Inogen Inc 10-Q

Item 1. Financial Statements Inogen, Inc. Consolidated Balance Sheets (unaudited) (amounts in thousands) September 30, December 31, 2021 2020 Assets Current assets Cash and cash equivalents $ 241,576 $ 211,962 Marketable securities 3,552 19,257 Accounts receivable, net 32,905 29,717 Inventories, net 31,785 24,815 Income tax receivable 1,787 2,048 Prepaid expenses and other current assets 24,226 17,898 Total current assets 335,831 305,697 Property and equipment Rental equipment, net 55,612 46,953 Manufacturing equipment and tooling 11,811 10,361 Computer equipment and software 8,375 7,356 Furniture and equipment 3,033 2,293 Leasehold improvements 6,682 4,592 Land and building 125 125 Construction in process 1,826 2,344 Total property and equipment 87,464 74,024 Less accumulated depreciation ( 50,398 ) ( 45,794 ) Property and equipment, net 37,066 28,230 Goodwill 33,028 33,165 Intangible assets, net 62,299 68,797 Operating lease right-of-use asset 25,830 8,827 Deferred tax asset - noncurrent 15,481 14,467 Other assets 3,322 2,669 Total assets $ 512,857 $ 461,852 See accompanying condensed notes to the consolidated financial statements. 3 Inogen, Inc. Consolidated Balance Sheets (continued) (unaudited) (amounts in thousands, except share and per share amounts) September 30, December 31, 2021 2020 Liabilities and stockholders' equity Current liabilities Accounts payable and accrued expenses $ 29,223 $ 33,712 Accrued payroll 12,223 7,091 Warranty reserve - current 6,310 5,740 Operating lease liability - current 3,518 1,931 Deferred revenue - current 8,424 6,994 Income tax payable 235 1,242 Total current liabilities 59,933 56,710 Long-term liabilities Warranty reserve - noncurrent 8,606 8,654 Operating lease liability - noncurrent 24,121 8,078 Earnout liability - noncurrent 17,118 26,940 Deferred revenue - noncurrent 12,135 11,822 Deferred tax liability - noncurrent 24 25 Total liabilities 121,937 112,229 Commitments and contingencies (Note 9) Stockholders' equity Common stock, $ 0.001 par value per share; 200,000,000 authorized; 22,721,619 and 22,131,447 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively 23 22 Additional paid-in capital 297,097 273,521 Retained earnings 92,149 75,605 Accumulated other comprehensive income 1,651 475 Total stockholders' equity 390,920 349,623 Total liabilities and stockholders' equity $ 512,857 $ 461,852 See accompanying condensed notes to the consolidated financial statements. 4 Inogen, Inc. Consolidated Statements of Comprehensive Income (Loss) (unaudited) (amounts in thousands, except share and per share amounts) Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Revenue Sales revenue $ 80,974 $ 66,809 $ 248,359 $ 215,561 Rental revenue 12,131 7,520 33,241 18,948 Total revenue 93,105 74,329 281,600 234,509 Cost of revenue Cost of sales revenue 40,437 37,714 129,637 120,914 Cost of rental revenue, including depreciation of $ 2,315 and $ 1,475 , for the three months ended and $ 6,257 and $ 3,995 for the nine months ended, respectively 4,981 3,609 14,068 9,474 Total cost of revenue 45,418 41,323 143,705 130,388 Gross profit Gross profit-sales revenue 40,537 29,095 118,722 94,647 Gross profit-rental revenue 7,150 3,911 19,173 9,474 Total gross profit 47,687 33,006 137,895 104,121 Operating expense Research and development 3,754 3,511 11,892 10,406 Sales and marketing 28,301 22,882 83,109 72,131 General and administrative 9,258 8,586 26,981 28,087 Total operating expense 41,313 34,979 121,982 110,624 Income (loss) from operations 6,374 ( 1,973 ) 15,913 ( 6,503 ) Other income (expense) Interest income 21 114 107 842 Other income (expense) ( 466 ) ( 54 ) ( 472 ) 5,586 Total other income (expense), net ( 445 ) 60 ( 365 ) 6,428 Income (loss) before provision (benefit) for income taxes 5,929 ( 1,913 ) 15,548 ( 75 ) Provision (benefit) for income taxes ( 6,245 ) ( 214 ) ( 996 ) 633 Net income (loss) 12,174 ( 1,699 ) 16,544 ( 708 ) Other comprehensive income (loss), net of tax Change in foreign currency translation adjustment ( 251 ) 385 ( 585 ) 405 Change in net unrealized gains (losses) on foreign currency hedging 494 ( 82 ) 2,028 162 Less: reclassification adjustment for net (gains) losses included in net income 106 ( 213 ) ( 267 ) ( 67 ) Total net change in unrealized gains (losses) on foreign currency hedging 600 ( 295 ) 1,761 95 Change in net unrealized gains (losses) on marketable securities ( 1 ) ( 1 ) — ( 6 ) Total other comprehensive income, net of tax 348 89 1,176 494 Comprehensive income (loss) $ 12,522 $ ( 1,610 ) $ 17,720 $ ( 214 ) Basic net income (loss) per share attributable to common stockholders (Note 6) $ 0.54 $ ( 0.08 ) $ 0.74 $ ( 0.03 ) Diluted net income (loss) per share attributable to common stockholders (Note 6) $ 0.53 $ ( 0.08 ) $ 0.73 $ ( 0.03 ) Weighted-average number of shares used in calculating net income (loss) per share attributable to common stockholders: Basic common shares 22,619,272 21,998,299 22,416,575 21,959,521 Diluted common shares 22,854,229 21,998,299 22,803,355 21,959,521 See accompanying condensed notes to the consolidated financial statements. 