Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

v3.10.0.1
Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Basis of Presentation

Basis of presentation

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

Basis of Consolidation

Basis of consolidation

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

Accounting Estimates

Accounting estimates

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

Revenue

Revenue

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

Sales revenue

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

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

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

The revenue is allocated to the distinct lifetime warranty performance obligation based on a relative SSP method. The Company has vendor-specific objective evidence of the selling price for its equipment. To determine the selling price of the lifetime warranty, the Company uses its best estimate of the SSP for the distinct performance obligation as the lifetime warranty is neither separately priced nor is the selling price available through third-party evidence. To calculate the selling price associated with the lifetime warranties, management considers the profit margins of service revenue, the average estimated cost of lifetime warranties and the price of extended warranties. Revenue from the distinct lifetime warranty is deferred after the delivery of the equipment and recognized based on an estimated mortality rate over five years, which is the estimated performance period of the contract based on the average patient life expectancy.

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

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

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

Contract liabilities primarily consist of deferred revenue related to lifetime warranties on direct-to-consumer sales revenue when cash payments are received in advance of services performed under the contract. The contract with the customer states the final terms of the sale, including the description, quantity, and price of each product or service purchase.  The increase in deferred revenue related to lifetime warranties were primarily driven by $6,909 and $4,290 of payments received in advance of satisfying performance obligations for the years ended December 31, 2018 and December 31, 2017, respectively, partially offset by $2,855 and $752 of revenues recognized that were included in the deferred revenue balances as of December 31, 2017 and December 31, 2016, respectively.  Deferred revenue related to lifetime warranties was $14,874 and $10,820 as of December 31, 2018 and December 31, 2017, respectively, and is classified within deferred revenue – current and noncurrent deferred revenue in the consolidated balance sheet.

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

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

 

(amounts in thousands)

 

Years ended December 31,

 

Revenue by region and category

 

2018

 

 

2017

 

 

2016

 

Business-to-business domestic sales

 

$

116,581

 

 

$

83,390

 

 

$

56,605

 

Business-to-business international sales

 

 

77,333

 

 

 

55,519

 

 

 

50,106

 

Direct-to-consumer domestic sales

 

 

142,101

 

 

 

86,583

 

 

 

61,459

 

Total sales revenue

 

$

336,015

 

 

$

225,492

 

 

$

168,170

 

 

Rental revenue

The Company recognizes equipment rental revenue over the non-cancelable lease term, which is one month, less estimated adjustments, in accordance with ASC 840—Leases. The Company has separate contracts with each patient that are not subject to a master lease agreement with any third-party payor. The Company evaluates the individual lease contracts at lease inception and the start of each monthly renewal period to determine if there is reasonable assurance that the bargain renewal option associated with the potential capped free rental period would be exercised. Historically, the exercise of such bargain renewal option is not reasonably assured at lease inception and most subsequent monthly lease renewal periods. If the Company determines that the reasonable assurance threshold for an individual patient is met at lease inception or at a monthly lease renewal period, such determination would impact the bargain renewal period for an individual lease. The Company would first consider the lease classification issue (sales-type lease or operating lease) and then appropriately recognize or defer rental revenue over the lease term, which may include a portion of the capped rental period. The Company deferred $0 associated with the capped rental period as of December 31, 2018 and December 31, 2017.

The lease term begins on the date products are shipped to patients and are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private payors, and Medicaid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. The Company adjusts revenue for historical trends on revenue adjustments due to timely filings, deaths, hospice, and other types of analyzable adjustments on a monthly basis. Accounts receivable are reduced by an allowance for doubtful accounts which provides for those accounts from which payment is not expected to be received although product was delivered and revenue was earned. The determination that an account is uncollectable and the ultimate write-off of that account occurs once collection is considered to be highly unlikely, and it is written-off and charged to the allowance at that time. Amounts billed but not earned due to the timing of the billing cycle are deferred and recognized in revenue on a straight-line basis over the monthly billing period. For example, if the first day of the billing period does not fall on the first of the month, then a portion of the monthly billing period will fall in the subsequent month and the related revenue and cost would be deferred based on the service days in the following month.

