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Section 1: 10-Q (10-Q)

ingn-10q_20190331.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, 2019

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, CA

93117

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (805) 562-0500

 

 

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 every Interactive Data File required to be submitted 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 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

 

  

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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

INGN

 

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

As of April 30, 2019, the registrant had 21,929,157 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, 2019 (unaudited) and December 31, 2018

 

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2019 and March 31, 2018

 

5

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2019 and March 31, 2018

 

6

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2019 and March 31, 2018

 

7

 

 

Condensed Notes to the Consolidated Financial Statements (unaudited)

 

9

Item 2.

 

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

 

30

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

48

Item 4.

 

Controls and Procedures

 

49

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

50

Item 1A.

 

Risk Factors

 

50

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,

 

 

2019

 

 

2018

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

190,236

 

 

$

196,634

 

Marketable securities

 

49,011

 

 

 

43,715

 

Accounts receivable, net

 

41,525

 

 

 

37,041

 

Inventories, net

 

28,820

 

 

 

27,071

 

Deferred cost of revenue

 

346

 

 

 

359

 

Income tax receivable

 

2,555

 

 

 

2,655

 

Prepaid expenses and other current assets

 

9,263

 

 

 

7,108

 

Total current assets

 

321,756

 

 

 

314,583

 

Property and equipment

 

 

 

 

 

 

 

Rental equipment, net

 

41,996

 

 

 

43,038

 

Manufacturing equipment and tooling

 

7,469

 

 

 

7,338

 

Computer equipment and software

 

6,701

 

 

 

6,153

 

Furniture and equipment

 

1,463

 

 

 

1,445

 

Leasehold improvements

 

3,521

 

 

 

3,407

 

Land and building

 

125

 

 

 

125

 

Construction in process

 

3,432

 

 

 

3,128

 

Total property and equipment

 

64,707

 

 

 

64,634

 

Less accumulated depreciation

 

(42,709

)

 

 

(42,293

)

Property and equipment, net

 

21,998

 

 

 

22,341

 

Goodwill

 

2,212

 

 

 

2,257

 

Intangible assets, net

 

3,411

 

 

 

3,755

 

Operating lease right-of-use asset

 

5,936

 

 

 

 

Deferred tax asset - noncurrent

 

29,296

 

 

 

30,130

 

Other assets

 

3,586

 

 

 

2,832

 

Total assets

$

388,195

 

 

$

375,898

 

 

 

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,

 

 

2019

 

 

2018

 

 

(unaudited)

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

24,731

 

 

$

26,786

 

Accrued payroll

 

7,832

 

 

 

11,407

 

Warranty reserve - current

 

3,734

 

 

 

3,549

 

Operating lease liability

 

2,061

 

 

 

 

Deferred revenue - current

 

5,283

 

 

 

4,451

 

Income tax payable

 

111

 

 

 

392

 

Total current liabilities

 

43,752

 

 

 

46,585

 

Long-term liabilities

 

 

 

 

 

 

 

Warranty reserve - noncurrent

 

6,023

 

 

 

5,981

 

Operating lease liability - noncurrent

 

4,920

 

 

 

 

Deferred revenue - noncurrent

 

11,379

 

 

 

11,844

 

Deferred tax liability - noncurrent

 

227

 

 

 

232

 

Other noncurrent liabilities

 

 

 

 

832

 

Total liabilities

 

66,301

 

 

 

65,474

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 200,000,000 authorized; 21,931,342 and 21,778,632

   shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

22

 

 

 

22

 

Additional paid-in capital

 

255,226

 

 

 

249,194

 

Retained earnings

 

65,786

 

 

 

60,484

 

Accumulated other comprehensive income

 

860

 

 

 

724

 

Total stockholders' equity

 

321,894

 

 

 

310,424

 

Total liabilities and stockholders' equity

$

388,195

 

 

$

375,898

 

 

 

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,

 

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

Sales revenue

$

84,818

 

 

$

73,584

 

Rental revenue

 

5,384

 

 

 

5,467

 

Total revenue

 

90,202

 

 

 

79,051

 

Cost of revenue

 

 

 

 

 

 

 

Cost of sales revenue

 

42,067

 

 

 

36,948

 

Cost of rental revenue, including depreciation of $1,705 and $2,165, respectively

 

3,726

 

 

 

4,376

 

Total cost of revenue

 

45,793

 

 

 

41,324

 

Gross profit

 

 

 

 

 

 

 

Gross profit-sales revenue

 

42,751

 

 

 

36,636

 

Gross profit-rental revenue

 

1,658

 

 

 

