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EX-32.2 - EX-32.2 - Inogen Incingn-ex322_7.htm
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EX-31.2 - EX-31.2 - Inogen Incingn-ex312_6.htm
EX-31.1 - EX-31.1 - Inogen Incingn-ex311_8.htm
EX-10.5 - EX-10.5 - Inogen Incingn-ex105_340.htm
EX-10.4 - EX-10.4 - Inogen Incingn-ex104_339.htm
EX-10.3 - EX-10.3 - Inogen Incingn-ex103_341.htm
EX-10.2 - EX-10.2 - Inogen Incingn-ex102_342.htm
EX-10.1 - EX-10.1 - Inogen Incingn-ex101_338.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of October 31, 2017, the registrant had 20,870,357 shares of common stock, par value $0.001, outstanding.

 

 

 


 

TABLE OF CONTENTS

 

 

 

Part I – Financial Information

 

Page

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

 

3

 

 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2017 and September 30, 2016

 

5

 

 

Consolidated Statements of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2017 and September 30, 2016

 

6

 

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2017 and September 30, 2016

 

7

 

 

Condensed Notes to the Consolidated Financial Statements (unaudited)

 

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

 

53

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

54

Item 1A.

 

Risk Factors

 

54

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

83

Item 3.

 

Defaults Upon Senior Securities

 

83

Item 4.

 

Mine Safety Disclosures

 

83

Item 5.

 

Other Information

 

83

Item 6.

 

Exhibits

 

84

SIGNATURES

 

85

 

 

 

2


 

INOGEN, INC.

PART I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Inogen, Inc.

Consolidated Balance Sheets

(amounts in thousands)

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

129,693

 

 

$

92,851

 

Marketable securities

 

33,395

 

 

 

21,033

 

Accounts receivable, net

 

34,699

 

 

 

30,828

 

Inventories, net

 

16,855

 

 

 

14,343

 

Deferred cost of revenue

 

358

 

 

 

398

 

Income tax receivable

 

1,593

 

 

 

433

 

Prepaid expenses and other current assets

 

3,186

 

 

 

1,659

 

Total current assets

 

219,779

 

 

 

161,545

 

Property and equipment

 

 

 

 

 

 

 

Rental equipment, net

 

51,010

 

 

 

54,582

 

Manufacturing equipment and tooling

 

6,693

 

 

 

6,133

 

Computer equipment and software

 

5,313

 

 

 

4,705

 

Furniture and equipment

 

781

 

 

 

779

 

Leasehold improvements

 

1,552

 

 

 

816

 

Land and building

 

125

 

 

 

125

 

Construction in process

 

265

 

 

 

75

 

Total property and equipment

 

65,739

 

 

 

67,215

 

Less accumulated depreciation

 

(44,788

)

 

 

(42,016

)

Property and equipment, net

 

20,951

 

 

 

25,199

 

Goodwill

 

2,330

 

 

 

 

Intangible assets, net

 

1,650

 

 

 

241

 

Deferred tax asset - noncurrent

 

24,619

 

 

 

26,654

 

Other assets

 

512

 

 

 

410

 

Total assets

$

269,841

 

 

$

214,049

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

3


 

Inogen, Inc.

Consolidated Balance Sheets (continued)

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

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

 

(unaudited)

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

22,367

 

 

$

12,795

 

Accrued payroll

 

6,871

 

 

 

6,123

 

Warranty reserve - current

 

2,298

 

 

 

1,688

 

Deferred revenue - current

 

3,646

 

 

 

2,239

 

Income tax payable

 

251

 

 

 

 

Total current liabilities

 

35,433

 

 

 

22,845

 

Long-term liabilities

 

 

 

 

 

 

 

Warranty reserve - noncurrent

 

3,269

 

 

 

1,792

 

Deferred revenue - noncurrent

 

8,622

 

 

 

7,042

 

Deferred tax liability - noncurrent

 

414

 

 

