Inogen, Inc. — Q1 2016 Form 10-Q
Business and period: Medical-technology company developing, manufacturing, selling and renting portable oxygen concentrators. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are with December 31, 2015. Amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date | Change |
|---|---|---|---|
| Total revenue | $43.0m | $33.8m | Up 27.4% |
| Sales revenue | $32.8m | $23.0m | Up 42.4% |
| Rental revenue | $10.2m | $10.7m | Down 4.9% |
| Gross profit / gross margin | $21.3m / 49.5% | $16.0m / 47.5% | Margin up 2.0 percentage points |
| Operating income | $3.3m | $2.5m | Up 30.1% |
| Net income | $2.4m | $1.6m | Up 50.4% |
| Diluted EPS | $0.11 | $0.08 | Up |
| Operating cash flow | $4.8m | $6.1m | Down 21.2% |
- Sales gross margin rose to 49.7% from 45.4%, attributed to lower unit costs following the G3 upgrade and a higher proportion of direct-to-consumer sales. Rental gross margin fell to 48.9% from 52.0%, reflecting lower reimbursement and higher rental adjustments.
- Operating expenses increased to $18.0m from $13.5m. Sales and marketing rose 29.5% to $9.0m; general and administrative rose 37.6% to $7.9m, including a labor-settlement accrual, higher staffing and bad-debt expense. R&D increased 35.3% to $1.2m.
- At March 31, cash and cash equivalents were $72.4m and short-term investments $13.7m; current assets were $124.0m, current liabilities $24.0m and working capital $99.9m. Total assets were $168.4m and stockholders’ equity $138.2m.
- Debt was $238,000, due during the remaining nine months of 2016. The company had no borrowings on its $15m revolving credit facility, leaving $15m available. It reported covenant EBITDA of $34.2m against a $10m minimum and tangible net worth of $138m against a $90m minimum; the EBITDA covenant minimum rises to $12.5m for test periods beginning June 30, 2016.
- Cash increased $6.3m during the quarter. Operating cash flow was affected by working-capital use, including growth in receivables and inventory. Investing cash flow was positive $0.9m, largely reflecting $10.1m of investment maturities offset by $7.0m of purchases; the company also spent $1.5m on rental equipment and $0.7m on other property and equipment. Financing cash flow was $0.5m.
Changes, outlook and management commentary
- System sales rose to approximately 17,000 from 11,000 units. Sales growth came from domestic direct-to-consumer and business-to-business channels and international business-to-business sales; total revenue growth was partially offset by rental declines.
- Rental patients increased to approximately 33,200 from 30,000 year over year. Medicare accounted for 82.2% of rental revenue and 19.5% of total revenue in Q1 2016. Capped patients were 12.9% of patients on service, versus 15.3% a year earlier.
- Management expected rental revenue per patient to decline as reimbursement cuts and capped rentals weigh on results. It estimated competitive-bidding changes would reduce 2016 total revenue by approximately 3.5%–4.0%, with the full adjusted rates taking effect July 1, 2016. No formal full-year revenue or earnings guidance is provided in the filing.
- Management expected sales and marketing, R&D and general and administrative expenses to rise as it expands sales capacity, product development and infrastructure. The upgraded G3 launched in December 2015; management expected to launch the lighter Inogen One G4 by the end of May 2016.
- The company said current cash, investments, available credit and expected operating cash generation should meet projected operating and investing requirements for at least 12 months, while noting liquidity assumptions could prove incorrect. It cited seasonality, with typically stronger sales in spring and summer.
- Material risks include Medicare and private-payor reimbursement changes, competitive bidding, claim audits and collection delays, competition, dependence on certain single-source components, manufacturing disruption, and regulatory and intellectual-property exposure. Purchase orders and other commitments totaled $23.0m; non-cancelable lease payments totaled $5.4m.
Contingencies and unusual items
- A California wage-and-hour class action filed April 13, 2016 was settled in April; the company disputed the claims and recorded an approximately $980,000 accrual at March 31. The settlement involved no admission of liability.
- Separation Design Group alleges patent infringement, trade-secret misappropriation and breach of contract, seeking unspecified damages and an injunction; Inogen denies the allegations and is contesting the case. Inogen’s separate patent case against Inova Labs remains stayed; reexamination of one patent was complete and the other had not concluded.
- Q1 included a $92,000 after-tax unrealized loss on foreign-currency cash-flow hedges and an $11,000 gain on available-for-sale investments. The securities class actions disclosed in the filing were voluntarily dismissed in 2015.
- Management stated disclosure controls were effective as of March 31, 2016 and that no material change in internal control over financial reporting occurred during the quarter. A previously identified revenue-documentation control weakness was reported as remediated by December 31, 2015.
Important facts for investors to verify
- Actual Q2 and full-year effects of Medicare reimbursement changes effective July 1, including whether the estimated 3.5%–4.0% revenue impact holds.
- Whether sales growth and G4 launch timing translate into sustained unit growth and margins, while monitoring the rising operating-expense base.
- Rental reimbursement, patient collections, receivables and allowance levels; net accounts receivable increased to $23.7m from $19.9m at year-end.
- Final settlement cost and payment timing for the wage-and-hour matter, and developments in the SDGIP and Inova patent disputes.
- Compliance with the higher credit-facility EBITDA threshold beginning with the June 30, 2016 test period and ongoing liquidity needs, including capital spending and purchase commitments.