in March 2022 in addition to the previous price increase that went into effect September 2021 in all channels, except rental. Domestic direct-to-consumer sales increased 12.2% to $34.4 million in the first quarter of 2022 from $30.6 million in the first quarter of 2021 primarily driven by increased average selling prices. Inside sales representative productivity increased in the quarter despite lower average inside sales representative…

Thanks, Nabil. I'm very happy to join the team here at Inogen. Total revenue for the first quarter of 2022 was $80.4 million, representing a decrease of 7.5% over the comparative period in 2021 but an increase of 5.2% sequentially from the fourth quarter of 2021. Gross profit in the first quarter of 2022 was $35 million, a decrease of $4.9 million as compared to the first quarter of 2021 driven primarily by lower sales volume, lower labor and overhead absorption due to the temporary manufacturing shutdown and higher cost of materials associated with the purchase of semiconductor chips on the open market. This was partially offset by higher selling prices and favorable channel mix. Total gross margin was 43.5% in the first quarter of 2022 versus 45.9% in the comparative period in 2021. Year-over-year, gross margin declined 240 basis points driven primarily by higher cost of materials and lower labor and overhead absorption, partially offset by higher average selling prices and decreased mix of domestic business-to-business sales. Diving one layer deeper, sales revenue gross margin was 41.4% in the first quarter of 2022, declining 330 basis points from the first quarter of 2021 driven by the same factors. Rental revenue gross margin was 54.7% in the first quarter of 2022 versus 55.1% in the first quarter of 2021, a decline of 40 basis points. The decrease was primarily driven by increased depreciation and service costs partially offset by higher Medicare reimbursement rates. Moving on to operating expenses. Research and development expense increased to $5.4 million in the quarter compared to $4 million in the first quarter of 2021 primarily associated with increased product development costs and personnel-related expenses. Sales and marketing expense increased to $28 million in the first quarter of 2022 versus $25.5 million in the comparative period…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. The first question comes from Robbie Marcus from J.P. Morgan. Please go ahead, Robbie.

Hi, this is actually Lilly on for Robbie today. Thanks for taking the question. Maybe starting with the P&L, I know there's a lot of moving pieces here with supply constraints, inflation, price increases. So could you just give us some color on how you're thinking about margins progressing over the rest of the year, specifically gross margin?

Hi, Lilly, this is Kristin. We are not giving guidance for the back half of the year at this time. But for Q2, we are suggesting that the margins will be in line with Q1.

Okay. Got it. And again, I know there's a lot going on with pandemic, EU MDR. And I know you guys have taken price to kind of offset some of those headwinds. So I'm just trying to get a sense for how underlying volumes are doing in this environment. So is there any way you can parse out the size of those price increases? And how much volumes and prices are contributing to growth right now?

Yes, hi Lilly, it's Nabil. I'm going to take that one. So I think we would be more comfortable commenting on the underlying volume if we were not in a supply-constrained environment because today, everything that we can make, we can sell. And we cannot really put a gauge on, are we meeting all the underlying demand in the market out there and all the channels or not. We know that we have a backlog in a couple of channels. So we believe that the underlying demand continues to be very stable and strong and our ability to meet it is supply-related, not demand-related. And maybe just as a reminder, back to the margins, and this is not about the remainder of the year. As the supply chain pressures abate and that negative PPV that has hit our cost goes away, we took also the price increases as a reminder. And that should be accretive to the margin line. But we would know once we see whether the demand and supply stabilize in the chip market and us determining what the costs are going to be moving forward for the remainder of the year at least.

Thank you. The next question comes from Matthew Mishan from KeyBanc. Please go ahead, Matthew.

Hey, good afternoon and thank you for taking the question. I just want to understand the dynamics in the direct-to-consumer rental channel. I believe you're having like sequential success with the direct-to-product prescriber sales force. But at the same token, reimbursement is relatively capped in -- and your -- the price of the POCs are kind of moving higher. How do you kind of reconcile those two factors and decide between which one you're going to prioritize with the direct-to-consumer rental versus the sale?

Yes. So Matt, thank you for the question. So let me start with the fact that we have prioritized both channels from a supply perspective. So let me get that out of the way. Today, the production goes primarily to these two channels. And then as we talked in our prepared remarks, the remainder goes to Europe because of the EU MDR as well as the margins and then the rest to B2B. So let me go to the DTC question that you asked just now. So for us, that is a channel that is the basis of some of the performance that we have. And we're working on making sure that we continue to support it, but we're working on increasing productivity and efficiency so we can drive higher growth rates within the channel and make sure that we are optimizing the cost of that growth for us. Now with that said, a lot of the growth will come also from the prescriber channel because we're going there, where people are actually diagnosed and prescribed. So you get at that point in time, 36 months of billable per patient, which is a different profile from a financial perspective. And we have demonstrated in the recent year that we are able to continue to work on the margins of both businesses. They're almost equal and they will actually continue to get improved with the productivity and the efficiency. So again, we're not taking our eye off the DTC. On the contrary, we're continuing to refine that. But we are also putting a lot of effort behind the prescriber channel because there is growth that sits out there that we were not participating in. And it's time for us to actually be able to participate and get our fair share of that growth.

Okay. Sounds like you take a long-term view of that area. Do you have visibility to like increased supply in 3Q and 4Q at this point? I asked the question because your second quarter sales, at least where you're putting them to, are definitely much better than where the last two quarters have been. Can you maintain that level of sales in 3Q and 4Q based upon your level of visibility at this point?

