ingn-10q_20160331.htm

(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.

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.

	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

	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

	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

										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

	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)

	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

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.

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.

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.

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.

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

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.

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:

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.

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

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.

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.

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

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).

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.

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:

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.

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

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:

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

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.

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.

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:

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:

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:

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.

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.

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)

Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨		Smaller reporting company ¨
				(Do not check if a smaller reporting company)

	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

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.

	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

	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

	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

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