Inogen, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013. Inogen develops, manufactures, sells and rents portable oxygen concentrators. The quarter included the February 20 IPO and conversion of all preferred stock into common stock.
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages and patient counts.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales revenue | $14.857 | $8.895 |
| Rental revenue | $8.776 | $6.852 |
| Total revenue | $23.633 | $15.747 |
| Gross profit / margin | $11.938 / 50.5% | $8.117 / 51.5% |
| Operating income | $1.549 | $0.633 |
| Net income | $0.888 | $0.730 |
| Net income (loss) attributable to common stockholders, after deemed preferred dividends | $(0.099); $(0.01) per share | $(0.993); $(3.65) per share |
| Operating cash flow | $(1.330) | $2.693 |
| Cash and cash equivalents at period end | $59.550 | $13.521 at Dec. 31, 2013 |
| Total debt at period end | $9.189 | $10.649 at Dec. 31, 2013 |
- Sales gross margin rose to 49.2% from 41.6%; rental gross margin fell to 52.7% from 64.4%, principally due to Medicare competitive-bidding reimbursement cuts.
- Adjusted EBITDA, a non-GAAP measure, was $4.345 million versus $2.527 million. The filing cautions it is not a substitute for GAAP results or cash flow.
- Current assets were $87.450 million and current liabilities $21.916 million at March 31.
Changes and business drivers
- Total revenue increased 50.1% year over year. Sales revenue rose 67.0%, driven by higher direct-to-consumer and business-to-business system sales; rental revenue increased 28.1% as rental patients grew to approximately 23,000 from 15,400.
- Management reported approximately 6,300 systems sold in Q1 2014, versus 3,600 in Q1 2013. Direct-to-consumer sales generally carry higher margins than business-to-business sales.
- Gross margin declined by 1.0 percentage point overall, as lower rental margins more than offset improved sales margins. Total operating expenses increased 38.8% to $10.389 million, including higher sales and marketing and general and administrative costs.
- The effective tax rate was 39.4%, versus 4.1%. The prior-year rate reflected a full valuation allowance; a $21.6 million valuation-allowance release generated a one-time tax benefit in 2013.
Liquidity, outlook and risks
- The IPO raised approximately $49.7 million net of underwriting discounts and offering expenses, substantially increasing cash. Preferred stock conversion also materially changed the balance sheet and common share count.
- Operating cash flow turned negative, principally because receivables increased $10.7 million. Management attributed this to billing delays during implementation of a new medical billing system and expected the trend to reverse in Q2 2014.
- On April 4, 2014, after quarter-end, Inogen drew the remaining $6.0 million available under Term Loan C. The added borrowing is repayable monthly over the remaining 30-month term beginning May 2014.
- Management stated cash, expected operating cash generation and borrowing availability were expected to fund projected operating and investing requirements for at least 12 months. No specific revenue or earnings guidance was provided. Management expected continued investment in rental assets, sales and marketing, and product development; it also anticipated higher public-company costs.
- Key exposures include Medicare and other reimbursement changes, competitive bidding, claims and billing delays or audits, dependence on selected suppliers, competition, product and regulatory compliance, and execution of growth plans. Medicare reimbursement programs represented 21.5% of total revenue in Q1 2014; three major vendors each supplied at least 10% of raw material purchases.
- The patent-infringement case against Inova Labs remained stayed pending patent reexaminations. The company said it did not expect other ordinary-course legal proceedings to have a material impact. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the billing-system delays reversed as expected in Q2, and how quickly the elevated accounts receivable balance converted to cash.
- The effect of further Medicare competitive-bidding and reimbursement changes on rental revenue and margins, including the impact of capped rental periods.
- The post-quarter $6.0 million Term Loan C draw, resulting debt and repayment obligations, and covenant compliance.
- Rental-patient growth, system sales, and the mix and margins of direct-to-consumer, business-to-business and rental revenue.
- The filing reports different IPO proceeds figures depending on the measure: approximately $52.5 million after underwriting discounts but before offering expenses, and approximately $49.7 million net after expenses. Verify the final proceeds and use of funds.
- Potential supplier interruptions, reimbursement audits, warranty exposure and developments in the stayed Inova Labs litigation.