UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended March 31, 2016

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 x    No o

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 x    No o

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

 

Large accelerated filer ¨

  

Accelerated filer x

  

Non-accelerated filer ¨

  

Smaller reporting company ¨

 

  

 

  

(Do not check if a smaller reporting company)

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

As of April 29, 2016, the registrant had 19,915,360 shares of common stock, par value $0.001, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Part I – Financial Information

 

Page

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

Balance Sheets as of March 31, 2016 and December 31, 2015

 

3

 

 

Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and March 31, 2015

 

5

 

 

Statement of Stockholders’ Equity for the Three Months Ended March 31, 2016

 

6

 

 

Statements of Cash Flows for the Three Months Ended March 31, 2016 and March 31, 2015

 

7

 

 

Condensed Notes to the Financial Statements

 

9

Item 2.

 

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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

43

Item 4.

 

Controls and Procedures

 

44

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

45

Item 1A.

 

Risk Factors

 

46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

71

Item 3.

 

Defaults Upon Senior Securities

 

72

Item 4.

 

Mine Safety Disclosures

 

72

Item 5.

 

Other Information

 

72

Item 6.

 

Exhibits

 

73

SIGNATURES

 

74

 

 

 

2


 

INOGEN, INC.

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Inogen, Inc.

Balance Sheets

(unaudited)

(amounts in thousands)

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

72,400

 

 

$

66,106

 

Short-term investments

 

13,694

 

 

 

16,793

 

Accounts receivable, net

 

23,748

 

 

 

19,872

 

Inventories, net

 

10,275

 

 

 

8,648

 

Deferred cost of revenue

 

520

 

 

 

397

 

Income tax receivable

 

2,158

 

 

 

2,158

 

Prepaid expenses and other current assets

 

1,185

 

 

 

870

 

Total current assets

 

123,980

 

 

 

114,844

 

Property and equipment

 

 

 

 

 

 

 

Rental equipment, net of allowances

 

54,876

 

 

 

54,677

 

Manufacturing equipment and tooling

 

4,818

 

 

 

4,680

 

Computer equipment and software

 

4,626

 

 

 

4,503

 

Furniture and equipment

 

802

 

 

 

732

 

Leasehold improvements

 

1,091

 

 

 

978

 

Land and building

 

126

 

 

 

125

 

Construction in process

 

847

 

 

 

578

 

Total property and equipment

 

67,186

 

 

 

66,273

 

Less accumulated depreciation

 

(37,542

)

 

 

(35,593

)

Property and equipment, net

 

29,644

 

 

 

30,680

 

Intangible assets, net

 

206

 

 

 

229

 

Deferred tax asset - noncurrent

 

14,474

 

 

 

15,464

 

Other assets

 

96

 

 

 

97

 

Total assets

$

168,400

 

 

$

161,314

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

3


 

Inogen, Inc.

Balance Sheets (continued)

(unaudited)

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

 

 

March 31,

 

 

December 31,

 

 

2016

 

 

2015

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

17,220

 

 

$

12,867

 

Accrued payroll

 

3,017

 

 

 

5,271

 

Current portion of long-term debt

 

238

 

 

 

315

 

Warranty reserve - current

 

1,351

 

 

 

1,226

 

Deferred revenue - current

 

2,212

 

 

 

2,323

 

Income tax payable

 

6

 

 

 

11

 

Total current liabilities

 

24,044

 

 

 

22,013

 

Long-term liabilities

 

 

 

 

 

 

 

Warranty reserve - noncurrent

 

1,078

 

 

 

747

 

Deferred revenue - noncurrent

 

4,768

 

 

 

4,199

 

Other noncurrent liabilities

 

321

 

 

 

337

 

Total liabilities

 

30,211

 

 

 

27,296

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 200,000,000 authorized; 19,877,486 and 19,782,403

 

 

 

 

 

 

 

shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

 

20

 

 

 

20

 

Additional paid-in capital

 

181,030

 

 

 

179,143

 

Accumulated deficit

 

(42,743

)

 

 

(45,108

)

Accumulated other comprehensive loss

 

(118

)

 

 

(37

)

Total stockholders' equity

 

138,189

 

 

 

134,018

 

Total liabilities and stockholders' equity

$

168,400

 

 

$

161,314

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

4


 

Inogen, Inc.

