Inogen, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are to Q1 2019 unless otherwise noted. Inogen develops, manufactures, sells, and rents portable oxygen concentrators and related respiratory products. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $88.5 | $90.2; down 1.9% |
| Sales revenue | $83.1 | $84.8; down 2.0% |
| Rental revenue | $5.3 | $5.4; down 0.7% |
| Gross profit / gross margin | $38.4 / 43.4% | $44.4 / 49.2% |
| Operating income (loss) | ($2.2) | $4.9 |
| Net income (loss) / diluted EPS | ($1.6) / ($0.07) | $5.3 / $0.24 |
| Adjusted EBITDA (non-GAAP) | $4.1 | $11.1 |
| Operating cash flow | $0.5 | ($1.8) |
| Cash and cash equivalents at quarter-end | $208.4 | $198.0 at Dec. 31, 2019 |
Sales gross margin fell to 43.3% from 50.4%, reflecting higher labor and overhead costs, lower average selling prices, and a greater business-to-business sales mix. Rental gross margin improved to 43.8% from 30.8%, primarily on higher rental revenue per patient and lower depreciation and servicing costs. The company reported total liabilities of $111.8 million and stockholders’ equity of $347.3 million at quarter-end. No interest-bearing debt is reported in the balance sheet; lease liabilities totaled $11.0 million. Working capital was $247.1 million. Management stated that cash, cash equivalents, and expected operating cash generation should fund projected operating and investing needs for at least 12 months.
Cash increased $10.3 million during the quarter. Investing cash flow was $8.9 million, primarily reflecting $11.1 million of marketable-security maturities, partly offset by $2.2 million of purchases of rental equipment and other property and equipment. The company had approximately $61.4 million of outstanding supplier purchase orders at March 31.
Material changes and operating developments
- System sales volume rose about 6% to 53,400 units, but sales revenue declined. Domestic business-to-business sales increased 5.7% to $27.6 million, while domestic direct-to-consumer sales fell 8.9% to $35.5 million. Inogen attributed the overall revenue decline principally to weaker direct-to-consumer sales.
- Rental patients on service fell 6.1% year over year to approximately 24,600. Rental revenue was nearly flat, as higher reimbursement rates partly offset fewer patients.
- Inogen One G5 accounted for more than 60% of domestic portable concentrator units sold. The company cited early-quarter availability constraints and higher unit costs for the product.
- Research and development expense more than doubled to $3.6 million, primarily due to approximately $1.9 million of New Aera intangible amortization. New Aera, acquired in August 2019, added portable non-invasive ventilation technology.
- Cash and cash equivalents rose from $198.0 million at year-end; marketable securities declined from $11.1 million to zero, principally due to maturities.
Outlook, commentary, and key risks
- COVID-19: Management said the pandemic had no material net impact on Q1 results, but late-quarter effects included higher business-to-business demand and lower direct-to-consumer sales. The company reduced planned hiring and advertising spend, increased rental setups to improve lead utilization, and warned that demand, referrals, supply, production, and shipping could remain volatile.
- Outlook: Inogen expected rental revenue to increase modestly in 2020, supported by rental-team expansion and higher reimbursement rates. It provided no quantified full-year revenue or earnings guidance. Management cautioned that planned sales and marketing expansion, normal seasonal sales patterns, and international regulatory timing could be disrupted.
- Reimbursement and bidding: Medicare’s Round 2021 competitive-bidding results and pricing were pending. The company estimated that E1392 reimbursement could fall about 42%, potentially reducing combined E1390/E1392 rates by about 15%. Temporary COVID-19 reimbursement increases and documentation waivers may benefit rentals while in effect.
- TAV reimbursement: Medicare coding for New Aera’s Tidal Assist Ventilator was unresolved after an appeal was denied in January 2020; further appeal options were being pursued. Without revised coding, provider adoption and direct rentals could be constrained. The company also cited limited supply of compatible stationary concentrators.
- Supply and concentration: Inogen relies on single- or limited-source suppliers for key components and reported prior G5 component shortages. Three vendors accounted for 23.6%, 15.2%, and 9.4% of Q1 raw-material purchases. One customer exceeded 10% of Q1 revenue; two customers represented significant portions of net receivables.
- Legal matters: Breathe Technologies asserted patent, inventorship, contract, and related claims; the patent infringement claims were refiled in a separate California action, and both cases were stayed through June 2020. A securities class action and multiple shareholder derivative suits were also pending. The filing does not provide a clear estimate of potential loss.
- Other exposures: Risks include Medicare and private-payor rate changes, customer credit and collections, foreign exchange, competition, product quality and warranty costs, and pandemic-related disruption. Warranty liabilities were $13.6 million; the company recorded no Q1 impairment of goodwill, rental equipment, or intangible assets.
Important facts for investors to verify
- Whether Q1’s lower direct-to-consumer sales and sales gross margin persist, and whether reported unit growth converts to revenue and profitability.
- Subsequent Medicare Round 2021 contract and reimbursement announcements, including the impact on E1392 and rental economics.
- Progress on TAV coding and reimbursement appeals, compatible-device supply, and commercial adoption.
- COVID-19 effects on sales channels, physician referrals, manufacturing, supplier availability, and the company’s stated 12-month liquidity outlook.
- Developments in the intellectual-property, securities, and derivative litigation, including any quantified exposure or material change.