 

 

Other noncurrent liabilities

 

817

 

 

 

282

 

Total liabilities

 

48,555

 

 

 

31,961

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.001 par value per share; 200,000,000 authorized; 20,851,696 and 20,389,860

   shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

21

 

 

 

20

 

Additional paid-in capital

 

211,817

 

 

 

194,466

 

Retained earnings (accumulated deficit)

 

9,245

 

 

 

(12,363

)

Accumulated other comprehensive income (loss)

 

203

 

 

 

(35

)

Total stockholders' equity

 

221,286

 

 

 

182,088

 

Total liabilities and stockholders' equity

$

269,841

 

 

$

214,049

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

4


 

Inogen, Inc.

Consolidated Statements of Comprehensive Income

(unaudited)

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

 

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue

$

63,137

 

 

$

47,177

 

 

$

167,141

 

 

$

125,566

 

Rental revenue

 

5,893

 

 

 

7,245

 

 

 

18,510

 

 

 

26,412

 

Total revenue

 

69,030

 

 

 

54,422

 

 

 

185,651

 

 

 

151,978

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales revenue

 

31,401

 

 

 

24,271

 

 

 

81,307

 

 

 

63,824

 

Cost of rental revenue, including depreciation of $2,366 and $2,878 for the

  three months ended and $7,577 and $8,733 for the nine months ended,

  respectively

 

4,459

 

 

 

5,023

 

 

 

13,863

 

 

 

15,532

 

Total cost of revenue

 

35,860

 

 

 

29,294

 

 

 

95,170

 

 

 

79,356

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit-sales revenue

 

31,736

 

 

 

22,906

 

 

 

85,834

 

 

 

61,742

 

Gross profit-rental revenue

 

1,434

 

 

 

2,222

 

 

 

4,647

 

 

 

10,880

 

Total gross profit

 

33,170

 

 

 

25,128

 

 

 

90,481

 

 

 

72,622

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,375

 

 

 

1,350

 

 

 

3,944

 

 

 

3,897

 

Sales and marketing

 

13,095

 

 

 

9,679

 

 

 

35,569

 

 

 

28,220

 

General and administrative

 

10,368

 

 

 

8,702

 

 

 

28,568

 

 

 

23,812

 

Total operating expense

 

24,838

 

 

 

19,731

 

 

 

68,081

 

 

 

55,929

 

Income from operations

 

8,332

 

 

 

5,397

 

 

 

22,400

 

 

 

16,693

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

(1

)

 

 

 

 

 

(6

)

Interest income

 

221

 

 

 

61

 

 

 

468

 

 

 

126

 

Other income (expense)

 

264

 

 

 

(8

)

 

 

994

 

 

 

78

 

Total other income, net

 

485

 

 

 

52

 

 

 

1,462

 

 

 

198

 

Income before provision for income taxes

 

8,817

 

 

 

5,449

 

 

 

23,862

 

 

 

16,891

 

Provision for income taxes

 

1,479

 

 

 

203

 

 

 

2,254

 

 

 

1,632

 

Net income

 

7,338

 

 

 

5,246

 

 

 

21,608

 

 

 

15,259

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

115

 

 

 

 

 

 

312

 

 

 

 

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

 

(196

)

 

 

10

 

 

 

(442

)

 

 

(24

)

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

 

305

 

 

 

2

 

 

 

297

 

 

 

51

 

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

 

109

 

 

 

12

 

 

 

(145

)

 

 

27

 

Change in net unrealized gains (losses) on available-for-sale investments

 

13

 

 

 

(4

)

 

 

71

 

 

 

16

 

Total other comprehensive income, net of tax

 

237

 

 

 

8

 

 

 

238

 

 

 

43

 

Comprehensive income

$

7,575

 

 

$

5,254

 

 

$

21,846

 

 

$

15,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0.35

 

 

$

0.26

 

 

$

1.05

 

 

$

0.76

 

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

$

0.33

 

 

$

0.25

 

 

$

0.99

 

 

$

0.73

 

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

  share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares

 

20,753,789

 

 

 

20,157,688

 

 

 

20,622,848

 

 

 

19,986,544

 

Diluted common shares

 

21,998,660

 

 

 

21,182,587

 

 

 

21,832,544

 

 

 

21,000,945

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

5


 

Inogen, Inc.

