Inogen(INGN) - 2020 Q3 - Quarterly Report

Part I – Financial Information Financial Statements Inogen's unaudited consolidated financial statements for Q3 and 9M 2020 show decreased assets, significant revenue decline, and a shift to net loss, primarily due to COVID-19 impacts Consolidated Balance Sheets Inogen's balance sheet as of September 30, 2020, shows a slight increase in total assets, primarily due to higher cash and property, with corresponding increases in liabilities and equity Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 (unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $213,984 | $198,037 | | Accounts receivable, net | $31,691 | $34,325 | | Inventories, net | $29,220 | $35,664 | | Total current assets | $303,381 | $292,219 | | Total assets | $460,331 | $447,339 | | Liabilities & Equity | | | | Total current liabilities | $51,971 | $50,181 | | Total liabilities | $107,831 | $102,718 | | Total stockholders' equity | $352,500 | $344,621 | Consolidated Statements of Comprehensive Income (Loss) In Q3 and 9M 2020, Inogen experienced significant revenue declines and a shift from net income to net loss, despite growth in rental revenue, reflecting a challenging financial performance Q3 Financial Performance (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $74,329 | $91,761 | -19.0% | | Sales Revenue | $66,809 | $86,392 | -22.7% | | Rental Revenue | $7,520 | $5,369 | +40.1% | | Gross Profit | $33,006 | $43,315 | -23.8% | | Net Income (Loss) | $(1,699) | $6,863 | -124.8% | | Diluted EPS | $(0.08) | $0.31 | -125.8% | Nine-Month Financial Performance (in thousands, except per share data) | Metric | 9M 2020 | 9M 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $234,509 | $283,026 | -17.1% | | Sales Revenue | $215,561 | $267,073 | -19.3% | | Rental Revenue | $18,948 | $15,953 | +18.8% | | Gross Profit | $104,121 | $137,939 | -24.5% | | Net Income (Loss) | $(708) | $22,325 | -103.2% | | Diluted EPS | $(0.03) | $1.00 | -103.0% | Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, operating cash flow decreased, while cash used in investing activities significantly declined due to the absence of a prior-year acquisition, leading to an overall increase in cash and cash equivalents Nine-Month Cash Flow Summary (in thousands) | Cash Flow Category | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $20,815 | $31,204 | | Net cash used in investing activities | $(7,118) | $(75,509) | | Net cash provided by financing activities | $1,982 | $3,947 | | Net increase (decrease) in cash | $15,947 | $(40,503) | - The significant decrease in cash used for investing activities in 2020 is primarily because there was no major acquisition, unlike in 2019 when the company made a net payment of $70.4 million for an acquisition[22] Condensed Notes to the Consolidated Financial Statements These notes detail accounting policies, the New Aera acquisition, fair value measurements, balance sheet components, and significant disclosures including a $7.0 million contingent liability for an IP lawsuit and a $6.2 million CARES Act grant - The company received a $6.2 million grant from the Public Health and Social Services Emergency Fund under the CARES Act. During the nine months ended September 30, 2020, it recognized $5.3 million in other income for lost revenues and a $0.9 million benefit in G&A expenses for related costs[37] - The company recorded a contingent liability of $7.0 million during the nine months ended September 30, 2020, related to an intellectual property lawsuit filed by Breathe Technologies, Inc[143] - The fair value of the earnout liability from the New Aera acquisition was $26.4 million as of September 30, 2020, measured using Level 3 inputs including revenue volatility and WACC[65] - The company suspended its 401(k) match effective July 1, 2020, as a cost-saving measure[134] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in revenue and profitability in Q3 and 9M 2020 primarily to COVID-19 impacts on demand, despite rental revenue growth, while maintaining a strong liquidity position and implementing cost-saving measures COVID-19 PHE Impact The COVID-19 pandemic adversely impacted Inogen's operating results, causing declines in both direct-to-consumer and business-to-business sales, prompting the company to implement various cost-saving measures - Direct-to-consumer sales were negatively impacted by social distancing, reduced travel, and lower consumer confidence[166] - Business-to-business demand declined as HME providers shifted focus to stationary oxygen concentrators to treat COVID-19 patients and saw fewer COPD patient referrals[166] - The company implemented cost-saving measures, including reducing advertising spend, decreasing new hires, and suspending its 