Rental revenue is recognized as earned, less estimated adjustments. Revenue not billed at the end of the period is reviewed for the likelihood of collections and accrued. The rental revenue stream is not guaranteed and payment will cease if the patient no longer needs oxygen or returns the equipment. Revenue recognized is at full estimated allowable amounts; transfers to secondary insurances or patient responsibility have no net effect on revenue. Rental revenue is earned for that entire month if the patient is on service on the first day of the 30-day period commencing on the recurring date of service for a particular claim, regardless if there is a change in condition or death after that date.

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

Fair Value of Financial Instruments

Fair value of financial instruments

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

Imputed interest associated with the Company’s non-interest bearing debt was insignificant and was appropriately recognized in the respective periods.

Fair value accounting

ASC 820Fair 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 securities, which are not in active markets, from a third-party professional pricing service using quoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. The Company's professional pricing service gathers observable inputs for all of its fixed income securities from a variety of industry data providers (e.g., large custodial institutions) and other third-party sources. Once the observable inputs are gathered, all data points are considered and the fair value is determined. The Company validates the quoted market prices provided by its primary pricing service by comparing their assessment of the fair values against the fair values provided by its investment managers. The Company's investment managers use similar techniques to its professional pricing service to derive pricing as described above. As all significant inputs were observable, derived from observable information in the marketplace or supported by observable levels at which transactions are executed in the marketplace, the Company has classified its marketable securities within Level 2 of the fair value hierarchy.

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 December 31, 2018

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

(amounts in thousands)

 

cost

 

 

gains (losses)

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

33,671

 

 

$

 

 

$

33,671

 

 

$

33,671

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

158,438

 

 

 

 

 

 

158,438

 

 

 

158,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

13,629

 

 

 

(16

)

 

 

13,613

 

 

 

 

 

 

13,613

 

U.S. Treasury securities

 

 

34,620

 

 

 

7

 

 

 

34,627

 

 

 

4,525

 

 

 

30,102

 

Total

 

$

240,358

 

 

$

(9

)

 

$

240,349

 

 

$

196,634

 

 

$

43,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

(amounts in thousands)

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

46,237

 

 

$

 

 

$

46,237

 

 

$

46,237

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

93,430

 

 

 

 

 

 

93,430

 

 

 

93,430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

11,010

 

 

 

(4

)

 

 

11,006

 

 

 

490

 

 

 

10,516

 

Corporate bonds

 

 

20,789

 

 

 

(21

)

 

 

20,768

 

 

 

2,796

 

 

 

17,972

 

Agency mortgage-backed securities

 

 

2,005

 

 

 

(1

)

 

 

2,004

 

 

 

 

 

 

2,004

 

U.S. Treasury securities

 

 

499

 

 

 

 

 

 

499

 

 

 

 

 

 

499

 

Total

 

$

173,970

 

 

$

(26

)

 

$

173,944

 

 

$

142,953

 

 

$

30,991

 

 

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

 

 

December 31,

 

(amounts in thousands)

2018

 

Due within one year

$

43,715

 

Due in one year through five years

 

 

Total

$

43,715

 

 

Derivative Instruments and Hedging Activities

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) income within stockholders’ equity and are recognized in the consolidated statements of comprehensive income during the period which approximates the time the corresponding sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain asset and liability balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in other expense, net in the consolidated statements of comprehensive income. The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in other income (expense), net.

The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheet. The Company had a receivable of $472 and a payable of $66 as of December 31, 2018 and 2017, respectively. The Company classifies the foreign currency derivative instruments within Level 2 in the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of whether it is designated and qualifies for hedge accounting.

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

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

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss)

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

 

 

As of December 31, 2018

 

 

Foreign

 

 

Unrealized

 

 

Unrealized

 

 

Accumulated

 

 

currency

 

 

gains (losses) on

 

 

gains (losses)

 

 

other

 

 

translation

 

 

marketable

 

 

on cash

 

 

comprehensive

 

(amounts in thousands)

adjustments

 

 

securities

 

 

flow hedges

 

 

income

 

Balance as of December 31, 2017

$

363

 

 

$

(17

)

 

$

(74

)

 

$

272

 

Other comprehensive gain

 

31

 

 

 

17

 

 

 

404

 

 

 

452

 

Balance as of December 31, 2018

$

394

 

 

$

 

 

$

330

 

 

$

724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

Foreign

 