5 Inogen, Inc. Consolidated Statements of Stockholders’ Equity (unaudited) (amounts in thousands, except share amounts) Three months ended September 30, 2021 and September 30, 2020 Accumulated Additional other Total Common stock paid-in Retained comprehensive stockholders' Shares Amount capital earnings income (loss) equity Balance, June 30, 2020 22,065,961 $ 22 $ 268,349 $ 82,425 $ 318 $ 351,114 Stock-based compensation — — 2,050 — — 2,050 Employee stock purchases 40,513 — 996 — 996 Vesting of restricted stock units 11,431 — ( 3 ) — — ( 3 ) Shares withheld related to net restricted stock settlement ( 1,614 ) — ( 47 ) — — ( 47 ) Net loss — — — ( 1,699 ) — ( 1,699 ) Other comprehensive income — — — — 89 89 Balance, September 30, 2020 22,116,291 $ 22 $ 271,345 $ 80,726 $ 407 $ 352,500 Balance, June 30, 2021 22,578,696 $ 23 $ 289,615 $ 79,975 $ 1,303 $ 370,916 Stock-based compensation — — 2,792 — — 2,792 Employee stock purchases 22,600 — 1,021 — — 1,021 Vesting of restricted stock units 12,131 — ( 39 ) — — ( 39 ) Shares withheld related to net restricted stock settlement ( 545 ) — ( 33 ) — — ( 33 ) Stock options exercised 108,737 — 3,741 — — 3,741 Net income — — — 12,174 — 12,174 Other comprehensive income — — — — 348 348 Balance, September 30, 2021 22,721,619 $ 23 $ 297,097 $ 92,149 $ 1,651 $ 390,920 Nine months ended September 30, 2021 and September 30, 2020 Accumulated Additional other Total Common stock paid-in Retained comprehensive stockholders' Shares Amount capital earnings income (loss) equity Balance, December 31, 2019 22,031,410 $ 22 $ 263,252 $ 81,434 $ ( 87 ) $ 344,621 Stock-based compensation — — 6,111 — — 6,111 Employee stock purchases 68,467 — 2,084 — — 2,084 Restricted stock awards issued, net of forfeitures ( 27,729 ) — — — — — Vesting of restricted stock units 41,647 — ( 14 ) — — ( 14 ) Shares withheld related to net restricted stock settlement ( 6,828 ) — ( 274 ) — — ( 274 ) Stock options exercised 9,324 — 186 — — 186 Net loss — — — ( 708 ) — ( 708 ) Other comprehensive income — — — — 494 494 Balance, September 30, 2020 22,116,291 $ 22 $ 271,345 $ 80,726 $ 407 $ 352,500 Balance, December 31, 2020 22,131,447 $ 22 $ 273,521 $ 75,605 $ 475 $ 349,623 Stock-based compensation — — 8,547 — — 8,547 Employee stock purchases 60,299 — 1,948 — — 1,948 Restricted stock awards issued, net of forfeitures ( 41,344 ) — — — — — Vesting of restricted stock units 89,052 — ( 396 ) — — ( 396 ) Shares withheld related to net restricted stock settlement ( 3,873 ) — ( 221 ) — — ( 221 ) Stock options exercised 486,038 1 13,698 — — 13,699 Net income — — — 16,544 — 16,544 Other comprehensive income — — — — 1,176 1,176 Balance, September 30, 2021 22,721,619 $ 23 $ 297,097 $ 92,149 $ 1,651 $ 390,920 See accompanying condensed notes to the consolidated financial statements. 6 Inogen, Inc. Consolidated Statements of Cash Flows (unaudited) (amounts in thousands) Nine months ended September 30, 2021 2020 Cash flows from operating activities Net income (loss) $ 16,544 $ ( 708 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 15,861 13,654 Loss on rental units and other fixed assets 952 502 Gain on sale of former rental assets ( 59 ) ( 84 ) Provision for sales revenue returns and doubtful accounts 8,248 8,341 Provision for rental revenue adjustments 3,543 2,115 Provision for inventory losses 1,452 720 Stock-based compensation expense 8,547 6,111 Deferred income taxes ( 1,014 ) 369 Change in fair value of earnout liability ( 9,822 ) ( 166 ) Changes in operating assets and liabilities: Accounts receivable ( 15,232 ) ( 7,716 ) Inventories ( 9,935 ) 2,597 Income tax receivable 261 ( 129 ) Prepaid expenses and other current assets ( 6,323 ) ( 8,695 ) Operating lease right-of-use asset ( 17,005 ) ( 3,463 ) Other noncurrent assets 73 2,105 Accounts payable and accrued expenses ( 3,015 ) ( 1,495 ) Accrued payroll 5,141 1,017 Warranty reserve 522 1,356 Deferred revenue 1,743 375 Income tax payable ( 979 ) 265 Operating lease liability 17,632 3,744 Net cash provided by operating activities 17,135 20,815 Cash flows from investing activities Purchases of marketable securities — ( 6,531 ) Maturities of marketable securities 15,705 11,057 Investment in intangible assets ( 132 ) ( 215 ) Investment in property and equipment ( 4,807 ) ( 3,352 ) Production and purchase of rental equipment ( 13,156 ) ( 8,217 ) Proceeds from sale of former assets 122 140 Net cash used in investing activities ( 2,268 ) ( 7,118 ) (continued on next page) See accompanying condensed notes to the consolidated financial statements. 