Inogen, Inc. (INGN) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Inogen 2015 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A Session. [Operator Instructions] As a reminder, this conference call is being recorded today November 10, 2015. I would now like to turn the call over to Leigh Salvo, Investor Relations. Please go ahead.

Thank you, Jonathan and thank you for participating in today’s call. Joining me from Inogen is President and CEO, Ray Huggenberger; and CFO and co-founder, Ali Bauerlein. Earlier today, Inogen released financial results for the third quarter ended September 30, 2015. Inogen’s earnings release and a corporate presentation are currently available in the Investor Relations section of the company’s website. During the call and subsequent Q&A session, we will be discussing plans and projections for our business, future financial results and market trends and opportunities including among others, statements regarding future product releases and improvements, our expectations with respect to the need for regulatory approvals, reimbursement rate expectations and guidance. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results. Additional information about risks and other factors that could potentially impact our financial results is included in today's press release and in our filings with the SEC including our annual report on Form 10-K and most recent quarterly report on Form 10-Q to be filed with the SEC. We advise investors to review these risk factors carefully. The forward-looking statements in this call are based on information available to us as of today’s date November 10, 2015, and we disclaim any obligation to update any forward-looking statements except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. A reconciliation between U.S. GAAP and non-GAAP results is presented in the table accompanying our earnings release which can be found in the Investors section of our website. I'll now turn the call over to Ray Huggenberger. Ray?

Thank you, Leigh. Good afternoon everyone, and thank you for joining our third quarter 2015 conference call. On our call today, I’ll start with the financial highlights followed by remarks on our recent business trends and operational accomplishments. Ali will then review the Q3 financials in more detail and provide our updated 2015 and initial 2016 guidance. At that point, we will open the call up for your questions. In the third quarter of 2015, demand for our portfolio of innovative oxygen concentrators once again increased across all of our revenue channels. Revenues in the third quarter were $40.8 million, which represented 38.7% growth from the same period last year. We continued to see strong demand in our domestic and international business to business sales channel as well as the positive impact on our direct to consumer channel from the strategic investments we made in expanding our sales team and brand awareness campaigns. In light of the strong growth we’ve seen throughout the year and the continued demand we anticipate in 2016, we felt this was an opportune time to make investments to further increase our direct-to-consumer sales capacity. We were successful in finding great candidates in the third quarter across both our California and Texas facilities. Even with the increased investment in sales personnel we still deliver the adjusted EBITDA of $8.2 million and net income of $2.7 million for the third quarter of 2015. Domestic business to business sales were once again our strongest growth channel in the quarter with 77.1% growth over the same period in the prior year. We believe the strength we are seeing in this channel comes from several factors including private label sales which contributed to the majority of the upside in the third quarter of 2015 over the same period in the prior year. This approach to reach DME providers that Inogen currently does not serve, was introduced earlier this year and while early we are optimistic that private label sales could provide continued revenue contribution in our domestic B2B channel. Increasing reseller demand was also a contributor to domestic B2B sales growth as we believe there is likely a pull through effect from the direct to consumer media campaigns and demonstrates the benefits of Inogen portable oxygen concentrators. Strong sales growth in Europe continued in the third quarter of 2015 and represented approximately 89% of our total international sales. Our recently added sales rep in Europe is focussed on expanding international distributor and key account relationships, as well as working with our existing partners to drive conversion from the traditional delivery based systems to our portable oxygen concentrators. Growth in the direct to consumer channels demonstrated both our growing brand awareness as well as the ramp up in productivity from our growing in-house sales team that came on board in the fourth quarter of 2014 and throughout 2015. U.S. direct to consumer sales and rental revenue in the third quarter of 2015 combined represented more than 35% growth over the same period in the prior year and more than half of our total revenue highlighting the strength of our direct to consumer marketing model. We continue to shift our emphasis to one for sale [ph] over a rental ahead of the competitive bidding environment where we expect the traditional custom Medicare reimbursement rates in 2016. As I mentioned earlier, we made the decision to increase sales capacity in Q3 based on the solid demand growth we’ve seen this year and the anticipated demand we see as we approach 2016. We have been very successful in adding qualified sales people to our team and we are continuing to recruit. I would also like to comment on the recently released Medicare market data from CMS for the full year of 2014. While the information provided has some limitations when used to assemble a picture of the oxygen therapy market such as the absence of brand or manufacturer information, we believe that the information can serve as a proxy for the entire oxygen therapy market. Based on the data set, the share of portable oxygen concentrators in the oxygen therapy market grew from 5.9% in 2013 to 6.9% over the course of 2014. However, this estimate does not include direct to consumer cash sales or private insurance transactions. Our direct to consumer cash as in 2014 grew fast without rentals, so we believe that this data from CMS likely represents a conservative estimate of actual portable oxygen concentrator market penetration. Inogen is still the market leader of portable oxygen concentrators in the U.S. based on 2014 Medicare billing data. So let’s turn to product updates. Maintaining our leadership position in the portable oxygen concentrator space, through continuous innovation and new product development was a key strategy for us. We plan to continue to make R&D investments to stay at the forefront of patient preference and product capabilities. As we highlighted last quarter, we are developing an upgrade to our Inogen One G3 and remain on track for product availability towards the end of 2015. After this upgrade the Inogen One G3 will be capable of producing upto 1050 millimetres a minute of oxygen, a 25% increase in output with no change in weight or size. This will allow us to service more oxygen patients with this product. The product will also feature additional improvements in sound level and lower production cost. Final design of our fourth generation portable oxygen concentrator the Inogen One G4 is on track for completion by the end of 2015 with commercial launch plan for the second quarter of 2016. The Inogen One G4 is expected to be smaller, lighter and less expensive to manufacture than our current Inogen One G2 and G3 products and we do not expect that it will require a new 510-K clearance based on the regulatory assessment because it is the same indications of use and core design technology and the changes do not impact the safety or effectiveness of the device. We have completed the build out of our 4 mm manufacturing facility in Texas in preparation for the expansion of our sales customer service and billing personnel that we will add as we execute our growth plans. With that I will now turn the call over to Ali to cover our financial performance and talk about our guidance.

