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Section 1: 10-Q (10-Q)

ingn-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              to             

Commission file number: 001-36309

 

INOGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0989359

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

326 Bollay Drive
Goleta, California

 

93117

(Address of principal executive offices)

 

(Zip Code)

(805) 562-0500

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 

As of April 20, 2018, the registrant had 21,220,517 shares of common stock, par value $0.001, outstanding.

 

 

 


 

TABLE OF CONTENTS

 

 

 

Part I – Financial Information

 

Page

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

 

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2018 and March 31, 2017

 

5

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2018 and March 31, 2017

 

6

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2018 and March 31, 2017

 

7

 

 

Condensed Notes to the Consolidated Financial Statements (unaudited)

 

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

49

Item 4.

 

Controls and Procedures

 

50

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

51

Item 1A.

 

Risk Factors

 

51

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

80

Item 3.

 

Defaults Upon Senior Securities

 

80

Item 4.

 

Mine Safety Disclosures

 

80

Item 5.

 

Other Information

 

80

Item 6.

 

Exhibits

 

81

SIGNATURES

 

82

 

 

 

2


 

INOGEN, INC.

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Inogen, Inc.

Consolidated Balance Sheets

(amounts in thousands)

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

154,284

 

 

$

142,953

 

Marketable securities

 

34,012

 

 

 

30,991

 

Accounts receivable, net

 

35,089

 

 

 

31,444

 

Inventories, net

 

22,965

 

 

 

18,842

 

Deferred cost of revenue

 

335

 

 

 

361

 

Income tax receivable

 

591

 

 

 

1,313

 

Prepaid expenses and other current assets

 

3,778

 

 

 

2,584

 

Total current assets

 

251,054

 

 

 

228,488

 

Property and equipment

 

 

 

 

 

 

 

Rental equipment, net

 

47,420

 

 

 

49,349

 

Manufacturing equipment and tooling

 

7,011

 

 

 

6,858

 

Computer equipment and software

 

5,836

 

 

 

5,484

 

Furniture and equipment

 

878

 

 

 

746

 

Leasehold improvements

 

1,603

 

 

 

1,598

 

Land and building

 

125

 

 

 

125

 

Construction in process

 

1,934

 

 

 

408

 

Total property and equipment

 

64,807

 

 

 

64,568

 

Less accumulated depreciation

 

(43,909

)

 

 

(44,465

)

Property and equipment, net

 

20,898

 

 

 

20,103

 

Goodwill

 

2,430

 

 

 

2,363

 

Intangible assets, net

 

4,456

 

 

 

4,717

 

Deferred tax asset - noncurrent

 

20,434

 

 

 

18,636

 

Other assets

 

610

 

 

 

765

 

Total assets

$

299,882

 

 

$

275,072

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

3


 

Inogen, Inc.

Consolidated Balance Sheets (continued)

(amounts in thousands, except share and per share amounts)

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(unaudited)

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

24,760

 

 

$

20,626

 

Accrued payroll

 

6,607

 

 

 

6,877

 

Warranty reserve - current

 

2,829

 

 

 

2,505

 

Deferred revenue - current

 

3,152

 

 

 

3,533

 

Income tax payable

 

319

 

 

 

345

 

Total current liabilities

 

37,667

 

 

 

33,886

 

Long-term liabilities

 

 

 

 

 

 

 

Warranty reserve - noncurrent

 

4,416

 

 

 

3,666

 

Deferred revenue - noncurrent

 

10,391

 

 

 

9,402

 

Deferred tax liability - noncurrent

 

358

 

 

 

348

 

Other noncurrent liabilities

 

713

 

 

 

729

 

Total liabilities

 

53,545

 

 

 

48,031

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 200,000,000 authorized; 21,214,662 and 20,976,350

   shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

21

 

 

 

21

 

Additional paid-in capital

 

226,635

 

 

 

218,109

 

Retained earnings

 

19,397

 

 

 

8,639

 

Accumulated other comprehensive income

 

284

 

 

 

272

 

Total stockholders' equity

 

246,337

 

 

 

227,041

 

Total liabilities and stockholders' equity

$

299,882

 

 

$

275,072

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

4


 

Inogen, Inc.