7 Inogen, Inc. Consolidated Statements of Cash Flows (continued) (unaudited) (amounts in thousands) Nine months ended September 30, 2021 2020 Cash flows from financing activities Proceeds from stock options exercised 13,699 186 Proceeds from employee stock purchases 1,948 2,084 Payment of employment taxes related to release of restricted stock ( 617 ) ( 288 ) Net cash provided by financing activities 15,030 1,982 Effect of exchange rates on cash ( 283 ) 268 Net increase in cash and cash equivalents 29,614 15,947 Cash and cash equivalents, beginning of period 211,962 198,037 Cash and cash equivalents, end of period $ 241,576 $ 213,984 Supplemental disclosures of cash flow information Cash paid during the period for income taxes, net of refunds received $ 1,284 $ 158 Supplemental disclosure of non-cash transactions Property and equipment in accounts payable and accrued liabilities 333 32 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 1,131,000 of its Inogen oxygen concentrators as of September 30, 2021. 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 nine months ended September 30, 2021 shown in this report are not necessarily indicative of results to be expected for the full year ending December 31, 2021. 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 24, 2021. 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 24, 2021. Basis of consolidation The consolidated financial statements include the accounts of Inogen, Inc. and its wholly owned subsidiary. All intercompany balances and transactions have been eliminated. 9 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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, warranty reserves and expense, determining the stand-alone selling price (SSP) and service period of performance obligations, rental asset valuations and write-downs, accounts receivable allowances for bad debts, returns and adjustments, impairment of long-lived assets, stock-based compensation expense, income taxes, fair value of acquired intangible assets and goodwill and fair value of earnout liabilities. Actual results could differ from these estimates. Recently adopted accounting pronouncements 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 Company adopted this standard on January 1, 2021 , 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. 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. 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. 10 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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 September 30, 2021 Gross Cash Adjusted unrealized and cash Marketable cost gains Fair value equivalents securities Cash $ 38,653 $ — $ 38,653 $ 38,653 $ — Level 1: Money market accounts 202,923 — 202,923 202,923 — Level 2: Agency mortgage-backed securities 3,552 — 3,552 — 3,552 Total $ 245,128 $ — $ 245,128 $ 241,576 $ 3,552 As of December 31, 2020 Gross Cash Adjusted unrealized and cash Marketable cost gains (losses) Fair value equivalents securities Cash $ 52,812 $ — $ 52,812 $ 52,812 $ — Level 1: Money market accounts 159,150 — 159,150 159,150 — Level 2: Corporate bonds 11,549 ( 1 ) 11,548 — 11,548 U.S. Treasury securities 4,107 — 4,107 — 4,107 Agency mortgage-backed securities 3,601 1 3,602 — 3,602 Total $ 231,219 $ — $ 231,219 $ 211,962 $ 19,257 11 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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 within stockholders’ equity and are recognized in the consolidated statements of comprehensive income during the period which approximates the time the corresponding sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain asset and liability balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in other expense, net in the consolidated statements of comprehensive income (loss). 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 $ 1,536 and a related payable $ 863 as of September 30, 2021 and December 31, 2020, respectively. 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 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 related to the hedging relationship. Accumulated other comprehensive income The components of accumulated other comprehensive income were as follows: Foreign Unrealized Unrealized Accumulated currency gains gains (losses) other translation on marketable on cash comprehensive adjustments securities flow hedges income Balance as of December 31, 2020 $ 1,128 $ — $ ( 653 ) $ 475 Other comprehensive income (loss) ( 585 ) — 1,761 1,176 Balance as of September 30, 2021 $ 543 $ — $ 1,108 $ 1,651 Comprehensive income 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 other comprehensive income (loss). 