Statements of Comprehensive Income

(unaudited)

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

 

 

Three months ended March 31,

 

 

 

2016

 

 

 

2015

 

Revenue

 

 

 

 

 

 

 

Sales revenue

$

32,811

 

 

$

23,049

 

Rental revenue

 

10,178

 

 

 

10,703

 

Total revenue

 

42,989

 

 

 

33,752

 

Cost of revenue

 

 

 

 

 

 

 

Cost of sales revenue

 

16,507

 

 

 

12,589

 

Cost of rental revenue, including depreciation of $2,947 and $2,956, respectively

 

5,203

 

 

 

5,140

 

Total cost of revenue

 

21,710

 

 

 

17,729

 

Gross profit

 

 

 

 

 

 

 

Gross profit-sales revenue

 

16,304

 

 

 

10,460

 

Gross profit-rental revenue

 

4,975

 

 

 

5,563

 

Total gross profit

 

21,279

 

 

 

16,023

 

Operating expense

 

 

 

 

 

 

 

Research and development

 

1,168

 

 

 

863

 

Sales and marketing

 

8,965

 

 

 

6,924

 

General and administrative

 

7,869

 

 

 

5,718

 

Total operating expense

 

18,002

 

 

 

13,505

 

Income from operations

 

3,277

 

 

 

2,518

 

Other income (expense)

 

 

 

 

 

 

 

Interest expense

 

(3

)

 

 

(7

)

Interest income

 

29

 

 

 

12

 

Other income (expense)

 

97

 

 

 

(105

)

Total other income (expense), net

 

123

 

 

 

(100

)

Income before provision for income taxes

 

3,400

 

 

 

2,418

 

Provision for income taxes

 

1,035

 

 

 

846

 

Net income

 

2,365

 

 

 

1,572

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

Unrealized loss on foreign currency hedging

 

(92

)

 

 

 

Unrealized gain on available-for-sale investments

 

11

 

 

 

 

Total other comprehensive loss, net of tax

 

(81

)

 

 

 

Comprehensive income

$

2,284

 

 

$

1,572

 

 

 

 

 

 

 

 

 

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

$

0.12

 

 

$

0.08

 

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

$

0.11

 

 

$

0.08

 

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

 

 

 

 

 

 

 

share attributable to common stockholders:

 

 

 

 

 

 

 

Basic common shares

 

19,827,669

 

 

 

19,167,585

 

Diluted common shares

 

20,783,943

 

 

 

20,562,040

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

5


 

Inogen, Inc.

Statement of Stockholders’ Equity

(unaudited)

(amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

Total

 

 

Common stock

 

 

paid-in

 

 

Accumulated

 

 

comprehensive

 

 

stockholders'

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

loss

 

 

equity

 

Balance, December 31, 2015

 

19,782,403

 

 

$

20

 

 

$

179,143

 

 

$

(45,108

)

 

$

(37

)

 

$

134,018

 

Stock-based compensation

 

 

 

 

 

 

 

1,295

 

 

 

 

 

 

 

 

 

1,295

 

Employee stock purchases

 

17,724

 

 

 

 

 

 

500

 

 

 

 

 

 

 

 

 

500

 

Stock options exercised

 

77,359

 

 

 

 

 

 

92

 

 

 

 

 

 

 

 

 

92

 

Net income

 

 

 

 

 

 

 

 

 

 

2,365

 

 

 

 

 

 

2,365

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

(81

)

Balance, March 31, 2016

 

19,877,486

 

 

$

20

 

 

$

181,030

 

 

$

(42,743

)

 

$

(118

)

 

$

138,189

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

6


 

Inogen, Inc.

Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

Three months ended March 31,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

2,365

 

 

$

1,572

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

3,448

 

 

 

3,444

 

Loss on rental units and other fixed assets

 

306

 

 

 

205

 

Provision for sales returns

 

2,066

 

 

 

966

 

Provision for doubtful accounts

 

841

 

 

 

297

 

Provision for rental revenue adjustments

 

2,644

 

 

 

2,481

 

Provision for inventory obsolescence

 

23

 

 

 

32

 

Recovery on other inventory losses

 

(6

)

 

 

(9

)

Stock-based compensation expense

 

1,295

 

 

 

518

 

Deferred tax assets

 

990

 

 

 

 

Excess tax benefits from stock-based compensation arrangements

 

 

 

 

(1,818

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(9,486

)

 

 

(6,203

)

Inventories

 

(2,170

)

 

 

(199

)

Deferred costs of revenue

 

(123

)

 

 

83

 

Income tax receivable

 

 

 

