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 September 30, 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     No 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 

  

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     No 

As of October 31, 2016, the registrant had 20,260,695 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 September 30, 2016 and December 31, 2015

 

3

 

 

Statements of Comprehensive Income for the Three Months Ended September 30, 2016 and September 30, 2015 and Nine Months Ended September 30, 2016 and September 30, 2015

 

5

 

 

Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2016 and September 30, 2015

 

6

 

 

Statements of Cash Flows for the Nine Months Ended September 30, 2016 and September 30, 2015

 

7

 

 

Condensed Notes to the Financial Statements

 

9

Item 2.

 

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

 

28

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

52

Item 4.

 

Controls and Procedures

 

54

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

55

Item 1A.

 

Risk Factors

 

56

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

83

Item 3.

 

Defaults Upon Senior Securities

 

84

Item 4.

 

Mine Safety Disclosures

 

84

Item 5.

 

Other Information

 

84

Item 6.

 

Exhibits

 

85

SIGNATURES

 

86

 

 

 

2


 

INOGEN, INC.

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Inogen, Inc.

Balance Sheets

(unaudited)

(amounts in thousands)

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

86,009

 

 

$

66,106

 

Marketable securities

 

22,331

 

 

 

16,793

 

Accounts receivable, net

 

29,717

 

 

 

19,872

 

Inventories, net

 

16,499

 

 

 

8,648

 

Deferred cost of revenue

 

439

 

 

 

397

 

Income tax receivable

 

1,612

 

 

 

2,158

 

Prepaid expenses and other current assets

 

1,470

 

 

 

870

 

Total current assets

 

158,077

 

 

 

114,844

 

Property and equipment

 

 

 

 

 

 

 

Rental equipment, net

 

54,684

 

 

 

54,677

 

Manufacturing equipment and tooling

 

5,850

 

 

 

4,680

 

Computer equipment and software

 

4,663

 

 

 

4,503

 

Furniture and equipment

 

757

 

 

 

732

 

Leasehold improvements

 

811

 

 

 

978

 

Land and building

 

125

 

 

 

125

 

Construction in process

 

430

 

 

 

578

 

Total property and equipment

 

67,320

 

 

 

66,273

 

Less accumulated depreciation

 

(40,485

)

 

 

(35,593

)

Property and equipment, net

 

26,835

 

 

 

30,680

 

Intangible assets, net

 

268

 

 

 

229

 

Deferred tax asset - noncurrent

 

9,514

 

 

 

15,464

 

Other assets

 

97

 

 

 

97

 

Total assets

$

194,791

 

 

$

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)

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

20,710

 

 

$

12,867

 

Accrued payroll

 

5,844

 

 

 

5,271

 

Current portion of long-term debt

 

80

 

 

 

315

 

Warranty reserve - current

 

1,559

 

 

 

1,226

 

Deferred revenue - current

 

2,035

 

 

 

2,323

 

Income tax payable

 

 

 

 

11

 

Total current liabilities

 

30,228

 

 

 

22,013

 

Long-term liabilities

 

 

 

 

 

 

 

Warranty reserve - noncurrent

 

1,838

 

 

 

747

 

Deferred revenue - noncurrent

 

6,343

 

 

 

4,199

 

Other noncurrent liabilities

 

300

 

 

 

337

 

Total liabilities

 

38,709

 

 

 

27,296

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 200,000,000 authorized; 20,244,243 and 19,782,403

   shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 

20

 

 

 

20

 

Additional paid-in capital

 

190,202

 

 

 

179,143

 

Accumulated deficit

 

(34,146

)

 

 

(45,108

)

Accumulated other comprehensive income (loss)

 

6

 

 

 

(37

)

Total stockholders' equity

 

156,082

 

 

 

134,018

 

Total liabilities and stockholders' equity

$

194,791

 

 

$

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

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue

$

47,177

 

 

$

29,248

 

 

$

125,566

 

 

$

84,682

 

Rental revenue

 

7,245

 

 

 

11,530

 

 

 

26,412

 

 

 

33,877

 

Total revenue

 

54,422

 

 

 

40,778

 

 

 

151,978

 

 

 

118,559

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales revenue

 

24,271

 

 

 

16,046

 

 

 

63,824

 

