Inogen Inc 10-Q

Item 1. Financial Statements Inogen, Inc. Consolidated Balance Sheets (amounts in thousands) June 30, December 31, 2020 2019 (unaudited) Assets Current assets Cash and cash equivalents $ 214,086 $ 198,037 Marketable securities 4,549 11,057 Accounts receivable, net 28,422 34,325 Inventories, net 36,180 35,664 Income tax receivable 2,984 2,976 Prepaid expenses and other current assets 16,544 10,160 Total current assets 302,765 292,219 Property and equipment Rental equipment, net 40,614 39,308 Manufacturing equipment and tooling 10,351 9,704 Computer equipment and software 7,841 7,266 Furniture and equipment 2,269 1,730 Leasehold improvements 4,607 4,388 Land and building 125 125 Construction in process 1,104 1,773 Total property and equipment 66,911 64,294 Less accumulated depreciation ( 45,381 ) ( 44,856 ) Property and equipment, net 21,530 19,438 Goodwill 32,957 32,954 Intangible assets, net 73,253 77,533 Operating lease right-of-use asset 9,454 5,855 Deferred tax asset - noncurrent 13,768 14,452 Other assets 4,394 4,888 Total assets $ 458,121 $ 447,339 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) June 30, December 31, 2020 2019 (unaudited) Liabilities and stockholders' equity Current liabilities Accounts payable and accrued expenses $ 29,363 $ 30,730 Accrued payroll 6,405 6,215 Warranty reserve - current 5,769 4,923 Operating lease liability - current 1,823 2,014 Deferred revenue - current 6,266 5,478 Income tax payable 988 821 Total current liabilities 50,614 50,181 Long-term liabilities Warranty reserve - noncurrent 8,039 7,648 Operating lease liability - noncurrent 8,693 4,702 Earnout liability - noncurrent 26,539 26,559 Deferred revenue - noncurrent 13,035 13,541 Deferred tax liability - noncurrent 87 87 Total liabilities 107,007 102,718 Commitments and contingencies (Note 10) Stockholders' equity Common stock, $ 0.001 par value per share; 200,000,000 authorized; 22,065,961 and 22,031,410 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively 22 22 Additional paid-in capital 268,349 263,252 Retained earnings 82,425 81,434 Accumulated other comprehensive income (loss) 318 ( 87 ) Total stockholders' equity 351,114 344,621 Total liabilities and stockholders' equity $ 458,121 $ 447,339 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 Six months ended June 30, June 30, 2020 2019 2020 2019 Revenue Sales revenue $ 65,612 $ 95,863 $ 148,752 $ 180,681 Rental revenue 6,079 5,200 11,428 10,584 Total revenue 71,691 101,063 160,180 191,265 Cost of revenue Cost of sales revenue 36,082 47,230 83,200 89,297 Cost of rental revenue, including depreciation of $ 1,221 and $ 1,594 , for the three months ended and $ 2,520 and $ 3,299 for the six months ended, respectively 2,860 3,618 5,865 7,344 Total cost of revenue 38,942 50,848 89,065 96,641 Gross profit Gross profit-sales revenue 29,530 48,633 65,552 91,384 Gross profit-rental revenue 3,219 1,582 5,563 3,240 Total gross profit 32,749 50,215 71,115 94,624 Operating expense Research and development 3,290 1,468 6,895 3,137 Sales and marketing 22,086 27,758 49,249 55,959 General and administrative 9,724 8,844 19,501 18,525 Total operating expense 35,100 38,070 75,645 77,621 Income (loss) from operations ( 2,351 ) 12,145 ( 4,530 ) 17,003 Other income (expense) Interest income 176 1,394 728 2,728 Other income 5,700 145 5,640 25 Total other income, net 5,876 1,539 6,368 2,753 Income before provision for income taxes 3,525 13,684 1,838 19,756 Provision for income taxes 945 3,524 847 4,294 Net income 2,580 10,160 991 15,462 Other comprehensive income (loss), net of tax Change in foreign currency translation adjustment 178 106 20 ( 31 ) Change in net unrealized gains (losses) on foreign currency hedging ( 417 ) ( 618 ) 244 ( 534 ) Less: reclassification adjustment for net (gains) losses included in net income 134 282 146 458 Total net change in unrealized gains (losses) on foreign currency hedging ( 283 ) ( 336 ) 390 ( 76 ) Change in net unrealized gains (losses) on marketable securities 1 23 ( 5 ) 36 Total other comprehensive income (loss), net of tax ( 104 ) ( 207 ) 405 ( 71 ) Comprehensive income $ 2,476 $ 9,953 $ 1,396 $ 15,391 Basic net income per share attributable to common stockholders (Note 7) $ 0.12 $ 0.47 $ 0.05 $ 0.71 Diluted net income per share attributable to common stockholders (Note 7) $ 0.12 $ 0.45 $ 0.04 $ 0.69 Weighted-average number of shares used in calculating net income per share attributable to common stockholders: Basic common shares 21,963,472 21,815,634 21,939,919 21,783,150 Diluted common shares 22,221,356 22,359,679 22,229,744 22,459,101 See accompanying condensed notes to the consolidated financial statements. 5 Inogen, Inc. Consolidated Statements of Stockholders’ Equity (amounts in thousands, except share amounts) Three months ended June 30, 2020 and June 30, 2019 Accumulated Additional other Total Common stock paid-in Retained comprehensive stockholders' Shares Amount capital earnings income (loss) equity Balance, March 31, 2019 (unaudited) 21,931,342 $ 22 $ 255,226 $ 65,786 $ 860 $ 321,894 Stock-based compensation — — 1,779 — — 1,779 Restricted stock awards issued, net of forfeitures ( 12,342 ) — — — — — Vesting of restricted stock units 10,111 — ( 8 ) — — ( 8 ) Shares withheld related to net restricted stock settlement ( 978 ) — ( 63 ) — — ( 63 ) Stock options exercised 5,536 — 243 — — 243 Net income — — — 10,160 — 10,160 Other comprehensive loss — — — — ( 207 ) ( 207 ) Balance, June 30, 2019 (unaudited) 21,933,669 $ 22 $ 257,177 $ 75,946 $ 653 $ 333,798 Balance, March 31, 2020 (unaudited) 22,044,527 $ 22 $ 267,011 $ 79,845 $ 422 $ 347,300 Stock-based compensation — — 1,277 — — 1,277 Vesting of restricted stock units 20,049 — ( 4 ) — — ( 4 ) Shares withheld related to net restricted stock settlement ( 1,605 ) — ( 61 ) — — ( 61 ) Stock options exercised 2,990 — 126 — — 126 Net income — — — 2,580 — 2,580 Other comprehensive loss — — — — ( 104 ) ( 104 ) Balance, June 30, 2020 (unaudited) 22,065,961 $ 22 $ 268,349 $ 82,425 $ 318 $ 351,114 Six months ended June 30, 2020 and June 30, 2019 Accumulated Additional other Total Common stock paid-in Retained comprehensive stockholders' Shares Amount capital earnings income (loss) equity Balance, December 31, 2018 21,778,632 $ 22 $ 249,194 $ 60,484 $ 724 $ 310,424 Stock-based compensation — — 5,365 — — 5,365 Employee stock purchases 16,767 — 1,525 — — 1,525 Restricted stock awards issued, net of forfeitures 54,602 — — — — — Vesting of restricted stock units 21,376 — ( 67 ) — — ( 67 ) Shares withheld related to net restricted stock settlement ( 13,023 ) — ( 718 ) — — ( 718 ) Stock options exercised 75,315 — 1,878 — — 1,878 Net income — — — 15,462 — 15,462 Other comprehensive loss — — — — ( 71 ) ( 71 ) Balance, June 30, 2019 (unaudited) 21,933,669 $ 22 $ 257,177 $ 75,946 $ 653 $ 333,798 Balance, December 31, 2019 22,031,410 $ 22 $ 263,252 $ 81,434 $ ( 87 ) $ 344,621 Stock-based compensation — — 4,061 — — 4,061 Employee stock purchases 27,954 — 1,088 — — 1,088 Restricted stock awards issued, net of forfeitures ( 27,729 ) — — — — — Vesting of restricted stock units 30,216 — ( 11 ) — — ( 11 ) Shares withheld related to net restricted stock settlement ( 5,214 ) — ( 227 ) — — ( 227 ) Stock options exercised 9,324 — 186 — — 186 Net income — — — 991 — 991 Other comprehensive income — — — — 405 405 Balance, June 30, 2020 (unaudited) 22,065,961 $ 22 $ 268,349 $ 82,425 $ 318 $ 351,114 See accompanying condensed notes to the consolidated financial statements. 