1,091

 

Total gross profit

 

44,409

 

 

 

37,727

 

Operating expense

 

 

 

 

 

 

 

Research and development

 

1,669

 

 

 

1,416

 

Sales and marketing

 

28,201

 

 

 

18,038

 

General and administrative

 

9,681

 

 

 

9,573

 

Total operating expense

 

39,551

 

 

 

29,027

 

Income from operations

 

4,858

 

 

 

8,700

 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

1,334

 

 

 

543

 

Other income (expense)

 

(120

)

 

 

444

 

Total other income, net

 

1,214

 

 

 

987

 

Income before provision (benefit) for income taxes

 

6,072

 

 

 

9,687

 

Provision (benefit) for income taxes

 

770

 

 

 

(1,071

)

Net income

 

5,302

 

 

 

10,758

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(137

)

 

 

108

 

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

 

84

 

 

 

(249

)

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

 

176

 

 

 

172

 

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

 

260

 

 

 

(77

)

Change in net unrealized gains (losses) on marketable securities

 

13

 

 

 

(19

)

Total other comprehensive income, net of tax

 

136

 

 

 

12

 

Comprehensive income

$

5,438

 

 

$

10,770

 

 

 

 

 

 

 

 

 

Basic net income per share attributable to common stockholders (Note 6)

$

0.24

 

 

$

0.51

 

Diluted net income per share attributable to common stockholders (Note 6)

$

0.24

 

 

$

0.48

 

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

  share attributable to common stockholders:

 

 

 

 

 

 

 

Basic common shares

 

21,750,305

 

 

 

21,026,154

 

Diluted common shares

 

22,534,885

 

 

 

22,295,213

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

5


 

Inogen, Inc.

Consolidated Statements of Stockholders’ Equity

(amounts in thousands, except share amounts)

 

 

Three months ended March 31, 2019 and March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

Total

 

 

Common stock

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

stockholders'

 

 

Shares

 

 

Amount

 

 

capital

 

 

earnings

 

 

income

 

 

equity

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

21,778,632

 

 

$

22

 

 

$

249,194

 

 

$

60,484

 

 

$

724

 

 

$

310,424

 

Stock-based compensation

 

 

 

 

 

 

 

3,586

 

 

 

 

 

 

 

 

 

3,586

 

Employee stock purchases

 

16,767

 

 

 

 

 

 

1,525

 

 

 

 

 

 

 

 

 

1,525

 

Restricted stock awards issued

 

66,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of restricted stock units

 

11,265

 

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Shares withheld related to net restricted stock settlement

 

(12,045

)

 

 

 

 

 

(655

)

 

 

 

 

 

 

 

 

(655

)

Stock options exercised

 

69,779

 

 

 

 

 

 

1,635

 

 

 

 

 

 

 

 

 

1,635

 

Net income

 

 

 

 

 

 

 

 

 

 

5,302

 

 

 

 

 

 

5,302

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

136

 

 

 

136

 

Balance, March 31, 2019 (unaudited)

 

21,931,342

 

 

$

22

 

 

$

255,226

 

 

$

65,786

 

 

$

860

 

 

$

321,894

 

 

 

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,

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

5,302

 

 

$

10,758

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

2,794

 

 

 

2,993

 

Loss on rental units and other fixed assets

 

171

 

 

 

284

 

Gain on sale of former rental assets

 

(21

)

 

 

(401

)

Provision for sales revenue returns and doubtful accounts

 

4,428

 

 

 

4,920

 

Provision for rental revenue adjustments

 

590

 

 

 

719

 

Provision for inventory losses

 

456

 

 

 

73

 

Stock-based compensation expense

 

3,586

 

 

 

3,381

 

Deferred income taxes

 

834

 

 

 

(1,798

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(9,517

)

 

 

(9,206

)

Inventories

 

(2,897

)

 

 

(4,327

)

Deferred cost of revenue

 

13

 

 

 

26

 

Income tax receivable

 

100

 

 

 

726

 

Prepaid expenses and other current assets

 

(2,156

)

 

 

(1,192

)

Operating lease right-of-use asset

 

(5,936

)

 

 

 

Other noncurrent assets

 

(491

)

 

 

 

Accounts payable and accrued expenses

 

(1,974

)

 

 

3,928

 

Accrued payroll

 

(3,572

)

 

 

(274

)

Warranty reserve

 

227

 

 

 

1,074

 

Deferred revenue

 

367

 

 

 

608

 

Income tax payable

 

(277

)

 

 

(36

)

Operating lease liability

 

6,981

 

 

 

 