 

 

46,501

 

Cost of rental revenue, including depreciation of $2,878 and $3,029 for the

   three months ended and $8,733 and $8,929 for the nine months ended,

   respectively

 

5,023

 

 

 

5,357

 

 

 

15,532

 

 

 

15,838

 

Total cost of revenue

 

29,294

 

 

 

21,403

 

 

 

79,356

 

 

 

62,339

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit-sales revenue

 

22,906

 

 

 

13,202

 

 

 

61,742

 

 

 

38,181

 

Gross profit-rental revenue

 

2,222

 

 

 

6,173

 

 

 

10,880

 

 

 

18,039

 

Total gross profit

 

25,128

 

 

 

19,375

 

 

 

72,622

 

 

 

56,220

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,350

 

 

 

1,116

 

 

 

3,897

 

 

 

2,954

 

Sales and marketing

 

9,679

 

 

 

8,132

 

 

 

28,220

 

 

 

22,623

 

General and administrative

 

8,702

 

 

 

6,413

 

 

 

23,812

 

 

 

19,066

 

Total operating expense

 

19,731

 

 

 

15,661

 

 

 

55,929

 

 

 

44,643

 

Income from operations

 

5,397

 

 

 

3,714

 

 

 

16,693

 

 

 

11,577

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1

)

 

 

(5

)

 

 

(6

)

 

 

(18

)

Interest income

 

61

 

 

 

28

 

 

 

126

 

 

 

66

 

Other income (expense)

 

(8

)

 

 

(59

)

 

 

78

 

 

 

(215

)

Total other income (expense), net

 

52

 

 

 

(36

)

 

 

198

 

 

 

(167

)

Income before provision for income taxes

 

5,449

 

 

 

3,678

 

 

 

16,891

 

 

 

11,410

 

Provision for income taxes

 

1,994

 

 

 

982

 

 

 

5,929

 

 

 

3,683

 

Net income

 

3,455

 

 

 

2,696

 

 

 

10,962

 

 

 

7,727

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on foreign currency hedging during the period

 

10

 

 

 

 

 

 

(24

)

 

 

 

Add: reclassification adjustment for losses included in net income

 

2

 

 

 

 

 

 

51

 

 

 

 

Total unrealized gain on foreign currency hedging

 

12

 

 

 

 

 

 

27

 

 

 

 

Unrealized gain (loss) on available-for-sale investments during the period

 

(4

)

 

 

 

 

 

16

 

 

 

 

Total other comprehensive income, net of tax

 

8

 

 

 

 

 

 

43

 

 

 

 

Comprehensive income

$

3,463

 

 

$

2,696

 

 

$

11,005

 

 

$

7,727

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0.17

 

 

$

0.14

 

 

$

0.55

 

 

$

0.40

 

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

$

0.16

 

 

$

0.13

 

 

$

0.52

 

 

$

0.37

 

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

   share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares

 

20,157,688

 

 

 

19,428,653

 

 

 

19,986,544

 

 

 

19,303,057

 

Diluted common shares

 

21,100,725

 

 

 

20,783,550

 

 

 

20,924,022

 

 

 

20,690,499

 

 

 

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

 

 

income (loss)

 

 

equity

 

Balance, December 31, 2014

 

19,059,364

 

 

$

19

 

 

$

174,824

 

 

$

(56,693

)

 

$

 

 

$

118,150

 

Stock-based compensation

 

 

 

 

 

 

 

2,343

 

 

 

 

 

 

 

 

 

2,343

 

Employee stock purchases

 

31,106

 

 

 

 

 

 

701

 

 

 

 

 

 

 

 

 

701

 

Stock options exercised

 

496,203

 

 

 

 

 

 

1,001

 

 

 

 

 

 

 

 

 

1,001

 

Net income

 

 

 

 

 

 

 

 

 

 

7,727

 

 

 

 

 

 

7,727

 

Balance, September 30, 2015

 

19,586,673

 

 

$

19

 

 

$

178,869

 

 

$

(48,966

)

 

$

 

 

$

129,922

 

Balance, December 31, 2015

 

19,782,403

 

 

 

20

 

 

 

179,143

 

 

 

(45,108

)

 

 

(37

)

 

 

134,018

 