6 Inogen, Inc. Consolidated Statements of Cash Flows (unaudited) (amounts in thousands) Six months ended June 30, 2020 2019 Cash flows from operating activities Net income $ 991 $ 15,462 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,942 5,554 Loss on rental units and other fixed assets 279 323 Gain on sale of former rental assets ( 74 ) ( 46 ) Provision for sales revenue returns and doubtful accounts 5,694 8,890 Provision for rental revenue adjustments 1,548 1,227 Provision for inventory losses 626 410 Stock-based compensation expense 4,061 5,365 Deferred income taxes 684 4,067 Change in fair value of earnout liability ( 20 ) — Changes in operating assets and liabilities: Accounts receivable ( 1,399 ) ( 19,735 ) Inventories ( 3,327 ) 1,536 Income tax receivable ( 8 ) ( 95 ) Prepaid expenses and other current assets ( 6,385 ) ( 3,154 ) Operating lease right-of-use asset ( 3,599 ) ( 5,461 ) Other noncurrent assets 1,509 ( 1,926 ) Accounts payable and accrued expenses ( 1,124 ) 223 Accrued payroll 190 ( 4,436 ) Warranty reserve 1,237 795 Deferred revenue 282 1,959 Income tax payable 163 15 Operating lease liability 3,800 6,462 Other noncurrent liabilities — ( 832 ) Net cash provided by operating activities 14,070 16,603 Cash flows from investing activities Purchases of marketable securities ( 4,554 ) ( 38,601 ) Maturities of marketable securities 11,057 40,150 Investment in intangible assets ( 215 ) ( 31 ) Investment in property and equipment ( 2,329 ) ( 1,973 ) Production and purchase of rental equipment ( 3,227 ) ( 1,481 ) Proceeds from sale of former assets 119 104 Net cash provided by (used in) investing activities 851 ( 1,832 ) (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) Six months ended June 30, 2020 2019 Cash flows from financing activities Proceeds from stock options exercised 186 1,878 Proceeds from employee stock purchases 1,088 1,525 Payment of employment taxes related to release of restricted stock ( 238 ) ( 785 ) Net cash provided by financing activities 1,036 2,618 Effect of exchange rates on cash 92 ( 76 ) Net increase in cash and cash equivalents 16,049 17,313 Cash and cash equivalents, beginning of period 198,037 196,634 Cash and cash equivalents, end of period $ 214,086 $ 213,947 Supplemental disclosures of cash flow information Cash paid during the period for income taxes, net of refunds received $ 132 $ 208 Supplemental disclosure of non-cash transactions Property and equipment in accounts payable and accrued liabilities 146 242 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 (POCs) 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 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. Since adopting the Company’s direct-to-consumer rental strategy in 2009, the Company has directly sold or rented more than 875,000 of its Inogen oxygen concentrators as of June 30, 2020. The Company incorporated Inogen Europe Holding B.V., a Dutch limited liability company, on April 13, 2017 . On May 4, 2017, Inogen Europe Holding B.V. acquired all issued and outstanding capital stock of MedSupport Systems B.V. (MedSupport) and began operating under the name Inogen Europe B.V. The Company merged Inogen Europe Holding B.V. and Inogen Europe B.V. on December 28, 2018. Inogen Europe B.V. is the remaining legal entity. Inogen completed the acquisition of New Aera, Inc. (New Aera) on August 9, 2019. 2. Basis of presentation and summary of significant accounting policies 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). The results of operations for the three months and six months ended June 30, 2020 shown in this report are not necessarily indicative of results to be expected for the full year ending December 31, 2020. In the opinion of the Company’s management, the information contained herein reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s results of operations, financial position, cash flows and stockholders’ equity. Certain footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations relating to interim financial statements. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2020. Except as further described below, 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 25, 2020. 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 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, fair value of acquired intangible assets and goodwill and fair value of earnout liabilities. Actual results could differ from these estimates. 9 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Government grants The Company may receive cash payments from government grants during a public health emergency (PHE). The Company considers the nature and substance of the government grant and records the cash payment in accordance with the terms and conditions of the grant. Income is deferred until all considerations required for receiving the grant are met and is recognized in the consolidated statements of comprehensive income based on the nature of the terms and conditions of the grant. In the three months ended June 30, 2020, the Company received a grant of $ 6,200 from the Public Health and Social Services Emergency Fund (Relief Fund), which was among the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act signed into law on March 27, 2020. During the three months ended June 30, 2020, t he Company recorded $ 5,600 in other income, which was associated with lost revenues from the COVID-19 PHE, and a $ 600 benefit in general and administrative expense due to COVID-19 PHE related costs incurred in the quarter. Recently issued accounting pronouncements not yet adopted In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new guidance also improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending the existing guidance. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect of the new guidance. Recently adopted accounting pronouncements In June 2016, the FASB issued ASU No. 2016-13, Accounting for Credit Losses (Topic 326) . The new standard requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. The Company adopted this standard on January 1, 2020, and adoption of this standard did not 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 Company adopted this standard on January 1, 2020, and adoption of this standard did 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 Company adopted this standard on January 1, 2020, and adoption of this standard did not have a material impact on the Company’s consolidated financial statement presentation or results. 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. 3. Acquisitions On August 6, 2019, the Company entered into an Agreement and Plan of Merger (Merger Agreement) by and among the Company, New Aera, Inc., a Delaware corporation, Move Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, and Gregory J. Kapust, as stockholder representative. On August 9, 2019, the Company completed the acquisition of New Aera pursuant to and on the terms set forth in the Merger Agreement. In connection with the Merger Agreement, the Company also separately acquired certain intellectual property assets from Silverbow Development, LLC, an affiliate of New Aera (Silverbow). New Aera is an innovative developer and manufacturer of portable non-invasive ventilators for people suffering from various chronic lung diseases. Under the terms of the Merger Agreement, all outstanding shares of capital stock of New Aera were cancelled and converted into the right to receive merger consideration with a value equal to up to $ 101,923 in cash in the aggregate (inclusive of payments to Silverbow) comprised of $ 70,523 of cash paid at closing and up to $ 31,400 in earnout payments if certain performance targets are achieved. Goodwill associated with this acquisition is not expected to be deductible for income tax purposes. 