12 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Earnout l iability 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 . The following table provides quantitative information about Level 3 inputs for fair value measurement of the earnout liability as of September 30, 2021 and December 31, 2020. Significant increases or decreases in these inputs in isolation could result in a significant impact on the fair value measurement: As of As of Simulation input September 30, 2021 December 31, 2020 Revenue volatility 30.00 % 35.00 % WACC 12.50 % 12.00 % 20-year risk free rate 2.02 % 1.45 % Market price of risk 5.00 % 8.00 % The reconciliation of the earnout liability measured and carried at fair value on a recurring basis is as follows: Three months ended Nine months ended September 30, 2021 September 30, 2021 Balance at beginning of period $ 19,795 $ 27,612 Change in fair value ( 2,052 ) ( 9,869 ) Balance at end of period $ 17,743 $ 17,743 The Company included $ 625 and $ 672 of preacquisition loss recoveries that can be withheld from any earnout amounts payable in the earnout liability as of September 30, 2021 and December 31, 2020, respectively. 4. Balance sheet components Cash, cash equivalents and marketable securities The Company considers all short-term highly liquid investments with a maturity of three months or less to be cash equivalents. 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. 13 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Cash, cash equivalents, and marketable securities consist of the following: September 30, December 31, Cash and cash equivalents 2021 2020 Cash $ 38,653 $ 52,812 Money market accounts 202,923 159,150 Total cash and cash equivalents $ 241,576 $ 211,962 Marketable securities Corporate bonds $ — $ 11,548 U.S. Treasury securities — 4,107 Agency mortgage-backed securities 3,552 3,602 Total marketable securities $ 3,552 $ 19,257 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 primarily 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 September 30, 2021 and December 31, 2020, included in accounts receivable on the consolidated balance sheets were earned but unbilled receivables of $ 1,400 and $ 459 , 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. 14 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Gross accounts receivable balance concentrations by major category as of September 30, 2021 and December 31, 2020 were as follows: September 30, December 31, Gross accounts receivable 2021 2020 Rental (1) $ 6,368 $ 4,190 Business-to-business and other receivables (2) 28,284 26,717 Total gross accounts receivable $ 34,652 $ 30,907 Net accounts receivable (gross accounts receivable, net of allowances) balance concentrations by major category as of September 30, 2021 and December 31, 2020 were as follows: September 30, December 31, Net accounts receivable 2021 2020 Rental (1) $ 5,417 $ 3,794 Business-to-business and other receivables (2) 27,488 25,923 Total net accounts receivable $ 32,905 $ 29,717 (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 $ 6,674 and $ 7,044 as of September 30, 2021 and December 31, 2020, 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 $ 10,000 in coverage as of September 30, 2021 and December 31, 2020 for this customer with a $ 400 deductible and 10 % retention. The following tables set forth the accounts receivable allowances as of September 30, 2021 and December 31, 2020: September 30, December 31, Allowances - accounts receivable 2021 2020 Doubtful accounts $ 47 $ 52 Rental revenue adjustments 951 396 Sales returns 749 742 Total allowances - accounts receivable $ 1,747 $ 1,190 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 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 nine months ended September 30, 2021 and for the nine months ended September 30, 2020. Two customers each represented more than 10% of the Company’s net accounts receivable balance with accounts receivable balances of $ 6,674 and $ 5,513 , respectively, as of September 30, 2021, and $ 8,417 and $ 7,044 , respectively, as of December 31, 2020. 15 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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, 2021, the Company’s three major vendors accounted for 17.0 %, 12.6 % and 10.8 %, respectively, of total raw material purchases. For the nine months ended September 30, 2020, the Company’s three major vendors accounted for 20.7 %, 11.1 % and 9.7 %, respectively, of total raw material purchases. A portion of revenue is earned from sales outside the United States. Approximately 71.0 % and 83.4 % of the non-U.S. revenue for the three months ended September 30, 2021 and September 30, 2020, respectively, were invoiced in Euros. Approximately 71.9 % and 75.6 % of the non-U.S. revenue for the nine months ended September 30, 2021 and September 30, 2020, respectively, were invoiced in Euros. A breakdown of the Company’s revenue from U.S. and non-U.S. sources for the three and nine months ended September 30, 2021 and September 30, 2020, respectively, is as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 U.S. revenue $ 71,271 $ 59,748 $ 222,223 $ 185,971 Non-U.S. revenue 21,834 14,581 59,377 48,538 Total revenue $ 93,105 $ 74,329 $ 281,600 $ 234,509 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 $ 1,879 and $ 1,153 as of September 30, 2021 and December 31, 2020, 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. The Company prepaid for raw materials of $ 12,126 as of September 30, 2021 that are classified