Consolidated Statements of Stockholders’ Equity

(amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

earnings

 

 

other

 

 

Total

 

 

Common stock

 

 

paid-in

 

 

(accumulated

 

 

comprehensive

 

 

stockholders'

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit)

 

 

income (loss)

 

 

equity

 

Balance, December 31, 2015

 

19,782,403

 

 

$

20

 

 

$

179,143

 

 

$

(45,108

)

 

$

(37

)

 

$

134,018

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

12,226

 

 

 

 

 

 

12,226

 

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

 

 

 

 

 

 

 

 

 

 

15,259

 

 

 

 

 

 

15,259

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

43

 

Balance, September 30, 2016 (unaudited)

 

20,244,243

 

 

$

20

 

 

$

190,202

 

 

$

(17,623

)

 

$

6

 

 

$

172,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

20,389,860

 

 

$

20

 

 

$

194,466

 

 

$

(12,363

)

 

$

(35

)

 

$

182,088

 

Stock-based compensation

 

41,574

 

 

 

 

 

 

6,630

 

 

 

 

 

 

 

 

 

6,630

 

Employee stock purchases

 

24,523

 

 

 

 

 

 

1,379

 

 

 

 

 

 

 

 

 

1,379

 

Stock options exercised

 

395,739

 

 

 

1

 

 

 

9,342

 

 

 

 

 

 

 

 

 

9,343

 

Net income

 

 

 

 

 

 

 

 

 

 

21,608

 

 

 

 

 

 

21,608

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

238

 

 

 

238

 

Balance, September 30, 2017 (unaudited)

 

20,851,696

 

 

$

21

 

 

$

211,817

 

 

$

9,245

 

 

$

203

 

 

$

221,286

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

 

6


 

Inogen, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

Nine months ended September 30,

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

21,608

 

 

$

15,259

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

9,257

 

 

 

10,290

 

Loss on rental units and other fixed assets

 

934

 

 

 

891

 

Gain on sale of former rental assets

 

(62

)

 

 

(224

)

Provision for sales returns and doubtful accounts

 

10,319

 

 

 

8,177

 

Provision for rental revenue adjustments

 

3,828

 

 

 

7,783

 

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

 

222

 

 

 

141

 

Stock-based compensation expense

 

6,630

 

 

 

5,404

 

Deferred tax assets

 

2,035

 

 

 

1,653

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(16,826

)

 

 

(25,812

)

Inventories

 

(3,481

)

 

 

(9,220

)

Deferred cost of revenue

 

40

 

 

 

(42

)

Income tax receivable

 

(1,155

)

 

 

546

 

Prepaid expenses and other current assets

 

(1,421

)

 

 

(600

)

Accounts payable and accrued expenses

 

9,103

 

 

 

7,801

 

Accrued payroll

 

717

 

 

 

573

 

Warranty reserve

 

2,085

 

 

 

1,424

 

Deferred revenue

 

2,987

 

 

 

1,856

 

Income tax payable

 

131

 

 

 

(11

)

Other noncurrent liabilities

 

535

 

 

 

(37

)

Net cash provided by operating activities

 

47,486

 

 

 

25,852

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of available-for-sale investments

 

(35,367

)

 

 

(26,321

)

Maturities of available-for-sale investments

 

23,076

 

 

 

20,799

 

Investment in intangible assets

 

(15

)

 

 

(112

)

Investment in property and equipment

 

(2,083

)

 

 

(1,483

)

Production and purchase of rental equipment

 

(2,682

)

 

 

(4,588

)

Proceeds from sale of former assets

 

129

 

 

 

328

 

Payment for acquisition, net of cash acquired

 

(4,447

)

 

 

 

Net cash used in investing activities

 

(21,389

)

 

 

(11,377

)

 

 

 

 

 

 

 

 

(continued on next page)

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

7


 

Inogen, Inc.