10 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Assets and liabilities of the acquired company were recorded at their estimated fair values at the date of acquisition. The excess purchase price over the fair value of net tangible assets and identifiable intangible asset s acquired has been allocated to goodwill. Goodwill represents the expected synergies with the existing business, the acquired assembled workforce, and future cash flows after the acquisition . The fair value assigned to the identifiable intangible asset was determined primarily by using the excess earnings method. T he key assumption s included in the excess earnings method included revenue recognized , cost of revenue and the discount rate. The fair value of the earnout liability was measured using a Monte Carlo simulation and was discounted using a rate that appropriately captures the risk associated with the obligation. The key assumption included in the simulation included revenue recognized . Preliminary fair values of assets acquired and liabilities assumed have been updated for deferred taxes. The purchase accounting for this acquisition has been finalized. The following table summarizes the purchase price allocation for the acquisition of New Aera: Cash $ 122 Inventories 140 Other current assets 8 Property and equipment 224 Goodwill 30,742 Intangible assets 77,700 Total assets acquired $ 108,936 Deferred tax liability - noncurrent $ 12,664 Earnout liability - noncurrent 25,749 Total liabilities assumed 38,413 Total purchase price $ 70,523 The consolidated financial and operating results reflect the New Aera operations beginning August 9, 2019. The following unaudited pro forma information for the three months and six months ended June 30, 2019 presents the revenue and net income assuming the acquisition of New Aera had occurred as of January 1, 2018. Three months ended Six months ended June 30, 2019 June 30, 2019 Total revenue $ 101,068 $ 191,275 Net income $ 7,359 $ 10,009 4. Fair value measurements 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. 11 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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. Cash, cash equivalents and marketable securities 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 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 June 30, 2020 Gross Cash Adjusted unrealized and cash Marketable cost gains Fair value equivalents securities Cash $ 54,332 $ — $ 54,332 $ 54,332 $ — Level 1: Money market accounts 159,754 — 159,754 159,754 — Level 2: Corporate bonds 4,547 2 4,549 — 4,549 U.S. Treasury securities — — — — — Total $ 218,633 $ 2 $ 218,635 $ 214,086 $ 4,549 As of December 31, 2019 Gross Cash Adjusted unrealized and cash Marketable cost gains Fair value equivalents securities Cash $ 51,560 $ — $ 51,560 $ 51,560 $ — Level 1: Money market accounts 146,477 — 146,477 146,477 — Level 2: Corporate bonds 2,011 2 2,013 — 2,013 U.S. Treasury securities 9,038 6 9,044 — 9,044 Total $ 209,086 $ 8 $ 209,094 $ 198,037 $ 11,057 Derivative instruments and hedging activities The Company transacts business in foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company has entered into foreign currency forward contracts, generally with maturities of twelve months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Forward contracts are used to hedge forecasted sales over specific months. Changes in the fair value of these forward contracts designed as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are recognized in the consolidated statements of comprehensive income (loss) during the period which approximates the time the corresponding sales occur. The Company may also enter into foreign exchange contracts that are not 12 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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 related receivable of $ 64 and a related payable of $ 514 as of June 30, 2020 and December 31, 2019, 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) The components of accumulated other comprehensive income (loss) were as follows: Foreign Unrealized Unrealized Accumulated currency gains (losses) gains (losses) other translation on marketable on cash comprehensive adjustments securities flow hedges income (loss) Balance as of December 31, 2019 $ 271 $ 6 $ ( 364 ) $ ( 87 ) Other comprehensive income (loss) 20 ( 5 ) 390 405 Balance as of June 30, 2020 $ 291 $ 1 $ 26 $ 318 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). Earnout liability The Com pany has obligations to pay up to $ 31,400 in earnout payments in cash if certain future financial results are met. The earnout liability was valued using Level 3 inputs. The fair value of the earnout was determined by employing a Monte Carlo simulation in a risk-neutral framework. The underlying simulated variable includes recognized revenue. The recognized revenue volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model includes other assumptions including the market price of risk, which was calculated as the weighted average cost of capital (WACC) less the long-term risk free rate. The earnout period for recognized revenue is each calendar year beginning with calendar year 2019 and ending on the calendar year in which the earnout consideration equals the earnout cap . 13 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) The following table provides quantitative information about Level 3 inputs for fair value measurement of the earnout liability as of June 30, 2020 and December 31, 2019. Significant increases or decreases in these inputs in isolation could result in a significant impact on our fair value measurement: As of As of Simulation input June 30, 2020 December 31, 2019 Revenue volatility 35.00 % 35.00 % WACC 12.00 % 13.00 % 20-year risk free rate 1.18 % 2.25 % Market price of risk 8.00 % 10.00 % The reconciliation of the earnout liability measured and carried at fair value on a recurring basis is as follows: Three months ended Six months ended June 30, June 30, 2020 2020 Balance at beginning of period $ 25,607 $ 26,559 Change in fair value 932 ( 20 ) Balance at end of period $ 26,539 $ 26,539 5. Balance sheet components Cash, cash equivalents and marketable securities The Company considers all short-term highly liquid investments with a maturity of three months or less to be cash equivalents. The Company’s marketable debt securities are 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: June 30, December 31, Cash and cash equivalents 2020 2019 Cash $ 54,332 $ 51,560 Money market accounts 159,754 146,477 Total cash and cash equivalents $ 214,086 $ 198,037 Marketable securities Corporate bonds $ 4,549 $ 2,013 U.S. Treasury securities — 9,044 Total marketable securities $ 4,549 $ 11,057 14 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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 for sales revenue and as a reduction of rental revenue in the periods in which they become known. The allowance is increased by bad debt provisions, net of recoveries, 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 for sales revenue, 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 allowances for rental