in prepaid expenses and other current assets. During the nine months ended September 30, 2021 and September 30, 2020, $ 817 and $ 1,795 , respectively, of inventory was transferred to rental equipment and was considered a noncash transaction in the production and purchase of rental equipment on the consolidated statements of cash flows. Inventories that are considered current consist of the following: September 30, December 31, 2021 2020 Raw materials and work-in-progress $ 25,354 $ 22,318 Finished goods 8,171 3,743 Less: reserves ( 1,740 ) ( 1,246 ) Inventories, net $ 31,785 $ 24,815 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 16 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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 $ 858 and $ 653 for the three months ended September 30, 2021 and September 30, 2020, respectively, and $ 2,531 and $ 1,776 for the nine months ended September 30, 2021 and September 30, 2020, respectively. Included within property and equipment is construction in process, primarily related to the design and engineering of tooling, jigs and other machinery. In addition, this item also includes computer software or development costs that have been purchased but have not completed the final configuration process for implementation into the Company’s systems. These items have not been placed in service; therefore, no depreciation or amortization was recognized for these items in the respective periods. Depreciation and amortization expense related to rental equipment and other property and equipment are summarized below for the three and nine months ended September 30, 2021 and September 30, 2020, respectively. Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Rental equipment $ 2,315 $ 1,475 $ 6,257 $ 3,995 Other property and equipment 1,052 982 2,982 2,912 Total depreciation and amortization $ 3,367 $ 2,457 $ 9,239 $ 6,907 Property and equipment and rental equipment with associated accumulated depreciation is summarized below as of September 30, 2021 and December 31, 2020, respectively. September 30, December 31, Property and equipment 2021 2020 Rental equipment, net of allowances of $ 1,100 and $ 575 , respectively $ 55,612 $ 46,953 Other property and equipment 31,852 27,071 Property and equipment 87,464 74,024 Accumulated depreciation Rental equipment 32,178 30,283 Other property and equipment 18,220 15,511 Accumulated depreciation 50,398 45,794 Property and equipment, net Rental equipment, net of allowances of $ 1,100 and $ 575 , respectively 23,434 16,670 Other property and equipment 13,632 11,560 Property and equipment, net $ 37,066 $ 28,230 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. During the three months ended June 30, 2021, the Company determined that an impairment indicator was present as a result of the court order to dismiss the Company’s preliminary injunction related to the Department of Health and Human Services and the Centers for Medicare and Medicaid Services lawsuit. The relevant long-lived asset grouping was evaluated for impairment. An undiscounted cash flow analysis demonstrated sufficient undiscounted cash flows in excess of the asset group’s carrying value. Estimates and significant assumptions included in the long-lived asset impairment analysis included identification of the asset group and undiscounted cash flow projections. The Company concluded that its definite-lived intangible assets and long-lived assets were not impaired based on the results of the quantitative analyses performed. No impairments were recorded as of September 30, 2021 and September 30, 2020. 17 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Goodwill The changes in the carrying amount of goodwill for the nine months ended September 30, 2021 were as follows: Balance as of December 31, 2020 $ 33,165 Translation adjustment ( 137 ) Balance as of September 30, 2021 $ 33,028 As of September 30, 2021, the Company had no accumulated impairment losses related to goodwill. Intangible assets There were no accumulated impairment losses related to the Company’s intangible assets as of September 30, 2021 and December 31, 2020. 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 September 30, 2021 (in years) amount amortization Net amount Technology 10 $ 77,700 $ 16,511 $ 61,189 Licenses 10 185 180 5 Patents and websites 5 4,488 3,560 928 Customer relationships 4 1,391 1,391 — Commercials 2-3 865 688 177 Total $ 84,629 $ 22,330 $ 62,299 Average estimated Gross useful lives carrying Accumulated December 31, 2020 (in years) amount amortization Net amount Technology 10 $ 77,700 $ 10,684 $ 67,016 Licenses 10 185 174 11 Patents and websites 5 4,488 3,015 1,473 Customer relationships 4 1,474 1,351 123 Commercials 2-3 733 559 174 Total $ 84,580 $ 15,783 $ 68,797 Annual estimated amortization expense for each of the succeeding fiscal years is as follows: September 30, 2021 Remaining 3 months of 2021 $ 2,152 2022 8,484 2023 7,881 2024 7,832 2025 