Thanks, Ray, and good afternoon everyone. During my prepared remarks, I will review the details of our third quarter financial performance and then I will provide our current guidance for full year 2015 as well as initial revenue guidance for 2016. Revenue for the third quarter of 2015 was $40.8 million representing 38.7% growth over the third quarter of 2014. Once again, we saw continued strong performance on the topline and period over period growth in all revenues streams. Looking at each of our revenue streams, direct to consumer rental revenue in the third quarter was $11.5 million representing 15.7% growth over the same quarter in the prior year. Rental revenue represented 28.3% of total revenue in the quarter. We continue to ship sales capacity towards consumer sales instead of rentals, primarily due to the upcoming additional Medicare reimbursement cut. Rental revenue was down 1% from the second quarter of 2015 where we saw rental revenue of $11.6 million. Rental revenue was down primarily due to the higher rental revenue adjustments per patients on service which more than offset the additional rental revenue from the addition of 800 net patients in the third quarter of 2015. At the end of the third quarter, we had 32,400 rental patients on service, a 20.9% increase over the number of patients on service as of September 30, 2014 and a 2.5% increase over the number of patients on service as of June 30, 2015. Total sales revenue was $29.2 million, reflecting 50.6% growth over the same quarter of the prior year. Total units sold increased to 14,700 in the third quarter of 2015 up 67% from the third quarter of 2014. Direct to consumer sales for the third quarter of 2015 were $11.6 million representing 63.7% growth over the third quarter of 2014 primarily due to the impact of additional sales headcount we added the end of 2014 and continue to add in 2015. As expected, in the third quarter of 2015 the direct to consumer sales channel flowed showed typical seasonality with sales slightly down from the second quarter where we see a peak to the consumer buying pattern partially offset by the increased sales capacity versus the same period in the prior year. International business to business sales were in line with expectations at $7.9 million with 15.4% versus the same period in the prior year. This growth was in line with our expectation based on normal seasonal trend and an unusually strong third quarter in 2014 following reimbursement approval of the Inogen One G3 in France. International average selling prices in the third quarter of 2015 declined over the same period in the prior year, primarily due to currency headwinds and additional discounts associated with the increased sales volume. Domestic business to business sales were $9.8 million in the third quarter of 2015 and was our fastest growing channel in the quarter with a growth rate of 77.1% over the same period in the prior year, primarily due to growing reseller and private label demand for our portable oxygen concentrators. Turning to gross margin, for the third quarter of 2015, total gross margin was 47.5% as compared to 49.8% in the third quarter of 2014, down approximately 230 basis points. Our sales gross margin was 45.1% in the third quarter of 2015 versus 47.8% in the third quarter of 2014. The decline in sales gross margin percentage was primarily related to faster growth in the lower gross margin, business-to-business sales domestically than the direct to consumer sale. In addition, average selling prices declined across business to business sales primarily due to currency headwinds and the increased volume discounts to resellers, private label partners and international customers. Our rental gross margin was 53.5% in the third quarter of 2015 versus 53.9% in the third quarter of 2014 primarily due to lower net revenue per rental patients partially offset by lower servicing cost per rental patient. In terms of operating expenses, overall operating expense was up 41.3% to $15.7 million in the third quarter of 2015 versus $11.1 million in the same 2014 