0001564590-14-005531.txt : 20141112 0001564590-14-005531.hdr.sgml : 20141111 20141112161549 ACCESSION NUMBER: 0001564590-14-005531 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20140930 FILED AS OF DATE: 20141112 DATE AS OF CHANGE: 20141112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Inogen Inc CENTRAL INDEX KEY: 0001294133 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36309 FILM NUMBER: 141214195 BUSINESS ADDRESS: STREET 1: 326 BOLLAY DRIVE CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 805-562-0500 MAIL ADDRESS: STREET 1: 326 BOLLAY DRIVE CITY: GOLETA STATE: CA ZIP: 93117 10-Q 1 ingn-10q_20140930.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2014

OR

¨

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

For the Transition Period From              to             

Commission file number: 001-36309

 

INOGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0989359

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

326 Bollay Drive
Goleta, California

 

93117

(Address of principal executive offices)

 

(Zip Code)

(805) 562-0500

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o

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

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

 

Large accelerated filer ¨

  

Accelerated filer ¨

  

Non-accelerated filer x

  

Smaller reporting company ¨

 

  

 

  

(Do not check if a smaller reporting company)

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

The total number of shares of common stock outstanding as of October 31, 2014 was 18,628,900.

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Part I – Financial Information

 

Page

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

Balance Sheets as of September 30, 2014 and December 31, 2013

 

3

 

 

Statements of Operations for the Three Months Ended September 30, 2014 and September 30, 2013 and Nine Months Ended September 30, 2014 and September 30, 2013

 

5

 

 

Statement of Redeemable Convertible Preferred Stock for the Nine Months Ended September 30, 2014

 

6

 

 

Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2014

 

7

 

 

Statements of Cash Flows for the Nine Months ended September 30, 2014 and September 30, 2013

 

8

 

 

Condensed Notes to the Financial Statements

 

9

Item 2.

 

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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

Item 4.

 

Controls and Procedures

 

39

 

 

Part II – Other Information

 

 

Item 1.

 

Legal Proceedings

 

40

Item 1A.

 

Risk Factors

 

40

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 6.

 

Exhibits

 

64

 

 

 

2


 

INOGEN, INC.

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Inogen, Inc.

Balance Sheets

(unaudited)

(amounts in thousands)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

56,160

 

 

$

13,521

 

Accounts receivable, net of allowances of $3,981 and $3,390 at September 30, 2014 and December 31, 2013, respectively

 

18,061

 

 

 

10,231

 

Inventories, net of allowances of $183 and $100 at September 30, 2014 and December 31, 2013, respectively

 

7,331

 

 

 

4,248

 

Deferred cost of rental revenue

 

423

 

 

 

289

 

Income tax receivable

 

-

 

 

 

87

 

Deferred tax asset - current

 

6,360

 

 

 

3,923

 

Prepaid expenses and other current assets

 

980

 

 

 

531

 

Total current assets

 

89,315

 

 

 

32,830

 

Property and equipment

 

 

 

 

 

 

 

Rental equipment, net of allowances of $682 and $157 at September 30, 2014 and December 31, 2013, respectively

 

45,532

 

 

 

37,573

 

Manufacturing equipment and tooling

 

2,745

 

 

 

2,551

 

Computer equipment and software

 

3,611

 

 

 

2,973

 

Furniture and equipment

 

608

 

 

 

601

 

Leasehold improvements

 

889

 

 

 

887

 

Land and building

 

126

 

 

 

-

 

Construction in process

 

1,186

 

 

 

1,093

 

Total property and equipment

 

54,697

 

 

 

45,678

 

Less accumulated depreciation

 

(23,640

)

 

 

(15,956

)

Property and equipment, net

 

31,057

 

 

 

29,722

 

Intangible assets, net

 

274

 

 

 

215

 

Deferred tax asset - noncurrent

 

16,427

 

 

 

17,865

 

Other assets

 

80

 

 

 

1,765

 

Total assets

$

137,153

 

 

$

82,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

3


 

Inogen, Inc.

