Greetings and welcome to the Inogen’s Third 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 presentation. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the conference over to our host, Matthew Pigeon, Head of 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, Allie Bauerlein. Earlier today, Inogen released financial results for the third 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, expectations related to our operating expenses for the remainder of 2020 and 2021, our ability to create shareholder value by driving awareness of our products, 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 and related investments, product development expectations, expectations regarding reimbursement and regulatory changes, including competitive bidding, our expectations regarding the market for our products, the impact of the COVID-19 Public Health Emergency or PHE, on our business and demand for our products, in both the short-term and long-term and our ESG Program.

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 the 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 third quarter 2020 conference call.

As previously discussed, the COVID-19 pandemic has had a significant impact worldwide and on our company in 2020, and has continued to have a meaningful effect on our business throughout the third quarter of this year, due to a substantial reduction in patient travel and activity outside of the home, as well as reduced consumer confidence.

In addition, we have seen physician offices in the U.S. and assessment centers in Europe limit patient interactions that traditionally have led to new oxygen patient referrals.

Furthermore, our HME customers worldwide turned their purchasing focus to stationary oxygen concentrators to treat COVID-19 patients, while also minimizing patient interactions, which includes replacing existing patient setups with POCs.

While these factors made for a challenging third quarter for our business, we saw total revenue and revenue for both domestic and international business to business channels grow sequentially from the second quarter of 2020.

Furthermore, we're pleased that our continued focus on our rental channel has produced strong operating performance, with rental revenue in the third quarter of 2020, growing both sequentially and versus the same period in the prior year. While it is difficult to predict what impact the COVID-19 PHE will have for the remainder of 2020, and 2021.

Oxygen therapy is a key treatment for severe COPD and other respiratory disorders. And after the pandemic, we expect the need for long-term oxygen therapy to normalize.

Before discussing our financial results in more detail, I wanted to briefly give an update on the recently released Medicare traditional fee-for-service market data for the full year 2019, and competitive bidding around '20 to '21.

While the Medicare information has certain 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 to approximate the long-term oxygen therapy market in the United States.

Based on the data set, we estimate that the share of portable oxygen concentrators in the traditional fee-for-service Medicare long-term oxygen therapy market, grew from 13.9% in 2018 to 18% in 2019. However, this estimate does not include patient cash sales or private insurance transactions.

So, we believe that this data from CMS may represent a conservative estimate of actual portable oxygen concentrator market penetration. POCs were still the fastest growing modality in oxygen therapy based on the CMS data. And we still believe this category has a significant growth opportunity ahead.

The data also showed a continued trend for a decreasing share of stationary concentrators, transfilling systems, liquid systems and oxygen tanks.

Due to the trend of a higher percentage of patients receiving both stationary and ambulatory oxygen, we have increased our estimate of target full penetration of total long-term oxygen therapy patients using POCs to be approximately 70%.

This is up from our prior estimate of 68%, and is based on our estimate that 90% of the ambulatory long-term oxygen therapy patients could be served by POCs over time.

In regards to competitive bidding around 2021, on October 27, CMS announced the competitive bidding contracts that were scheduled to go into effect on January 1, 2021, will not be awarded for most product categories, including oxygen, due to the payment amounts not achieving the expected savings and the current COVID-19 public health emergency.

We believe that not moving forward with competitive bidding around 2021 will increase beneficiary access, and also remove uncertainty for all DME suppliers, and we plan to continue to focus on driving POC adoption through consumer and physician awareness and through our partners.

CMS also issued a proposed rule to establish payment amounts going forward for DMEPOS items products and services covered under Medicare.

We believe that Medicare rates will not change for the length of the PHE, except for the 2% Medicare sequestration that will go back into effect on January 1, 2021, and any net change for inflation and budget neutrality adjustments that typically occur annually each January, but not yet been announced.

CMS is proposing to set Medicare rates after the PHE at the 50/50 blended rates in the non-contagious and rural areas as a permanent construct. But Medicare rates in all other areas would be set at the adjusted payment amount.

This would reduce Medicare rates after the PHE is over in the current areas that are considered non-rural but not covered by a former CBA, as those areas are currently receiving a 75/25 blended reimbursement rate. There's a 60 day comment period on this proposed rule, so we expect this rule to be finalized in the first quarter of 2021.

I would also like to note that we have recently published our first report on our environmental, social and governance practices, which can be found in the Investor Relations section of the company's website. We plan to continue to develop our ESG program in future years.

With that, I will now provide details around our third quarter 2020 revenue by channel. We generated total revenue of $74.3 million, reflecting a decline of 19% compared to $91.8 million in the third quarter of 2019. However, our third quarter of 2020 revenue was up 3.7% sequentially from the second quarter of 2020.