 

Unrealized

 

 

Unrealized

 

 

Accumulated

 

 

currency

 

 

gains (losses) on

 

 

gains (losses)

 

 

other

 

 

translation

 

 

marketable

 

 

on cash

 

 

comprehensive

 

(amounts in thousands)

adjustments

 

 

securities

 

 

flow hedges

 

 

income (loss)

 

Balance as of December 31, 2016

$

 

 

$

(82

)

 

$

47

 

 

$

(35

)

Other comprehensive gain (loss)

 

363

 

 

 

65

 

 

 

(121

)

 

 

307

 

Balance as of December 31, 2017

$

363

 

 

$

(17

)

 

$

(74

)

 

$

272

 

 

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, the Company does not have any transactions or other economic events that qualify as comprehensive income (loss).

Cash, Cash Equivalents, and Marketable Securities

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.  The Company’s marketable debt securities have been classified and accounted for as available-for-sale. Cash equivalents are recorded at cost plus accrued interest, which is considered adjusted cost, and approximates fair value. Marketable debt securities 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, but less than one year, to be marketable securities. Investments are reported at fair value with realized and unrealized gains or losses reported in 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. Cash, cash equivalents, and marketable securities consist of the following:

 

(amounts in thousands)

December 31,

 

Cash and cash equivalents

2018

 

 

2017

 

Cash

$

33,671

 

 

$

46,237

 

Money market accounts

 

158,438

 

 

 

93,430

 

Certificates of deposit

 

 

 

 

490

 

Corporate bonds

 

 

 

 

2,796

 

U.S. Treasury securities

 

4,525

 

 

 

 

Total cash and cash equivalents

$

196,634

 

 

$

142,953

 

Marketable securities

 

 

 

 

 

 

 

Certificates of deposit

$

 

 

$

10,516

 

Corporate bonds

 

13,613

 

 

 

17,972

 

Agency mortgage-backed securities

 

 

 

 

2,004

 

U. S. Treasury securities

 

30,102

 

 

 

499

 

Total marketable securities

$

43,715

 

 

$

30,991

 

 

Accounts Receivable and Allowance for Bad Debts, Returns, and Adjustments

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 general and administrative expense 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 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, audit adjustments, 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 December 31, 2018 and December 31, 2017, included in accounts receivable on the consolidated balance sheets were earned but unbilled receivables of $589 and $1,470, 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. For the years ended December 31, 2018 and December 31, 2017, the Company had increases of $1,757 and $3,442, respectively, in the provision for bad debt and revenue adjustments related to prior years.

Gross accounts receivable balance concentrations by major category as of December 31, 2018 and December 31, 2017 were as follows:

 

 

 

As of

 

 

As of

 

(amounts in thousands)

 

December 31, 2018

 

 

December 31, 2017

 

Gross accounts receivable

 

$

 

 

%

 

 

$

 

 

%

 

Rental (1)

 

$

3,406

 

 

 

8.7

%

 

$

6,236

 

 

 

18.0

%

Business-to-business and other receivables (2)

 

 

35,656

 

 

 

91.3

%

 

 

28,474

 

 

 

82.0

%

Total gross accounts receivable

 

$

39,062

 

 

 

100.0

%

 

$

34,710

 

 

 

100.0

%

 

Net accounts receivable (gross accounts receivable, net of allowances) balance concentrations by major category as of December 31, 2018 and December 31, 2017 were as follows:

 

 

 

As of

 

 

As of

 

(amounts in thousands)

 

December 31, 2018

 

 

December 31, 2017

 

Net accounts receivable

 

$

 

 

%

 

 

$

 

 

%

 

Rental (1)

 

$

2,413

 

 

 

6.5

%

 

$

4,212

 

 

 

13.4

%

Business-to-business and other receivables (2)

 

 

34,628

 

 

 

93.5

%

 

 

27,232

 

 

 

86.6

%

Total net accounts receivable

 

$

37,041

 

 

 

100.0

%

 

$

31,444

 

 

 

100.0

%

 

(1)

Rental includes Medicare, Medicaid/other government, private insurance and patient pay.