Balance Sheets (continued)

(unaudited)

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

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

11,201

 

 

$

9,219

 

Accrued payroll

 

3,732

 

 

 

2,898

 

Current portion of long-term debt

 

267

 

 

 

5,258

 

Warranty reserve

 

669

 

 

 

420

 

Deferred revenue

 

1,959

 

 

 

1,487

 

Income tax payable

 

2,647

 

 

 

-

 

Total current liabilities

 

20,475

 

 

 

19,282

 

Long-term liabilities

 

 

 

 

 

 

 

Warranty reserve - noncurrent

 

503

 

 

 

389

 

Preferred stock warrant liability

 

-

 

 

 

260

 

Deferred revenue-noncurrent

 

1,878

 

 

 

776

 

Long-term debt, net of current portion

 

391

 

 

 

5,391

 

Total liabilities

 

23,247

 

 

 

26,098

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

 

 

 

 

 

 

Preferred stock, $0.001 par value per share;  10,000,000 authorized as of December 31, 2013; 0 and 9,541,631 shares issued and outstanding; liquidation preference of $0 and $136,660 at September 30, 2014 and December 31, 2013, respectively (Note 7)

 

-

 

 

 

118,671

 

Stockholders' equity (deficit)

 

 

 

 

 

 

 

Preferred stock, $0.001 par value per share; 10,000,000 and 100,000 shares authorized; 0 and 66,666 shares issued and outstanding; liquidation preference of $0 and $250 at September 30, 2014 and December 31, 2013, respectively. (Note 7)

 

-

 

 

 

247

 

Common stock, $0.001 par value per share; 200,000,000 and 60,000,000 shares authorized; 18,436,802 and 280,974 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively.

 

18

 

 

 

1

 

Additional paid-in-capital

 

172,100

 

 

 

-

 

Accumulated deficit

 

(58,212

)

 

 

(62,620

)

Total stockholders' equity (deficit)

 

113,906

 

 

 

(62,372

)

Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit)

$

137,153

 

 

$

82,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

4


 

Inogen, Inc.

Statements of Operations

(unaudited)

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

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2014

 

 

 

2013

 

 

 

2014

 

 

 

2013

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales revenue

$

19,425

 

 

$

12,134

 

 

$

54,746

 

 

$

33,780

 

Rental revenue

 

9,968

 

 

 

7,643

 

 

 

28,673

 

 

 

21,901

 

Total revenue

 

29,393

 

 

 

19,777

 

 

 

83,419

 

 

 

55,681

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales revenue

 

10,146

 

 

 

6,751

 

 

 

28,369

 

 

 

18,406

 

Cost of rental revenue, including depreciation of $2,752 and $1,955 for the three months ended and $7,512 and $4,921 for the nine months ended, respectively

 

4,598

 

 

 

3,384

 

 

 

13,349

 

 

 

8,459

 

Total cost of revenue

 

14,744

 

 

 

10,135

 

 

 

41,718

 

 

 

26,865

 

Gross profit

 

14,649

 

 

 

9,642

 

 

 

41,701

 

 

 

28,816

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

798

 

 

 

674

 

 

 

2,312

 

 

 

1,817

 

Sales and marketing

 

5,587

 

 

 

4,550

 

 

 

17,656

 

 

 

13,292

 

General and administrative

 

4,697

 

 

 

3,532

 

 

 

12,654

 

 

 

9,796

 

Total operating expenses

 

11,082

 

 

 

8,756

 

 

 

32,622

 

 

 

24,905

 

Income from operations

 

3,567

 

 

 

886

 

 

 

9,079

 

 

 

3,911

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(104

)

 

 

(113

)

 

 

(440

)

 

 

(312

)

Interest income

 

10

 

 

 

3

 

 

 

28

 

 

 

9

 

Change in fair value of preferred stock warrant liability

 

-

 

 

 

41

 

 

 

36

 

 

 

(202

)

Other income

 

1

 