 

814

 

Prepaid expenses and other current assets

 

(315

)

 

 

(162

)

Accounts payable and accrued expenses

 

4,260

 

 

 

2,975

 

Accrued payroll

 

(2,254

)

 

 

586

 

Warranty reserve

 

456

 

 

 

276

 

Deferred revenue

 

458

 

 

 

221

 

Income tax payable

 

(5

)

 

 

 

Other noncurrent liabilities

 

(16

)

 

 

(18

)

Net cash provided by operating activities

 

4,777

 

 

 

6,061

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

(6,990

)

 

 

 

Maturities of available-for-sale investments

 

10,100

 

 

 

 

Investment in intangible assets

 

 

 

 

(11

)

Production and purchase of rental equipment

 

(1,455

)

 

 

(3,477

)

Purchases of property and equipment

 

(714

)

 

 

(552

)

Reimbursement of deposit

 

1

 

 

 

 

Net cash provided by (used in) investing activities

 

942

 

 

 

(4,040

)

 

 

 

 

 

 

 

 

(continued on next page)

 

 

 

See accompanying condensed notes to the financial statements.

 

7


 

Inogen, Inc.

Statements of Cash Flows (continued)

(unaudited)

(amounts in thousands)

 

 

Three months ended March 31,

 

Cash flows from financing activities

2016

 

 

2015

 

Proceeds from stock options exercised

 

92

 

 

 

166

 

Proceeds from employee stock purchases

 

500

 

 

 

342

 

Repayment of debt from investment in intangible assets

 

(77

)

 

 

(81

)

Excess tax benefits from stock-based compensation arrangements

 

 

 

 

1,818

 

Net cash provided by financing activities

 

515

 

 

 

2,245

 

Effect of exchange rates on cash

 

60

 

 

 

 

Net increase in cash and cash equivalents

 

6,294

 

 

 

4,266

 

Cash and cash equivalents, beginning of period

 

66,106

 

 

 

56,836

 

Cash and cash equivalents, end of period

$

72,400

 

 

$

61,102

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

$

4

 

 

$

8

 

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

 

5

 

 

 

33

 

 

 

See accompanying condensed notes to the financial statements.

 

 

8


 

Inogen, Inc.

Condensed Notes to the 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 4.8 or 7.0 pounds. The Company’s Inogen One G3® and Inogen One G2® have up to 4.5 and 5 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 2014. The Company estimates based on 2014 Medicare data that patients using portable oxygen concentrators represent approximately 6% to 8% of the total addressable oxygen market in the United States, although the Medicare data does not account for cash-pay sales into the market. Based on 2014 industry data, the Company believes it was the leading worldwide manufacturer of portable oxygen concentrators, as well as the largest provider of portable oxygen concentrators to Medicare patients, as measured by dollar volume. 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, as well as compete with the home medical equipment providers that many rely on across their entire homecare business.

Since adopting the Company’s direct-to-consumer strategy in 2009 following its acquisition of Comfort Life Medical Supply, LLC, which had an active Medicare billing number but few other assets and limited business activities, the Company has directly sold or rented its Inogen oxygen concentrators to more than 145,000 patients as of March 31, 2016.

 

 

2. Basis of presentation and summary of significant accounting policies

The accompanying financial statements are unaudited. The balance sheet at December 31, 2015 has been derived from the audited financial statements of the Company. The accompanying 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, and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying financial statements should be read in conjunction with the 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 March 14, 2016. 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 March 14, 2016.

9


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

Use of estimates

The preparation of the Company’s financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying condensed notes. 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, inventory and rental asset valuations and write-downs, accounts receivable allowances for bad debts, returns and adjustments, stock compensation expense, impairment assessments, depreciation and amortization, income tax provision and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles.  Actual results could differ materially from these estimates.

Recent accounting pronouncements

Income taxes:  In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as noncurrent in a statement of financial position. The Company early adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the Company’s net current deferred tax asset to the net noncurrent deferred tax asset in the Company’s balance sheets as of December 31, 2015. No prior periods were retrospectively adjusted.

Revenue Recognition: 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 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 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 August 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year.  The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date.  As such, the updated standard will be effective for the Company in the first quarter of 2018, with the option to adopt it in the first quarter of 2017.  The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on the Company’s financial statements and has not yet determined the method by which the Company will adopt the standard.