reserve adjustments and doubtful accounts, the rental revenue adjustments account (contra rental revenue account) is charged. As of June 30, 2020 and December 31, 2019, included in accounts receivable on the consolidated balance sheets were earned but unbilled receivables of $ 1,520 and $ 590 , respectively. These balances reflect gross unbilled receivables prior to any allowances for adjustments and write-offs. The Company consistently applies its allowance estimation methodology from period-to-period. The Company’s best estimate is made on an accrual basis and adjusted in future periods as required. Any adjustments to the prior period estimates are included in the current period. As additional information becomes known, the Company adjusts its assumptions accordingly to change its estimate of the allowance. Gross accounts receivable balance concentrations by major category as of June 30, 2020 and December 31, 2019 were as follows: June 30, December 31, Gross accounts receivable 2020 2019 Rental (1) $ 3,960 $ 3,003 Business-to-business and other receivables (2) 25,815 33,101 Total gross accounts receivable $ 29,775 $ 36,104 15 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Net accounts receivable (gross accounts receivable, net of allowances) balance concentrations by major category as of June 30, 2020 and December 31, 2019 were as follows: June 30, December 31, Net accounts receivable 2020 2019 Rental (1) $ 3,314 $ 2,464 Business-to-business and other receivables (2) 25,108 31,861 Total net accounts receivable $ 28,422 $ 34,325 (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 $ 5,866 and $ 10,695 as of June 30, 2020 and December 31, 2019, 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 $ 20,000 in coverage as of June 30, 2020 and allocated up to $ 20,000 in coverage as of December 31, 2019 for this customer with a $ 400 deductible and 10 % retention. The following tables set forth the accounts receivable allowances as of June 30, 2020 and December 31, 2019: June 30, December 31, Allowances - accounts receivable 2020 2019 Doubtful accounts $ 141 $ 205 Rental revenue adjustments 544 411 Sales returns 668 1,163 Total allowances - accounts receivable $ 1,353 $ 1,779 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 The Company primarily sells its products to traditional home medical equipment providers, distributors, and resellers in the United States and in foreign countries primarily 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 six months ended June 30, 2020, and no single customer represented more than 10% of the Company’s total revenue for the six months ended June 30, 2019. Two customers each represented more than 10% of the Company’s net accounts receivable balance with accounts receivable balances of $ 5,866 and $ 8,900 , respectively, as of June 30, 2020, and $ 10,695 and $ 5,228 , respectively, as of December 31, 2019. 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 six months ended June 30, 2020, the Company’s three major vendors accounted for 21.4 %, 10.6 %, and 10.4 %, respectively, of total raw material purchases. For the six months ended June 30, 2019, the Company’s three major vendors accounted for 21.5 %, 13.1 % and 9.3 %, respectively, of total raw material purchases. 16 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) A portion of revenue is earned from sales outside the United States. Approximately 77.2 % and 71.8 % of the non-U.S. revenue for the three months ended June 30, 2020 and June 30, 2019, respectively, were invoiced in Euros. Approximately 72.2 % and 71.6 % of the non-U.S. revenue for the six months ended June 30, 2020 and June 30, 2019, respectively, were invoiced in Euros. A breakdown of the Company’s revenue from U.S. and non-U.S. sources for the three and six months ended June 30, 2020 and June 30, 2019, respectively, is as follows: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 U.S. revenue $ 57,817 $ 78,499 $ 126,223 $ 148,898 Non-U.S. revenue 13,874 22,564 33,957 42,367 Total revenue $ 71,691 $ 101,063 $ 160,180 $ 191,265 Inventories Inventories are stated at the lower of cost 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 $ 2,091 and $ 1,076 as of June 30, 2020 and December 31, 2019, 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 six months ended June 30, 2020 and June 30, 2019, $ 1,193 and $ 670 , 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 flow. Inventories that are considered current consist of the following: June 30, December 31, 2020 2019 Raw materials and work-in-progress $ 31,925 $ 31,676 Finished goods 5,085 5,174 Less: reserves ( 830 ) ( 1,186 ) Inventories, net $ 36,180 $ 35,664 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 $ 598 and $ 701 for the three months ended June 30, 2020 and June 30, 2019, respectively, and $ 1,123 and $ 1,363 for the six months ended June 30, 2020 and June 30, 2019, 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. 17 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Depreciation and amortization expense related to rental equipment and other property and equipment are summarized below for the three and six months ended June 30, 2020 and June 30, 2019, respectively. Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Rental equipment $ 1,221 $ 1,594 $ 2,520 $ 3,299 Other property and equipment 1,009 842 1,930 1,603 Total depreciation and amortization $ 2,230 $ 2,436 $ 4,450 $ 4,902 Property and equipment and rental equipment with associated accumulated depreciation is summarized below as of June 30, 2020 and December 31, 2019, respectively. June 30, December 31, Property and equipment 2020 2019 Rental equipment, net of allowances of $ 355 and $ 395 , respectively $ 40,614 $ 39,308 Other property and equipment 26,297 24,986 Property and equipment 66,911 64,294 Accumulated depreciation Rental equipment 30,678 30,984 Other property and equipment 14,703 13,872 Accumulated depreciation 45,381 44,856 Property and equipment, net Rental equipment, net of allowances of $355 and $395, respectively 9,936 8,324 Other property and equipment 11,594 11,114 Property and equipment, net $ 21,530 $ 19,438 Long-lived assets The Company accounts for the impairment and disposition of long-lived assets in accordance with ASC 360 — Property, 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 June 30, 2020 and June 30, 2019. Goodwill The changes in the carrying amount of goodwill for the six months ended June 30, 2020 were as follows: Balance as of December 31, 2019 $ 32,954 Translation adjustment 3 Balance as of June 30, 2020 $ 32,957 Intangible assets There were no impairments recorded related to the Company’s intangible assets as of June 30, 2020 and June 30, 2019. Amortization expense for intangible assets for the three months ended June 30, 2020 and June 30, 2019 was $ 2,250 and $ 324 , respectively, and for the six months ended June 30, 2020 and June 30, 2019 was $ 4,492 and $ 652 , respectively. 