 

 

-

 

 

 

12

 

 

 

209

 

Total other expense, net

 

(93

)

 

 

(69

)

 

 

(364

)

 

 

(296

)

Income before provision for income taxes

 

3,474

 

 

 

817

 

 

 

8,715

 

 

 

3,615

 

Provision for income taxes

 

1,341

 

 

 

43

 

 

 

3,408

 

 

 

151

 

Net income

$

2,133

 

 

$

774

 

 

$

5,307

 

 

$

3,464

 

Less deemed dividend on redeemable convertible preferred stock

 

-

 

 

 

(1,851

)

 

 

(987

)

 

 

(5,359

)

Net income (loss)

$

2,133

 

 

$

(1,077

)

 

$

4,320

 

 

$

(1,895

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share attributable to common stockholders (note 2)

$

0.12

 

 

$

(3.90

)

 

$

0.24

 

 

$

(6.91

)

Diluted net income (loss) per share attributable to common stockholders (note 2)

$

0.11

 

 

$

(3.90

)

 

$

0.22

 

 

$

(6.91

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares used in calculating income (loss) per share attributable to common stockholders (note 2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares

 

18,286,208

 

 

 

276,618

 

 

 

15,340,877

 

 

 

274,357

 

Diluted common shares

 

20,213,102

 

 

 

276,618

 

 

 

17,293,833

 

 

 

274,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

5


 

Inogen, Inc.

Statement of Redeemable Convertible Preferred Stock

(unaudited)

(amounts in thousands, except share amounts)

 

 

Series B

 

 

Series C

 

 

Series D

 

 

Series E

 

 

Series F

 

 

Series G

 

 

Total

 

 

redeemable

 

 

redeemable

 

 

redeemable

 

 

redeemable

 

 

redeemable

 

 

redeemable

 

 

redeemable

 

 

convertible

 

 

convertible

 

 

convertible

 

 

convertible

 

 

convertible

 

 

convertible

 

 

convertible

 

 

preferred stock

 

 

preferred stock

 

 

preferred stock

 

 

preferred stock

 

 

preferred stock

 

 

preferred stock

 

 

preferred

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

stock

 

Balance, December 31, 2013

 

425,511

 

 

$

5,056

 

 

 

365,903

 

 

$

6,460

 

 

 

1,573,126

 

 

$

34,619

 

 

 

1,634,874

 

 

$

29,130

 

 

 

2,701,957

 

 

$

15,620

 

 

 

2,840,260

 

 

$

27,786

 

 

$

118,671

 

Warrants exercised

 

 

 

 

 

 

 

11,094

 

 

 

279

 

 

 

11,415

 

 

 

314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

593

 

Deemed dividend on

   redeemable convertible

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

139

 

 

 

 

 

 

207

 

 

 

 

 

 

641

 

 

 

987

 

Conversion of preferred stock

  to common stock in

  connection with initial

  public offering

 

(425,511

)

 

 

(5,056

)

 

 

(376,997

)

 

 

(6,739

)

 

 

(1,584,541

)

 

 

(34,933

)

 

 

(1,634,874

)

 

 

(29,269

)

 

 

(2,701,957

)

 

 

(15,827

)

 

 

(2,840,260

)

 

 

(28,427

)

 

 

(120,251

)

Balance, September 30, 2014

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

6


 

Inogen, Inc.

Statement of Stockholders’ Equity (Deficit)

(unaudited)

(amounts in thousands, except share amounts)

 

 

Series A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

convertible

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

preferred stock

 

 

Common stock

 

 

paid-in

 

 

Accumulated

 

 

stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

equity (deficit)

 

Balance, December 31, 2013

 

66,666

 

 

$

247

 

 

 

280,974

 

 

$

1

 

 

$

-

 

 

$

(62,620

)

 

$

(62,372

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

1,035

 

 

 

88

 

 

 

1,123

 

Employee stock purchase

 

 

 

 

 

 

 

 

 

30,358

 

 

 