Inventory:  In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The ASU requires entities to measure most inventory “at the lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market.  The ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods within annual periods. Early application is permitted and should be applied prospectively. The adoption of ASU No. 2015-11 is not expected to have a material effect on the Company’s financial statements.

Leases:  On February 25, 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 12 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. The Company is currently evaluating the effect of the new lease recognition guidance, and has not yet determined the impact on the Company’s results of operations and financial condition.

Stock compensation: In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for any entity in any interim or annual period.  If early adoption is elected during an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  If early adoption is elected, all of the amendments must be adopted in the same period.  The adoption of ASU No. 2016-09 and its impact to the financial statements is still being reviewed by the Company, and early adoption has not yet been determined.

10


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

Business segments

The Company operates in only one business segment – development, manufacturing, marketing, sales, and rental of respiratory products.

 

3. Fair value of financial instruments

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses, debt and warrants. The carrying values of cash and cash equivalents, short-term investments, accounts receivable and accounts payable and accrued expenses approximate fair values based on the short-term nature of these financial instruments.

The fair value of the Company’s debt approximates carrying value based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. Imputed interest associated with the Company’s non-interest bearing debt is insignificant and has been appropriately recognized in the respective periods.

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 should be determined based on assumptions that market participants would use in pricing the asset or liability. 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.

11


Inogen, Inc.

Condensed Notes to the 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 short-term investments:

 

 

 

As of March 31, 2016

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

Short-

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

term

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

investments

 

Cash

 

$

55,309

 

 

$

 

 

$

55,309

 

 

$

55,309

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

6,765

 

 

 

 

 

 

6,765

 

 

 

6,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

24,036

 

 

 

(16

)

 

 

24,020

 

 

 

10,326

 

 

 

13,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

86,110

 

 

$

(16

)

 

$

86,094

 

 

$

72,400

 

 

$

13,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

Short-

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

term

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

investments

 

Cash

 

$

52,164

 

 

$

 

 

$

52,164

 

 

$

52,164

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

6,725

 

 

 

 

 

 

6,725

 

 

 

6,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

24,047

 

 

 

(37

)

 

 

24,010

 

 

 

7,217

 

 

 

16,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

82,936

 

 

$

(37

)

 

$

82,899

 

 

$

66,106

 

 

$

16,793

 

 

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 may enter 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 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 income (expense), net in the 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.

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 balance sheet.  The Company had a payable of $197 and $24 as of March 31, 2016 and December 31, 2015, respectively.  The Level 2 inputs consist of forward contracts at the end of the reporting period.  The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.

12


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

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 (OCI) and reclassified into earnings in the same period or 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 OCI related to the hedging relationship.

Accumulated other comprehensive loss

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

 

 

Unrealized

 

 

Unrealized

 

 

Accumulated

 

 

gains (losses) on

 

 

losses

 

 

other

 

 

available-for-

 

 

on cash

 

 

comprehensive

 

 

sale investments

 

 

flow hedges

 

 

loss

 

Balance as of December 31, 2015

$

(23

)

 

$

(14

)

 

$

(37

)

Other comprehensive gain (loss), net of tax

 

11

 

 

 

(92

)

 

 

(81

)

Balance as of March 31, 2016

$

(12

)

 

$

(106

)

 

$

(118

)

 

Comprehensive income (loss) is the total net earnings and all other non-owner changes in equity. Except for net income and unrealized gains and losses on cash flow hedges and available-for-sale investments, the Company does not have any transactions or other economic events that qualify as comprehensive income (loss).

 

 

4. Balance sheet components

Cash, cash equivalents, and short-term investments

The Company considers all short-term highly liquid investments with a maturity of three months or less to be cash equivalents. Cash equivalents are recorded at cost plus accrued interest, which approximates fair value. Certificates of deposit are included in cash equivalents and short-term investments based on the maturity date of the security.

The Company considers investments with maturities greater than three months, but less than one year, to be short-term investments. Investments that have maturities of more than one year are classified as long-term investments. Investments are classified as available-for-sale and are reported at fair value with unrealized gains or losses, if any, reported, net of tax, in accumulated other comprehensive income (loss). All income generated and realized gains or losses from investments are recorded to other income (expense), net.