Stock-based compensation

 

 

 

 

 

 

 

5,404

 

 

 

 

 

 

 

 

 

5,404

 

Employee stock purchases

 

37,378

 

 

 

 

 

 

1,055

 

 

 

 

 

 

 

 

 

1,055

 

Stock options exercised

 

424,462

 

 

 

 

 

 

4,600

 

 

 

 

 

 

 

 

 

4,600

 

Net income

 

 

 

 

 

 

 

 

 

 

10,962

 

 

 

 

 

 

10,962

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

43

 

Balance, September 30, 2016

 

20,244,243

 

 

$

20

 

 

$

190,202

 

 

$

(34,146

)

 

$

6

 

 

$

156,082

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

6


 

Inogen, Inc.

Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

Nine months ended September 30,

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

10,962

 

 

$

7,727

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

10,290

 

 

 

10,468

 

Loss on rental units and other fixed assets

 

891

 

 

 

889

 

Gain on sale of former assets

 

(224

)

 

 

 

Provision for sales returns and doubtful accounts

 

8,177

 

 

 

5,346

 

Provision for rental revenue adjustments

 

7,783

 

 

 

6,364

 

Provision for inventory obsolescence and other inventory losses, net of recoveries

 

141

 

 

 

131

 

Stock-based compensation expense

 

5,404

 

 

 

2,343

 

Deferred tax assets

 

5,950

 

 

 

3,682

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(25,812

)

 

 

(13,251

)

Inventories

 

(9,220

)

 

 

(3,167

)

Deferred cost of revenue

 

(42

)

 

 

41

 

Income tax receivable

 

546

 

 

 

(32

)

Prepaid expenses and other current assets

 

(600

)

 

 

(774

)

Accounts payable and accrued expenses

 

7,801

 

 

 

3,030

 

Accrued payroll

 

573

 

 

 

573

 

Warranty reserve

 

1,424

 

 

 

673

 

Deferred revenue

 

1,856

 

 

 

1,615

 

Income tax payable

 

(11

)

 

 

 

Other noncurrent liabilities

 

(37

)

 

 

(54

)

Net cash provided by operating activities

 

25,852

 

 

 

25,604

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

(26,321

)

 

 

(33,557

)

Maturities of available-for-sale investments

 

20,799

 

 

 

14,529

 

Investment in intangible assets

 

(112

)

 

 

(21

)

Investment in property and equipment

 

(6,071

)

 

 

(9,780

)

Proceeds from sale of former assets

 

328

 

 

 

 

Net cash used in investing activities

 

(11,377

)

 

 

(28,829

)

 

 

 

 

 

 

 

 

(continued on next page)

 

 

 

See accompanying condensed notes to the financial statements.

 

7


 

Inogen, Inc.

Statements of Cash Flows (continued)

(unaudited)

(amounts in thousands)

 

 

Nine months ended September 30,

 

 

2016

 

 

2015

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

4,600

 

 

 

1,001

 

Proceeds from employee stock purchases

 

1,055

 

 

 

701

 

Repayment of debt from investment in intangible assets

 

(235

)

 

 

(223

)

Net cash provided by financing activities

 

5,420

 

 

 

1,479

 

Effect of exchange rates on cash

 

8

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

19,903

 

 

 

(1,746

)

Cash and cash equivalents, beginning of period

 

66,106

 

 

 

56,836

 

Cash and cash equivalents, end of period

$

86,009

 

 

$

55,090

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

$

9

 

 

$

21

 

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

 

(533

)

 

 

32

 

 

 

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 2.8, 4.8 or 7.0 pounds with a single battery. The Company’s Inogen One G4®, Inogen One G3® and Inogen One G2® have up to 2.5, 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 2015. The Company estimates based on 2015 Medicare data that patients using portable oxygen concentrators represent approximately 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 2015 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 196,000 patients as of September 30, 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, stockholders’ equity and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 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 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. 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 from these estimates.

Reclassifications

Certain reclassifications have been made to prior years’ financial statements to conform to current period financial statements’ presentation with no effect on previously reported financial position, results of operations or cash flows. These changes consisted of reclassifications to certain line items in the accompanying Statement of Cash Flows and did not change total operating, financing or investing activities as previously reported.