 

 

 

 

413

 

 

 

 

 

 

 

413

 

Stock options exercised

 

 

 

 

 

 

 

243,828

 

 

 

 

 

 

229

 

 

 

 

 

 

229

 

Warrants exercised - preferred & common

 

 

 

 

 

 

 

92,584

 

 

 

 

 

 

76

 

 

 

 

 

 

76

 

Reclassification of warrant liability

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

22

 

Deemed dividend on redeemable convertible

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(987

)

 

 

(987

)

Conversion of preferred stock

 

(66,666

)

 

 

(247

)

 

 

14,259,647

 

 

 

14

 

 

 

120,484

 

 

 

 

 

 

120,251

 

Issuance of common stock in connection with initial

   public offering

 

 

 

 

 

 

 

3,529,411

 

 

 

3

 

 

 

49,841

 

 

 

 

 

 

49,844

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,307

 

 

 

5,307

 

Balance, September 30, 2014

 

 

 

$

 

 

 

18,436,802

 

 

$

18

 

 

$

172,100

 

 

$

(58,212

)

 

$

113,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the financial statements.

 

 

 

7


 

Inogen, Inc.

Statements of Cash Flows

(unaudited)

(amounts in thousands)

 

 

Nine months ended September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

$

5,307

 

 

$

3,464

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

8,779

 

 

 

5,995

 

Loss on rental units

 

1,203

 

 

 

330

 

Loss on disposal of other fixed assets

 

 

 

 

85

 

Provision for sales returns

 

2,558

 

 

 

1,090

 

Provision for doubtful accounts

 

1,201

 

 

 

1,353

 

Provision for rental revenue adjustments

 

5,530

 

 

 

4,057

 

Provision for inventory obsolescence

 

125

 

 

 

92

 

Stock-based compensation expense

 

1,123

 

 

 

116

 

Deferred tax assets

 

(999

)

 

 

 

Increase (decrease) in fair value of preferred stock warrant liability

 

(36

)

 

 

202

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

(17,119

)

 

 

(9,176

)

Inventories

 

(3,208

)

 

 

(130

)

Deferred costs of rental revenue

 

(134

)

 

 

(124

)

Prepaid expenses and other current assets

 

(449

)

 

 

(404

)

Accounts payable and accrued expenses

 

1,982

 

 

 

2,718

 

Accrued payroll

 

834

 

 

 

447

 

Warranty reserve

 

363

 

 

 

396

 

Deferred revenue

 

1,574

 

 

 

867

 

Income tax receivable

 

87

 

 

 

 

Income tax payable

 

2,647

 

 

 

100

 

Net cash provided by operating activities

 

11,368

 

 

 

11,478

 

Cash flows from investing activities

 

 

 

 

 

 

 

Investment in intangible assets

 

(184

)

 

 

(7

)

Production of rental equipment

 

(10,132

)

 

 

(11,918

)

Purchases of property and equipment

 

(1,060

)

 

 

(2,572

)

Net cash used in investing activities

 

(11,376

)

 

 

(14,497

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from borrowings

 

6,000

 

 

 

6,000

 

Proceeds from redeemable convertible preferred stock warrants and common stock warrants exercised

 

467

 

 

 

1,875

 

Proceeds from stock options exercised

 

229

 

 

 

 

Proceeds from initial public offering

 

56,471

 

 

 

 

Costs associated with initial public offering

 

(4,942

)

 

 

 

Employee stock purchase

 

413

 

 

 

 

Repayment of debt from investment in intangible assets

 

(130

)

 

 

(159

)

Repayment of borrowings

 

(15,861

)

 

 

(2,750

)

Net cash provided by financing activities

 

42,647

 

 

 

4,966

 

Net increase (decrease) in cash and cash equivalents

 

42,639

 

 

 

1,947

 

Cash and cash equivalents, beginning of period

 

13,521

 

 

 

15,112

 

Cash and cash equivalents, end of period

$

56,160

 

 

$

17,059

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

 

478

 

 

 

307

 

Cash paid during the period for income taxes

 

1,673

 

 

 

124

 

Non-cash transactions:

 

 

 

 

 

 

 

Deemed dividend on redeemable convertible preferred stock

 

987

 

 

 

5,359

 

 

 

 

 

 

 

See accompanying condensed notes to the financial statements.