13


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Credit losses and other-than-temporary impairments are declines in fair value that are not expected to recover and are charged to other income (expense), net. During the three months ended March 31, 2016 and 2015, respectively, no losses were recognized for other-than-temporary impairments. Cash, cash equivalents and short-term investments consist of the following:

 

 

 

March 31,

 

 

December 31,

 

Cash and cash equivalents

 

2016

 

 

2015

 

Cash

 

$

55,309

 

 

$

52,164

 

Money market accounts

 

 

6,765

 

 

 

6,725

 

Certificates of deposit

 

 

10,326

 

 

 

7,217

 

Total cash and cash equivalents

 

$

72,400

 

 

$

66,106

 

Short-term investments

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

13,694

 

 

$

16,793

 

Total short-term investments

 

$

13,694

 

 

$

16,793

 

 

Accounts receivable and allowance for bad debts, returns, and adjustments

Accounts receivable are customer obligations due under normal sales and rental terms. The Company performs credit evaluations of the customers’ financial condition and generally does not require collateral. The allowance for doubtful accounts is maintained at a level that, in management’s opinion, is adequate to absorb potential losses related to accounts receivable and is based upon the Company’s continuous evaluation of the collectability of outstanding balances. Management’s evaluation takes into consideration such factors as past bad debt experience, economic conditions and information about specific receivables. The Company’s evaluation also considers the age and composition of the outstanding amounts in determining their net realizable value.

The allowance for doubtful accounts is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods in which they become known. This allowance is increased by bad debt provisions charged to bad debt expense, net of recoveries, in operating expense and is reduced by direct write-offs.

The Company generally does not allow returns from providers for reasons not covered under its standard warranty. Therefore, provision for sales returns applies primarily to direct-to-consumer sales. This reserve is calculated based on actual historical return rates under the Company’s 30-day return program and is applied to the related sales revenue for the last month of the quarter reported.

The Company also records an allowance for rental revenue adjustments, which is recorded as a reduction of rental revenue and net rental accounts receivable balances. These adjustments result from contractual adjustments, including untimely claims filings, or billings not paid due to another provider performing same or similar functions for the patient in the same period, all of which prevent billed revenue from becoming realizable. The reserve is based on historical revenue adjustments as a percentage of rental revenue billed and unbilled during the related period.

When recording the allowance for doubtful accounts, the bad debt expense account (general and administrative expense account) is charged; when recording allowance for sales returns, the sales returns account (contra sales revenue account) is charged; and when recording the allowance for rental reserve adjustments, the rental revenue adjustments account (contra rental revenue account) is charged.

As of March 31, 2016 and December 31, 2015, included in accounts receivable on the balance sheets were earned but unbilled receivables of $5,067 and $5,155, respectively. These balances reflect gross unbilled receivables prior to any allowances for adjustments and write-offs. The Company consistently applies its allowance estimation methodology from period-to-period.  The Company’s best estimate is made on an accrual basis and adjusted in future periods as required.  Any adjustments to the prior period estimates are included in the current period.  As additional information becomes known, the Company adjusts its assumptions accordingly to change its estimate of the allowance.

14


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

Gross accounts receivable balance concentrations by major category as of March 31, 2016 and December 31, 2015 were as follows:

 

 

 

March 31,

 

 

December 31,

 

Gross accounts receivable

 

2016

 

 

2015

 

Medicare

 

$

11,195

 

 

$

10,510

 

Medicaid/other government

 

 

683

 

 

 

683

 

Private insurance

 

 

4,970

 

 

 

4,852

 

Patient responsibility

 

 

3,928

 

 

 

3,603

 

Business-to-business & other receivables

 

 

10,495

 

 

 

6,369

 

Total gross accounts receivable

 

$

31,271

 

 

$

26,017

 

 

 

Net accounts receivable (gross accounts receivable net of allowances) balance concentrations by major category as of March 31, 2016 and December 31, 2015 were as follows:

 

 

 

March 31,

 

 

December 31,

 

Net accounts receivable

 

2016

 

 

2015

 

Medicare

 

$

7,432

 

 

$

7,441

 

Medicaid/other government

 

 

503

 

 

 

550

 

Private insurance

 

 

3,907

 

 

 

3,895

 

Patient responsibility

 

 

2,211

 

 

 

2,060

 

Business-to-business & other receivables

 

 

9,695

 

 

 

5,926

 

Total net accounts receivable

 

$

23,748

 

 

$

19,872

 

 

 

The following tables set forth the allowances for accounts receivable as of March 31, 2016 and December 31, 2015:

 

 

 

March 31,

 

 

December 31,

 

Allowances - accounts receivable

 

2016

 

 

2015

 

Doubtful accounts

 

$

2,021

 

 

$

1,664

 

Rental revenue adjustments

 

 

4,761

 

 

 

4,115

 

Sales returns

 

 

741

 

 

 

366

 

Total allowances - accounts receivable

 

$

7,523

 

 

$

6,145

 

 

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. At times, cash account balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation (FDIC). However, management believes the risk of loss to be minimal. The Company performs periodic evaluations of the relative credit standing of these institutions and has not experienced any losses on its cash and cash equivalents to date. The Company has entered into hedging relationships with a single counterparty to offset the forecasted Euro based revenues. The credit risk has been reduced due to a net settlement arrangement whereby the Company is allowed to net settle transactions with a single net amount payable by one party to the other.