(2)

Business-to business receivables included one customer with a gross accounts receivable balance of $16,198 and $10,394 as of December 31, 2018 and December 31, 2017, respectively. This customer received extended payment terms through a direct financing plan offered. The Company also has a credit insurance policy in place, which allocated up to $18,000 in coverage as of December 31, 2018 and allocated up to $12,000 in coverage as of December 31, 2017 for this customer with a $400 deductible and 10% retention.

 

The following table sets forth the percentage breakdown of the Company’s net accounts receivable (gross accounts receivable net of allowances) by aging category by invoice due date as of December 31, 2018 and December 31, 2017.

 

 

 

As of

 

 

As of

 

(amounts in thousands)

 

December 31, 2018

 

 

December 31, 2017

 

Net accounts receivable by aging category

 

$

 

 

%

 

 

$

 

 

%

 

Held and Unbilled

 

$

80

 

 

 

0.2

%

 

$

537

 

 

 

1.7

%

Aged 0-90 days

 

 

36,245

 

 

 

97.9

%

 

 

29,237

 

 

 

93.0

%

Aged 91-180 days

 

 

425

 

 

 

1.1

%

 

 

435

 

 

 

1.4

%

Aged 181-365 days

 

 

234

 

 

 

0.6

%

 

 

602

 

 

 

1.9

%

Aged over 365 days

 

 

57

 

 

 

0.2

%

 

 

633

 

 

 

2.0

%

Total net accounts receivable

 

$

37,041

 

 

 

100.0

%

 

$

31,444

 

 

 

100.0

%

 

The following table sets forth the accounts receivable allowances as of December 31, 2018 and December 31, 2017:

 

 

 

As of

 

 

As of

 

(amounts in thousands)

 

December 31, 2018

 

 

December 31, 2017

 

Allowances - accounts receivable

 

$

 

 

%

 

 

$

 

 

%

 

Doubtful accounts

 

$

693

 

 

 

1.8

%

 

$

1,415

 

 

 

4.1

%

Rental revenue adjustments

 

 

438

 

 

 

1.1

%

 

 

947

 

 

 

2.7

%

Sales returns

 

 

890

 

 

 

2.3

%

 

 

904

 

 

 

2.6

%

Total allowances - accounts receivable

 

$

2,021

 

 

 

5.2

%

 

$

3,266

 

 

 

9.4

%

 

Concentration of Credit Risk

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, marketable securities 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 also 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

Concentration of customers and vendors

The Company primarily sells its products to traditional home medical equipment providers, distributors, and resellers in the United States and in foreign countries on a credit basis. The Company also sells its products direct-to-consumers on a primarily prepayment basis. One single customer represented more than 10% of the Company’s total revenue for the years ended December 31, 2018, 2017, and 2016. Two customers represented more than 10% of the Company’s net accounts receivable balance with accounts receivable balances of $16,198 and $4,155, respectively, as of December 31, 2018, and $10,394 and $6,459, respectively, as of December 31, 2017.

The Company also rents products direct-to-consumers for insurance reimbursement, which resulted in a customer concentration relating to Medicare’s service reimbursement programs in 2016. Medicare’s service reimbursement programs accounted for 72.6% of rental revenue in the year ended December 31, 2016 and based on total revenue was 12.4% for the year ended December 31, 2016. Medicare did not represent more than 10% of the Company’s total revenue in the years ended December 31, 2018 and 2017. Medicare did not represent more than 10% of the Company’s net accounts receivable balance as of December 31, 2018 and 2017.

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 year ended December 31, 2018, the Company’s three major vendors accounted for 20.0%, 11.9% and 10.2%, respectively, of total raw material purchases. For the year ended December 31, 2017, the Company’s three major vendors accounted for 19.7%, 15.4% and 9.5%, respectively, of total raw material purchases.  

