Inogen, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 12, 2014. Inogen develops, manufactures, sells, and rents portable oxygen concentrators and related products for long-term oxygen therapy.
Financial performance
Amounts below are in millions of dollars except per-share data, patient counts, and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales revenue | $19.425 | $12.134 | $54.746 | $33.780 |
| Rental revenue | $9.968 | $7.643 | $28.673 | $21.901 |
| Total revenue | $29.393 | $19.777 | $83.419 | $55.681 |
| Gross profit / margin | $14.649 / 49.8% | $9.642 / 48.8% | $41.701 / 50.0% | $28.816 / 51.8% |
| Operating income | $3.567 | $0.886 | $9.079 | $3.911 |
| Net income | $2.133 | $0.774 | $5.307 | $3.464 |
| Adjusted EBITDA (non-GAAP) | $7.218 | $3.293 | $18.993 | $10.231 |
- Revenue increased 48.6% in Q3 and 49.8% year to date. Management attributed growth to higher system sales, increased direct-to-consumer marketing and business-to-business demand, and a larger rental patient base.
- Q3 sales gross margin improved to 47.8% from 44.4%; rental gross margin declined to 53.9% from 55.7%. For the nine-month period, sales gross margin rose to 48.2% from 45.5%, while rental gross margin fell to 53.4% from 61.4%, mainly reflecting Medicare reimbursement reductions and higher rental costs.
- Sales were approximately 8,800 systems in Q3 versus 5,300 a year earlier, and 24,300 year to date versus 14,400. Rental patients reached approximately 26,800, up from 19,200.
- Basic/diluted EPS was $0.12/$0.11 in Q3 and $0.24/$0.22 for nine months. Prior-year reported common-stockholder losses included deemed dividends on preferred stock; the IPO conversion eliminated that preferred-stock effect.
Cash flow, balance sheet, and financing
- At September 30, cash and cash equivalents were $56.160 million, versus $13.521 million at December 31, 2013. Current assets were $89.315 million and current liabilities $20.475 million.
- Nine-month operating cash flow was $11.368 million (prior year $11.478 million); investing cash outflow was $11.376 million (prior year $14.497 million); financing cash inflow was $42.647 million (prior year $4.966 million). Financing included IPO proceeds and debt repayments.
- The company paid off its Comerica term-loan balances and accrued interest, totaling $11.6 million, on August 22. Remaining reported debt at quarter-end was $0.658 million, primarily a patent-related contractual obligation; $0.267 million was current.
- February’s IPO raised approximately $49.7 million net of underwriting discounts and offering expenses, and preferred shares converted into common stock. Stockholders’ equity was $113.906 million at quarter-end; accumulated deficit was $58.212 million.
- In November, Inogen entered a three-year $15 million revolving credit facility with JPMorgan Chase, priced at LIBOR plus 1.25%, replacing the prior facility. The filing states management expected available cash, borrowings, and operating cash generation to cover projected needs for at least 12 months.
Changes, outlook, and risks
- Growth in domestic direct-to-consumer and business-to-business sales, plus international sales, was partly offset in rentals by competitive-bidding reimbursement cuts. Medicare programs represented 25.6% of nine-month total revenue, down from 28.8% a year earlier; they accounted for 74.3% of rental revenue.
- Management estimated the CMS pricing changes for previously unbid areas could reduce 2016 revenue by approximately 3%–4%. The company was monitoring implementation and the next competitive-bidding re-compete. No specific full-year 2014 revenue or earnings guidance is provided.
- Management expected sales and marketing costs to rise further in 2015 and administrative costs to continue increasing as the business grows and bears public-company costs. Research and development investment was also expected to continue.
- Significant risks include Medicare and other payor reimbursement changes, billing delays and audits, dependence on a limited number of component suppliers, competition, product liability and regulatory compliance. Three vendors accounted for 18.8%, 17.8%, and 8.0% of nine-month raw-material purchases.
- The company’s patent-infringement case against Inova Labs remained stayed pending patent reexaminations; management said it did not expect ordinary-course legal proceedings to have a material adverse effect. The filing also describes healthcare fraud-and-abuse, HIPAA, FDA, and product-recall risks.
- On November 4, selling stockholders sold 2,415,891 shares at $21.50 per share; Inogen received no proceeds and expected approximately $0.5 million in offering costs in Q4. This was a secondary offering, not a company share issuance.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether rental-revenue growth and patient additions can offset lower reimbursement rates and weaker rental margins.
- Cash conversion and receivable quality: accounts receivable rose to $18.061 million from $10.231 million, and the filing cites slower rental-receivable collections.
- Actual CMS implementation and the company’s exposure to competitive bidding, Medicare rental caps, and payor audits.
- Terms, covenant compliance, and availability under the new $15 million revolving facility; the filing describes tangible-net-worth and EBITDA requirements.
- Future warranty, rental-asset depreciation, and product-return costs, as well as any developments in the stayed Inova Labs litigation.