Other noncurrent liabilities

 

(832

)

 

 

(16

)

Net cash provided by (used in) operating activities

 

(1,824

)

 

 

12,240

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(19,033

)

 

 

(11,565

)

Maturities of marketable securities

 

13,750

 

 

 

8,525

 

Investment in property and equipment

 

(933

)

 

 

(2,075

)

Production and purchase of rental equipment

 

(781

)

 

 

(1,447

)

Proceeds from sale of former assets

 

49

 

 

 

573

 

Net cash used in investing activities

 

(6,948

)

 

 

(5,989

)

 

 

 

 

 

 

 

 

(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,

 

 

2019

 

 

2018

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

1,635

 

 

 

4,459

 

Proceeds from employee stock purchases

 

1,525

 

 

 

988

 

Payment of employment taxes related to release of restricted stock

 

(714

)

 

 

(302

)

Net cash provided by financing activities

 

2,446

 

 

 

5,145

 

Effect of exchange rates on cash

 

(72

)

 

 

(65

)

Net increase (decrease) in cash and cash equivalents

 

(6,398

)

 

 

11,331

 

Cash and cash equivalents, beginning of period

 

196,634

 

 

 

142,953

 

Cash and cash equivalents, end of period

$

190,236

 

 

$

154,284

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

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

$

214

 

 

$

(14

)

Supplemental disclosure of non-cash transactions

 

 

 

 

 

 

 

Property and equipment in accounts payable and accrued liabilities

$

194

 

 

$

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 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.

Since adopting the Company’s direct-to-consumer rental strategy in 2009, the Company has directly sold or rented more than 619,000 of its Inogen oxygen concentrators as of March 31, 2019.

The Company incorporated Inogen Europe Holding B.V., a Dutch limited liability company, on April 13, 2017. On May 4, 2017, Inogen Europe Holding B.V. acquired all issued and outstanding capital stock of MedSupport Systems B.V. (MedSupport) and began operating under the name Inogen Europe B.V. The Company merged Inogen Europe Holding B.V. and Inogen Europe B.V. on December 28, 2018. Inogen Europe B.V. is the remaining legal entity.

 

2. Basis of presentation and summary of significant accounting policies

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

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 26, 2019. 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 26, 2019.

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.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, operating lease liability, and operating lease liability - noncurrent on the consolidated balance sheets.

 

9


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

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

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments as the rate implicit in each lease is generally not readily determinable. The operating lease ROU asset also includes any lease payments made to the lessor at or before the commencement date and excludes lease incentives.  Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.  

 

The Company has lease agreements with lease and non-lease components.  The Company elected the practical expedient to treat the lease and non-lease components as a single lease component. Additionally, the Company elected the practical expedient to not record leases with an initial term of 12 months or less on the consolidated balance sheets.  

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 Statements of Comprehensive Income, primarily comes from service contracts, replacement parts 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 oxygen 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 directly from 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 considers the profit margins of service revenue, 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 and recognized based on an estimated mortality rate over five years, which is the estimated performance 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 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, 2019 was primarily driven by $2,416 of payments received in advance of satisfying performance obligations, partially offset by $1,995 of revenues recognized that were included in the deferred revenue balances as of December 31, 2018. Deferred revenue related to lifetime warranties was $15,295 and $14,874 as of March 31, 2019 and December 31, 2018, respectively, and is classified within deferred revenue – current and noncurrent deferred revenue in the consolidated balance sheet.

The Company elected to apply the practical expedient in accordance with Accounting Standards Codification (ASC) 606Revenue Recognition and did not evaluate contracts of one year or less for the existence of a significant financing component.  The Company does not expect any revenue to be recognized over a multi-year period with the exception of revenue related to lifetime warranties.

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, home medical equipment 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

 

2019

 

 

2018

 

Business-to-business domestic sales

 

$

26,061

 

 

$

28,016

 

Business-to-business international sales

 

 

19,803

 

 

 

16,906

 

Direct-to-consumer domestic sales

 

 

38,954

 

 

 

28,662

 

Total sales revenue

 

$

84,818

 

 

$

73,584

 

 

Rental revenue

The Company recognizes equipment rental revenue over the non-cancelable lease term, which is one month, less estimated adjustments, in accordance with ASC 842 —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 it is reasonably certain that the monthly renewal option and the bargain renewal option associated with the potential capped free rental period would be exercised. Historically, the exercise of the monthly renewal and bargain renewal option is not reasonably certain at lease inception and at most subsequent monthly lease renewal periods. If the Company determines that the reasonably certain 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 Company deferred $0 associated with the capped rental period as of March 31, 2019 and December 31, 2018.