Consolidated Statements of Comprehensive Income

(unaudited)

(amounts in thousands, except share and per share amounts)

 

 

Three months ended

 

 

March 31,

 

 

2018

 

 

2017

 

Revenue

 

 

 

 

 

 

 

Sales revenue

$

73,584

 

 

$

45,966

 

Rental revenue

 

5,467

 

 

 

6,534

 

Total revenue

 

79,051

 

 

 

52,500

 

Cost of revenue

 

 

 

 

 

 

 

Cost of sales revenue

 

36,948

 

 

 

21,913

 

Cost of rental revenue, including depreciation of $2,165 and $2,689, respectively

 

4,376

 

 

 

4,843

 

Total cost of revenue

 

41,324

 

 

 

26,756

 

Gross profit

 

 

 

 

 

 

 

Gross profit-sales revenue

 

36,636

 

 

 

24,053

 

Gross profit-rental revenue

 

1,091

 

 

 

1,691

 

Total gross profit

 

37,727

 

 

 

25,744

 

Operating expense

 

 

 

 

 

 

 

Research and development

 

1,416

 

 

 

1,309

 

Sales and marketing

 

18,038

 

 

 

10,529

 

General and administrative

 

9,573

 

 

 

8,335

 

Total operating expense

 

29,027

 

 

 

20,173

 

Income from operations

 

8,700

 

 

 

5,571

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

543

 

 

 

101

 

Other income

 

444

 

 

 

207

 

Total other income, net

 

987

 

 

 

308

 

Income before benefit for income taxes

 

9,687

 

 

 

5,879

 

Benefit for income taxes

 

(1,071

)

 

 

(53

)

Net income

 

10,758

 

 

 

5,932

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

108

 

 

 

 

Change in net unrealized gains (losses) on foreign currency hedging

 

(249

)

 

 

54

 

Less: reclassification adjustment for net (gains) losses included in net income

 

172

 

 

 

(57

)

Total net change in unrealized gains (losses) on foreign currency hedging

 

(77

)

 

 

(3

)

Change in net unrealized gains (losses) on available-for-sale investments

 

(19

)

 

 

64

 

Total other comprehensive income, net of tax

 

12

 

 

 

61

 

Comprehensive income

$

10,770

 

 

$

5,993

 

 

 

 

 

 

 

 

 

Basic net income per share attributable to common stockholders (Note 5)

$

0.51

 

 

$

0.29

 

Diluted net income per share attributable to common stockholders (Note 5)

$

0.48

 

 

$

0.27

 

Weighted-average number of shares used in calculating net income per

  share attributable to common stockholders:

 

 

 

 

 

 

 

Basic common shares

 

21,026,154

 

 

 

20,489,532

 

Diluted common shares

 

22,295,213

 

 

 

21,579,721

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

5


 

Inogen, Inc.

Consolidated Statements of Stockholders’ Equity

(amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

earnings

 

 

other

 

 

Total

 

 

Common stock

 

 

paid-in

 

 

(accumulated

 

 

comprehensive

 

 

stockholders'

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit)

 

 

income (loss)

 

 

equity

 

Balance, December 31, 2016

 

20,389,860

 

 

$

20

 

 

$

194,466

 

 

$

(12,363

)

 

$

(35

)

 

$

182,088

 

Stock-based compensation

 

 

 

 

 

 

 

1,891

 

 

 

 

 

 

 

 

 

1,891

 

Employee stock purchases

 

11,805

 

 

 

 

 

 

581

 

 

 

 

 

 

 

 

 

581

 

Stock options exercised

 

157,412

 

 

 

 

 

 

2,222

 

 

 

 

 

 

 

 

 

2,222

 

Net income

 

 

 

 

 

 

 

 

 

 

5,932

 

 

 

 

 

 

5,932

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

61

 

Balance, March 31, 2017 (unaudited)

 

20,559,077

 

 

$

20

 

 

$

199,160

 

 

$

(6,431

)

 

$

26

 

 

$

192,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

20,976,350

 

 

$

21

 

 

$

218,109

 

 

$

8,639

 

 

$

272

 

 

$

227,041

 

Stock-based compensation

 

 

 

 

 

 

 

3,381

 

 

 

 

 

 

 

 

 

3,381

 

Employee stock purchases

 

12,013

 

 

 

 

 

 

988

 

 

 

 

 

 

 

 

 

988

 

Restricted stock awards issued

 

53,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock units

 

6,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld related to net restricted stock settlement

 

(2,553

)

 

 

 

 

 

(302

)

 

 

 

 

 

 

 

 

(302

)

Stock options exercised

 

169,594

 

 

 

 

 

 

4,459

 

 

 

 

 

 

 

 

 

4,459

 

Net income

 

 

 

 

 

 

 

 

 

 

10,758

 

 

 

 

 

 

10,758

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

12

 

Balance, March 31, 2018 (unaudited)

 

21,214,662

 

 

$

21

 

 

$

226,635

 

 

$

19,397

 

 

$

284

 

 

$

246,337

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

6


 

Inogen, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

Three months ended March 31,

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

10,758

 

 

$

5,932

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

2,993

 

 

 

3,204

 

Loss on rental units and other fixed assets

 

284

 

 

 

325

 

Gain on sale of former rental assets

 

(401

)

 

 

(37

)

Provision for sales returns and doubtful accounts

 

4,920

 

 

 

3,181

 

Provision for rental revenue adjustments

 

719

 

 

 

1,731

 

Provision for inventory obsolescence and other inventory losses

 

73

 

 

 

7

 

Stock-based compensation expense

 

3,381

 

 

 

1,891

 

Deferred income taxes

 

(1,798

)

 

 

(54

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(9,206

)

 

 

(5,015

)

Inventories

 

(4,327

)

 

 

49

 

Deferred cost of revenue

 

26

 

 

 

16

 

Income tax receivable

 

726

 

 

 

(129

)

Prepaid expenses and other current assets

 

(1,192

)

 

 

(773

)

Accounts payable and accrued expenses

 

3,928

 

 

 

4,045

 

Accrued payroll

 

(274

)

 

 

(2,291

)

Warranty reserve

 

1,074

 

 

 

528

 

Deferred revenue

 

608

 

 

 

621

 

Income tax payable

 

(36

)

 

 

 

Other noncurrent liabilities

 

(16

)

 

 

(19

)

Net cash provided by operating activities

 

12,240

 

 

 

13,212

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

(11,565

)

 

 

(9,988

)

Maturities of available-for-sale investments

 

8,525

 

 

 

7,950

 

Investment in property and equipment

 

(2,075

)

 

 

(593

)

Production and purchase of rental equipment

 

(1,447

)

 

 

(1,188

)

Proceeds from sale of former assets

 

573

 

 

 

54

 

Net cash used in investing activities

 

(5,989

)

 

 

(3,765

)

 

 

 

 

 

 

 

 

(continued on next page)

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

7


 

Inogen, Inc.

Consolidated Statements of Cash Flows (continued)

(unaudited)

(amounts in thousands)

 

 

Three months ended March 31,

 

 

2018

 

 

2017

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

4,459

 

 

 

2,222

 

Proceeds from employee stock purchases

 

988

 

 

 

581

 

Payment of employment taxes related to release of restricted stock

 

(302

)

 

 

 

Net cash provided by financing activities

 

5,145

 

 

 

2,803

 

Effect of exchange rates on cash

 

(65

)

 

 

4

 

Net increase in cash and cash equivalents

 

11,331

 

 

 

12,254

 

Cash and cash equivalents, beginning of period

 

142,953

 

 

 

92,851

 

Cash and cash equivalents, end of period

$

154,284

 

 

$

105,105

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid (received) during the period for income taxes, net of refunds received

$

(14

)

 

$

45

 

Supplemental disclosure of non-cash transactions

 

 

 

 

 

 

 

Property and equipment in accounts payable and accrued liabilities

$

93

 

 

$

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

8


 

Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements

(unaudited)

(amounts in thousands, except share and per share amounts)

 

1. Business overview

Inogen, Inc. (Company or Inogen) was incorporated in Delaware on November 27, 2001. The Company is a medical technology company that primarily develops, manufactures and markets innovative portable oxygen concentrators used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions. Traditionally, these patients have relied on stationary oxygen concentrator systems for use in the home and oxygen tanks or cylinders for mobile use, which the Company calls the delivery model. The tanks and cylinders must be delivered regularly and have a finite amount of oxygen, which requires patients to plan activities outside of their homes around delivery schedules and a finite oxygen supply. Additionally, patients must attach long, cumbersome tubing to their stationary concentrators simply to enable mobility within their homes. The Company’s proprietary Inogen One® systems concentrate the air around the patient to offer a single source of supplemental oxygen anytime, anywhere with a portable device weighing approximately 2.8, 4.8 or 7.0 pounds with a single battery. The Company’s Inogen One G4®, Inogen One G3® and Inogen One G2® have up to 2.6, 4.7 and 5.0 hours of battery life, respectively, with a single battery and can be plugged into an outlet when at home, in a car, or in a public place with outlets available. The Company’s Inogen One systems reduce the patient’s reliance on stationary concentrators and scheduled deliveries of tanks with a finite supply of oxygen, thereby improving patient quality of life and fostering mobility.

Portable oxygen concentrators represented the fastest-growing segment of the Medicare oxygen therapy market between 2012 and 2016. The Company estimates based on 2016 Medicare data that the number of patients using portable oxygen concentrators represents approximately 9.1% of the total addressable oxygen market in the United States, although the Medicare data does not account for private insurance and cash-pay patients in the market. Based on 2016 industry data, the Company believes it was the leading worldwide manufacturer of portable oxygen concentrators. The Company believes it is the only manufacturer of portable oxygen concentrators that employs a direct-to-consumer strategy in the United States, meaning the Company markets its products to patients, processes their physician paperwork, provides clinical support as needed and bills Medicare or insurance on their behalf. To pursue a direct-to-consumer strategy, the Company’s manufacturing competitors would need to meet national accreditation and state-by-state licensing requirements and secure Medicare billing privileges including Medicare competitive bidding contracts, as well as compete with the home medical equipment providers who many of the Company’s manufacturing competitors sell to across their entire homecare business.

Since adopting the Company’s direct-to-consumer strategy in 2009, the Company has directly sold or rented more than 409,000 of its Inogen oxygen concentrators as of March 31, 2018.

The Company incorporated Inogen Europe Holding B.V., a Dutch limited liability company, on April 13, 2017. The Company owns all outstanding stock of Inogen Europe Holding B.V., which became a wholly owned subsidiary of the Company. On May 4, 2017, the Company, through its wholly owned subsidiary, Inogen Europe Holding B.V., acquired all issued and outstanding capital stock of MedSupport Systems B.V. (MedSupport).

 

 

2. Basis of presentation and summary of significant accounting policies

The accompanying consolidated financial statements are unaudited. The consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements of the Company. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, stockholders’ equity and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 27, 2018. There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K filed with the SEC on February 27, 2018.

9


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

Basis of consolidation

The consolidated financial statements include the accounts of Inogen, Inc. and its wholly owned subsidiaries.  All intercompany balances and transactions have been eliminated.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue recognition and determining the stand-alone selling price (SSP) of performance obligations, inventory and rental asset valuations and write-downs, accounts receivable allowances for bad debts, returns and adjustments, warranty expense, stock compensation expense, depreciation and amortization, income tax provision and uncertain tax positions, fair value of financial instruments, and fair value of acquired intangible assets and goodwill. Actual results could differ from these estimates.

Revenue

The Company generates revenue primarily from sales and rentals of its products. The Company’s products consist of its proprietary line of oxygen concentrators and related accessories. Other revenue, which is included in sales revenue on the Consolidated Statements of Comprehensive Income, consists of repair services and freight revenue for product shipments.

Sales revenue

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue from product sales is generally recognized upon shipment of the product but is deferred for certain transactions when control has not yet transferred to the customer.

The Company’s product is generally sold with a right of return and the Company may provide other incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize.  Returns and incentives are estimated at the time sales revenue is recognized. The provisions for estimated returns are made based on known claims and estimates of additional returns based on historical data and future expectations. Sales revenue incentives within the Company’s contracts are estimated based on the most likely amounts expected on the related sales transaction and recorded as a reduction to revenue at the time of sale in accordance with the terms of the contract. Accordingly, revenue is recognized net of allowances for estimated returns and incentives.

The Company also offers a lifetime warranty for direct-to-consumer sales of its portable concentrators. For a fixed price, the Company agrees to provide a fully functional portable oxygen concentrator for the remaining life of the patient. Lifetime warranties are only offered to patients upon the initial sale of portable oxygen concentrators by the Company and are non-transferable. Lifetime warranties are considered to be a distinct performance obligation that are accounted for separately from its sale of portable oxygen concentrators with a standard warranty of three years.

