Inogen, Inc. (INGN) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Inogen’s Second Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to today to Mr. Matt Bacso, Investor Relations. Thank you. You may begin.

Thank you for participating in today’s call. Joining me from Inogen is CEO, Scott Wilkinson; and CFO and Co-Founder, Ali Bauerlein. Earlier today, Inogen released financial results for the second quarter of 2020. This earnings release and Inogen’s corporate presentation are currently available on the Investor Relations section of the company’s website. As a reminder, the information presented today will include forward-looking statements, including without limitation statements about our growth prospects and strategy for 2020 and beyond. Our ability to creating shareholder value by driving awareness of our product, expectations regarding international sales and tender activity, sales expectations in our domestic sales channels, including expectations related to our rental channel, hiring expectations and expectations regarding our sales and marketing roles. Expectations regarding reimbursement and regulatory changes, and the impact of COVID-19 Public Health Emergency or PHE, on our business and demand for our products. The forward-looking statements in this call are based on information currently available to us as of today’s date. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligation to update these forward-looking statements except as maybe required by law. We have posted historical financial statements in our investor presentation in the Investor Relations section of the company’s website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash items and other expenses that are not indicative of Inogen’s core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to provide a reconciliation of our non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort as discussed in more detail in our earnings release. With that, I will turn the call over to Inogen’s President and CEO, Scott Wilkinson. Scott.