 

 

8


 

Inogen, Inc.

Condensed Notes to the Financial Statements

(unaudited)

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

 

1. General

a)

Basis of presentation

The unaudited condensed financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years or other interim periods.

Inogen, Inc. (Company or Inogen) was incorporated in Delaware on November 27, 2001. The Company is a medical technology company that develops, manufactures and markets innovative oxygen concentrators used for supplemental long-term oxygen therapy by patients with chronic obstructive pulmonary disease, or COPD, and other chronic respiratory conditions. The Company’s proprietary Inogen One systems are designed to address the quality-of-life and other shortcomings of the traditional oxygen therapy model, which Inogen calls the delivery model. Traditionally, oxygen therapy patients have relied upon stationary oxygen concentrator systems in the home in conjunction with regular deliveries of oxygen tanks or cylinders for ambulatory, or mobile, use, limiting their mobility and requiring them to plan activities outside of their homes around delivery schedules and a finite oxygen supply.  The Company’s Inogen One systems concentrate the air around them to offer a single source of supplemental oxygen anytime, anywhere from devices weighing approximately five to seven pounds. Inogen’s products eliminate the need for oxygen deliveries, as well as regular use of a stationary concentrator, thereby improving patient quality-of-life and fostering patient mobility.

As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company’s annual financial statements and footnotes thereto. For further information refer to the financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on April 1, 2014 (Annual Report).

b)

Use of estimates

The preparation of the Company’s condensed financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these condensed financial statements and accompanying notes. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory and rental asset valuations and write-downs, accounts receivable reserves and allowance for bad debts, returns and adjustments, stock compensation expense, impairment assessments, depreciation and amortization, income tax provision and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles.  Actual results could differ materially from these estimates.

c)

Reclassifications

Certain reclassifications have been made to prior years financial statements to conform to current period financial statement presentation with no effect on previously reported financial position, results of operations or cash flows.

d)

Initial public offering (IPO)

The Company completed an initial public offering on February 20, 2014, and sold 3,529,411 shares to the public for $16.00 per share.  In addition, the selling shareholders sold 981,902 shares for a combined total of 4,511,313 shares sold in the offering.  The Company netted approximately $49,668 after the underwriters discount and other associated expenses.  In connection with the completion of our IPO, the Company’s outstanding redeemable convertible preferred stock and non-redeemable preferred stock were all converted to common stock.  As of September 30, 2014, the Company had 18,436,802 shares of common stock outstanding.

9


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

e)

Revenue from contracts with customers

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

The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017.

 

2. Summary of significant accounting policies

Sales 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 Operations, comes from service contracts, extended warranty contracts and freight revenue for product shipments.

Revenue from product sales is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price to the customer is fixed or determinable; and (4) collectability is reasonably assured. Revenue from product sales is recognized upon shipment of the product. Provisions for estimated returns and discounts are made at the time of shipment. Provisions for standard warranty obligations, which are included in cost of sales revenue on the Statements of Operations, are also provided for at the time of shipment.

Revenue from the sales of the Company’s services is recognized when no significant obligations remain undelivered and collection of the receivables is reasonably assured. The Company offers extended service contracts on its Inogen One concentrator line for periods ranging from 12 to 24 months after the end of the standard warranty period. Revenue from these extended service contracts is recognized in income on a straight-line basis over the contract period.

Accruals for estimated standard warranty expenses are made at the time that the associated revenue is recognized. The provisions for estimated returns, discounts and warranty obligations are made based on known claims and discount commitments and estimates of additional returns and warranty obligations based on historical data and future expectations. The Company accrued $1,172 and $809 to provide for future warranty costs at September 30, 2014 and December 31, 2013, respectively.