Concentration of customers and vendors

The Company primarily sells its products to home medical equipment providers, distributors, and resellers in the United States and in foreign countries on a credit basis. The Company primarily sells its products to consumers on a prepayment basis. No single customer represented more than 10% of the Company’s total revenue for the three months ended March 31, 2016 and March 31, 2015. No single customer represented more than 10% of the Company’s total accounts receivable balance as of March 31, 2016 or as of December 31, 2015.

15


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

The Company also rents products directly to consumers for insurance reimbursement, which resulted in a customer concentration relating to Medicare’s service reimbursement programs. Medicare’s service reimbursement programs accounted for 82.2% and 82.1% of rental revenue for the three months ended March 31, 2016 and March 31, 2015, respectively, and based on total revenue were 19.5% and 26.0% for the three months ended March 31, 2016 and March 31, 2015, respectively. Accounts receivable balances relating to Medicare’s service reimbursement programs (including held and unbilled, net of allowances) amounted to $7,432 or 31.3% of total accounts receivable as of March 31, 2016 as compared to $7,441, or 37.4% of total accounts receivable as of December 31, 2015.

The Company currently purchases raw materials from a limited number of vendors, which resulted in a concentration of three major vendors. The three major vendors supply the Company with raw materials used to manufacture the Company’s products. For the three months ended March 31, 2016, the Company’s three major vendors accounted for 14.1%, 11.8%, and 7.1%, respectively, of total raw material purchases. For the three months ended March 31, 2015, the Company’s three major vendors accounted for 22.7%, 18.0% and 5.8%, respectively, of total raw material purchases.  

A portion of revenue is earned from sales outside the United States. Approximately 68.3% and 22.0% of the non-U.S. revenue for the three months ended March 31, 2016 and March 31, 2015, respectively, was invoiced in Euros. A breakdown of the Company’s revenue from U.S. and non-U.S. sources for the three months ended March 31, 2016 and March 31, 2015 is as follows:

 

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

U.S. revenue

 

$

33,024

 

 

$

25,354

 

Non-U.S. revenue

 

 

9,965

 

 

 

8,398

 

Total revenue

 

$

42,989

 

 

$

33,752

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using a standard cost method, including material, labor and manufacturing overhead, whereby the standard costs are updated at least quarterly to reflect approximate actual costs using the first-in, first-out (FIFO) method and market represents the lower of replacement cost or estimated net realizable value. The Company records adjustments at least quarterly to inventory for potentially excess, obsolete, slow-moving or impaired items. Inventories consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Raw materials and work-in-progress

 

$

8,785

 

 

$

7,097

 

Finished goods

 

 

1,655

 

 

 

1,679

 

Less: reserves

 

 

(165

)

 

 

(128

)

Inventories

 

$

10,275

 

 

$

8,648

 

 

Property and equipment

Property and equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives as follows:  

 

Rental equipment

 

1.5-5 years

Manufacturing equipment and tooling

 

2-5 years

Computer equipment and software

 

2-3 years

Furniture and equipment

 

3-5 years

Leasehold improvements

 

Shorter of 3-10 years or remaining life of underlying lease

 

Expenditures for additions, improvements and replacements are capitalized and depreciated to a salvage value of $0. Repair and maintenance costs are included in cost of revenue on the statements of comprehensive income. Repair and maintenance expense, which includes labor, parts and freight for rental equipment was $687 and $570 for the three months ended March 31, 2016 and March 31, 2015, respectively.

16


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

Included within property and equipment is construction in process, primarily related to the design and engineering of tooling, jigs and other machinery.  In addition, this item also includes computer software or development costs that have been purchased, but have not completed the final configuration process for implementation into the Company’s systems. These items have not been placed in service; therefore, no depreciation or amortization was recognized for these items in the respective periods.

Depreciation an