Inogen, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; financial amounts below are in U.S. dollars. The company develops, manufactures, sells and rents portable oxygen concentrators and related respiratory products. New Aera, acquired in August 2019, added portable ventilator technology.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $71.7 million | $101.1 million | $160.2 million | $191.3 million |
| Sales revenue | $65.6 million | $95.9 million | $148.8 million | $180.7 million |
| Rental revenue | $6.1 million | $5.2 million | $11.4 million | $10.6 million |
| Gross profit / margin | $32.7 million / 45.7% | $50.2 million / 49.7% | $71.1 million / 44.4% | $94.6 million / 49.5% |
| Operating income (loss) | ($2.4 million) | $12.1 million | ($4.5 million) | $17.0 million |
| Net income | $2.6 million | $10.2 million | $1.0 million | $15.5 million |
| Diluted EPS | $0.12 | $0.45 | $0.04 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $10.0 million | $16.8 million | $14.1 million | $27.9 million |
| Operating cash flow | Not presented quarterly | $14.1 million | $16.6 million |
Sales gross margin was 45.0% in Q2 and 44.1% for the first half, down from 50.7% and 50.6%, respectively. Rental gross margin improved to 53.0% in Q2 and 48.7% for the first half. Lower sales volume, lower average selling prices, sales mix and manufacturing inefficiencies weighed on sales margins; higher rental revenue per patient and lower rental depreciation and service costs supported rental margins.
Liquidity, cash flow and obligations
- At June 30, cash and cash equivalents were $214.1 million, marketable securities $4.5 million, current assets $302.8 million and current liabilities $50.6 million. Working capital was $252.2 million, versus $242.0 million at year-end 2019.
- Cash increased $16.0 million during the first half. Operating cash flow was $14.1 million; investing activities provided $0.9 million, including net marketable-security maturities; financing activities provided $1.0 million.
- No borrowings or conventional debt balance are reported in the presented balance sheet. Reported liabilities include $10.5 million of operating lease liabilities and a $26.5 million New Aera earnout liability.
- Purchase orders with vendors and suppliers totaled approximately $68.2 million. Future minimum payments of $21.5 million relate to headquarters and Texas leases not yet commenced, expected to begin in 2021.
Changes and management commentary
- Q2 revenue fell 29.1% year over year; first-half revenue fell 16.3%. Sales declined across direct-to-consumer and domestic and international business-to-business channels. Systems sold fell 24.8% in Q2 and 10.3% for the first half.
- Management attributed the decline chiefly to COVID-19 disruption: reduced consumer mobility and confidence, fewer physician interactions and referrals, HME providers shifting purchases toward stationary concentrators, closures of European respiratory assessment centers and delayed tenders. First-half sales were also affected by Inogen One G5 supply constraints in Q1.
- Rental revenue rose 16.9% in Q2 and 8.0% in the first half, supported by more patients on service, higher Medicare reimbursement rates and increased billable patients. The company reported about 26,400 oxygen rental patients at June 30, 2020, up 1.9% year over year.
- Q2 net income included $5.6 million of CARES Act Provider Relief Fund income for COVID-19-related lost revenue, plus a $0.6 million benefit in general and administrative expense for related costs. The company received $6.2 million in total grant funds. Thus, reported profit included material relief-fund benefits while operations generated a loss.
- The company reduced advertising, slowed sales hiring and increased rental setups to improve lead utilization and conserve cash. It suspended its 401(k) match effective July 1, 2020. Management said cash and expected operating cash generation should meet operating and investing needs for at least 12 months, while cautioning that assumptions could prove incorrect.
- No specific numerical revenue or earnings guidance is provided. Management expects rental revenue to grow with additional rental setups and higher reimbursement, but says COVID-19, sales hiring, marketing efficiency, reimbursement changes and competitive bidding may affect results.
Risks, contingencies and unusual items
- COVID-19: Further disruption could reduce demand, constrain suppliers or production, delay product development and regulatory clearances, and prolong weaker consumer and physician engagement. The company said it had broadly maintained operations through the first half.
- Medicare reimbursement: Competitive bidding Round 2021 was expected to begin January 1, 2021, with contracts and pricing expected to be announced in 2020. Inogen estimated that E1392 reimbursement could decline about 42%, potentially reducing combined E1390 and E1392 rates by about 15%; actual pricing was uncertain. Temporary COVID-19 reimbursement relief and waivers may expire or change.
- New Aera/TAV: CMS denied the company’s appeal for E0466 coding for the Tidal Assist Ventilator, and further appeal efforts were underway. Coding and coverage uncertainty could constrain adoption and rental opportunities.
- Litigation: In the Breathe Technologies patent and related claims, Inogen recorded a $6.0 million contingent liability in Q2 and an offsetting receivable from the New Aera acquisition escrow account. A securities class action and related derivative cases remained pending or stayed; the company said it would defend them.
- Concentration and supply: One customer accounted for more than 10% of first-half revenue; two customers each exceeded 10% of net receivables at June 30. Three vendors represented 21.4%, 10.6% and 10.4% of first-half raw-material purchases. Certain components are single-source, and the filing describes prior G5 supply issues.
- The company reported no material impact from adoption of the accounting standards noted in the filing and no goodwill or intangible-asset impairment through June 30, 2020.
Most important facts for investors to verify
- Whether demand and sales-channel trends recover as COVID-19 restrictions, physician access and consumer confidence change—and whether margins improve as volumes normalize.
- Final Round 2021 contract awards and reimbursement rates, including any effect on oxygen rental economics and patient access.
- Progress and resolution of TAV reimbursement coding and coverage, and whether the product can scale commercially.
- Whether cash generation remains resilient after the relief-fund benefit, and how the $68.2 million of purchase orders and future lease commitments affect liquidity.
- Developments in the Breathe litigation, the securities class action and related derivative cases, including potential exposure beyond amounts recorded.
- Customer receivable concentration, credit-insurance coverage, and continuity of single-source and contract-manufacturer supply.