7,784 Thereafter 28,166 $ 62,299 18 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Current liabilities Accounts payable and accrued expenses as of September 30, 2021 and December 31, 2020 consisted of the following: September 30, December 31, 2021 2020 Accounts payable $ 15,939 $ 12,520 Accrued inventory (in-transit and unvouchered receipts) and trade payables 9,838 9,023 Accrued litigation settlement — 8,000 Accrued purchasing card liability 2,269 2,468 Accrued franchise, sales and use taxes 488 449 Other accrued expenses 689 1,252 Accounts payable and accrued expenses $ 29,223 $ 33,712 Accrued payroll as of September 30, 2021 and December 31, 2020 consisted of the following: September 30, December 31, 2021 2020 Accrued bonuses $ 5,548 $ 4 Accrued wages and other payroll related items 3,448 3,796 Accrued vacation 3,049 2,642 Accrued employee stock purchase plan deductions 178 649 Accrued payroll $ 12,223 $ 7,091 5. Leases The Company has entered into operating leases primarily for commercial buildings. These leases have terms which range from 2 years to 11 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 certain 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. Rent expense, including short-term lease cost, was $ 1,007 and $ 675 for the three months ended September 30, 2021 and September 30, 2020, respectively, and $ 3,099 and $ 2,183 for the nine months ended September 30, 2021 and September 30, 2020, respectively. Information related to the Company's right-of-use assets and related operating lease liabilities were as follows: Nine months ended September 30, 2021 2020 Cash paid for operating lease liabilities $ 2,273 $ 1,803 Operating lease cost 2,842 2,045 Non-cash right-of-use assets obtained in exchange for new operating lease obligations 19,417 5,234 Weighted-average remaining lease term 3.0 years 2.9 years Weighted-average discount rate 3.0 % 3.3 % 19 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) Maturities of lease liabilities due in the 12-month period ending September 30, 2022 $ 4,083 2023 3,957 2024 3,976 2025 2,731 2026 2,699 Thereafter 12,783 30,229 Less imputed interest ( 2,590 ) Total lease liabilities $ 27,639 Operating lease liability - current $ 3,518 Operating lease liability - noncurrent $ 24,121 Total lease liabilities $ 27,639 6. Earnings (loss) per share Earnings (loss) 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 (loss) per share is calculated using the Company’s weighted-average outstanding common shares. Diluted earnings (loss) 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. 20 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) The computation of EPS is as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Numerator—basic and diluted: Net income (loss) $ 12,174 $ ( 1,699 ) $ 16,544 $ ( 708 ) Denominator: Weighted-average common shares - basic common stock (1) 22,619,272 21,998,299 22,416,575 21,959,521 Weighted-average common shares - diluted common stock 22,854,229 21,998,299 22,803,355 21,959,521 Net income (loss) per share - basic common stock $ 0.54 $ ( 0.08 ) $ 0.74 $ ( 0.03 ) Net income (loss) per share - diluted common stock (2) $ 0.53 $ ( 0.08 ) $ 0.73 $ ( 0.03 ) Denominator calculation from basic to diluted: Weighted-average common shares - basic common stock (1) 22,619,272 21,998,299 22,416,575 21,959,521 Stock options and other dilutive awards 234,957 206,274 386,780 252,096 Weighted-average common shares - diluted common stock 22,854,229 22,204,573 22,803,355 22,211,617 Shares excluded from diluted weighted-average shares: Stock options 88,391 655,953 54,498 473,390 Restricted stock units and restricted stock awards 67,374 395,395 69,062 218,080 Shares excluded from diluted weighted-average shares 155,765 1,051,348 123,560 691,470 (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 . (2) Due to a net loss for the three and nine months ended September 30, 2020, diluted loss per share is the same as basic. 7. 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 taxes 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. 21 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) In determining the interim provision for income taxes, the Company has historically calculated its income tax provision by applying an estimate of the annual effective tax rate for the full fiscal year to ordinary income or loss for the reporting period. For the three and nine months ended September 30, 2021 , the Company utilized the discrete effective tax rate method, as allowed by ASC 740-270 — Income Taxes – Interim Reporting . Given the significant uncertainty with respect to the impact of the COVID-19 pandemic and related public health emergency on its supply chain and the developments during the three months ended September 30, 2021 in its ability to forecast the supply and cost of semiconductor chips , the Company was not able to reliably estimate its annual effective income tax rate for the year ending December 31, 2021. The discrete method treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis. 8. 