The revenue is allocated to the distinct lifetime warranty performance obligation based on a relative SSP method. The Company has vendor-specific objective evidence of the selling price for its equipment. To determine the selling price of the lifetime warranty, the Company uses its best estimate of the SSP for the distinct performance obligation as the lifetime warranty is neither separately priced nor is the selling price available through third-party evidence. To calculate the selling price associated with the lifetime warranties, management considered the profit margins of the overall business, the average estimated cost of lifetime warranties and the price of extended warranties. Revenue from the distinct lifetime warranty is deferred after the delivery of the equipment for three years and recognized on a straight-line basis during the fourth and fifth year, which is the estimated usage period of the contract based on the average patient life expectancy.

Revenue from the sale of the Company’s repair services is recognized when the performance obligations are satisfied and collection of the receivables is probable. Other revenue from sale of replacement parts and non-warranty repair services is generally recognized when product is shipped to customers.

10


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

Freight revenue consists of fees associated with the deployment of products internationally and domestically when expedited freight options are requested or when minimum order quantities are not met. Freight revenue is generally recognized upon shipment of the product but is deferred if control has not yet transferred to the customer. Shipping and handling costs for sold products and rental assets shipped to the Company’s customers are included on the Consolidated Statements of Comprehensive Income as part of cost of sales revenue and cost of rental revenue, respectively.

The payment terms and conditions of customer contracts vary by customer type and the products and services offered.  For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.  The timing of sales revenue recognition, billing and cash collection results in billed accounts receivable and deferred revenue in the consolidated balance sheet.

Contract liabilities primarily consist of deferred revenue related to lifetime warranties on direct-to-consumer sales revenue when cash payments are received in advance of services performed under the contract. The contract with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchase.  The increase in deferred revenue related to lifetime warranties for the three months ended March 31, 2018 is primarily driven by $1,459 of cash payments received in advance of satisfying the distinct performance obligation, offset by $286 of revenues recognized that were included in the deferred revenue balance as of December 31, 2017.  Lifetime warranties on direct-to-consumer sales revenue of $11,993 and $10,820 as of March 31, 2018 and December 31, 2017, respectively, are classified within deferred revenue – current and deferred revenue – noncurrent in the consolidated balance sheet.

The Company elected to apply the practical expedient in accordance with ASC 606 and did not evaluate contracts of one year or less for the existence of a significant financing components.  The Company does not expect any revenue to be recognized over a multi-year period.

The Company’s sales revenue is primarily derived from the sale of its Inogen One systems, Inogen At Home systems, and related accessories to individual consumers, HME providers, distributors, the Company’s private label partner and resellers worldwide.  Sales revenue is classified into two areas: business-to-business sales and direct-to-consumer sales. The following table sets forth the Company’s sales revenue disaggregated by sales channel and geographic region:

 

 

 

Three months ended

 

 

 

March 31,

 

Revenue by region and category

 

2018

 

 

2017

 

Business-to-business domestic sales

 

$

28,016

 

 

$

17,461

 

Business-to-business international sales

 

 

16,906

 

 

 

11,423

 

Direct-to-consumer domestic sales

 

 

28,662

 

 

 

17,082

 

Total sales revenue

 

$

73,584

 

 

$

45,966

 

Rental revenue

The Company recognizes equipment rental revenue over the non-cancelable lease term, which is one month, less estimated adjustments, in accordance with Accounting Standards Codification (ASC) —Leases. The Company has separate contracts with each patient that are not subject to a master lease agreement with any third-party payor. The Company evaluates the individual lease contracts at lease inception and the start of each monthly renewal period to determine if there is reasonable assurance that the bargain renewal option associated with the potential capped free rental period would be exercised. Historically, the exercise of such bargain renewal option is not reasonably assured at lease inception and most subsequent monthly lease renewal periods. If the Company determines that the reasonable assurance threshold for an individual patient is met at lease inception or at a monthly lease renewal period, such determination would impact the bargain renewal period for an individual lease. The Company would first consider the lease classification issue (sales-type lease or operating lease) and then appropriately recognize or defer rental revenue over the lease term, which may include a portion of the capped rental period.

The lease term begins on the date products are shipped to patients and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private payors, and Medicaid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of

11


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. The Company adjusts revenue for historical trends on revenue adjustments due to timely filings, deaths, hospice, and other types of analyzable adjustments on a monthly basis. Accounts receivable are reduced by an allowance for doubtful accounts which provides for those accounts from which payment is not expected to be received although product was delivered, and revenue was earned. The determination that an account is uncollectible, and the ultimate write-off of that account occurs once collection is considered to be not probable, and it is written-off and charged to the allowance at that time. Amounts billed but not earned due to the timing of the billing cycle are deferred and recognized in rental revenue on a straight-line basis over the monthly billing period. For example, if the first day of the billing period does not fall on the first of the month, then a portion of the monthly billing period will fall in the subsequent month and the related revenue and cost would be deferred based on the service days in the following month.