18 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) The following tables represent the changes in net carrying values of intangible assets as of the respective dates: Average estimated Gross useful lives carrying Accumulated June 30, 2020 (in years) amount amortization Net amount Technology 10 $ 77,700 $ 6,799 $ 70,901 Licenses 10 185 169 16 Patents and websites 5 4,490 2,658 1,832 Customer relationships 4 1,347 1,067 280 Commercials 2-3 777 553 224 Total $ 84,499 $ 11,246 $ 73,253 Average estimated Gross useful lives carrying Accumulated December 31, 2019 (in years) amount amortization Net amount Technology 10 $ 77,700 $ 2,914 $ 74,786 Licenses 10 185 165 20 Patents and websites 5 4,274 2,308 1,966 Customer relationships 4 1,346 897 449 Commercials 2-3 777 465 312 Total $ 84,282 $ 6,749 $ 77,533 Annual estimated amortization expense for each of the succeeding fiscal years is as follows: June 30, 2020 Remaining 6 months of 2020 $ 4,506 2021 8,723 2022 8,410 2023 7,835 2024 7,830 Thereafter 35,949 $ 73,253 Current liabilities Accounts payable and accrued expenses as of June 30, 2020 and December 31, 2019 consisted of the following: June 30, December 31, 2020 2019 Accounts payable $ 13,189 $ 16,399 Accrued inventory (in-transit and unvouchered receipts) and trade payables 6,992 11,124 Accrued purchasing card liability 2,132 1,675 Accrued franchise, sales and use taxes 408 713 Other accrued expenses 6,642 819 Accounts payable and accrued expenses $ 29,363 $ 30,730 19 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Accrued payroll as of June 30, 2020 and December 31, 2019 consisted of the following: June 30, December 31, 2020 2019 Accrued bonuses $ 4 $ 87 Accrued wages and other payroll related items 3,157 3,158 Accrued vacation 2,488 2,169 Accrued employee stock purchase plan deductions 756 801 Accrued payroll $ 6,405 $ 6,215 6. Leases The Company has entered into operating leases primarily for commercial buildings. These leases have terms which range from 2 years to 8 years, some of which include options to extend the leases for up to 5 years. There are no economic penalties for the Company to extend the lease, and it is not reasonably assured that the Company will exercise the extension options. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. The operating leases do not contain material residual value guarantees or material restrictive covenants. T he Company leases a property owned by a related party. Operating lease cost for the property was $ 8 and $ 16 for the three and six months ended June 30, 2020, respectively, which was included in the total operating lease cost. Information related to the Company's right-of-use assets and related operating lease liabilities were as follows: Six months ended June 30, 2020 2019 Cash paid for operating lease liabilities $ 1,183 $ 1,164 Operating lease cost 1,344 1,087 Non-cash right-of-use assets obtained in exchange for new operating lease obligations 4,667 6,418 Weighted-average remaining lease term 2.9 years 2.8 years Weighted-average discount rate 3.7 % 3.8 % Maturities of lease liabilities due in the 12-month period ending June 30, 2021 $ 2,143 2022 1,971 2023 1,752 2024 1,757 2025 846 Thereafter 3,344 11,813 Less imputed interest ( 1,297 ) Total lease liabilities $ 10,516 Operating lease liability - current $ 1,823 Operating lease liability - noncurrent $ 8,693 Total lease liabilities $ 10,516 20 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) As of June 30, 2020, the Company has additional operating leases for its corporate headquarters in California and industrial space in Texas that have not yet commenced, with total minimum lease payments of $ 21,548 . Lease payments for its corporate headquarters will increase annually by the lesser of the change, if any, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor or three and one-half percent ( 3.5 %) at each annual adjustment date thereafter. Lease payments for the Company’s industrial space in Texas will increase annually by two and one-half percent ( 2.5 %) at each annual adjustment date thereafter . These operating leases are estimated to commence in the first quarter of 2021 with a lease term of 10 to 11 years . The table above excludes lease payments that were not fixed at commencement or modification. 7. 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: Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Numerator—basic and diluted: Net income $ 2,580 $ 10,160 $ 991 $ 15,462 Denominator: Weighted-average common shares - basic common stock (1) 21,963,472 21,815,634 21,939,919 21,783,150 Weighted-average common shares - diluted common stock 22,221,356 22,359,679 22,229,744 22,459,101 Net income per share - basic common stock $ 0.12 $ 0.47 $ 0.05 $ 0.71 Net income per share - diluted common stock $ 0.12 $ 0.45 $ 0.04 $ 0.69 Denominator calculation from basic to diluted: Weighted-average common shares - basic common stock (1) 21,963,472 21,815,634 21,939,919 21,783,150 Stock options and other dilutive awards 257,884 544,045 289,825 675,951 Weighted-average common shares - diluted common stock 22,221,356 22,359,679 22,229,744 22,459,101 Shares excluded from diluted weighted-average shares: Stock options 476,385 66,485 252,842 — Restricted stock units and restricted stock awards 224,860 158,680 47,870 165,060 Shares excluded from diluted weighted-average shares 701,245 225,165 300,712 165,060 (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 exclude common stock options, restricted stock units, and restricted stock awards, which were anti-dilutive for the three and six months ended June 30, 2020 and June 30, 2019. 21 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 8. 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 significant interest or penalties were recognized during the periods presented. The Company operates in several taxing jurisdictions, including U.S. federal, multiple U.S. states and the Netherlands. The statute of limitations has expired for all tax years prior to 2016 for federal and prior to 2015 to 2016 for various state tax purposes. However, the net operating loss generated on the Company’s federal and state tax returns in prior years may be subject to adjustments by the federal and state tax authorities. The Company determined the income tax provision for interim periods using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimated annual effective tax rate, and if the estimated annual effective tax rate changes, a cumulative adjustment is recorded in that quarter. The Company’s quarterly income tax provision and quarterly estimate of the annual effective tax rate are subject to volatility due to several factors, including our ability to accurately predict the proportion of our income before provision for income taxes in multiple jurisdictions, the tax effects of our stock-based compensation, and the effects of its foreign entity. On March 27, 2020, the CARES Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 PHE. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material tax impact on the Company’s consolidated financial statement presentation or results as of and for the three and six months ended June 30, 2020. The Company is continuing to assess the future implications of these provisions within the CARES Act. 9. Stockholders’ equity The Company has a 2002 Stock Incentive Plan (2002 Plan) as amended, under which the Company granted options to purchase shares of its common stock. As of June 30, 2020, options to purchase 333 shares of common stock remained outstanding under the 2002 Plan. The 2002 Plan was terminated in March 2012 in connection with the adoption of the 2012 Plan, and, accordingly, no new options are available for issuance under this plan. The 2002 Plan continues to govern outstanding awards granted thereunder. The Company has a 2012 Equity Incentive Plan (2012 Plan) under which the Company granted options to purchase shares of its common stock. As of June 30, 2020, options to purchase 138,736 shares of common stock remained outstanding under the 2012 Plan. The 2012 Plan was terminated in connection with the Company’s initial public offering in February 2014, and accordingly, no new options are available for issuance under this plan. The 2012 Plan continues to govern outstanding awards granted thereunder. The Company has a 2014 Equity Incentive Plan (2014 Plan) that provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to the Company’s employees and any parent and subsidiary corporation’s employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, restricted stock awards, stock appreciation rights, performance units and performance shares to its employees, directors and consultants and its parent and subsidiary corporations’ employees and consultants. 22 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) As of June 30, 2020, awards with respect to 1,212,795 shares of the Company’s common stock were outstanding, and 1,620,935 shares of common stock remained available for issuance under the 2014 Plan. The shares available for issuance under the 2014 Plan will be increased by any shares returned to the 2002 Plan, 2012 Plan and the 2014 Plan as a result of expiration or termination of awards (provided that the maximum number of shares that may be added to the 2014 Plan pursuant to such previously granted awards under the 2002 Plan and 2012 Plan is 2,328,569 shares). The number of shares available for issuance under the 2014 Plan also is increased annually on the first day of each fiscal year by an amount equal to the least of: • 895,346 shares; • 4 % of the outstanding shares of common stock as of the last day of the Company’s immediately preceding fiscal year; or • such other amount as the Company’s board of directors may determine. For 2020, no additional shares were added to the 2014 Plan share reserve pursuant to the provision described above. Stock options Options typically expire between seven and ten years from the date of grant and vest over one to four year terms. Options have been granted to employees, directors and consultants of the Company, as determined by the board of directors, at the deemed fair market value of the shares underlying the options at the date of grant. The activity for stock options under the Company’s stock plans for the six months ended June 30, 2020 is as follows: Remaining weighted- Weighted- average Per share average contractual average Price per exercise terms intrinsic Options share price (in years) value Outstanding as of December 31, 2019 980,884 $0.75-$83.30 $ 35.24 2.84 $ 34.07 Granted — — — Exercised ( 9,324 ) 1.17-44.19 20.00 Forfeited ( 3,784 ) 44.19-56.72 51.44 Expired — — — Outstanding as of June 30, 2020 967,776 0.75-83.30 35.33 2.34 7.62 Vested and exercisable as of June 30, 2020 967,776 0.75-83.30 35.33 2.34 7.62 Vested and expected to vest as of June 30, 2020 967,776 $0.75-$83.30 $ 35.33 2.34 $ 7.62 The total intrinsic value of options exercised during the six months ended June 30, 2020 and June 30, 2019 was $ 269 and $ 6,870 , respectively. As of June 30, 2020, all stock-based compensation expense for options granted under the Plans was recognized. Stock incentive awards The Company grants restricted stock units (RSUs) and restricted stock awards (RSAs) under the 2014 Plan (Stock Awards). The Stock Awards vest either based solely on the satisfaction of time-based service conditions or on the satisfaction of time-based service conditions combined with performance criteria. Stock Awards are subject to forfeiture if the holder’s services to the Company terminate before vesting. Stock Awards granted with only time-based service vesting conditions generally vest over a four-year service period, as defined in the terms of each award. Stock Awards that vest based on the satisfaction of time-based service conditions combined with performance criteria generally vest over a three-year service and performance period, based on performance criteria established at the time of the award. The portion of the Stock Award that is earned may equal or be less than the targeted number of shares subject to the Stock Award depending on whether the performance criteria are met. 23 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Stock Awards activity for the six months ended June 30, 2020 is summarized below: Weighted- average grant Performance date fair and value Restricted stock units Time-based time-based Total per share Unvested restricted stock units as of December 31, 2019 108,976 3,134 112,110 $ 83.48 Granted 181,313 88,458 269,771 44.88 Vested ( 30,484 ) — ( 30,484 ) 88.71 Forfeited/canceled ( 13,519 ) ( 3,134 ) ( 16,653 ) 81.50 Unvested restricted stock units as of June 30, 2020 (1) 246,286 88,458 334,744 $ 52.68 Unvested and expected to vest restricted stock units outstanding as of June 30, 2020 247,317 $ 53.74 Weighted- average grant Performance date fair and value Restricted stock awards Time-based time-based Total per share Unvested restricted stock awards outstanding as of December 31, 2019 71,070 62,628 133,698 $ 95.74 Granted — — — — Vested ( 14,480 ) — ( 14,480 ) 98.42 Forfeited/canceled — ( 29,273 ) ( 29,273 ) 110.27 Unvested restricted stock awards outstanding as of June 30, 2020 (1) 56,590 33,355 89,945 $ 91.45 Unvested and expected to vest restricted stock awards outstanding as of June 30, 2020 58,037 $ 84.75 (1) Outstanding restricted stock units and restricted stock awards are based on the maximum payout of the targeted number of shares. As of June 30, 2020, the unrecognized compensation cost related to unvested employee restricted stock units and restricted stock awards was $ 16,438 , excluding estimated forfeitures. This amount is expected to be recognized over a weighted-average period of 2.7 years. Employee stock purchase plan The Company’s 2014 Employee Stock Purchase Plan (ESPP) provides for the grant to all eligible employees an option to purchase stock under the ESPP, within the meaning Section 423 of the Internal Revenue Code. The ESPP permits participants to purchase common stock through payroll deductions of up to 15 % of their eligible compensation, which includes a participant’s base straight time gross earnings, incentive compensation, bonuses, overtime and shift premium, but exclusive of payments for equity compensation and other similar compensation. A participant may purchase a maximum of 1,500 shares during a purchase period. Amounts deducted and accumulated by the participant are used to purchase shares of the Company’s common stock at the end of each six-month period. The purchase price of the shares will be 85 % of the lower of the fair market value of the Company’s common stock on the first trading day of each offering period or on the exercise date. The offering periods are currently approximately six months in length beginning on the first business day on or after March 1 and September 1 of each year and ending on the first business day on or after September 1 and March 1 approximately six months later. As of June 30, 2020, a total of 670,678 shares of common stock were available for sale pursuant to the ESPP. 24 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) The number of shares available for sale under the ESPP is increased annually on the first day of each fiscal year by an amount equal to the least of: • 179,069 shares; • 1.5 % of the outstanding shares of the Company’s common stock on the last day of the Company’s immediately preceding fiscal year; or • such other amount as may be determined by the administrator. For 2020, no additional shares were added to the ESPP share reserve pursuant to the provision described above. Stock-based compensation Stock-based compensation expense recognized for the three and six months ended June 30, 2020 and June 30, 2019, was as follows: Three months ended Six months ended June 30, June 30, 2020 2019 2020 2019 Stock-based compensation expense by type of award: Stock option plan awards $ 184 $ 776 $ 709 $ 1,923 Restricted stock units and restricted stock awards 892 791 2,975 3,048 Employee stock purchase plan 201 212 377 394 Total stock-based compensation expense $ 1,277 $ 1,779 $ 4,061 $ 5,365 Employee stock-based compensation expense was calculated based on awards of stock options, restricted stock units and restricted stock awards ultimately expected to vest based on the Company’s historical award cancellations. The employee stock-based compensation expense recognized for the six months ended June 30, 2020 and June 30, 2019 has been reduced for estimated forfeitures of stock option plan awards at a rate of 7.3 % and 7.3 %, respectively. ASC 718 – Compensation-Stock Compensation requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three and six months ended June 30, 2020 and June 30, 2019, respectively, stock-based compensation expense recognized under ASC 718, included in cost of revenue, research and development expense, sales and marketing expense, and general and administrative expense was as follows: Three months ended Six months ended June 30, June 30, 2020 2019 2020 2019 Cost of revenue $ 97 $ 199 $ 326 $ 484 Research and development 173 227 493 604 Sales and marketing 459 336 1,071 1,026 General and administrative 548 1,017 2,171 3,251 Total stock-based compensation expense $ 1,277 $ 1,779 $ 4,061 $ 5,365 401(k) retirement savings plan The Company maintains a 401(k) retirement savings plan for the benefit of eligible employees. Under the terms of this plan, eligible employees are able to make contributions to the plan on a tax-deferred basis. The Company matched employees’ contributions from January 1, 2017 through June 30, 2020. The Company suspended its 401(k) match, effective July 1, 2020. The Company contributed $ 459 and $ 505 , net of forfeitures, to the 401(k) plan for the six months ended June 30, 2020 and June 30, 2019, respectively. 25 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 10. Commitments and contingencies Non-cancelable contractual obligations The Company enters into non-cancelable contractual obligations for software licenses and maintenance agreements. As of June 30, 2020, the minimum aggregate payments due under specified non-cancelable contractual obligations are summarized as follows: Non-cancelable contractual obligations Remaining 6 months of 2020 $ 289 2021 457 2022 — 2023 — 2024 — Thereafter — $ 746 Purchase obligations The Company had approximately $ 68,200 of outstanding purchase orders with its outside vendors and suppliers as of June 30, 2020. Warranty obligations The following table identifies the changes in the Company’s aggregate product warranty liabilities for the six and twelve-month periods ended June 30, 2020 and December 31, 2019, respectively: June 30, December 31, 2020 2019 Product warranty liability at beginning of period $ 12,571 $ 9,530 Accruals for warranties issued 4,914 8,131 Adjustments related to preexisting warranties (including changes in estimates) ( 304 ) 1,433 Settlements made (in cash or in kind) ( 3,373 ) ( 6,523 ) Product warranty liability at end of period $ 13,808 $ 12,571 Contract liabilities Contract liabilities primarily consist of deferred revenue related to lifetime warranties on direct-to-consumer sales revenue when 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 for the six months ended June 30, 2020 was primarily driven by $ 2,845 of payments received in advance of satisfying performance obligations, partially offset by $ 2,594 of revenue recognized that were included in the deferred revenue balances as of December 31, 2019. Deferred revenue related to lifetime warranties was $ 17,979 and $ 17,728 as of June 30, 2020 and December 31, 2019, respectively, and is classified within deferred revenue – current and deferred revenue – noncurrent in the consolidated balance sheet. Legislation and HIPAA The healthcare industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has continued with respect to investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers. Violations of these laws and regulations could result in exclusion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. 26 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) The Company believes that it is in compliance in all material respects with applicable fraud and abuse regulations and other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was enacted to en sure health insurance portability, reduce healthcare fraud and abuse, guarantee security and privacy of health information, and enforce standards for health information. The Health Information Technology for Economic and Clinical Health Act (HITECH Act) , in part, imposes notification requirements of certain security breaches relating to protected health information. The Company believes that it complies in all material respects with the provisions of those regulations that are applicable to the Company’s business. Legal proceedings Intellectual property lawsuit On November 21, 2019, Breathe Technologies, Inc. (Breathe), a subsidiary of Hill-Rom Holdings, filed a lawsuit against Inogen, Inc., New Aera, Inc., Silverbow Development, LLC, and Todd W. Allum in the United States District Court for the Northern District of California (N.D. Cal. Lawsuit). Breathe alleged: willful infringement of the ‘250 patent assigned to Breathe; that inventorship was incorrectly assigned and that Breathe owns rights to certain patents filed by New Aera, Inc. and Silverbow Development LLC; breach of contract; inducing breach of contract; interference with contract; and violation of California Business and Professional Code Section 17200. The complaint seeks to correct inventorship of certain patents now owned by the Company, injunctive relief, compensatory and punitory damages in an unspecified amount including trebling of all damages awarded with respect to infringement of the ‘250 patent, costs and expenses, including attorneys’ fees and expert fees, prejudgment and post-judgment interest and such other relief as the court deems proper. On March 31, 2020, Breathe filed a First Amended Complaint in which it dropped the patent infringement claims in the N.D. Cal. Lawsuit and added another claim for violation of California Business and Professional Code Section 17200. On the same day, Breathe re-filed the ‘250 patent infringement claims in the United States District Court for the Central District of California (C.D. Cal. Lawsuit). The Company intends to vigorously defend itself against the allegations in both lawsuits. The Company recorded a contingent liability of $ 6,000 during the three months ended June 30, 2020. The related payable was recorded in accounts payable and accrued expenses and receivable from the New Aera acquisition escrow account in prepaid expenses and other current assets as of June 30, 2020. Securities class action and derivative lawsuits On March 6, 2019, plaintiff William Fabbri filed a lawsuit against Inogen, Scott Wilkinson, and Alison Bauerlein, in the United States District Court for the Central District of California