Thank you, Matt. So let me maybe just go back and reflect on how we managed 2021 and the first quarter of 2022. Those challenges that have been there all along did not prevent us from actually being very industrious in terms of how we found ways to be able to get that supply to meet most of the demand that's there. We're not meeting all of the demand. Now it's a little bit difficult for us to continue to -- because there are two new variables that are on the table. Of course, the Russia-Ukraine war as well as the shutdown in China. With that said, we are very focused on -- and we've listed the three things. I'm going to start with open channel and the open market, the regular channel and the board redesign, hoping that we would be able to continue to block and tackle like we did on a weekly basis. This is not something that we're managing in the long-term. This is daily and weekly meetings that help us get to what we need to do in terms of meeting the demand. But there is a risk that's on the table because there are the two variables I just mentioned that we still haven't really learned how they're going to materialize in terms of is it going to be very different than 2021 or is it going to be similar? We've managed for; call it, six quarters with the supply shortages. And we hope that our efforts will continue to help us manage moving forward. But we'll see. We need to wait and see a little bit on the two new variables.

Just last question for me. I think you're making a lot of investments. You're dealing with a ton of supply chain issues. But you have -- there's a ton of demand out there. The last piece would be the balance sheet remaining intact. As you go through the next couple of quarters, do you still walkout with a couple of hundred million dollars of cash? And how closely are you watching that at this point?

Yes. So I'm going to maybe make a couple of comments without quantifying things. So the one -- we actually pre-bought some of what we need in 2022 already. So that already has eaten into the cash balance that we have. I'm not going to quantify how much of it and what's remaining. But we're in a good position, in my mind, with the cash that sits on the balance sheet to do three things. One is continue to run the business despite the increased costs. The other one is invest like we had promised in the beginning to build a stronger company and then payoff these investments in the next year or so moving forward. And then, thirdly, we remain open to potentially grow through inorganic means. We believe that the cash balance we have will allow us to balance and manage these three things at the same time. So the answer is we feel very comfortable with the cash balance we will have on hand.

Thank you. [Operator Instructions]. The next question comes from Mike Matson from Needham & Company. Please go ahead, Mike.

Yes, thanks. So I wanted to make sure I'm understanding the situation with the EU MDR. So just from a modeling perspective, what should we be assuming for the International B2B business over the next couple of quarters until you get the MDR in place? I mean is it going to drop significantly in that timeframe or --?

Yes, hey Matt, it's Nabil. Thank you for the question. I think you guys could look comparatively to the quarter and say, okay, definitely, there was a push on our side within the allowed MDD legislation to be able to sell products into the European market ahead of time to meet the demand that existed in our system with the orders that were backlog. Now part of it is, of course, to satisfy the market need while we actually are beyond the certificate expiry, which is May 18. We believe that from the current feedback that we have from the bodies that are reviewing this, including BSI, is we'll be able to dovetail that supply of the market with the renewal of the MDR certificates on the back half in Q4 of 2022. So there is an increase in sales. Of course, there's going to be a little bit of a dip because of the push. But then we have to pick it up in the balance of the year once we get the certification that we need from an MDR perspective.

Okay. Got it. And then I assume if the demand there is -- I shouldn't say demand. But if your sales there are lower because of this issue, then you can funnel some of those POCs into the domestic B2B channel because you've kind of been starving that portion of your business in that timeframe?

Yes, Mike, I think that's fair to say. Also, we indicated in the prepared remarks that we started now in May, in the first week of May, to ship product into the domestic B2B channel. The intent is to remediate some of the pressure that this channel has actually taken in terms of the prioritization. And we'll see, depending on supply, how we can balance all the channels that we have. But definitely, part of it is going to go to the B2B U.S. channel, depending on supply levels that we have. We've already started shipping in May.

Okay. And then my final question is just on your new product pipeline. I know you're probably not going to talk about like what's in the pipeline or the timing. But I guess what I'm wondering is have the supply chain issues had any sort of impact on your ability to develop and the timing of any future product launches like new POCs or anything like that? Has it caused delays there that caused you to be launching them maybe later than you otherwise would have?

Yes. So maybe I'll characterize it in a two-part answer. What's in the pipeline is relatively closer to new and improved, which have the same variables in terms of supply and the chips that are required, the chipsets that go on the motherboard. So you can say you're dealing with an equal level of either challenges and/or the mitigations that we're running. In terms of future products, one of the things that we're thinking about is -- and we're working actively on through outside partners is how do you lead forward in your motherboard designs for products that are either existing or future products that take into consideration where the investments are going from the foundries basically. Because, of course, you know all the people that part of the challenges we face is the lower margin -- low-power chips were the ones that were under the most constrained supply. It's because they never actually prioritize them and they were going towards the more complex. So the balancing game moving forward in new product development is to work with third-parties outside that are experts in terms of the technology roadmap from these chipset manufacturers for us to really factor that into our design efforts also. So eventually, we don't have to go through the same issue that we suffered within the last year or so.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Nabil Shabshab for closing remarks. Thank you.

Thank you. Thank you for the question, guys. While in the short-term, our outlook is impacted by certain supply constraints, we are proud of our pricing execution to mitigate most of the margin pressures while continuing to meet demand as a result of the focused efforts by our manufacturing and commercial teams. I'm also pleased with the progress we are making in terms of structural improvements in our business, including a management team that is focused on new sources of growth, including commercial execution, rebuilding our innovation pipeline and investing in market development efforts. I remain confident in our ability to advance Inogen to a global market leader with innovative, evidence-based chronic respiratory care solutions with long-term sustainable revenue growth and profitability. As I conclude, I would like to thank our investors for your support and your interest in Inogen and thank the Inogen employees for their continued dedication and hard work that has allowed us to continue to serve patients with oxygen therapy needs in the U.S. and abroad. Thank you so much, and have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Okay. Thank you.