Thanks, Matt. Good afternoon and thank you for joining our second quarter 2020 conference call. As everyone is aware, the COVID-19 virus began having a significant impact in the U.S. in the first calendar quarter of this year and continued to have a meaningful impact throughout the second quarter. The COVID-19 pandemic led governments to order residents to shelter in place and practice social distancing to reduce further transmission. Such orders have come at a time when our business typically benefits from the seasonal increase of patients ordering portable oxygen concentrators or POCs to travel and be active outside of the home. In addition, physician offices in the U.S. and assessment centers in Europe have limited patient interactions that traditionally have led to new oxygen patient referrals. Furthermore, HME providers turn their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients, while also minimizing patient interactions in response to the COVID-19 PHE, which includes replacing existing patient setups with POCs. These factors have made for a challenging second quarter for our business. However, we saw increased patient interest in our products sequentially in May and June. In addition, we are pleased with the positive early indicators we are seeing from our greater focus on the rail channel and its contribution to our growth and margins. Before discussing our financial results, I wanted to quickly give an update on the CARES Act impact on our business and competitive bidding round 2021. As we noted on our last earnings call, the CARES Act stimulus bill increased Medicare reimbursement rates modestly, which is reflected in our second quarter results. In addition, the CARES Act established a provider Relief Fund for Medicare providers and suppliers to prevent, prepare for and respond to the COVID-19 PHE. As a Medicare supplier, we received $6.2 million in funds in the second quarter of 2020. Which Ali will cover in more detail when she reviews the financial results. CMS has not announced the delay and competitive bidding rounds 2021 for oxygen, and has previously said competitive bidding pricing will be announced in the summer of 2020 with contracts going into effect on January 1, 2021. With that, I will now provide details around our second quarter 2020 revenue by channel. We generated total revenue of $71.7 million, reflecting the decline of 29.1%, compared to $101.1 million for the second quarter of 2019. Domestic business-to-business sales in the second quarter of 2020 decreased 27.3% to $21.6 compared to $29.7 million in the second quarter of 2019. The decrease was primarily driven by reduced demand from our HME providers and resellers for POCs. We believe this decrease demand was due to physician offices limiting patient interactions that traditionally have led to new oxygen patient referrals. Lower retail sales, HME providers minimizing the replacement of existing oxygen patient setups with POCs to limit patient interactions in response to the COVID-19 PHE, and providers focusing on supplying stationary oxygen concentrators with higher flow characteristics to treat COVID-19 patients. We believe competitive bidding round 2021 also impacted HME provider purchases as they waited to see the rates and winners of these three year contracts. Domestic business-to-business accessory sales were also down significantly in the second quarter of 2020, compared to the same period and prior year when we typically experienced higher sales due to increase patient travel. International business-to-business sales in the second quarter of 2020, decreased by 38.5% on an as reported basis, and 37.4% on a constant currency basis to $13.9 million, compared to $22.6 million in the second quarter of 2019. The decrease was primarily driven by the temporary closure of certain European respiratory assessment centers due to the COVID-19 pandemic, and continued tender delays in certain European markets. In addition, like in the United States, providers turn their focus to supply and stationary oxygen concentrators with higher flow characteristics in response to the COVID-19 PHE. Direct-to-consumer sales decreased 30.9% to $30.2 million in the second quarter of 2020, from $43.6 million in the second quarter of 2019. We believe the decrease was primarily driven by government mandated shelter in place initiatives across the United States, reducing travel and mobility among our patient population, combined with a decline in consumer confidence resulting from an economic slowdown. This lack of mobility and economic uncertainty impacted our direct-to-consumer channel at a time when patients typically experienced the greatest benefits of POCs for travel and activities outside of the home. However, we did see sequential monthly improvements throughout the second quarter with April being the lowest month in terms of purchases and close rates. Given the challenges of remote hiring, training and coaching, we have been closely monitoring our direct-to-consumer close rates, and adjusted our hiring practices to be primarily focused on replacement of sales rep attrition for the remainder of 2020. Rental revenue in the second quarter of 2020 increased to $6.1 million from $5.2 million in the same period in the prior year an increase of 16.9%. We had approximately 26,400 patients on service as of the end of the second quarter of 2020, which was up by 7.3% sequentially, compared to the first quarter of 2020. As we made considerable progress in using more of our leads for rental setups, and training our rental intake team during the quarter. Such effort should lead to increase rental setups, as well as increased productivity of our inside sales force. We remain excited about our focus to drive new oxygen patient rentals as we see meaningful patient interest in our products, especially if they can use their existing healthcare benefits to cover a large portion of the cost. We believe that the rental channel is a future growth opportunity that should also provide margin expansion to our overall business. As we announced in June, I decided to retire by the end of 2021, and as a result, the Board has initiated a process for finding a new Chief Executive Officer for Inogen. We have engaged a search firm that no candidate has been selected and we are still early in the process. I remain committed to supporting Inogen in this transition period as we continue to execute on our initiatives to offer innovative respiratory and medical devices as the market leader for portable oxygen concentrators. Furthermore, in support of our growth objectives, I’m very pleased to announce that with the Board of Directors support, Erin Riebel has accepted an offer to join Inogen as Executive Vice President of sales, effective August 17, 2020. This role will report to the Chief Executive Officer and be responsible for sales efforts across all sales channels worldwide. Erin comes to us with broad sales experience, including over 19-years in various sales roles across Allegiance Healthcare, Cardinal Health, CareFusion and Becton, Dickinson. Byron Myers, who is currently the Executive Vice President of Sales and Marketing will become Executive Vice President of Marketing, responsible for all marketing and product management efforts worldwide. We believe that with our expectations of future growth, we require dedicated senior leadership that bifurcates the growing responsibilities for sales and we are excited to have Aaron and Byron as leaders in these roles. We believe we are a leader in POC technology with our product offerings, and the market for our technology remains under penetrated. While the COVID-19 PHE has created a challenging short-term impact. We are still working relentlessly to optimize - we believe we can execute on our plan to create long-term shareholder value by focusing on increased patient and physician awareness of our innovative products and services. Lastly, given where Inogen stands today, and in spite of the challenges we in the global economy have been facing, we believe our strong cash, cash equivalents and marketable securities of $218.6 million with no debt outstanding provides us with a certain level of stability and liquidity to operate to be adaptable during this unprecedented time. We still see POCs as the future for oxygen therapy patients worldwide, as they provide increased freedom and independence for patients while also decreasing service and delivery costs to providers. With that I will now turn the call over to our CFO we Ali Bauerlein. Ali.