on behalf of a purported class of purchasers of the Company’s securities. On March 21, 2019, plaintiff Steven Friedland filed a substantially similar lawsuit against the same defendants in the same court. On May 20, 2019, the court issued an order consolidating the two lawsuits under the name In re Inogen, Inc. Sec. Litig., No. 2:19-cv-01643-FMO-AGR, appointing Dr. John Vasil and Paragon Fund Management as lead plaintiffs, and appointing Robbins Geller Rudman & Dowd LLP and Glancy Prongay & Murray LLP as lead plaintiffs’ counsel. On July 10, 2019, the lead plaintiffs filed a consolidated amended complaint on behalf of a purported class of purchasers of the Company’s common stock between November 8, 2017 and May 7, 2019. The complaint generally alleges that the defendants failed to disclose that: (i) Inogen had overstated the true size of the total addressable market for its portable oxygen concentrators and had misstated the basis for its calculation of the total addressable market; (ii) Inogen had falsely attributed its sales growth to the strong sales acumen of its salesforce, rather than to deceptive sales practices; (iii) the growth in Inogen’s domestic business-to-business sales to home medical equipment providers was inflated, unsustainable and was eroding direct-to-consumer sales; and (iv) Inogen’s decision to focus on sales over rentals of portable oxygen concentrators harmed its ability to serve the Medicare market, in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended. The complaint seeks compensatory damages in an unspecified amount, costs and expenses, including attorneys’ fees and expert fees, prejudgment and post-judgment interest and such other relief as the court deems proper. O n January 2, 2020, the court dismissed the consolidated amended complaint with leave to amend. On January 9, 2020, the plaintiffs filed a second amended complaint generally alleging substantially similar claims as those in the previous complaint. On January 23, 2020, the defendants filed a motion to dismiss the second amended complaint. The Company intends to vigorously defend itself against these allegations. 27 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) On June 26, 2019, plaintiff Twana Brown filed a shareholder derivative lawsuit against Inogen, Scott Wilkinson, Alison Bauerlein, Benjamin Anderson-Ray, Scott Beardsley, R. Scott Greer, Raymond Huggenberger, Heath Lukatch, Loren McFarland, and Heather Rider in the United States District Court for the Central District of California. The complaint purports to bring claims on behalf of Inogen against the individual defendants for breaches of their fiduciary duties as directors and/or officers of Inogen, unjust enrichment, waste of corporate assets and violations of section 14(a) of the Securities Exchange Act of 1934, as amended. The complaint generally alleges similar claims to the securities class action. The complaint seeks compensatory damages and restitution in an unspecified amount, changes to the Company’s corporate governance and internal procedures, costs and expenses, including attorneys’ fees and expert fees, and such other relief as the court deems proper. On August 5, 2019, the court issued an order staying the derivative action pending the resolution of the motion to dismiss stage in In re Inogen, Inc. Sec. Litig . Between October 7, 2019 and October 31, 2019, three additional shareholder derivative complaints were filed in the United States District Court for the Central District of California based on similar factual allegations. These lawsuits purport to bring claims on behalf of Inogen for breach of fiduciary duty, unjust enrichment, waste of corporate assets, insider trading and misappropriation of information, and violations of section 14(a) of the Securities Exchange Act of 1934, as amended. On January 13, 2020, the court consolidated the four derivative lawsuits before it under the name In re Inogen, Inc. S’holder Deriv. Litig. , Lead Case No. 2:19-cv-5568-FMO-AGR and ordered that the consolidated action be stayed pending the resolution of the motion to dismiss stage in In re Inogen, Inc., Sec. Litig. On September 13, 2019, plaintiff Dustin Weller filed a shareholder derivative lawsuit against Inogen, Scott Wilkinson, Alison Bauerlein, Benjamin Anderson-Ray, Scott Beardsley, R. Scott Greer, Raymond Huggenberger, Heath Lukatch, Loren McFarland, and Heather Rider in the United States District Court for the District of Delaware captioned Weller v. Wilkinson, et al. , No. 1:19-cv-01723-MN. On October 17, 2019, plaintiff Sharokh Soltanipour filed a shareholder derivative lawsuit against the same defendants in the same court, captioned Soltanipour v. Wilkinson, et al. , No. 1:19-cv-1968-MN. The complaints generally allege similar claims to those in In re Inogen, Inc., S’holder Deriv. Litig. The complaints purport to bring claims on behalf of Inogen for breach of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control, gross mismanagement, insider selling and misappropriation of information, violations of section 14(a) of the Securities Exchange Act of 1934, as amended, and for contribution from certain of the individual defendants. The complaints seek compensatory damages in unspecified amounts, changes to the Company’s corporate governance and internal procedures, return of compensation, disgorgement of profits from sale of stock, costs and expenses, including attorneys’ fees and expert fees, and such other relief as the court deems proper. On May 15, 2020, the court consolidated the two derivative lawsuits before it under the name In re Inogen, Inc. S’holder Deriv. Litig. , Lead Case No. 1:19-cv-01723-MN-JLH. On July 8, 2020, the court ordered that the consolidated action be stayed pending the resolution of the motion to dismiss in the securities class action, In re Inogen, Inc., Sec. Litig . Other litigation In addition to the lawsuits discussed above, the Company is party to various legal proceedings arising in the normal course of business. The Company carries insurance, subject to specified deductibles under the policies, to protect against losses from certain types of legal claims. At this time, the Company does not anticipate that any of these other proceedings arising in the normal course of business will have a material adverse effect on the Company’s business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors. 11. Foreign currency exchange contracts and hedging As of June 30, 2020 and June 30, 2019, the Company’s total non-designated and designated derivative contracts had notional amounts totaling approximately $ 3,152 and $ 12,278 , respectively, and $ 2,388 and $ 8,926 , respectively. These contracts were comprised of offsetting contracts with the same counterparty, each expires within one to six months . During the six months ended June 30, 2020 and June 30, 2019, these contracts had, net of tax, an unrealized gain of $ 390 and an unrealized loss of $ 76 , respectively. The nonperformance risk of the Company and the counterparty did not have a material impact on the fair value of the derivatives. During the six months ended June 30, 2020 and June 30, 2019, there were no ineffective portions relating to these hedges and the hedges remained effective through their respective settlement dates. As of June 30, 2020, the Company had five designated hedges and one non-designated hedge. As of June 30, 2019, the Company had thirteen designated hedges and three non-designated hedges. 28