period, and was up as a percentage of revenue to 38.4% versus 37.7% in the same 2014 period. As we hired additional personnel and transitioned our former manufacturing facility to support projected growth. For research and development expense, we had $1.1 million in R&D expenditures in the third quarter of 2015 versus $0.8 million in the same 2014 period. The increase was primarily associated with additional personnel related expenses for engineering projects, primarily the Inogen One G3 upgrade and the Inogen One G4 project. For selling, general and administrative expenses, sales and marketing expense was $8.1 million for the third quarter versus $5.6 million in the same 2014 period primarily due to increased direct consumer personnel related expenses, media expenses and related customer and clinical services personnel related expenses. General and administrative expense was $6.4 million for the third quarter compared to $4.7 million in the same 2014 period. The increase was primarily related to increased personnel related and facilities related expenses. Total SG&A expenses increased 41.4% to $14.5 million in the third quarter of 2015 versus $10.3 million in the same 2014 period, due to the additional investments we made this year and sales [Indiscernible] and capacity expansion that we expect to help our growth in 2016 and beyond. In the third quarter of 2015, we reported income tax expense of $1 million compared to $1.3 million in the third quarter of 2014. Our effective tax rate was 26.7% in the third quarter of 2015 versus 38.6% in the third quarter of 2014, primarily due to a decrease evaluation allowance related to California net operating losses. As a result, our net income after-tax in the third quarter of 2015 was $2.7 million compared to $2.1 million in the third quarter of 2014, an increase of 26.4% in the comparative period and representing return on revenue of 6.6%. Earnings per diluted common share was $0.13 in the third quarter of 2015 and $0.11 in the third quarter of 2014. Moving to our cash balance, we ended the third quarter with $74.1 million of cash, cash equivalents and short term investments, an increase of $8.1million from June 30, 2015. This increase in cash, cash equivalent and short term investments was partially offset by investments in property and equipments of $2 million during the quarter, primarily for our rental fleet addition. As of the end of the third quarter of 2015, we had no bank debt outstanding and our entire $15 million credit facility was available. In addition, I would like to cover some key non-GAAP financial measures. Adjusted EBITDA for the third quarter was $8.2 million, which was a 20.2% return on revenue. Adjusted EBITDA increased 14% in the third quarter of 2015 versus the third quarter of 2014, for adjusted EBITDA with $7.2 million. Turning to our guidance, we are increasing our 2015 revenue guidance to a range of $150 million to $153 million, which represents year-over-year growth of 33.3% to 36%. This compares to our previous revenue expectation of $145 million to $149 million. We are also providing a guidance range for the full year 2016 total revenue of $177 million to $183 million representing 16.8% to 20.8% over the 2015 guidance midpoint of $151.5 million. This revenue growth is inspite of the additional revenue headwinds expected in 2016 associated with the national application of competitive bid prices to Medicare areas currently not subject to competitive bidding. Adjusted EBITDA guidance for 2015 is unchanged from prior guidance of $29 million to $32 million representing an increase of 21.1% to 33.6% over 2014. Net income for 2015 is also unchanged and currently expected to be in the range of $8.5 million to $10 million representing an approximate increase of 24.5% to 46.5% over 2014. We currently expect our effective tax rate in 2015 to be approximately 34%. In addition, we continue to expect net positive cash flow for 2015 with no additional equity capital required to meet our current plan. With that, Ray and I would now be happy to take the questions.