Rental revenue is recognized as upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services, less estimated adjustments. Revenue not billed at the end of the period is reviewed for the probability of collection and accrued if collection is probable. Rental revenue is not guaranteed, and payment will cease if the patient no longer needs oxygen or returns the equipment. Rental revenue is recognized at estimated allowable amounts that reflect the full consideration the Company expects to receive in exchange for the equipment; transfers to secondary insurances or patient responsibility have no net effect on revenue. Rental revenue is earned for that entire month if the patient is on service on the first day of the 30-day period commencing on the recurring date of service for a particular claim, regardless if there is a change in condition or death after that date.

Included in rental revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled rental revenue recognized is based on historical trends and estimates of future collectability. In addition, the Company estimates potential future adjustments and write-offs of these unbilled amounts and includes these estimates in the allowance for adjustments and write-offs of rental revenue which is netted against gross receivables.

Recently issued accounting pronouncements not yet adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than twelve months. This will increase the reported assets and liabilities – in some cases very significantly. ASU No. 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all entities. In January 2018, the FASB issued ASU No. 2018-01, Land Easement Practice Expedient for Transition to Topic 842, which is an amendment to ASU No. 2016-02 that offers a practical expedient for accounting for land easements.  This practice expedient allows an entity the option of not evaluating existing land easements under ASC 842.  New or modified land easements will still require evaluation under ASC 842 on a prospective basis beginning on the date of adoption. While the Company continues to evaluate the effect of adopting this guidance on the consolidated financial statements and related disclosures, the Company expects its operating leases, as disclosed in Note 7 – Commitments and contingencies, will be subject to the new standard.  The Company intends to recognize right-of-use assets and operating lease liabilities on the consolidated balance sheets upon adoption, which will increase the Company’s total assets and liabilities.

In June 2016, the FASB issued ASU No. 2016-13, Accounting for Credit Losses (Topic 326). The new standard requires the use of an “expected loss” model on certain types of financial instruments.  The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities.  The ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted.  The Company is evaluating the new guidance but does not expect it to have a material impact on the Company’s consolidated financial statement presentation or results.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The new guidance eliminates step two of the goodwill impairment test. Under the new guidance, an entity should recognize an impairment charge for the amount by which a reporting unit’s carrying value exceeds its fair value. The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect of the new guidance but does not expect it to have a material impact on the Company’s consolidated financial statement presentation or results.

12


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No. 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. The Company is still evaluating the impact that this guidance will have on the Company’s consolidated financial statement presentation or results and has not yet determined whether the Company will early adopt ASU No. 2017-12.

In January 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance permits entities the option to reclassify tax effects that are stranded in accumulated other comprehensive income as a result of the implementation of the Tax Cuts and Jobs Act to retained earnings.  The Company is currently evaluating the impact of the new guidance but does not expect it to have a material impact on the Company’s consolidated financial statement presentation or results.

Recently adopted accounting pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  In March 2016, the FASB issued ASU No. 2016-08, Revenue with Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is an amendment to ASU No. 2014-09 that improved the operability and understandability of implementation guidance versus agent considerations by clarifying the determination of principal versus agent.  The Company completed its adoption plan including assessment of the Company’s revenue streams and analysis of all outstanding contracts by application of the five-step model to those contracts and revenue streams.  The Company adopted the standard on January 1, 2018, using the modified retrospective method. The Company finalized its analysis and the adoption of this standard did not have a material impact on the consolidated financial statements and internal controls over financial reporting.  

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The new guidance revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. The Company adopted this standard on January 1, 2018. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statement presentation or results.

Business segments

The Company operates and reports in only one operating and reportable segment – development, manufacturing, marketing, sales, and rental of respiratory products. Management reports financial information on a consolidated basis to the Company’s chief operating decision maker.

 

3. Fair value of financial instruments

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses. The carrying values of its financial instruments approximate fair value based on their short-term nature.  

