Inogen, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited. Unless stated otherwise, amounts are in millions of dollars. Inogen develops, manufactures, sells and rents portable oxygen concentrators.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales revenue | $29.2 | $19.4 | $84.7 | $54.7 |
| Rental revenue | $11.5 | $10.0 | $33.9 | $28.7 |
| Total revenue | $40.8 | $29.4 | $118.6 | $83.4 |
| Gross profit / margin | $19.4 / 47.5% | $14.6 / 49.8% | $56.2 / 47.4% | $41.7 / 50.0% |
| Operating income | $3.7 | $3.6 | $11.6 | $9.1 |
| Net income | $2.7 | $2.1 | $7.7 | $5.3 |
| Diluted EPS | $0.13 | $0.11 | $0.37 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $8.2 | $7.2 | $24.2 | $19.0 |
Revenue growth reflected higher system sales and a larger rental patient base. Q3 systems sold rose to 14,700 from 8,800; nine-month sales were 42,100 versus 24,300. Rental patients reached 32,400 at September 30, up from 26,800 a year earlier. Medicare represented 21.1% of nine-month total revenue and 74.0% of rental revenue.
Gross margin declined year over year: nine-month sales margin fell to 45.1% from 48.2%, while rental margin was 53.2% versus 53.4%. Management cited sales mix, lower average selling prices, currency headwinds, rental revenue adjustments and repair costs. Operating expenses rose, including sales and marketing to $22.6 million from $17.7 million and general and administrative to $19.1 million from $12.7 million. G&A included $1.8 million of audit committee investigation and related class-action legal costs.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $25.6 million, compared with $11.4 million in 2014. Investing cash outflow was $28.8 million, including net purchases of short-term investments and spending on rental equipment; financing cash inflow was $1.5 million.
- Cash and cash equivalents were $55.1 million and short-term investments were $19.0 million at September 30. Net working capital was $91.6 million. Cash and cash equivalents were $56.8 million at December 31, 2014.
- Debt outstanding was approximately $0.4 million, primarily patent-related obligations. The company also had a $15.0 million revolving credit facility available and reported no revolver borrowings. It was in compliance with financial covenants: trailing-four-quarter EBITDA of $29.3 million versus a $10.0 million minimum and tangible net worth of $129.7 million versus a $90.0 million minimum.
- Management said available liquidity, the credit facility and expected operating cash generation should be sufficient for projected needs for at least 12 months, while cautioning that assumptions could prove incorrect.
Changes, outlook and key risks
- Management expected an upgraded Inogen One G3 by year-end 2015 and the Inogen One G4 in Q2 2016, subject to development and launch execution. It expected continued increases in R&D, sales and marketing, and G&A spending.
- Management estimated CMS reimbursement changes could reduce 2016 total revenue by approximately 2.5%–3.5%; the estimated impact reflects phased implementation and rates reduced by an average 35%–40% in affected areas. This is an estimate, not formal earnings guidance.
- Competitive bidding, Medicare and private-payor reimbursement, capped rental periods, claims audits and collection adjustments are material business risks. Capped patients were approximately 15.0% of rental patients, up from 13.7%; the filing reports no revenue recognized for these capped patients.
- Sales and rental revenue depend on reimbursement estimates and documentation. Accounts receivable were $20.9 million, including $5.7 million of earned but unbilled receivables; the allowance for receivables was $7.1 million. Estimates for collection, returns, rental adjustments and lifetime warranties could affect reported results.
- Disclosure controls were deemed ineffective as of September 30, 2015 because a previously identified material weakness in review of sales-order documentation supporting direct-to-consumer sales and rentals had not been fully remediated or tested.
- A securities class action filed in 2015 was voluntarily dismissed and the case closed in June 2015. A new patent, trade-secret and contract lawsuit was filed by Separation Design Group IP Holdings on October 23, 2015; damages are unspecified and the company said it would contest the claims. The Inova Labs patent case remained stayed pending reexamination.
- Other exposures include reliance on a limited number of suppliers for key components, foreign-currency movements, product liability and warranty costs, healthcare regulation, and competition. The company reported $5.1 million in purchase obligations and $5.3 million in future minimum lease payments.
Most important facts for investors to verify
- Whether the revenue-documentation material weakness is effectively remediated and disclosure controls become effective.
- Actual CMS reimbursement impact in 2016, competitive-bidding outcomes and the effect on rental economics and revenue.
- Whether rapid sales growth can be sustained without further erosion in selling prices and gross margins.
- Receivables quality, rental revenue adjustments, unbilled balances and the trend in capped rental patients.
- Progress and commercial performance of the upgraded G3 and planned G4 launch.
- Developments in the SDGIP and Inova Labs litigation and any resulting financial or operating consequences.