Consolidated Statements of Cash Flows (continued)

(unaudited)

(amounts in thousands)

 

 

Nine months ended September 30,

 

 

2017

 

 

2016

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from stock options exercised

 

9,343

 

 

 

4,600

 

Proceeds from employee stock purchases

 

1,379

 

 

 

1,055

 

Repayment of debt from investment in intangible assets

 

 

 

 

(235

)

Net cash provided by financing activities

 

10,722

 

 

 

5,420

 

Effect of exchange rates on cash

 

23

 

 

 

8

 

Net increase in cash and cash equivalents

 

36,842

 

 

 

19,903

 

Cash and cash equivalents, beginning of period

 

92,851

 

 

 

66,106

 

Cash and cash equivalents, end of period

$

129,693

 

 

$

86,009

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

$

 

 

$

9

 

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

 

1,164

 

 

 

(533

)

Supplemental disclosure of non-cash transactions

 

 

 

 

 

 

 

Property and equipment in accounts payable and accrued liabilities

$

104

 

 

$

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

8


 

Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements

(unaudited)

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

 

1. Business overview

Inogen, Inc. (Company or Inogen) was incorporated in Delaware on November 27, 2001. The Company is a medical technology company that primarily develops, manufactures and markets innovative portable oxygen concentrators used to deliver supplemental long-term oxygen therapy to patients suffering from chronic respiratory conditions. Traditionally, these patients have relied on stationary oxygen concentrator systems for use in the home and oxygen tanks or cylinders for mobile use, which the Company calls the delivery model. The tanks and cylinders must be delivered regularly and have a finite amount of oxygen, which requires patients to plan activities outside of their homes around delivery schedules and a finite oxygen supply. Additionally, patients must attach long, cumbersome tubing to their stationary concentrators simply to enable mobility within their homes. The Company’s proprietary Inogen One® systems concentrate the air around the patient to offer a single source of supplemental oxygen anytime, anywhere with a portable device weighing approximately 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 2.6, 4.7 and 5.0 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 2016. The Company estimates based on 2016 Medicare data that patients using portable oxygen concentrators represent approximately 9.1% of the total addressable oxygen market in the United States, although the Medicare data does not account for private insurance and cash-pay sales into the market. Based on 2016 industry data, the Company believes it was the leading worldwide manufacturer of portable oxygen concentrators. 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, including Medicare competitive bidding contracts, as well as compete with the home medical equipment providers who many of the Company’s manufacturing competitors sell to 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 more than 327,000 of its Inogen oxygen concentrators as of September 30, 2017.

The Company incorporated Inogen Europe Holding B.V., a Dutch limited liability company, on April 13, 2017. The Company owns all outstanding stock of Inogen Europe Holding B.V., which became a wholly owned subsidiary of the Company.

On May 4, 2017, the Company, through its wholly owned subsidiary, Inogen Europe Holding B.V., acquired all issued and outstanding capital stock of MedSupport Systems B.V. (MedSupport) for approximately $5,831 comprised of $5,779 of cash paid at closing and estimated net working capital adjustments of approximately $52 to be paid in the fourth quarter of 2017 classified in accounts payable and accrued expenses.  In aggregate, $1,337 was cash acquired, $1,529 was attributed to intangible assets, $2,154 was attributed to goodwill, and $811 was attributed to net assets assumed.  MedSupport is engaged in the business of importing and distributing medical devices throughout Europe.  The acquisition allows the Company to add a European customer support and repair site in the Netherlands and is currently operating as Inogen Europe B.V. Goodwill associated with this acquisition is not deductible for tax purposes in the Netherlands. Acquisition expenses of approximately $370 were expensed in 2017 and are classified within general and administrative expense.   The Company's allocation of the purchase price remains incomplete and any measurement period adjustments that result from the finalization of the purchase price allocation will be recorded retrospectively to the acquisition date. Pro forma results of operations for this acquisition have not been presented because they are not material to the consolidated results of operations, either individually or in aggregate.