A portion of revenue is earned from sales outside the United States. Approximately 74.8% of the non-U.S. revenue for the year ended December 31, 2018 was invoiced in Euros. A breakdown of the Company’s revenue from U.S. and non-U.S. sources for the years ended December 31, 2018, 2017 and 2016 is as follows:

 

 

Years ended December 31,

 

(amounts in thousands)

2018

 

 

2017

 

 

2016

 

U.S. revenue

$

280,778

 

 

$

193,919

 

 

$

152,723

 

Non-U.S. revenue

 

77,333

 

 

 

55,519

 

 

 

50,106

 

Total revenue

$

358,111

 

 

$

249,438

 

 

$

202,829

 

 

Inventories

Inventories

Inventories are stated at the lower of cost or market and net realizable value. 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. The Company records adjustments at least quarterly to inventory for potentially excess, obsolete, slow-moving or impaired items. The Company recorded noncurrent inventory related to inventories that are expected to be realized or consumed after one year of $1,085 and $644 as of December 31, 2018 and 2017, respectively. Noncurrent inventories are primarily related to raw materials purchased in bulk to support long-term expected repairs to reduce costs and are classified in other assets. During the years ended December 31, 2018, 2017 and 2016, $1,187, $1,055 and $1,454, respectively, of inventory was transferred to rental equipment and was considered a noncash transaction in the production and purchase of rental equipment on the consolidated statements of cash flows. Inventories that are considered current consist of the following:

 

 

December 31,

 

(amounts in thousands)

2018

 

 

2017

 

Raw materials and work-in-progress

$

24,980

 

 

$

16,324

 

Finished goods

 

2,756

 

 

 

2,917

 

Less: reserves

 

(665

)

 

 

(399

)

Inventories

$

27,071

 

 

$

18,842

 

 

Property and Equipment

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

3-5 years

 

 

 

 

Computer equipment and software

2-3 years

 

 

 

 

Furniture and equipment

3-5 years

 

 

 

 

Leasehold improvements

Lesser of estimated useful life or remaining lease term

Expenditures for additions, improvements and replacements are capitalized and depreciated to a salvage value of $0. Repair and maintenance costs on rental equipment are included in cost of rental revenue on the consolidated statements of comprehensive income. Repair and maintenance expense, which includes labor, parts and freight, for rental equipment was $2,289, $2,385 and $2,464 for the years ended December 31, 2018, 2017 and 2016, 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.

Depreciation and amortization expense related to rental equipment and other property and equipment are summarized below for the years ended December 31, 2018, 2017 and 2016, respectively.

 

 

Years ended December 31,

 

(amounts in thousands)

2018

 

 

2017

 

 

2016

 

Rental equipment

$

7,567

 

 

$

9,835

 

 

$

11,429

 

Other property and equipment

 

2,463

 

 

 

1,960

 

 

 

2,028

 

Total depreciation and amortization

$

10,030

 

 

$

11,795

 

 

$

13,457

 

 

Property and equipment and rental equipment with associated accumulated depreciation is summarized below as of December 31, 2018 and 2017, respectively.

 

(amounts in thousands)

December 31,

 

Property and equipment

2018

 

 

2017

 

Rental equipment, net of allowances of $594 and $754, respectively

$

43,038

 

 

$

49,349

 

Other property and equipment

 

21,596

 

 

 

15,219

 

Property and equipment

 

64,634

 

 

 

64,568

 

Accumulated depreciation

 

 

 

 

 

 

 

Rental equipment

 

31,813

 

 

 

34,754

 

Other property and equipment

 

10,480

 

 

 

9,711

 

Accumulated depreciation

 

42,293

 

 

 

44,465

 

Property and equipment, net

 

 

 

 

 

 

 

Rental equipment, net of allowances of $594 and $754, respectively

 

11,225

 

 

 

14,595

 

Other property and equipment

 

11,116

 

 

 

5,508

 

Property and equipment, net

$

22,341

 

 

$

20,103

 

Long-lived Assets

 

Long-lived assets

The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 360Property, Plant, and Equipment. In accordance with ASC 360, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets to determine whether or not impairment to such value has occurred. No impairments were recorded as of December 31, 2018 and 2017.

Goodwill and Intangible Assets

Goodwill and intangible assets

Goodwill is tested for impairment on an annual basis as of October 1. Interim testing of goodwill for impairment is also required whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or asset below its carrying amount. No impairments were recorded as of December 31, 2018 and 2017.

Finite-lived intangible assets are amortized over their useful lives and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Customer relationships and non-compete agreements are amortized using the straight-line method.

Business Combinations

Business combinations

The results of operations of the businesses acquired by the Company are included as of the acquisition date. The purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. The Company may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if it obtains more information regarding asset valuations and liabilities assumed. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Loss Contingencies

Loss contingencies

The Company is involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business.  The Company records a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated.  Significant judgment is required to determine both probability and the estimated amount. The Company reviews at least quarterly and adjusts accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.  At this time, the Company has no accrual related to lawsuits, claims, investigations and proceedings.