[Operator Instructions] Our first question comes from the line of Mike Weinstein from JPMorgan. Your question, please.

Hi this is Robbie Marcus in for Mike. Congrats on quarter, guys.

Thanks, Robbie.

I was wondering if you could start off and give us a little flavour for 2016 guidance that came in well above the street, maybe you could help us break down the different categories and how you see sales, rental B2B breaking out.

Yes at this point we are just giving a high level guidance but on a qualitative basis, we do expect direct to consumer sales to be a strong contributor to our growth rates and our success in 2016. So that certainly is the area where we expect to see the largest growth rate.

And obviously rentals will be impacted by the fact that you know we have the reimbursement cuts coming our way in 2016. So rentals will actually be down slightly despite an increased separations [ph] but because of that we are expecting -- 40% of the market to be subject to a 30% to 40% cut will see a best sideways probably slightly down, development of rentals offset by relatively strong growth in the direct to consumer sales area.

All right. Then maybe on 2015 guidance, can you help us understand how the sales was raised by EBITDA and net income guidance was maintained, what’s the driver there and was that something that popped up in the third quarter, was that something that was planned from the beginning of the year?

That’s really something when we look at the results that we’ve seen thus far, we really saw an opportunity in the third quarter to invest in our sales force. And so when we look at guidance for the rest of the year we want to if we have the opportunity to continue to invest in the right candidate. We think it’s the right thing to do to set ourselves up for a very strong 2016. So we are certainly looking at levels of investments and where it is right to continue to add sales capacity and attempting to increase the number of sales reps that we have. So that’s a primary driver. The increase also is associated with the business-to-business side and that side of the business especially on the private label side doesn't have a strong of a contribution on the same percent of net income contribution versus say, the direct-to-consumer side.

And then last one from me. Along those lines we're seeing unit sales growing 57% in the quarter, but revenue growing 51%. Can you give us a sense of what the difference in margins are, and is that a trend you think that should narrow over the course of 2016, are you still expect that trend to widen next year? Thanks.

Well, part of that is just associated with the addition of private label sales in the mix, so it's obviously are sold at a lower price in order for distributor to also make a margin on those sales. So, part of it is just the strength of that private label as well as the overall strength of the business-to-business side where that continues to be our fastest growing segment. And because those are at lower average selling prices you see a hiring uptick of units versus the average selling price.

It gets compounded a little bit by volume just going up and customer buying more in larger volumes, they negotiate lower prices that's perfectly normal. And then another thing that composite is that we have a little bit of revenue of currency translation headwinds or out of Europe which is 89% of our international business. So all that compounded kind of gives you that's spread between the growth rate in the unit volume and the growth rate in the revenue. Your second part of the question is that going to level off. Well, we hope it won't, because typically again if you have volumes growing you have prices declining as long as that doesn't outstrip our ability to reduce costs, it should strategically actually not be a bad move. So, I do expect that business-to-business sales will continue to be at a lower gross margin than retail sales. And as volumes increase in either channel you may see a little bit of pricing pressure but that's not necessarily a bad thing. Did I answer your question?

Yes. Thanks a lot.

Thank you. Our next question comes from the line of Margaret Kaczor from William Blair. Your question, please.

Hi, guys, it Scott [ph] in for Margaret, actually, thanks for taking a few questions. I wanted to start with the sales force expansion, you guys mentioned last year, I think this time you are investing in growing sales force close to 20% year-over-year. Should we be expecting something similar for this year at the end or should we expected growing faster and then I guess overall should we expect kind of the same strong correlation to sales rep growth to revenue growth that we've seen in the past?

So, as we've done last year, we were not providing guidance on headcount. But we will give you a snapshot update on where our sales headcount is at the end of the year. In terms of third quarter relative to the fourth quarter, in the third quarter we have somewhat unique conditions to make additional investments in the sales headcount, because what we had experienced was better than what we had expected year to-date sales, and at the same time we were able to find good candidates. Therefore we have not planned to kind of see that conflict ration of better than expected sales and finding good candidates which historically we've had not had the resume flow or the candidate flow that we've seen in the third quarter. The other element is that the sales managers need to have time to recruit good candidates and then spend time to onboard them and train them and each of these activities is critical but it does take them away from [Indiscernible]. So adding headcount is we have to balance to managerial time we have to spend to being these news recruits onboard and the available recent management resources. Again, we had a bump in the third quarter, this year we had a bump in to fourth quarter last. We had a bump in the third quarter this year. I don't think you can assume we'll have the same luck when a candidate flow in future quarters as we had in the third quarter. But if you look at the year, we had a very successful year, because now is the time when you have the opportunity and to means t o actually make that a basement and set ourselves up for 2016, but don't forget the people we have hired in the third quarter will not really hit the stride until January, February?

And just to expand a little bit on that. When we compared to last year, obviously, in the direct-to-consumer sale side we've done increase of almost 64% year-over-year. Part of that is a fact that last year when we look at – when we invested in the sales force, we invested in the fourth quarter. So the third quarter really didn't have significantly increases in sales personnel and we know we didn't do much investing in our first or second half of 2014, because we were working on productivity improvement. So the fact that that we really have to more sales reps is largest reason why you see such as increases on a year-over-year basis in the third quarter.