Thanks Scott and good afternoon, everyone. During my prepared remarks, I will review our second quarter of 2020 financial performance. As Scott noted, total revenue for the second quarter of 2020 was 71.7 million representing a decline of 29.1% from the second quarter of 2019. Turning to gross margin for the second quarter of 2020 total gross margin was 45.7% compared to 49.7% in the second quarter of 2019. Our sales revenue gross margin was 45% in the second quarter of 2020 versus 50.7% in the same period of 2019. The decrease in sales revenue gross margin was primarily due to increased mix towards domestic business-to-business sales, which have a lower gross margin than our international business-to-business and direct-to-consumer sales, lower mix of accessory sales and increased overhead costs per unit due to lower sales volumes. In addition, average selling prices were down in the second quarter of 2020 versus the same period in the prior year across all sales channels. Rental revenue gross margin increased to 53% in the second quarter of 2020 versus 30.4% in the second quarter of 2019. primarily due to higher Medicare reimbursement rates, lower revenue adjustments and lower servicing and depreciation and things that. While we are proud of the improvements in our rental revenue gross margin, we believe that the lower servicing costs in the second quarter of 2020 were partially due to the lack of mobility of our patient population from COVID-19, which may not recur in future periods. As for operating expense, total operating expense decreased to 35.1 million in the second quarter of 2020 versus 38.1 million in the second quarter of 2019. Primarily due to a reduction in advertising expense, partially offset by the impacts associated with new era intangible amortization and change in the fair value of the earn out liability. Research and development expense increased to 3.3 million in the second quarter of 2020, compared to 1.5 million in the second quarter of 2019, primarily associated with 1.9 billion of new era intangible amortization expense. Sales and marketing expense decreased to 22.1 million in the second quarter of 2020 versus 27.8 million in the comparative period of 2019. Primarily due to decreased advertising expenditures of 7.2 million in the second quarter of 2020 as compared to 11.6 million in the second quarter of 2019. General and administrative expense increased to 9.7 million in the second quarter of 2020 versus 8.8 million in the second quarter of 2019, primarily due to increased increasing booking fees and 0.9 million expense from the change in fair value of the new era earn out liability. As Scott noted, we received 6.2 million from the CARES Act provider Relief Fund, all of which was received and recognized in the second quarter of 2020. In regards to receiving these funds, we recorded 5.6 million in other income, which was associated with loss revenues from the COVID-19 PHE and also recorded a $0.6 million benefit in general and administrative expense due to COVID-19 PFE related costs incurred in the quarter. In the second quarter of 2020, we generated an operating loss of 2.4 million and adjusted EBITDA of 10 million. In the second quarter of 2020, we reported a net income of 2.6 million, compared to 10.2 million in the second quarter of 2019. Earnings per diluted common share was $0.12 in the second quarter of 2020 versus $0.45 in the second quarter of 2019. Now turning to guidance because of the unprecedented market uncertainties, we are still unable to provide guidance for the full-year 2020. Given the uncertain scope and duration of the COVID-19 PHE we were unable to estimate the impact on our financial results, including our revenue, revenue mix, net income and adjusted EBITDA estimates for the full-year. Given these uncertainties, we are continuing to be cost efficient by decreasing certain personnel hires and reducing advertising spend, while also increasing rental setups to improve lead utilization. I also want to reiterate Scott’s comments on our liquidity position. We believe our strong cash, cash equivalents and marketable securities of 218.6 million with no debt outstanding provides us the stability and liquidity necessary to operate during this time of uncertainty. With that, we will be happy to take your question.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Danielle Antalffy with SVB Leerink.

Hey good afternoon everyone, thanks for taking the question. Let me start by saying Scott, congratulations on your retirement, you will be very, very messed. And thanks for all that you have done. I guess my first question is, you actually did come in ahead of us on DTC and I think the street as well. Modestly, but it did feel like before COVID, you’d started to see some stabilization in that business. And I was wondering, Scott, if you are alley, if you could give a little bit of color on, you have talked in the past about where you are from a lead and close rate, per perspective, and maybe just dig a little deeper on, whether you are seeing or how much you are seeing trends improve there from a close perspective? And then I have one follow-up.