 The Company also offers a lifetime warranty for direct-to-consumer sales. For a fixed price, the Company agrees to provide a fully functional oxygen concentrator for the remaining life of the patient. Lifetime warranties are only offered to patients upon the initial sale of oxygen equipment by the Company and are non-transferable. Product sales with lifetime warranties are considered to be multiple element arrangements within the scope of the Accounting Standards Codification (ASC) 605-25—Revenue Recognition-Multiple-Element Arrangements.

There are two deliverables when product that includes a lifetime warranty is sold. The first deliverable is the oxygen concentrator equipment which comes with a standard warranty of three years. The second deliverable is the lifetime warranty that provides for a functional oxygen concentrator for the remaining lifetime of the patient. These two deliverables qualify as separate units of accounting.

 

10


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

The revenue is allocated to the two deliverables on a relative selling price method. The Company has vendor-specific objective evidence of selling price for the equipment. To determine the selling price of the lifetime warranty, the Company uses its best estimate of the selling price for that deliverable 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 considered the profit margins of the overall business, the average estimated cost of lifetime warranties and the price of extended warranties. A significant estimate used to calculate the price and expense of lifetime warranties is the life expectancy of patients. Based on clinical studies, the Company estimates that 60% of patients will succumb to their disease within three years. Given the approximate mortality rate of 20% per year, the Company estimates on average all patients will succumb to their disease within five years. The Company has taken into consideration that when patients decide to buy an Inogen portable oxygen concentrator with a lifetime warranty, they typically have already been on oxygen for a period of time, which can have a large impact on their life expectancy from the time the Company’s product is deployed.

After applying the relative selling price method, revenue from equipment sales is recognized when all other revenue recognition criteria for product sales are met. Lifetime warranty revenue is recognized using the straight-line method during the fourth and fifth year after the delivery of the equipment which is the estimated usage period of the contract based on the average patient life expectancy.

Shipping and handling costs for sold products and rental assets, shipped to the Company’s customers are included on the Statements of Operations as part of cost of sales revenue and cost of rental revenue, respectively.

Revenue from the sales of used rental equipment is recognized upon delivery and when collectability is reasonably assured and other revenue recognition criteria are met. When a rental unit is sold, the related cost and accumulated depreciation are removed from their respective accounts, and any gains or losses are included in cost of sales revenue on the Statements of Operations.

 

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 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. To date, the Company has not deferred any amounts associated with the capped rental period. Amounts related to the capped rental period have not been material in the periods presented.

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. 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. Upon determination that an account is uncollectible, it is written-off and charged to the allowance. Amounts billed but not earned due to the timing of the billing cycle are deferred and recognized in income 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.

11


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

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 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 unbilled rental revenue accrual is based on historical trends and estimates of future collectability.

 

Fair value of financial instruments

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

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

The fair value of the Company’s preferred stock warrant liability was estimated using a Monte Carlo valuation model.

Fair value accounting

ASC 820—Fair Value Measurements and Disclosures, creates a single definition of fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. Assets and liabilities adjusted to fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Level inputs, as defined by ASC 820, are as follows:

 

Level input

  

Input definition

Level 1

  

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

 

 

 

Level 2

  

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

 

 

 

Level 3

  

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

 

The following table summarizes fair value measurements by level at December 31, 2013 for the liabilities measured at fair value on a recurring basis:

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Preferred stock warrant liability

$

 

 

$

 

 

$

260

 

 

$

260

 

Total liabilities

$

 

 

$

 

 

$

260

 

 

$

260

 

 

12


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

The following table summarizes the fair value measurements using significant Level 3 inputs, and changes therein as of nine months ended September 30, 2014.