Yes. That's helpfully. Thanks. Second question is – so the last few quarters highlights in kind of the growth in the B2B domestic obviously, but the TDC came in stronger this year and accelerated a little bit faster than we're expecting. What's the main driver there? Is it a more productive sales force like you just mention, are new hires becoming more productive sooner, are you closing more Inogen at homes, just kind of give us some flavor at what's more of sustainable growth there and what your growth in the quarter?

It's a resounding yes to all of the above. Yes, we're closing more Inogen at homes, but those are packages. It helps. We have the effect of the bump in the sales force that we added in the fourth quarter of last year. They are fully productive. And we hired additional people. So all of that combined helps – and then on top of that we keep emphasizing sales over rentals, so in the end part you kind of have to look at 63% growth in the sales area alongside 15% growth in the rental area, because of the reimbursement cuts that are coming our way in 2016. We're trying to manage our exposure to rentals and to reimbursement. It has successful done so, because we were able to actually deliver pretty decent growth every quarter than yet our portion of rentals of our total business has gone from somewhere in the 34% range from last year to 28% or so this year going into third quarter. So, we are kind of balancing and managing the exposure to reimbursement while not giving up on growth, but in some respect you can look at the 63% without looking at the 15 at the same time.

And then one last if I could Rick, kind of more than picture question, are you seeing any new evidence of stress on the HME providers that would kind of suggest the market conversion won to a non-model accelerating. I'm just trying to get your sense of what some of those careless might look like. And then would you characterize the success that you're seeing with Applied Home Healthcare as a strong indicator of that market stress? Thanks.

Well, if we work off of not assumptions or what interpretations, but just hard data. In 2014 we've been asked this question every time as well. In 2014 POCs increased went from 6.9% penetration to 6.9% penetration that to me is not a broad scale adoption. Now we don't have 2015 data yet and I am personally predicting that POCs will again – will increase in adoption, but it’s not a tipping point, it’s not an event and all of a sudden in one year we're going from 6% to 30% or something like that, which is the – is there a recognition that POCs are probably the more economic way of providing oxygen therapy. I think that recognition is spreading. Is there a – do we see a volume pickup of significant proportions? No. I don't. And we see volume increasing but that's because POCs are increasing in penetration. I have no evidence that says the tipping point is a upon us.

Thanks.

Thank you. Our next question comes from the line Danielle Antalffy from Leerink Partners. Your question please.

Hey, good afternoon guys. Thanks for taking the question and congrats on yet another great quarter. I was hoping to touch on – just focus on direct to consumer health and what you think that business mix is look like few years from now, from a rental versus direct to consumer sales. That's a first of your question. I guess the second part of the question would be what sort of impact that could have on margins because presumably margins are higher on DCP side of thing?

But it will -- they will be next year. And right now we still have a very solid margin on rentals. But that is a clearly a challenge in terms of for us to manage cost in the rental business, because it's coming down. We have another reinvestment kind of ahead of us. Its still going to be decent market but it is not without presenting a challenge to us to reduce our cost which we are actively doing. To your first question as to what's that business is going to look like two or three years from now in sales versus rentals. This is very, very hard for me to answer that because I'd have to start every aspect of that would it's depend. It depends on how many other providers default to POCs. It depends on where reimbursement is going to be at next round of competitive bidding. It depends on a lot of other things so it's really hard for me to say that. The only thing I'm convinced of his that two or three years from now penetration of POCs in the overall market will be higher than it is today. But whether that goes from – right we're at 7.00 or give it a range call it six to eight. Whether that's an 10 to 12 or 14 to 18 or 20, I don't know. I don't know because we are certainly not by ourselves going to drag the market to 20% penetration in the next two or three years.

Yes. I'll just provide a little bit more flavor for 2016, right now rentals is the largest individual revenue channel of the business at 28.6% of total revenue year to data. And so given that we expect that business because of the reimbursement cuts to decrease next year compared to this year and we expect a largest segment increase being that direct-to-consumer sales side. I would expect that to be our largest segment next year and rentals to be our second largest segment.

Okay. Got it. That's helpful and just as we think about 2015 and some of the moving parts, can you remind us how quickly it takes sales – direct-to-consumer sales people to ramp productivity because I assume the ads that are coming on line right now are increase against in driver till the 2016 guidance and how meaningful the next gen product is hitting that guidance? I guess in other way to ask that part of the question is, if that were to slip it out, does that change your view on 2016 guidance that you made outstay? Thanks so much.