Thanks, Danielle. I will start with that one if Ali has something to add. She can chime in. First, thanks for your kind of comments. I feel like I’m kind of leaving one family here ultimately it Inogen of course, I’m not gone yet. So I would like to reemphasize that, but I will be leaving one fabulous family. I have been here 15-years. And it is been like family, but kind of going back to my other family being on the road, and they are excited about having me around a little bit more. And I’m excited about that, too. But thank you for your comments. On the, we went through some trials and tribulations a year ago, and made some changes in the sales force with our hiring practices, our training practices, changed out some management. And through probably the last four or five months of last year, in the first two to three months of this year. We got enough runtime under our belt that we felt really good about the changes that we made and felt like we corrected the root cause issues and we are kind of back on the horse and anxious to get into 2020 improve that. And I think if things were going at the beginning of the year, we felt very good about that. COVID-19 has impacted close rates. Pretty substantially, we had said in the last call that close rates were down about 20% versus par. And normally close rates would go up as you start getting into the warmer months. So we gave that number to give some context of, it is not like the travel industry or the hospitality industry where things are down 95%, but it also does have, an impact on us. The nature of the calls that we take are a little bit different, people certainly aren’t going on the cruise of a lifetime like they used to right now. And virtually none of the elderly which are the most susceptible to COVID-19, they aren’t traveling, but they do want to get out of the house, even if it is go for a walk down the street or get out and work in their garden. So, we do still have demand but the close rates are down and then you can’t underestimate the impact of just the uncertainty in the economy, and you would be surprised because with higher unemployment rates, most of our clients are retired, but they have family members that maybe are laid off temporarily. And we hear that, hey, I might have to help my son or daughter make a house payment, while they are unemployed. So while they are very interested in the product, and the freedom that it can give them, and the independence that it can give them, close rates are down, people are a little bit more stingy with their pocketbook. So having said all of that, our lead flow is very strong, as strong as it is been. So we are pleased with that the phones still ring when we run ads, cost per lead, cost per sale still very attractive to us. So that part of our processes working very well. Now, the retail close rates, as I said, are down. We have tried to be a little bit more careful with hiring in this time because it is going to be a little bit longer ramp to proficiency at the lower close rates, and a little bit longer route to break even. So we have been much more selective in our hiring practices. And we have kind of also gone through a transition where we have moved a significant number of our office personnel to work from home, focusing on their safety and health. So we had to work through that as well. So, we will still continue to hire as we said in our remarks through the rest of the year. We don’t want to go down and headcount on the Salesforce, but we are being very selective and very careful right now. We do inherently think that we have fixed those problems that we had a year ago, but we think we will still be challenged from a closed rate standpoint. As long as there is economic uncertainty. Now, we did use more of our leads to do rental setups. And as I mentioned and Ali also mentioned that that has been a great opportunity for us as we look ahead with the lead flow being strong and people being able to use. Whether it would be a Medicare or private insurance benefit, we did a lot more placements that way to use those leads, because we don’t want to waste them. And that that should be a big part of our future as well. So we are excited about that. Hopefully that answers your question and Ali, did I miss anything you want to add.

I mean, I just add a couple comments there. Really, we are proud of the reduction in the marketing spend that we had in the quarter. Scott mentioned it, but, it is about a 38% decline in marketing spend year-over-year, in the second quarter compared to the second quarter of 2019. And we saw about a 31% reduction in direct-to-consumer sales. So we were able to get more leverage on our media spend. And that is in spite of the additional leads going to the rental side of the business and using those leads for rental setups. So, that is something that we are proud of, we were able to reduce our cost per lead on a year-over-year basis. And, in spite of what is going on with the COVID-19 PHE. So we were happy with the results and as Scott said, we did see a sequential increase throughout the quarter in our direct-to-consumer sales, which was also a positive trend for us.