Domestic business-to-business sales in the third quarter of 2020 decreased 23.5% to $23.1 million, compared to $30.1 million in the third quarter of 2019.

We were pleased to see that domestic business-to-business sales in the third quarter of 2020, were up 6.9% sequentially compared to the second quarter of 2020, especially given the uncertainty of the competitive bidding outcome in the quarter.

The decrease in domestic business-to-business sales in the third quarter of 2020 versus the comparative period in the prior year was primarily driven by reduced demand, from resellers and our HME providers for POCs.

We believe this decreased demand was primarily due to competitive bidding uncertainty and the continued impact of the COVID-19 PHE, including lower retail sales, reduced patient travel, physician offices continuing to limit patient interactions but traditionally have led to new oxygen patient referrals, HME providers minimizing the replacement of existing oxygen patient setups with POCs to limit patient interactions, and providers focusing on supplying stationary oxygen concentrators with higher flow characteristics to treat COVID-19 patients.

International business-to-business sales in the third quarter of 2020 decreased by 21.1% on an as reported basis, and 23% on a constant currency basis to $14.6 million, compared to $18.5 million in the third quarter of 2019.

The decrease was primarily driven by reduced operating capacity of certain European respiratory assessment centers due to the COVID-19 pandemic, continued tender delays in certain European markets and decreased sales in other markets, primarily Canada and Australia.

Sequentially, international business-to-business sales in the third quarter of 2020 were up 5.1% compared to the second quarter of 2020.

We are also pleased to say that multiple tenders for the United Kingdom were resolved as in service contracts for them were delivered in the third quarter of 2020, which are expected to take effect starting in the fourth quarter of 2020 and the first quarter of 2021.

Finally, in the fourth quarter of 2020, we received confirmation that the Inogen One G5, portable oxygen concentrator was cleared for reimbursement in France. So we expect our French customers to begin to purchase our latest and highest output POCs.

Direct-to-consumer sales decreased 22.7% to $29.2 million in the third quarter of 2020, from $37.8 million in the third quarter of 2019. We believe the decrease was primarily driven by the impacts of the COVID-19 PHE on consumer travel and mobility, in addition to lower consumer confidence.

Direct-to-consumer sales in the third quarter of 2020 were down 3.3% sequentially, compared to the second quarter of 2020, primarily due to lower average sales representative headcount in the quarter, partially offset by improved sales rep productivity.

We expect minimal direct-to-consumer hiring in the fourth quarter of 2020, and planning to continue to focus on sales representative efficiencies, including improved sales rep productivity and lead utilization, while we monitor the impact of the COVID-19 PHE.

Rental revenue in the third quarter of 2020 increased to $7.5 million from $5.4 million in the same period in the prior year, an increase of 40.1% primarily due to increased reimbursement rates and increase in patients on service, higher billable patients as a percent of total patients on service, and lower revenue adjustments.

We had approximately 29,500 patients on service as of the end of the third quarter of 2020, which was up by 11.7% sequentially compared to the second quarter of 2020, as we made notable progress and using more of our direct-to-consumer generated leads for rental setups, reduced paperwork requirements associated with the COVID-19 PHE and increasing rentals across our physician sales force.

We remain excited about our focus to drive new oxygen patient rentals, as we see meaningful patient interest in our products. We continue to believe that the rental channel is an opportunity that should provide future revenue growth and stability, as well as margin expansion to our overall business. And we plan to continue to increase rental setups.

As I mentioned in our second quarter earnings release, I have decided to retire from the company by the end of 2021. And as a result, the Board of Directors has initiated a process for finding a new Chief Executive Officer for Inogen.

The Board is continuing the search process, and I remain committed to supporting Inogen in this transition period, as we continue to execute on our initiatives to deliver innovative respiratory solutions to patients and homecare providers.

We believe we are a leader in POC technology with our product offerings that the market for our technology remains underpenetrated. We still see POCs as the future for oxygen therapy worldwide, as they provide increased freedom and independence for patients, while also decreasing service and delivery costs to providers.

In addition, POCs provide a lower touch model compared to regular tank deliveries, which we believe is critical during the period of the COVID-19 pandemic and beyond.

Furthermore, while we work relentlessly to optimize our operations with the focus on improving margins, we also plan to make investments in our business to drive long-term revenue growth for our respiratory technologies, and provide patients with best-in-class products and solutions for their respiratory needs.

Lastly, given where Inogen stands today, and in spite of the challenges we and the global economy have been facing, we believe are strong cash, cash equivalents and marketable securities of $220.5 million, with no debt outstanding, provides us with a certain level of stability and liquidity, operate and be adaptable during this unprecedented time.