So what we've seen historically is about 4 to 6 months for sales reps to come up to full productivities. It’s fairly consistent across hiring rounds we done in the past, so we don't expect that to change significantly with the rounds that we've recently hired and that we expect to hire in the future. That certainly is the contributing factor to what we expect to be our success drivers in 2016 is the reps that we've just added as well as that we expect to continue to add in the rest of 2015 and in 2016. So, if there was a change in that rep curve or in productivity per rep that certainly would have an impact. We do – when looking at the new product particular the cheap oil product which is expected in the second quarter of next year. We expect that to have a positive impact on rep productivity because it will be have higher patient preference. But how much that will impact productivity is still unknown. So that's not something that –it something we'll see how the productivity develop based on the new product. But we will launch to shift as much sale to the G4 as we can because they will have less expense for us to manufacture the product. And hopefully, higher patient preference and interest in the product.

Thanks so much.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Mike Matson from Needham and Company. Your question please.

Hi. Thanks for taking my questions. Just curious, you've talked about National expansion into the world [ph] areas for bidding but I was curious on the round 2 where EBIT, have you heard anything from Medicare yet in terms of number of contracts that you've won and where are the reimbursement levels are going to end up for that round?

No. We haven't yet heard anything. The latest information that we heard is that single payment amount will be announce in winter of 2016, so we expect now that to come out some times January, February, the single payments amounts and they'll start the contracting process.

It takes about three months.

Right, right, right. So, we do expect to note something in the first quarter, second quarter of next year but at this point there hasn't been any information announced on the Round 2 rebid. The Round 1 areas are going through the rebid process currently. And those contracts are for January 1s of 2017 through December 31st of 2018, those bids are due by December 16th of this year and we do plan on bidding for the contracts for the respiratory contract. The other announcement that is new on the CMS side was they did announce this specific [Indiscernible] will be eligible to receive the 110% of the competitive bid area pricing. Our analysis is that less than 10% of our total patients would qualify for this additional reimbursement given our current mix.

Okay. And then, you just – given that the Round 2 is still an unknown for you. What are your assumptions that you use the guidance? I guess based on what you said before that you kind of expected to be pretty close to the regional Round 2, but some of the sees that the case.

Yes. So we still believe that the 2.5% to 3.5% revenue headwind in 2016 is a reasonable estimate due to those cuts to the reimbursement rates.

But I guess I was getting at the Round 2 rebid, right, because of the Round 2 rebid were to come in 110, 20, 30% below the last round to and that would an incremental headwind, I guess.

And that's part of the reason why we gave a range of this 2.5% to 3.5%, if you do the calculation, the straight math, would say around 2.5% to 3%, so we have another half a percentage point in there for potential other changes in reimbursement.

Okay. Got it. And then the rental revenue per patient's being declining. I know you probably address this before but I've gotten few questions on it, so I just wanted to have you give you a chance to comment on and on the call?

Yes. So, in the quarter we've added 800 net rental patients on service, obviously when you add those patients and the quarter does have an impact on how much revenue that you can recognize for those patients, but call those patients on average about $300,000 of revenue for the quarter. So if we would have just had status scope [ph] plus adding those patients we would have been at about $11.9 million. So we did have higher adjustments of about 400,000. Part of this is an increase in the number of cap patients that we have on service. We saw an increase from 13.7% to 15% of our patient population in the cap period. We also churn of those patients has a big impact as well as adjustment for write-off. So all of those have an impact but the total impact of those items was about 0.4 million.

Okay. And I mean, it's been heading down from some time, is that kind of – would you expect that trend to continue or do you expected to stabilize and level off at some point?

Well, we do expect in 2016 of it to trend down because of the changes in reimbursement.

For different reasons.

Yes. Got it.

Outside of that no, we don't expect additional decline in that rental revenue per patient from where we're at.

All right. Then just last question, the prices and margins on DTC sales were those up down or stable in the quarter?

They were stable on the direct to consumer side. We did not conduct any pricing trials, so the pricing has been consistent all year frankly. So there's a little bit of mix differences in the prices depending on what configuration people buys, but that's relatively immaterial, so the prices have been very stable.

All right. Thanks a lot.

Thank you. This does conclude the question and answer session as well as today’s program. Thank you for your participation in today's conference. You may now disconnect. Good day.