And then my next question is kind of at a higher level. I mean, so the HMEs in the B2B business, there is a lot of uncertainty right now, right? I mean, they sort of pre-purchase some equipment, if you want to call it that are stocked up on inventory immediately with COVID. Now, we are also waiting for the competitive bid rates and things like that. So, and they are all crunched for cash at this point, as well. So I’m just curious if you are having conversations with some of your B2B customers about how long this sort of slows down their purchasing of POCs. And at some point could it lead to an acceleration of purchasing of POCs, once they are in more stable financial position, once the uncertainty around competitive bidding is lifted, et cetera?

It is a good question Danielle and we are having correspondence with customers both in the U.S. and abroad. We have some of the dynamics are similar, as far as everybody focusing on trying to treat the COVID-19 patients. Top of mind is probably not going out and replacing tanks for people and giving them a POC. We have seen that people want to limit that interaction and exposure. But ironically, when you think about the future part of that conversation is hey, when the smoke clears, this is another push and value of POCs in this non delivery and non touch model, that there is a solution for the future. Well, you don’t have to drag tanks, out to somebody’s house or be in their home. So while now it is kind of the height of a pandemic, here, people are minimizing interaction, they also see further value of this conversion. And we think that should bode well for us in the future. Once some of the short-term challenges pass. Now, there is a few kind of folks in the road here. One is, I will say fairly discreet, and should take care of itself in the short-term. And that is competitive bidding. There is still a lot of talk and a push about trying to delay competitive bidding. It doesn’t seem to make a lot of sense to essentially reduce the number of providers that can participate and provide oxygen therapy to patients at a time when you are in the middle of a pandemic. And stationary oxygen is one of the primary treatments for COVID-19. So strong push there, there hasn’t been a decision yet. We have been watching things day to day, so we were up to date with the release. But you are at a point with contracts going into place here at the beginning of next year, in the rather short-term like next, let’s call it next month or so. You either need to see a delay, which takes competitive bidding off the table for a while, or you need to see rates announced and then for the winners know who they are. And then that uncertainty disappears. And so that that take care of one of the things that has people are a little nervous and a little reticent about making investments in the future, when they are not really sure how that is going to go. That is short-term. Now, little longer term, as you know, COVID-19 don’t know how long that is going to go. It certainly had an impact and diverted focus from people converting their model to the non-delivery model. And a lot of the resources and money has been tied up with treating these relatively short-term oxygen patients that have contracted COVID-19. But we have seen some easing through the second quarter. It is difficult to predict the future, if that is going to continue to ease up, or we have a relapse in the number of incidents rise and even faster right now and cause continued distraction. And that is why we are hesitant to put guidance in place right now because of that uncertainty. But if you look out long-term, I mean, we all know that COVID-19 is not going to last forever. And at the end of the day, it is a superior non-delivery model. It is more preferred by patients, because of the freedom and independence it gives them. And I will emphasize independence now. Because again, in the future people are going to look even more strongly at a model that eliminates, the need and dependence on others. Because this may not be the last virus that we that we see down the road, I mean, these things still happen every day. But they do happen every so often. So, I think the future for us in an under penetrated market is still very bright more excited about that, despite kind of the short term set rocks that we face right now because of COVID-19.

And I would add just a little bit there, Danielle, for additional clarity. We saw a very strong April on the domestic business-to-business side, followed by a very weak May, and then a recovery of sorts in June. And so while that is a little bit different and a lot of other MedTech companies in terms of their cycles associated with COVID-19. We do see that there is some level of return to growth there. Of course, there are still significant uncertainty going forward. But I do want to point out that, while these patients are not currently getting POCs, and there may be some delayed treatments, because physician offices are limiting, physician up for limiting patient interaction, those patients still will eventually need oxygen, it is not like patients with COPD recover from COPD and they no longer need oxygen in the future. So eventually, those patients should be prescribed oxygen and receive oxygen therapy. I would also like to point out in the domestic business-to-business channel. Of course, a portion of those same sales are two internet resellers and other resellers who sell the product on for cash. And they of course, were impacted like our direct-to-consumer business by the lower travel and the lower consumer confidence. So that subset of that channel was impacted more significantly than the overall domestic business-to-business, the traditional HME’s because of the consumer impact in that subset.