 

 

9


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

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

 

2. Basis of presentation and summary of significant accounting policies

The accompanying consolidated financial statements are unaudited. The balance sheet at December 31, 2016 has been derived from the audited financial statements of the Company. The accompanying consolidated 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, 2017 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying consolidated 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 February 28, 2017. There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K filed with the SEC on February 28, 2017.

Basis of consolidation

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

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue recognition, inventory and rental asset valuations and write-downs, accounts receivable allowances for bad debts, returns and adjustments, 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.

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.

Goodwill and other acquired intangibles

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. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis.

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.

10


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

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

 

Recently issued accounting pronouncements not yet adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. 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 new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method).  To date, the Company has performed an initial assessment of the Company’s revenue streams, substantially completed its summary of all outstanding contracts, and begun the process of applying the five-step model to those contracts and revenue streams. The Company anticipates adopting the standard using the modified retrospective method.  The Company expects to adopt on January 1, 2018 and has developed its plan for adoption and the impact on its revenue recognition policies, procedures and control framework and the resulting impact on its consolidated financial statements.

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 ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, 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 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 is still evaluating the impact that this guidance will have on its consolidated financial statements, and has not yet determined whether the Company will early adopt ASU No. 2017-12.

Recently adopted accounting 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 Company adopted this guidance on January 1, 2017. The adoption of this ASU did not have a material effect on the Company’s consolidated financial presentation or results.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting.  The Company elected to early adopt ASU No. 2016-09 in the fourth quarter of 2016, which requires any adjustments to be recorded as of the beginning of fiscal 2016.  As a result, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and statements of cash flows and stockholders’ equity for the nine months ended September 30, 2016 were adjusted to include the impact of ASU No. 2016-09 adoption.  See “Note 2 –Summary of significant accounting policies” in the notes

11


Inogen, Inc.

Condensed Notes to the Consolidated Financial Statements (continued)

(unaudited)

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

 

to the financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for detailed adoption information.  

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 an aggregate basis to the Company’s chief operating decision maker.

 

3. Fair value of financial instruments

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

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

Fair value accounting

Accounting Standards Codification (ASC) 820 — Fair Value Measurements and Disclosures, creates a single definition of fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement 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 Consolidated Financial Statements (continued)

(unaudited)

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

 

The following table summarizes fair value measurements by level for the assets measured at fair value on a recurring basis for cash, cash equivalents and marketable securities:

 

 

 

As of September 30, 2017

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

50,670

 

 

$

 

 

$

50,670

 

 

$

50,670

 

 

$

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

77,020

 

 

 

 

 

 

77,020

 

 

 

77,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

14,302

 

 

 

(3

)

 

 

14,299

 

 

 

 

 

 

14,299

 

Corporate bonds

 

 

18,110

 

 

 

(14

)

 

 

18,096

 

 

 

 

 

 

18,096

 

Agency mortgage-backed securities

 

 

3,004

 

 

 

(1

)

 

 

3,003

 

 

 

2,003

 

 

 

1,000

 

Total

 

$

163,106

 

 

$

(18

)

 

$

163,088

 

 

$

129,693

 

 

$

33,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Adjusted

 

 

unrealized

 

 

 

 

 

 

and cash

 

 

Marketable

 

 

 

cost

 

 

losses

 

 

Fair value

 

 

equivalents

 

 

securities

 

Cash

 

$

48,533

 

 

$

 

 

$

48,533

 

 

$

48,533

 

 

$

 

Level 1: