Inogen, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Inogen develops, manufactures, sells, and rents portable oxygen concentrators and related respiratory products. Unless otherwise noted, amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $105.4 | $93.1 | $289.2 | $281.6 |
| Gross profit | $42.8 | $47.7 | $124.1 | $137.9 |
| Gross margin | 40.6% | 51.2% | 42.9% | 49.0% |
| Operating income (loss) | $(10.3) | $6.4 | $(26.8) | $15.9 |
| Net income (loss) | $(9.5) | $12.2 | $(27.2) | $16.5 |
| Diluted EPS | $(0.42) | $0.53 | $(1.19) | $0.73 |
- Q3 revenue mix: Sales revenue was $90.7 million, up 12.0%; rental revenue was $14.7 million, up 21.3%. Domestic business-to-business sales rose 86.7%, while international business-to-business sales fell 30.9% and domestic direct-to-consumer sales fell 9.1%.
- Nine-month revenue mix: Sales revenue was $247.4 million, down 0.4%; rental revenue was $41.8 million, up 25.7%. The company sold approximately 127,000 systems, versus 146,400 in the prior-year period.
- Margins and costs: Q3 sales gross margin declined to 38.4% from 50.1%; rental gross margin declined to 54.5% from 58.9%. Nine-month sales and rental gross margins were 41.0% and 54.4%, respectively, down from 47.8% and 57.7%. Management cited semiconductor costs, warranty and labor costs, manufacturing under-absorption, and sales-channel mix. Open-market semiconductor purchases added $6.6 million of material costs in Q3 and $18.1 million year to date.
- Expenses: Q3 operating expenses were $53.1 million, up from $41.3 million; nine-month expenses were $150.8 million, up from $122.0 million. Increases included sales and marketing investment, personnel costs, R&D, and a smaller benefit from changes in the New Aera earnout liability’s fair value.
- Cash flow: Nine-month operating cash use was $22.1 million, compared with $17.1 million provided in 2021. Investing used $3.9 million and financing provided $0.5 million. Cash and cash equivalents declined $25.9 million to $209.6 million; capital expenditures and rental-equipment investment totaled approximately $14.1 million.
- Liquidity and obligations: Current assets were $317.8 million and current liabilities $65.7 million. The company reported no borrowings; it had $24.1 million of operating lease liabilities and a $14.3 million earnout liability. Equity was $350.8 million. Outstanding supplier purchase orders were approximately $141.7 million, generally due within one year.
Material changes versus the prior comparable period
- Q3 revenue increased 13.2%, supported by domestic business-to-business sales and rental growth, but gross profit fell 10.3% and the company swung to a net loss.
- For the first nine months, revenue increased 2.7%, but gross profit fell 10.0% and the company swung from net income to a $27.2 million net loss. Sales-system volume fell 13.3%, reflecting supply constraints, the early-2022 production interruption, and European regulatory delays.
- Cash from operations deteriorated by $39.2 million year over year. Accounts receivable rose to $50.5 million from $24.5 million at year-end 2021, while cash declined from $235.5 million.
Outlook, risks, and unusual items
- Management said current cash and expected sales and rental receipts should fund projected operating and investing needs for at least 12 months, while cautioning that assumptions may prove incorrect. No numerical revenue or earnings guidance is provided.
- Management expected semiconductor shortages, elevated component costs, and potential supply constraints to persist through the remainder of 2022 and into 2023, with possible future production slowdowns. Manufacturing at company facilities and its Czech contract manufacturer was suspended in January and restarted in February 2022.
- EU Medical Device Regulation approval remained pending. Existing EU/UK certificates expired May 18, 2022; limited country derogations were obtained, and management expected EU sales to be negatively affected until required certification was secured. Q3 international business-to-business sales reflected this disruption.
- Management anticipated fulfilling most outstanding domestic business-to-business orders by year-end 2022 and a return to normalized demand in the first half of 2023. It also expected rental revenue to grow as patient setups and sales capacity expand; rental growth remains exposed to reimbursement, billing, and patient-service factors.
- On June 21, 2022, the company received a U.S. Attorney’s Office civil investigative demand in a False Claims Act investigation concerning alleged kickbacks in the portable oxygen concentrator sector. The inquiry relates to customer financing arrangements and a customer agreement involving marketing, exclusivity, discounts, and financing terms. Inogen is cooperating and cannot predict the outcome or whether litigation will follow.
- Medicare represented 77.8% of rental revenue for the nine-month period. The filing highlights risks from reimbursement changes, Medicare sequestration, possible future competitive bidding, and changes to oxygen-coverage administration. Three suppliers accounted for 55.6% of raw-material purchases in the period, and the company relies on single- or limited-source suppliers for key components.
- The company recorded a valuation allowance against deferred tax assets. It also reported a $1.7 million year-to-date reduction in the earnout liability’s fair value; this noncash benefit partly offset operating expenses. Disclosure controls were assessed as effective as of September 30, 2022.
Most important facts for investors to verify
- Progress and timing of EU MDR certification, country derogations, and the resulting effect on international sales.
- Semiconductor and other component availability, open-market sourcing costs, production continuity, and recovery of domestic business-to-business shipments.
- Whether weaker sales margins and operating cash flow improve, including the effects of warranty costs, channel mix, receivables, and inventory.
- Rental-patient growth, Medicare reimbursement and sequestration changes, and the implementation of revised oxygen coverage requirements.
- Developments, potential financial exposure, and any related litigation from the False Claims Act investigation.
- Ability to meet supplier commitments and fund operations while maintaining the stated liquidity outlook.