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 September 30, 2021, there are no remaining options to purchase shares of common stock 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 Company has a 2012 Equity Incentive Plan (2012 Plan) under which the Company granted options to purchase shares of its common stock. As of September 30, 2021, options to purchase 71,452 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. As of September 30, 2021, awards with respect to 799,150 shares of the Company’s common stock were outstanding, and 1,450,669 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 2012 Plan and 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 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 2021, 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. 22 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) The activity for stock options under the Company’s stock plans for the nine months ended September 30, 2021 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, 2020 955,479 $0.75-$83.30 $ 35.49 1.85 $ 11.81 Exercised ( 486,038 ) 0.75-46.66 28.19 Forfeited ( 10,000 ) 83.30 83.30 Outstanding as of September 30, 2021 459,441 1.17-83.30 42.18 1.61 6.29 Vested and exercisable as of September 30, 2021 459,441 1.17-83.30 42.18 1.61 6.29 Vested and expected to vest as of September 30, 2021 459,441 $1.17-$83.30 $ 42.18 1.61 $ 6.29 The total intrinsic value of options exercised during the nine months ended September 30, 2021 and September 30, 2020 was $ 14,524 and $ 269 , respectively. As of September 30, 2021, 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 nine months ended September 30, 2021 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, 2020 245,462 88,458 333,920 $ 49.29 Granted 240,044 88,902 328,946 56.01 Vested ( 96,230 ) — ( 96,230 ) 52.07 Forfeited/canceled ( 66,384 ) ( 69,276 ) ( 135,660 ) 45.92 Unvested restricted stock units as of September 30, 2021 (1) 322,892 108,084 430,976 $ 54.72 Unvested and expected to vest restricted stock units outstanding as of September 30, 2021 373,163 $ 54.80 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, 2020 42,076 33,355 75,431 $ 93.96 Vested ( 13,247 ) — ( 13,247 ) 91.84 Forfeited/canceled ( 13,945 ) ( 27,399 ) ( 41,344 ) 100.89 Unvested restricted stock awards outstanding as of September 30, 2021 (1) 14,884 5,956 20,840 $ 83.60 Unvested and expected to vest restricted stock awards outstanding as of September 30, 2021 20,081 $ 86.50 (1) Outstanding restricted stock units and restricted stock awards are based on the maximum payout of the targeted number of shares. As of September 30, 2021, the unrecognized compensation cost related to unvested employee restricted stock units and restricted stock awards was $ 17,481 , excluding estimated forfeitures. This amount is expected to be recognized over a weighted-average period of 2.6 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 September 30, 2021, a total of 569,866 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 2021, 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 nine months ended September 30, 2021 and September 30, 2020, was as follows: Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Stock-based compensation expense by type of award: Stock option plan awards $ — $ — $ — $ 709 Restricted stock units and restricted stock awards 2,631 1,878 8,014 4,853 Employee stock purchase plan 161 172 533 549 Total stock-based compensation expense $ 2,792 $ 2,050 $ 8,547 $ 6,111 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. 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 nine months ended September 30, 2021 and September 30, 2020, 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 Nine months ended September 30, September 30, 2021 2020 2021 2020 Cost of revenue $ 269 $ 185 $ 826 $ 511 Research and development 264 233 944 726 Sales and marketing 695 516 1,975 1,587 General and administrative 1,564 1,116 4,802 3,287 Total stock-based compensation expense $ 2,792 $ 2,050 $ 8,547 $ 6,111 401(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; however, matching contributions were reinstated on June 21, 2021. The Company contributed $ 212 and $ 455 , net of forfeitures, to the 401(k) plan for the nine months ended September 30, 2021 and September 30, 2020, respectively. 