Inogen, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unless otherwise noted, financial amounts below are in millions of dollars; the filing reports amounts in thousands. Inogen develops, manufactures, and markets portable oxygen concentrators and rents oxygen equipment. It acquired Physio-Assist in September 2023, adding its Simeox airway-clearance device business.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $84.0 | $105.4 | $239.8 | $289.2 |
| Gross profit | $33.8 | $42.8 | $98.5 | $124.1 |
| Gross margin | 40.2% | 40.6% | 41.1% | 42.9% |
| Operating loss | $(46.7) | $(10.3) | $(80.4) | $(26.8) |
| Net loss | $(45.7) | $(9.5) | $(75.9) | $(27.2) |
| Loss per diluted share | $(1.97) | $(0.42) | $(3.28) | $(1.19) |
- Revenue mix: Q3 sales revenue was $68.0 million, down 25.0%; rental revenue was $16.0 million, up 8.7%. For nine months, sales revenue fell 22.3% to $192.2 million while rental revenue rose 13.8% to $47.6 million.
- Margins: Sales gross margin was 37.2% in Q3 versus 38.4% a year earlier; rental gross margin was 53.1% versus 54.5%. Nine-month sales and rental margins were 38.2% and 52.6%, respectively, compared with 41.0% and 54.4%.
- Operating expenses: Q3 included a $32.9 million goodwill impairment. Nine-month operating expenses were $178.9 million, including that impairment, versus $150.8 million in 2022. Adjusted EBITDA, a non-GAAP measure, was a loss of $5.5 million in Q3 and $20.4 million for nine months.
- Cash flow: Operating cash use was $0.1 million for the first nine months, compared with $22.1 million used in 2022. Investing cash use was $63.4 million, including $29.6 million net for the acquisition, $20.2 million for rental equipment and property/equipment, and $13.3 million net purchases of marketable securities. Cash declined $62.4 million to $124.6 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $124.6 million and marketable securities were $13.4 million; net working capital was $164.9 million. The balance sheet reports no outstanding borrowing balance; most acquired Physio-Assist bank loans were settled before quarter-end. Lease liabilities totaled $22.8 million.
Material changes and notable items
- Oxygen system sales volume fell 34.7% in Q3 to approximately 35,400 units and 24.1% for nine months to approximately 96,400. Management attributed the decline mainly to lower domestic business-to-business demand and lower direct-to-consumer volume, including reduced sales staffing and marketing spend. Q3 international business-to-business sales increased, partly reflecting comparison with the prior-year European certificate disruption.
- The Q3 goodwill impairment followed a sustained decline in the stock price that brought market capitalization below book equity. The charge reduced goodwill from $32.9 million at year-end 2022 to $9.9 million, including goodwill recorded for Physio-Assist.
- Physio-Assist was acquired for $32.3 million cash plus a $3.2 million estimated earnout liability. A potential cash earnout of up to $13.0 million depends on U.S. FDA clearance or authorization of Simeox within four years. The acquisition added $34.1 million of identifiable intangible assets, primarily developed technology.
- Product warranty liabilities increased to $22.4 million from $19.9 million at year-end 2022. Outstanding purchase orders due within one year were approximately $114.9 million.
Outlook, management commentary, and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expects existing cash, securities, and anticipated cash generated from sales and rentals to cover projected operating and investing needs for at least the next 12 months, while cautioning that actual liquidity needs could exceed expectations.
- Management expects rental revenue to grow through additional rental patients, expanded sales efforts, insurance contracts, and higher Medicare reimbursement rates through December 31, 2023. Rental revenue remains exposed to reimbursement levels, billable-patient mix, denials, capped rental periods, and revenue adjustments.
- Higher semiconductor and other component costs pressured sales margins; management expected chip-related cost premiums to affect cost of sales into the first half of 2024. Inflation, hiring and retention challenges, supply-chain disruption, and customer credit and capital constraints may weigh on demand or costs.
- Inogen launched the Rove 6 in the U.S. in July 2023 following FDA clearance, and planned a late-2023 launch of the Rove 4 following clearance. It plans to market Simeox in existing regions and pursue U.S. regulatory approval; timing and success are uncertain.
- Cost-reduction initiatives included targeted workforce reductions, manufacturing centralization, and outsourcing certain back-office activities. Restructuring charges were $3.4 million for nine months.
- Other risks include dependence on Medicare and other payors, customer and supplier concentration, foreign currency exposure, and executive turnover. The CEO was temporarily overseeing commercial and marketing teams after the Chief Commercial Officer’s departure; a new CFO began in September. The filing also notes pending securities class-action and related derivative litigation. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether sales volumes and sales-channel demand recover, and whether lower direct-to-consumer staffing and marketing improve profitability without further suppressing revenue.
- Whether sales and rental gross margins stabilize despite channel mix, pricing pressure, service costs, and semiconductor premiums.
- Whether operating cash flow remains near breakeven and the stated 12-month liquidity outlook holds after acquisition, rental-fleet investment, and purchase commitments.
- Whether the Physio-Assist integration and Simeox U.S. regulatory pathway achieve the expected commercial and acquisition milestones, including any earnout obligations.
- Whether restructuring, leadership transitions, warranty costs, and pending litigation create additional expenses or disrupt execution.