 

 

 

 

 

 

Warrant

liability

 

Balance as of December 31, 2013

$

260

 

Fair value of preferred stock warrants exercised

 

(148

)

Change in fair value

 

(36

)

Reclassification of liability to additional paid in capital

 

(76

)

Balance as of September 30, 2014

$

 

 

The preferred stock warrant liability was marked to market at each reporting date and the fair value was estimated using a Monte Carlo valuation model, which takes into consideration the market values of comparable public companies, considering among other factors, the use of multiples of earnings, and adjusted to reflect the restrictions on the ability of the Company’s shares to trade in an active market.

 

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 is based on estimates, and ultimate losses may vary from current estimates. As adjustments to these estimates become necessary, they are reported in earnings in the periods that they become known. The 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, net of recoveries.

The Company does not allow returns from providers. Provision for sales returns applies to direct-to-consumer sales only. This reserve is calculated based on actual historical return rates under the Company’s 30-day return program and is applied to the sales revenue for direct-to-consumer sales for the last month of the quarter reported.

The Company also records an allowance for rental revenue adjustments and write-offs, which is recorded as a reduction of rental revenue and rental accounts receivable balances. These adjustments and write-offs 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 becoming realizable. The reserve is based on historical revenue adjustments as a percentage of rental revenue billed 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 adjustments, the rental revenue adjustments account (contra rental revenue account) is charged.

At September 30, 2014 and December 31, 2013, included in accounts receivable on the balance sheets were earned but unbilled receivables of $3,410 and $1,435, respectively.

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents 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 and short-term investments to date.

13


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

Concentration of customers and vendors

The Company sells its products to home medical equipment providers in the United States and in foreign countries on a credit basis. No single customer represented more than 10% of the Company’s total revenue for the nine months ended September 30, 2014 and September 30, 2013.  No single customer represented more than 10% of the Company’s total accounts receivable balance as of September 30, 2014, or as of December 31, 2013.

The Company also rents products directly to patients, which resulted in a customer concentration relating to Medicare’s service reimbursement programs. Medicare’s service reimbursement programs (net of patient co-insurance obligations) accounted for 78.6% and 70.8% of rental revenue for the three months ended September 30, 2014 and September 30, 2013, respectively, and based on total revenue were 26.7% and 27.4% for the three months ended September 30, 2014 and September 30, 2013, respectively.  Medicare’s service reimbursement programs (net of patient co-insurance obligations) accounted for 74.3% and 73.1% of rental revenue for the nine months ended September 30, 2014 and September 30, 2013, respectively, and based on total revenue were 25.6% and 28.8% for the nine months ended September 30, 2014 and September 30, 2013, respectively.  Accounts receivable balances relating to Medicare’s service reimbursement programs amounted to $3,661 or 20.3% of total accounts receivable at September 30, 2014 as compared to $2,560, or 25.0% of total accounts receivable at December 31, 2013.

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 nine months ended September 30, 2014, the Company’s three major vendors accounted for 18.8%, 17.8%, and 8.0%, respectively, of total raw material purchases.  For the nine months ended September 30, 2013, the Company’s three major vendors accounted for 15.7%, 14.9% and 8.6%, respectively, of total raw material purchases.  

A portion of revenue is earned from sales outside the United States. Non-U.S. revenue is denominated in U.S. dollars. A breakdown of the Company’s revenue from U.S. and non-U.S. sources for the three months and nine months ended September 30, 2014 and September 30, 2013 is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

U.S. revenue

 

$

22,571

 

 

$

15,194

 

 

$

65,996

 

 

$

42,768

 

Non-U.S. revenue

 

 

6,822

 

 

 

4,583

 

 

 

17,423

 

 

 

12,913

 

Total revenue

 

$

29,393

 

 

$

19,777

 

 

$

83,419

 

 

$

55,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

Raw materials and work-in-progress

 

$

6,058

 

 

$

3,783

 

Finished goods

 

 

1,456

 

 

 

565

 

Less: reserves

 

 

(183)

 

 

 

(100

)

Inventories

 

$

7,331

 

 

$

4,248

 

 

 

14


Inogen, Inc.

Condensed Notes to the Financial Statements (continued)

(unaudited)

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

 

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

  

5 years