25 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 9. Commitments and contingencies Non-cancelable contractual obligations The Company enters into non-cancelable contractual obligations for software licenses and maintenance agreements. As of September 30, 2021, the minimum aggregate payments due under specified non-cancelable contractual obligations are summarized as follows: Non-cancelable contractual obligations Remaining 3 months of 2021 $ 24 2022 — 2023 — 2024 — 2025 — Thereafter — $ 24 Purchase obligations The Company had approximately $ 65,700 of outstanding purchase orders due within one year with its outside vendors and suppliers as of September 30, 2021. Warranty obligations The following table identifies the changes in the Company’s aggregate product warranty liabilities for the nine and twelve-month periods ended September 30, 2021 and December 31, 2020, respectively: September 30, December 31, 2021 2020 Product warranty liability at beginning of period $ 14,394 $ 12,571 Accruals for warranties issued 7,770 9,462 Adjustments related to preexisting warranties (including changes in estimates) ( 522 ) ( 754 ) Settlements made (in cash or in kind) ( 6,726 ) ( 6,885 ) Product warranty liability at end of period $ 14,916 $ 14,394 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 nine months ended September 30, 2021 was primarily driven by $ 5,339 of payments received in advance of satisfying performance obligations, partially offset by $ 4,319 of revenue recognized that was included in the deferred revenue balances as of December 31, 2020. Deferred revenue related to lifetime warranties was $ 18,098 and $ 17,078 as of September 30, 2021 and December 31, 2020, 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 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 sales force, 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. On September 2, 2020, the court denied the defendants’ motion to dismiss without prejudice and instructed defendants to file another motion to dismiss if the parties are unable to resolve the issues relating to the second amended complaint. The Company filed its motion to dismiss on October 28, 2020. On August 13, 2021, the court granted Defendants’ motion to dismiss, and on September 27, 2021, the court entered judgment dismissing the action in its entirety. 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. The parties are currently engaged in discussions regarding future proceedings in this action. 27 Inogen, Inc. Condensed Notes to the Consolidated Financial Statements (continued) (unaudited) (amounts in thousands, except share and per share amounts) 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 . On November 3, 2021, the court approved the parties’ stipulation to voluntarily dismiss the Delaware derivative action without prejudice. Department of Health and Human Services and the Centers for Medicare and Medicaid Services lawsuit On September 21, 2020, Inogen filed a lawsuit against defendants, Alex M. Azar, Secretary of the Department of Health and Human Services (HHS), in his official capacity, Seema Verma, Administrator of the Centers for Medicare and Medicaid Services (CMS), in her official capacity and Palmetto GBA, LLC. The lawsuit seeks to invalidate the defendants’ arbitrary and capricious decision to retract a valid HCPCS code to Inogen’s Tidal Assist ® Ventilator (TAV ® ), thereby eliminating reimbursements for the ventilator, in violation of the Administrative Procedures Act (5 U.S.C. §§ 551 , et seq. ). Further, CMS’s failure to provide notice and the opportunity to comment on a change in HCPCS code verification for the Sidekick Tidal Assist Ventilator and similar devices constitutes a violation of the procedural right provided under the Social Security Act (42 U.S.C. §§ 1395hh(a)(2)), and Inogen’s due process rights. On June 17, 2021, the United States District Court for the District of Columbia issued an order to deny the Company’s motion for a preliminary injunction and dismissed the complaint stating that the Company had failed to present its claim to CMS and exhaust its administrative remedies. The Company does not intend to appeal the court order or pursue additional alternatives to meet the Medicare reimbursement coding requirements. Therefore, the Company adjusted its recognized revenue estimates for the fair value of the earnout liability and evaluated the relevant long-lived asset grouping for impairment. 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. 10. Foreign currency exchange contracts and hedging As of September 30, 2021 and September 30, 2020, the Company’s total non-designated and designated derivative contracts had notional amounts totaling approximately $ 2,772 and $ 31,118 , respectively, and $ 2,221 and $ 1,176 , respectively. These contracts were comprised of offsetting contracts with the same counterparty, each expires within one to fifteen months . During the nine months ended September 30, 2021 and September 30, 2020, these contracts had, net of tax, unrealized gains of $ 1,761 and $ 95 , 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 nine months ended September 30, 2021 and September 30, 2020, there were no ineffective portions relating to these hedges and the hedges remained effective through their respective settlement dates. As of September 30, 2021, the Company had twenty-one designated hedges and three non-designated hedges. As of September 30, 2020, the Company had nineteen designated hedges and one non-designated hedge. 28