Deferred Rent

Deferred rent

The Company’s operating leases for its office facilities in California, Texas and Ohio include a rent abatement period and scheduled rent increases. The Company has accounted for the leases to provide straight-line charges to operations over the life of the leases.

Research and Development

Research and development

Research and development costs are expensed as incurred.

Advertising Costs

Advertising costs

Advertising costs, which approximated $30,755, $12,511 and $6,215 during the years ended December 31, 2018, 2017 and 2016, respectively, are expensed as incurred, excluding the production costs of direct response advertising. Advertising costs are included in sales and marketing expense in the accompanying consolidated statements of comprehensive income.

Income Taxes

Income taxes

The Company accounts for income taxes in accordance with ASC 740—Income Taxes. Under ASC 740, income taxes are recognized for the amount of taxes payable or refundable for the current period and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in the Company’s consolidated financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax asset will not be realized.

The Company accounts for uncertainties in income tax in accordance with ASC 740-10—Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company recognizes interest and penalties on taxes, if any, within its income tax provision on its consolidated statements of comprehensive income. No interest or penalties were recognized during the periods presented.

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect the Company’s business. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017, expensing of capital expenditures, the transition of U.S. international taxation from a worldwide tax system to a territorial system, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, and limitations on the deductibility of certain executive compensation and other deductions. The Company is required to recognize the effect of the tax law changes in the period of enactment, including the transition tax, re-measuring the Company’s U.S. deferred tax assets and liabilities, as well as reassessing the net realizability of the Company’s deferred tax assets and liabilities. During the fourth quarter of 2017, the Company recorded a provisional net charge of $7,578 related to the TCJA due to the remeasurement of its deferred tax assets. There was no impact related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings. As of December 31, 2018, the Company completed its evaluation and analysis of the TCJA and there was no additional adjustment to the provisional amount recorded in the fourth quarter of 2017.

Accounting for Stock-Based Compensation

Accounting for stock-based compensation

The Company accounts for its stock-based compensation in accordance with ASC 718—Compensation—Stock Compensation, which establishes accounting for share-based awards, exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. Stock–based compensation cost for stock options and employee stock purchase plan are determined at the grant date using the Black-Scholes option pricing model. Stock-based compensation cost for stock incentive awards is based on the number of shares ultimately expected to vest, estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the employee’s requisite service period.

As part of the provisions of ASC 718, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future periods.

Foreign Currency

Foreign currency

The functional currency of the Company’s international subsidiaries is the local currency.  The financial statements of the subsidiaries are translated to U.S. dollars using month-end exchange rates for assets and liabilities, and average rates of exchange for revenues, cost of revenue, operating expense and provision for income taxes. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity. Foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are reflected as a component of foreign currency exchange gains or losses in other income (expense) in the consolidated statements of comprehensive income.

Business Segments

Business segments

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

Earnings Per Share

Earnings per share

Earnings per share (EPS) is computed in accordance with ASC 260—Earnings per Share and is calculated using the weighted-average number of common shares outstanding during each period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents (which can include dilution of outstanding stock options, restricted stock units and restricted stock awards) unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, common stock subject to repurchase by the Company, options, and other dilutive awards are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

Basic earnings per share is calculated using the Company’s weighted-average outstanding common shares. Diluted earnings per share is calculated using the Company’s weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method.

The computation of EPS is as follows:

 

 

Years ended December 31,

 

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

2018

 

 

2017

 

 

2016

 

Numerator—basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

Net income

$

51,845

 

 

$

21,002

 

 

$

20,519

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - basic common stock (1)

 

21,266,696

 

 

 

20,683,807

 

 

 

20,067,152

 

Weighted-average common shares - diluted common stock

 

22,514,513

 

 

 

21,897,988

 

 

 

21,095,867

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - basic common stock

$

2.44

 

 

$

1.02

 

 

$

1.02

 

Net income per share - diluted common stock

$

2.30

 

 

$

0.96

 

 

$

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator calculation from basic to diluted:

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares - basic common stock (1)

 

21,266,696

 

 

 

20,683,807

 

 

 

20,067,152

 

Stock options and other dilutive awards

 

1,247,817

 

 

 

1,214,181

 

 

 

1,028,715

 

Weighted-average common shares - diluted common stock

 

22,514,513

 

 

 

21,897,988

 

 

 

21,095,867

 

Shares excluded from diluted weighted-average shares:

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

37,249

 

 

 

841,760

 

Restricted stock units and restricted stock awards

 

39,330

 

 

 

26,064

 

 

 

 

Shares excluded from diluted weighted-average shares

 

39,330

 

 

 

63,313

 

 

 

841,760

 

 

(1)

Unvested restricted stock units and restricted stock awards are not included as shares outstanding in the calculation of basic earnings per share. Vested restricted stock units and restricted stock awards are included in basic earnings per share if all vesting and performance criteria have been met. Performance-based restricted stock units and restricted stock awards are included in the number of shares used to calculate diluted earnings per share as long as all applicable performance criteria are met, and their effect is dilutive. Restricted stock awards are eligible to receive all dividends declared on the Company’s common shares during the vesting period; however, such dividends are not paid until the restrictions lapse.

The computations of diluted net income attributable to common stockholders excluded common stock options, restricted stock units, and restricted stock awards, which were anti-dilutive for the years ended December 31, 2018, 2017 and 2016.

Recently Issued Accounting Pronouncements Not Yet Adopted

Recently issued accounting pronouncements not yet adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new guidance will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than twelve months. This will increase the reported assets and liabilities – in some cases very significantly. ASU No. 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption will be permitted for all entities. In January 2018, the FASB issued ASU No. 2018-01, Land Easement Practice Expedient for Transition to Topic 842, which is an amendment to ASU No. 2016-02 that offers a practical expedient for accounting for land easements.  This practical expedient allows an entity the option of not evaluating existing land easements under ASC 842.  New or modified land easements will still require evaluation under ASC 842 on a prospective basis beginning on the date of adoption. The Company adopted the standard using the modified retrospective transition method at the adoption date of January 1, 2019 that does not require restatement of its comparative periods presented.  As permitted under the transition guidance, the Company will carry forward the assessment of whether the Company’s contracts contain or are leases, classification of the Company’s leases and remaining lease terms. The Company elected the practical expedients to not record leases with an initial term of 12 months on the consolidated balance sheet and to not separate lease and non-lease components for all of our leases as the non-lease components are not significant to the overall lease costs. The Company finalized its analysis and the adoption of this standard will impact its operating leases, as disclosed in Note 7 – Commitments and contingencies, which are primarily relating to property. The Company will recognize approximately $6,400 right-of-use assets and operating lease liabilities on the consolidated balance sheets upon adoption, which will increase the Company’s total assets and liabilities.

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

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

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, which changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, in order to better align an entity’s risk management activities and financial reporting for hedging relationships. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU No. 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, with early adoption permitted. The Company adopted this standard on January 1, 2019 and adoption of this standard will not have a material impact on the Company’s consolidated financial statement presentation or results.

In January 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance permits entities the option to reclassify tax effects that are stranded in accumulated other comprehensive income as a result of the implementation of the Tax Cuts and Jobs Act to retained earnings.  The Company adopted this standard on January 1, 2019 using the beginning of the period of adoption method and adoption of this standard will not have a material impact on the Company’s consolidated financial statement presentation or results.

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

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements.  The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. While the Company continues to evaluate the effect of adopting this guidance, the Company expects the fair value disclosures related to marketable securities, as disclosed in Note 2 – Fair value of financial instruments, will be subject to the new standard.

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

Recently Adopted Accounting Pronouncements

Recently adopted accounting pronouncements

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

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments and requires the Company to prospectively record changes in the fair value of the Company’s marketable securities in net income instead of in accumulated other comprehensive income.  The Company adopted this standard during 2018. The adoption of this ASU did not have a material effect on the Company’s consolidated financial statement presentation or results.

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

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance clarifies the accounting for implementation costs in cloud computing arrangements. The ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard on October 1, 2018 using the prospective method.  Adoption of this standard did not have a material impact on the Company’s consolidated financial statement presentation or results.