Our next question comes from Matthew Mishan with KeyBanc. Please proceed with your question.

Great. Thank you for taking the question guys. My first question is, does the COVID-19 pandemic impact any of your assumptions around the long-term market opportunity for portable oxygen concentrators? Is there a potential - I guess the question is around, does the post acute market for oxygen therapy increase as a result of this?

It is a good question, Matt. We have heard that a couple times. And I will say, certainly there is nothing that we see from COVID-19. That hurts our future opportunity. There are a couple things that might help it. But I want to be careful about that because it is still a little early to make that call, but I think directionally there is some possibilities. And let me just cover those quickly - point. There is even more value of non-delivery and non-touch model that people can see in the future. Now, it is always been our vision that the market would convert to that, the HME providers would eventually standardize on POCs over tanks with time. I think this is another little push of the benefits there, that we are hopeful that, once the urgency of the day passes, that, it helps with that conversion rate in the future. Now, as far as the opportunity for the patient pool, there have been some folks that have, theorized that this is a respiratory ailment, and there could be long-term impacts from COVID-19 where, more people in the future may need long-term oxygen therapy, because they had COVID-19, not just from traditional diseases COPD. It is a little early to say that is absolutely going to happen. There is that chance if it does, it would broaden or make the pool bigger for long-term oxygen therapy patients. So that would be a tailwind to our business in the long-term. But it is a little early to say that is going to happen. But certainly, there is nothing that would be a negative from it in the long-term. So it should be the same or better in our view as far as the opportunity.

Okay. And what about a year since you have completed the new era acquisition, I just didn’t I don’t think I heard you mentioned it on the call. Have you finalized the commercial rollout of that product? Or is that on, set on hold as we kind of given the situation currently?

Yes, it is not really on hold, but it is kind of, I will say in a relaunch stage. We started a limited launch at the very end of 2019. So we had trained and armed a subset of our Salesforce with that product, and we started to sell for the first couple months of this year, we had our own expectations. And I will say that we, we greatly exceeded our expectations in the first three months of the year. But when we did get into COVID-19, hitting and we saw the negative impact on our close rates, with POCs, we also saw a negative impact on TAV, our new era product. So we pulled back there, we have kind of reformulated our approach to selling. We have trained our entire inside Salesforce and relaunched in the last month. So now we are back to selling again, with the entire team, not just a subset of the team. We have taken some of the feedback and learnings from the first couple months, refined our message refined our pricing, and we are back on the horse. So I would say we are on it again. But if COVID-19 did throw us a little bit of a curveball, they are on TAV as well.

And just to add a bit there, the real goal and where we see the true benefit is combining the PHE product with our POC, which is still under development. So we don’t expect material sales until we really get that combination product. That to us is the true game changer and the best use of this technology.

Just a follow-up to that. How long until you think you would have that product?

We haven’t announced that specifically for competitive purposes.

Okay, great.

[Operator Instructions]. Our next question comes from Mike Matson with Needham & Company. Please proceed with your question.

Yes. Thanks for taking my question. I had a couple on the rental business. I was surprised to see that gross margin, strong as it was. And then you also made a comment that you thought, it would be, who would actually drive margin expansion. I thought that this business was a much lower margin three guys, so maybe talk about the factors in the quarter and kind of where you think the gross margin can be going forward, the factors that helped in the quarter everything can be going forward. And then how do you know that when bid levels come out that this will still be accretive to your overall margins?

Yes, sure. I can take that one. So as we said, we saw large improvements in our rental gross margin 53% for the quarter. Some of that was just the fact that the patient population wasn’t as mobile. So things like servicing costs and disposable usages and freight costs. Those types of things, were down in the period. We also benefited from there was a modest Medicare rate increase associated with the COVID-19 PHE. So that rate increase will continue for the length of the PHE, but at some point that will also go away. So that will be a headwind to gross margin and rental revenue at the point that that PHE is over. But in spite of that, we are proud of what is improved on the rental gross margin side. Obviously above 50% is a great gross margin compared to our corporate average that is what we were really comparing against. Of course, our direct-to-consumer gross margin is still our highest gross margin business that we have because of the cash prices paid there. Long-term we haven’t put out a specific rental gross margin targets but we have been actively working on improving the gross margin of that business and improving asset utilization, reducing freight costs, reducing our adjustments and denials and improving our percent of billable patients. So those are active areas that we are continuing to focus on. Of course, competitive bidding is an uncertainty. But we do feel that we are in the best position here as the manufacturer as a vertically integrated DME for us to continue to improve our gross margin profile there. Right now we are continuing to add new patients for the first time in many, many quarters. And as we add new patients that also should help improve our utilization and our cost profile because the units that we are putting out into the rental fleet now are at significantly lower costs and the products that we were putting out a few years ago that have been depreciating now. So we do think that we continue to drive leverage here, but there is, of course that certainty on the competitive bidding rights, but we do expect to know that relatively soon.

Okay, thanks. And then you commented that you have seen increased interest for patients in May and June. So, do you have any feel for whether those patients will translate into DTC sales or DTC rentals or is it just too hard to predict at this point? I know you are trying to kind of build the rental business, but the near-term revenue benefit, even if the margins are good is a lot smaller from rental.

Right. So yes, we did see improving close rates throughout the quarter. So we did see those convert into both sales and rentals. So you know, of course, there is some lag time on marketing spend versus when somebody decides to buy or rent the product. But we did see solid conversions in the quarter after taking into account the March and April drops that we saw associated with COVID. So, we are continuing to refine that sales pitch to people in light of the current market dynamics and what consumers are most interested in right now. We have also seen, lower purchases of items like accessories and add on purchases. But overall, we think that business did show improvements throughout the quarter. And that is a good sign although of course, we are hesitant just around a potential second wave and any impact of that on a consumer focused business. But of course, the rental side of the business is a great opportunity for us. Given the improvements we have seen in that business from financial results perspective, to be able to give access to our product to more patients. And that is not as price sensitive, since they are already paying a coinsurance for their oxygen. These are existing oxygen patients converting from tanks to POCs. So we think that that is a great way, especially in light of the COVID-19 challenges for us to build that base. And while of course, rentals are not as impactful on revenue right out of the gate, they do provide a stable revenue stream overtime with that patient pool that we can build on.

Okay. And then just one quick one on the B2B side. I mean, you obviously talked about may and June for DTC, but on B2B, did you see improvement as well in the latter part of the quarter? That is all I have. Thank you.

Yes, so what we saw in the quarter was a little bit different for B2B. We saw March and April, very, very strong in both the domestic and international B2B channels. May was extremely weak in both those channels, and then there was a recovery in June. So we didn’t see it the same cadence. It happened a little bit delayed compared to the D2C impact. But we did see improvements in June off of the May low.

Thanks.

Our next question comes from Margaret Kaczor with William Blair. Please proceed with your question.

Hey good afternoon guys, thanks for taking the question. Maybe just to dissect a little bit further on some of Mike’s questions. More specifically, are you seeing new patient flows back to question for COPD looks there, can you give any color around that? And you have talked a lot about May and June, but can you provide any July commentary as well?

Yes, Margaret it Scott, I will take the first part of that. As far as patient flow. We are seeing increased flow, but I wouldn’t say it is back to normal. Okay. What we have heard in Europe, is that assessment centers are running at, anywhere from 20% to 40% of full capacity is what we have heard. I would say, in the U.S., it might be a little bit better, but it is not as clamped down as it was a few months ago, but it is certainly not what I would call back to normal. So, as far as those physician CM patients, and the new patient flows, kind of entering the pool. I would say it is still at a stifled rate right now, but, we seem to be trending a little better, of course. We are always careful about looking ahead, because, we all see the news and see the number of cases rising and seeing government’s starting to take little more aggressive action to try and curb the spread again. So that is why, we are not sure if you know where the trend is going to go here. But if I just look at the last couple months, it is improved.