13


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

Fair value accounting

Accounting Standards Codification (ASC) 820 — Fair Value Measurements and Disclosures, creates a single definition of fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement is to estimate the price at which an orderly transaction to sell an asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. Assets and liabilities adjusted to fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by ASC 820, are as follows:

 

Level input

  

Input definition

Level 1

  

Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

 

 

 

Level 2

  

Inputs, other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

 

 

 

Level 3

  

Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

The Company obtained the fair value of its available-for-sale investments, which are not in active markets, from a third-party professional pricing service using quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. The Company's professional pricing service gathers observable inputs for all of its fixed income securities from a variety of industry data providers (e.g., large custodial institutions) and other third-party sources. Once the observable inputs are gathered, all data points are considered, and the fair value is determined. The Company validates the quoted market prices provided by its primary pricing service by comparing their assessment of the fair values against the fair values provided by its investment managers. The Company's investment managers use similar techniques to its professional pricing service to derive pricing as described above. As all significant inputs were observable, derived from observable information in the marketplace or supported by observable levels at which transactions are executed in the marketplace, the Company has classified its available-for-sale investments within Level 2 of the fair value hierarchy.

14


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

The following table summarizes fair value measurements by level for the assets measured at fair value on a recurring basis for cash, cash equivalents and marketable securities:

 

 

 

As of March 31, 2018

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

43,188

 

 

$

 

 

$

43,188

 

 

$

43,188

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

107,906

 

 

 

 

 

 

107,906

 

 

 

107,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

11,652

 

 

 

(1

)

 

 

11,651

 

 

 

3,190

 

 

 

8,461

 

Corporate bonds

 

 

22,086

 

 

 

(43

)

 

 

22,043

 

 

 

 

 

 

22,043

 

Agency mortgage-backed securities

 

 

1,005

 

 

 

 

 

 

1,005

 

 

 

 

 

 

1,005

 

U.S. Treasury securities

 

 

2,503

 

 

 

 

 

 

2,503

 

 

 

 

 

 

2,503

 

Total

 

$

188,340

 

 

$

(44

)

 

$

188,296

 

 

$

154,284

 

 

$

34,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

46,237

 

 

$

 

 

$

46,237

 

 

$

46,237

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

93,430

 

 

 

 

 

 

93,430

 

 

 

93,430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

11,010

 

 

 

(4

)

 

 

11,006

 

 

 

490

 

 

 

10,516

 

Corporate bonds

 

 

20,789

 

 

 

(21

)

 

 

20,768

 

 

 

2,796

 

 

 

17,972

 

Agency mortgage-backed securities

 

 

2,005

 

 

 

(1

)

 

 

2,004

 

 

 

 

 

 

2,004

 

U.S. Treasury securities

 

 

499

 

 

 

 

 

 

499

 

 

 

 

 

 

499

 

Total

 

$

173,970

 

 

$

(26

)

 

$

173,944

 

 

$

142,953

 

 

$

30,991

 

 

The following table summarizes the estimated fair value of the Company’s investments in marketable securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:

 

 

 

March 31,

 

 

 

2018

 

Due within one year

 

$

34,012

 

Derivative instruments and hedging activities

The Company transacts business in foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company has entered into foreign currency forward contracts, generally with maturities of twelve months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Forward contracts are used to hedge forecasted sales over specific months. Changes in the fair value of these forward contracts designed as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in the consolidated statements of comprehensive income during the period which approximates the time the corresponding sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain asset and liability balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in other expense, net in the consolidated statements of comprehensive income. The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in other income (expense), net.

15


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

(amounts in thousands, except share and per share amounts)

 

The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheet. The Company had a related payable of $255 and $66 as of March 31, 2018 and December 31, 2017, respectively. The Company classifies the foreign currency derivative instruments within Level 2 in the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of whether it is designated and qualifies for hedge accounting.

The Company documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company assesses hedge effectiveness and ineffectiveness at a minimum quarterly but may assess it monthly. For derivative instruments that are designed and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported in other comprehensive income (loss) and reclassified into earnings in the same periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current period earnings.

The Company will discontinue hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedge risk. The cash flow hedge is de-designated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in the fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company will discontinue hedge accounting and recognize immediately in earnings gains and losses that were accumulated in other comprehensive income (loss) related to the hedging relationship.

Accumulated other comprehensive income (loss)

The components of accumulated other comprehensive income (loss) were as follows:

 

 

 

Foreign

 

 

Unrealized

 

 

Unrealized

 

 

Accumulated

 

 

 

currency

 

 

losses on

 

 

losses

 

 

other

 

 

 

translation