Inogen, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are to the same 2019 periods. Amounts below are in millions of dollars unless stated otherwise. Inogen develops, manufactures, sells and rents portable oxygen concentrators and, following its 2019 New Aera acquisition, is developing its non-invasive ventilation business.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $74.3 | $91.8 | $234.5 | $283.0 |
| Sales revenue | $66.8 | $86.4 | $215.6 | $267.1 |
| Rental revenue | $7.5 | $5.4 | $18.9 | $16.0 |
| Gross profit | $33.0 | $43.3 | $104.1 | $137.9 |
| Operating income (loss) | $(2.0) | $8.1 | $(6.5) | $25.1 |
| Net income (loss) | $(1.7) | $6.9 | $(0.7) | $22.3 |
| Diluted EPS | $(0.08) | $0.31 | $(0.03) | $1.00 |
| Adjusted EBITDA (non-GAAP) | $4.6 | $12.8 | $18.7 | $40.8 |
- Margins: Q3 total gross margin was 44.4%, down from 47.2%; sales gross margin fell to 43.5% from 48.2%, while rental gross margin rose to 52.0% from 31.5%. For nine months, total gross margin was 44.4% versus 48.7%; sales margin was 43.9% versus 49.8%, and rental margin was 50.0% versus 30.9%.
- Cash flow: Nine-month operating cash flow was $20.8 million, down from $31.2 million. Investing used $7.1 million versus $75.5 million, which included the prior-year New Aera acquisition. Financing provided $2.0 million. Cash increased $15.9 million to $214.0 million.
- Liquidity and obligations: At September 30, cash and equivalents were $214.0 million and marketable securities $6.5 million; working capital was $251.4 million. The balance sheet reports no borrowings; reported liabilities include $10.5 million of operating lease liabilities and a $26.4 million New Aera earnout liability. Total liabilities were $107.8 million.
Material changes and management commentary
- Revenue declined 19.0% in Q3 and 17.1% for the nine-month period, primarily from lower direct-to-consumer and domestic and international business-to-business sales amid COVID-19. System sales fell 18.2% in Q3 and 12.9% year to date.
- Rental revenue increased 40.1% in Q3 and 18.8% year to date, supported by more patients on service, higher reimbursement rates, a higher share of billable patients and lower revenue adjustments. Patients on oxygen rental service reached approximately 29,500, up 15.2% year over year in Q3.
- Sales margin pressure reflected lower average selling prices, sales mix and higher material, overhead and manufacturing costs per unit. Rental margin improved with reimbursement and patient-mix benefits and lower depreciation and servicing costs per patient.
- Operating expenses were $35.0 million in Q3, approximately flat year over year; nine-month expenses declined to $110.6 million from $112.8 million. R&D increased, partly due to New Aera intangible amortization; sales and marketing fell with reduced advertising and other costs.
- Inogen received $6.2 million from the CARES Act Provider Relief Fund; it recognized $5.3 million as other income for lost revenue and a $0.9 million benefit to general and administrative expense for eligible COVID-related costs. The nine-month loss before tax was nearly breakeven partly because of this support.
- The Inogen One G5 represented more than 68% of domestic POC units sold in the first nine months. The company reported first-quarter G5 supply constraints and said Q3 manufacturing cost had reached parity with the G3.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management stated that cash and expected product sales and rentals should fund projected operating and investing needs for at least 12 months, while cautioning that assumptions could prove incorrect.
- Management expected minimal sales representative hiring for the remainder of 2020, continued lower marketing spend during the pandemic and greater emphasis on rental setups, lead utilization and productivity. Rental growth is expected to depend on patient additions and reimbursement conditions.
- CMS announced that most competitive-bidding contracts, including oxygen, scheduled for 2021 would not be awarded. A proposed payment rule could reduce reimbursement in some areas after the COVID-19 public health emergency; management expected a final rule in Q1 2021. The temporary 2% Medicare sequestration suspension was scheduled to end December 31, 2020.
- Inogen sued HHS, CMS and Palmetto GBA over the retraction of a favorable reimbursement code for its Tidal Assist Ventilator (TAV). The company said lack of revised coding could limit provider adoption and direct rentals. TAV sales also faced lower retail demand and limited supply of compatible stationary concentrators.
- In a separate intellectual-property dispute involving Breathe Technologies and New Aera, Inogen recorded a $7.0 million contingent liability, with a corresponding receivable from the New Aera acquisition escrow account. Securities class-action and shareholder derivative litigation also remained pending; the company said it would defend itself.
- Other significant exposures include continued COVID-related demand and supply-chain uncertainty, dependence on limited or single-source suppliers, customer and receivable concentration, changing Medicare and private-payor reimbursement, and foreign-exchange risk. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales volumes, direct-to-consumer demand and margins recover as COVID-related restrictions and patient access conditions change.
- Whether the CMS proposed reimbursement rule, sequestration resumption and future bidding decisions alter rental economics.
- The status and potential financial impact of the TAV coding lawsuit, Breathe dispute, and securities and derivative cases, including the escrow recovery for the recorded $7.0 million liability.
- Whether cash generation remains adequate as rental-equipment investment, purchase commitments of approximately $56.5 million and planned leases for new facilities proceed.
- How much of reported performance is recurring versus temporary government relief; Adjusted EBITDA is a non-GAAP measure and should be assessed alongside GAAP results and cash flows.