Okay, and July, any comments there to the continue to get better or at least stable?

I can take that. There were no material change in trend in July.

Okay. And that is D2C and B2B?

Correct.

Okay. And then as we look at the competitive bidding outcome, I know there is some thoughts that might get delayed. Would that swing you one way or the other? If there is a change in rate, would that swing you one way or the other in terms of investments?

No.

Okay.

I mean, let me back up and expound a little bit more. Just to know. I mean, look, we don’t see the rates changing dramatically. We have said that in the past, right. I mean, the first wave 10 years ago, we saw 30% drop. Since then we have seen a couple percent here and there. Some people have suppose that rates might go up, some have said they might go down. But in general, we think they are going to move such that it is going to be the status quo, it is going to remove uncertainty of what they are, and it is going to remove uncertainty of who the winners are. But if it goes up a couple percent, it still puts strain on the delivery model. If it goes down a couple percent, the delivery model remains superior, even more valuable, and can be profitable in a couple percent off. As far as what we are doing from a go-to-market strategy of trying to drive awareness with patients and physicians doesn’t change that strategy at all. So we will continue to do that we are showing, we have worked hard over really a two-year period and a lot of the heavy lifting in the last year to improve our rental gross margins. And that wasn’t by accident or luck. It is lot of driving costs and optimizing some things to put us in a position where this is attractive. So it doesn’t change the rates one way or another couple percent, it doesn’t matter how it is going to come out, doesn’t change things for us in our approach.

Just one more, and this is maybe slightly a bigger picture question. But just as you guys look at investments within driving top-line revenue versus trying to prioritize operating margin and cash flow. Where are you guys right now, as you look at it strategically, that maybe over the next 12-months and then maybe over the next three to five years? Does that Barry? Thanks.

So you with the with COVID-19, we have seen a lot of companies really struggle with cash flow with reduced revenue not covering their costs. Our primary objective in the very short-term is to not burn our cash. We have emphasized really scrutinizing our expenses. The only hires that we are making are what we consider critical hires for the future, but they are investments for the future. So our hirings aren’t zero, but we are being careful. As Ali mentioned, we really tried to crank down our advertising, spend a little bit and use more of the leads with a rental approach, where you have a broader close rate, and save some money there on advertising. And I think we did a pretty good job in a difficult time. In the short-term, we set it a couple times, we are in a great position from a cash standpoint, we are not really worried about being able to navigate or operate and what really a difficult time for a lot of companies. Long-term though, the money that we have on our balance sheet that is earmarked for growth. We still think there is great opportunity for us the market is under penetrated. We have got a superior model and a superior product and a market leadership position. So, that is earmarked for growth, whether it be investing in expanding and other international markets, new product development, commercialization, driving more awareness through advertising, or new products, whether that is developed internally or other acquisitions, and that includes continuing to scale up our TAV products. And the integrating that into our POC is as Ali said. So that is where the money is at. I will say it is a slight emphasis on growth, but we want to do it while we drive some leverage as well. So it is not gross at all expense. And to heck with the bottom-line, we want to grow and show leverage like stuff.

Got it. Thanks guys.

Thank you. At this time, I’d like to turn the call back over to management for closing comments.

The COVID-19 PHE has placed all of us in unprecedented times, and we continue to respond by making sure we are part of the solution that helps patients with respiratory disorders, while also keeping our employees healthy and safe. However, despite these immediate challenges, we continue to believe our future is bright, and the portable oxygen concentrators will be the standard of care for oxygen therapy patients in the U.S. and worldwide. Given our strong balance sheet, we believe we have the ability to weather the storm. And once this turbulence passes, we believe, we can execute on our plan to deliver attractive revenue growth, with improvements in operating leverage. With that, I would like to thank our employees for the extraordinary effort they make every day to take care of patients that require oxygen therapy. Thank you all for your time today.

Thank you. This does today’s teleconference, you may disconnect your lines at this time and thank you for your participation and have a great day.