Recent accounting pronouncements

Income taxes pronouncements:

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 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 No. 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 sheet as of December 31, 2015. No prior periods were retrospectively adjusted.

Revenue recognition pronouncements:

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

In August 2015, the FASB decided to delay the effective date of ASU No. 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 No. 2014-09 on the Company’s financial statements and has not yet determined the method by which the Company will adopt the standard.

In March 2016, the FASB issued ASU No. 2016-08, Revenue with Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus net), which is an amendment to ASU No. 2014-09 that improved the operability and understandability of implementation guidance versus agent considerations by clarifying the determination of principal versus agent.  The implementation guidelines follow ASU No. 2014-09.

In April 2016, the FASB issued ASU No. 2016-10, Revenue with Contracts with Customers: Identifying Performance Obligations and Licensing, which is an amendment to ASU No. 2014-09 that clarifies the aspects of identifying performance obligations and the licensing implementing guidance, while retaining the related principles within those areas.  The implementation guidelines follow ASU No. 2014-09.

10


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue with Contracts with Customers: Narrow-scope Improvements and Practical Expedients, which is an amendment to ASU No. 2014-09 that clarifies the objective of the collectability criterion, to allow entities to exclude amounts collected from customers from all sales taxes from the transaction price, to specify the measurement date for noncash consideration is contract inception, variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, and clarification on contract modifications at transition.  The implementation guidelines follow ASU No. 2014-09.

Inventory pronouncements:  

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 pronouncements:

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 pronouncements:

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 for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Certain amendments related to ASU No. 2016-09 are implemented with changes recognized on a modified retrospective transition method, retrospectively as well as prospectively. 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.

Financial instruments pronouncements:

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

Statement of cash flows pronouncements:

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The standard is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The ASU is effective for fiscal years beginning after December 15, 2017, 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 significant impact on the Company’s financial statement presentation or results.

11


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

Business segments

The Company operates and reports in only one operating and reportable 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, marketable securities, accounts receivable, accounts payable and accrued expenses, debt and warrants. The carrying values of cash and cash equivalents, marketable securities, 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

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

 

Level input

  

Input definition

Level 1

  

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

 

 

 

Level 2

  

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

 

 

 

Level 3

  

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

 

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

12


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 marketable securities:

 

 

 

As of September 30, 2016

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

43,454

 

 

$

 

 

$

43,454

 

 

$

43,454

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

39,793

 

 

 

 

 

 

39,793

 

 

 

39,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

14,782

 

 

 

 

 

 

14,782

 

 

 

2,762

 

 

 

12,020

 

Corporate bonds

 

 

10,321

 

 

 

(10

)

 

 

10,311

 

 

 

 

 

 

10,311

 

Total

 

$

108,350

 

 

$

(10

)

 

$

108,340

 

 

$

86,009

 

 

$

22,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

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

 

 

 

September 30,

 

 

 

2016

 

Due within one year

 

$

15,081

 

Due in one year through five years

 

 

7,250

 

Total

 

$

22,331

 

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 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.

13


Inogen, Inc.

Condensed Notes to the 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 balance sheet. The Company had a receivable of $6 as of September 30, 2016 and a payable of $24 as of December 31, 2015. 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 similar instruments. 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 (loss) 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 other comprehensive income related to the hedging relationship.

Accumulated other comprehensive income (loss)

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

 

 

Unrealized

 

 

Unrealized

 

 

Accumulated

 

 

gains (losses) on

 

 

gains (losses)

 

 

other

 

 

available-for-

 

 

on cash

 

 

comprehensive

 

 

sale investments

 

 

flow hedges

 

 

income (loss)

 

Balance as of December 31, 2015

$

(23

)

 

$

(14

)

 

$

(37

)

Other comprehensive gain, net of tax

 

16

 

 

 

27

 

 

 

43

 

Balance as of September 30, 2016

$

(7

)

 

$

13

 

 

$

6

 

 

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 marketable securities

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 (adjusted cost), which approximates fair value which includes the unrealized gains (losses). Certificates of deposit are included in cash equivalents and marketable securities based on the maturity date of the security.  Short-term investments are included in marketable securities in the current period presentation.

The Company considers investments with maturities greater than three months to be marketable securities. 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.

14


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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