401(k) match effective July 1, 2020[167] Results of Operations In Q3 and 9M 2020, total revenue significantly declined, driven by decreased sales across channels, leading to a net loss, despite growth in rental revenue and improved rental gross margin Q3 2020 vs. Q3 2019 Revenue Breakdown (in thousands) | Revenue Category | Q3 2020 | Q3 2019 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Business-to-business domestic | $23,056 | $30,143 | -23.5% | | Business-to-business international | $14,581 | $18,492 | -21.1% | | Direct-to-consumer domestic sales | $29,172 | $37,757 | -22.7% | | Direct-to-consumer domestic rentals | $7,520 | $5,369 | +40.1% | | Total Revenue | $74,329 | $91,761 | -19.0% | 9M 2020 vs. 9M 2019 Revenue Breakdown (in thousands) | Revenue Category | 9M 2020 | 9M 2019 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Business-to-business domestic | $72,174 | $85,857 | -15.9% | | Business-to-business international | $48,538 | $60,859 | -20.2% | | Direct-to-consumer domestic sales | $94,849 | $120,357 | -21.2% | | Direct-to-consumer domestic rentals | $18,948 | $15,953 | +18.8% | | Total Revenue | $234,509 | $283,026 | -17.1% | - Sales revenue gross margin decreased to 43.5% in Q3 2020 from 48.2% in Q3 2019, primarily due to lower average selling prices and increased material and overhead costs per unit[234] - Rental revenue gross margin increased significantly to 52.0% in Q3 2020 from 31.5% in Q3 2019, driven by higher Medicare reimbursement rates and lower costs per patient[235] Liquidity and Capital Resources As of September 30, 2020, Inogen maintained a strong liquidity position with $214.0 million in cash and $251.4 million in net working capital, believing these resources are sufficient for future operations Key Liquidity Metrics (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $213,984 | $198,037 | | Net working capital | $251,410 | $242,038 | - The company believes its current cash and expected cash generation are sufficient to meet projected operating and investing needs for at least the next 12 months[266] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are foreign currency exchange risk from Euro-denominated sales, which are hedged, and minimal interest rate risk due to the short-term nature of its $214.0 million cash holdings - The principal market risk is foreign currency exchange risk, as the majority of European sales are denominated in Euros. The company uses forward contracts to hedge this exposure[287][288] - Interest rate risk is considered minimal due to the short-term nature of the company's $214.0 million in cash and cash equivalents, though declines in rates would reduce future interest income[289] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective at the reasonable assurance level[291] - No material changes to the internal control over financial reporting were identified during the most recent fiscal quarter[292] Part II – Other Information Legal Proceedings The company is involved in several significant legal matters, including an intellectual property lawsuit with a $7.0 million contingent liability, a securities class action, and a lawsuit against HHS and CMS regarding reimbursement coding - In an intellectual property lawsuit from Breathe Technologies, Inc., the company recorded a contingent liability of $7.0 million during the nine months ended September 30, 2020[296] - The company is defending a consolidated securities class action lawsuit alleging misstatements regarding its total addressable market and sales practices between November 2017 and May 2019[297] - On September 21, 2020, Inogen filed a lawsuit against HHS and CMS to invalidate the retraction of a reimbursement code (HCPCS) for its Tidal Assist Ventilator[301] Risk Factors This section details numerous risks, including intense competition, dependence on limited customers and single-source suppliers, COVID-19 impacts, changes in Medicare reimbursement, and intellectual property protection challenges - The company faces intense competition from large, well-capitalized companies like Respironics (Philips) and Invacare, which have greater resources for R&D, marketing, and sales[304][305][307] - The COVID-19 pandemic has adversely affected and could continue to disrupt business operations, reduce product demand, and impact the supply chain[314] - The business is heavily dependent on reimbursement from Medicare. Changes in reimbursement rates, payment methodologies, or the competitive bidding process could materially and adversely affect operating results[319][326] - The company relies on single-source suppliers for key components like batteries, motors, and valves, creating risk of production delays and an inability to meet customer demand if supply is disrupted[310]