11


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

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

 

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 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, bad debt and other types of analyzable adjustments on a monthly basis to record rental revenue at the expected collectible amounts. 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 highly unlikely, 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 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.

The lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for supplies. The Company elected the practical expedient to treat the lease and non-lease components as a single lease component.

Rental revenue is recognized as earned, less estimated adjustments. Revenue not billed at the end of the period is reviewed for the likelihood of collections and accrued. The rental revenue stream is not guaranteed and payment will cease if the patient no longer needs oxygen or returns the equipment. Revenue recognized is at full estimated allowable amounts; 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 June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements.  The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. While the Company continues to evaluate the effect of adopting this guidance, the Company expects the fair value disclosures related to marketable securities, as disclosed in Note 3 – Fair value of financial instruments, will be subject to the new standard.

12


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

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

 

Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance requires organizations that lease assets—referred to as “lessees”—to recognize on the consolidated balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than twelve months. The Company adopted the standard using the modified retrospective transition method at the adoption date of January 1, 2019 that does not require restatement of its comparative periods presented, allows it to apply the standard as of the adoption date and record a cumulative adjustment in retained earnings.  As permitted under the transition guidance, the Company carried forward the assessment of whether the Company’s contracts contain or are leases, classification of the Company’s leases and remaining lease terms. The Company elected the practical expedients to not record leases with an initial term of 12 months or less on the consolidated balance sheet and to not separate lease and non-lease components for all of its leases as the non-lease components are not significant to the overall lease costs. The Company recognized approximately $6,400 of operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets upon adoption on January 1, 2019. The Company also recognizes equipment rental revenue over the non-cancelable lease term, which is one month, less estimated adjustments, in accordance with Topic 842, effective January 1, 2019.  The impact on rental revenue as a result of the adoption did not have a material impact on the Company’s consolidated financial presentation or results. There was no cumulative adjustments recorded to retained earnings as a result of the adoption.

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. The Company adopted this standard on January 1, 2019 and adoption of this standard did not have a material impact on the Company’s consolidated financial statement presentation or results.

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 adopted this standard on January 1, 2019 using the beginning of the period of adoption method and adoption of this standard did not have a material impact on the Company’s consolidated financial statement presentation or results.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new guidance modifies the accounting for nonemployee share-based payments.  The Company adopted this standard on January 1, 2019 and adoption of this standard did not have a material impact on the Company’s consolidated financial statement presentation or results.

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which is an amendment to ASU No. 2016-13 that clarifies the scope of the guidance.  The amendment clarifies that receivables arising from operating leases are not within the scope of ASU No. 2016-13 and impairment of receivables arising from operating leases should be accounted for in accordance with ASU No. 2016-02.  As a result, the bad debt expense account associated with the rental revenue allowance for doubtful account is charged to rental revenue instead of general and administrative expense upon adoption.  This change results in decreased rental revenue and decreased operating expense. The Company adopted the standard using the modified retrospective transition method at the adoption date of January 1, 2019 that does not require restatement of its comparative periods presented.  The adoption of this reclassification did not have a material impact 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

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 marketable securities 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, 2019

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

gains

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

19,300

 

 

$

 

 

$

19,300

 

 

$

19,300

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

170,181

 

 

 

 

 

 

170,181

 

 

 

170,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

10,064

 

 

 

1

 

 

 

10,065

 

 

 

 

 

 

10,065

 

U.S. Treasury securities

 

 

39,685

 

 

 

16

 

 

 

39,701

 

 

 

755

 

 

 

38,946

 

Total

 

$

239,230

 

 

$

17

 

 

$

239,247

 

 

$

190,236

 

 

$

49,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

gains (losses)

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

33,671

 

 

$

 

 

$

33,671

 

 

$

33,671

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

158,438

 

 

 

 

 

 

158,438

 

 

 

158,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

13,629

 

 

 

(16

)

 

 

13,613

 

 

 

 

 

 

13,613

 

U.S. Treasury securities

 

 

34,620

 

 

 

7

 

 

 

34,627

 

 

 

4,525

 

 

 

30,102

 

Total

 

$

240,358

 

 

$

(9

)

 

$

240,349

 

 

$

196,634

 

 

$

43,715

 

 

The following table summarizes the estimated fair value of the Company’s investments in marketable securities, classified by the contractual maturity date of the securities:

 

 

 

March 31, 2019

 

Due within one year

 

$

49,011

 

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 receivable of $862 and a receivable of $472 as of March 31, 2019 and December 31, 2018, 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