With that, I will now turn the call over to our CFO, Allie Bauerlein.

Allie?.

Thanks, Scott, and good afternoon, everyone. During my prepared remarks, I will review our third quarter of 2020 financial performance. As Scott noted, total revenue for the third quarter of 2020 was $74.3 million, representing a decline of 19% from the third quarter of 2019.

Turning to gross margin, for the third quarter of 2020 total gross margin was 44.4%, compared to 47.2% in the third quarter of 2019. Our sales revenue gross margin was 43.5% in the third quarter of 2020 versus 48.2% in the same period of 2019.

A decrease in sales revenue gross margin in the comparative period was primarily due to lower average selling prices, particularly in our direct-to-consumer channel, where consumers bought product configurations with lower margin bundles, and increased material and overhead costs per unit, partially offset by lower warranty expense per unit.

Rental revenue gross margin increased to 52% in the third quarter of 2020 versus 31.5% in the third quarter of 2019, primarily due to higher Medicare reimbursement rates, higher billable patients as a percent of total patients on service, lower revenue adjustments and lower servicing and depreciation expense per patient on service.

We believe a portion of the lower servicing expense may be related to lower travel of our patient population due to the COVID-19 PHE, which may not recur in future periods.

As for operating expense, total operating expense decreased to $35 million in the third quarter of 2020 versus $35.2 million in the third quarter of 2019, primarily due to a reduction in advertising expense, partially offset by an increase in intangible amortization.

Research and development expense increased to $3.5 million in the third quarter of 2020, compared to $2.6 million in the third quarter of 2019, primarily associated with $1 million of increased intangible amortization expense.

Sales and marketing expense decreased to $22.9 million in the third quarter of 2020 versus $24 million in the comparative period of 2019, primarily due to decreased advertising expenditures of $7.7 million in the third quarter of 2020, as compared to $9 million in the third quarter of 2019.

General and administrative expense increased to $8.6 million in the third quarter of 2020 versus $8.5 million in the third quarter of 2019, primarily due to higher personnel related expenses, partially offset by lower legal and consulting expense.

In addition, we adjusted $0.3 million from the CARES Act provider Relief Fund payment received in the second quarter of 2020, to offset COVID-19 PHE related costs incurred in the third quarter of 2020, as a benefit to general and administrative expense and a reduction to lost revenues classified in other income.

In the third quarter of 2020, we generated an operating loss of $2 million, adjusted EBITDA of $4.6 million, and net loss of $1.7 million and loss per diluted common share of $0.08. Now turning to guidance, because of the unprecedented market uncertainties, we are still unable to provide guidance for the full year 2020 or 2021.

Given the uncertain scope and duration of the COVID-19 PHE, we are unable to estimate the impact on our financial results, including our revenue, revenue mix, net income or loss and adjusted EBITDA estimates for such period.

While we continue to look for ways to be cost efficient, and also drive rental setups to improve lead utilization, we do expect that the COVID-19 pandemic will continue to have an adverse impact on our business in the fourth quarter of 2020.

And net revenue in the fourth quarter of 2020 will be down compared to the third quarter of 2020, primarily due to the seasonality in our business and the impacts of the COVID-19 PHE.

While we expect the COVID-19 pandemic and any potential for further prolonged lockdown would have a negative impact on our sales in those periods, we also believe it is prudent to make investments to broaden our product portfolio with the use of the recently acquired New Aera technology, and also build the necessary infrastructure to support our increased focus on rental.

Given these investment initiatives, we expect increased operating expenses in the remainder of 2020 and 2021, that we believe will support future revenue growth. In addition, while we expect to incur minimal expenses related to bonus and performance based stock compensation in 2020, we expect such costs to increase in 2021.

I also want to reiterate Scott's comments on our liquidity position.

We believe our strong cash, cash equivalents and marketable securities of $220.5 million, with no debt outstanding as of September 30, 2020, provides us the stability and liquidity necessary to operate during this time of uncertainty, while providing the capital necessary to make investments and initiatives that will drive future growth.

With that, we will be happy to take your questions..

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Robbie Marcus with J.P. Morgan. Please state your question..

Hi, this is actually Lily on for Robbie. Thanks for taking the question. I was wondering if you could give a little bit more detail on trends that you've been seeing on a monthly basis. Did things continue to improve throughout the quarter? Or what's that kind of disrupted by rising cases in the U.S.

and elsewhere? And if you could provide any detail on what you've been seeing in October and November as well, that would be really helpful. Thanks..

Yes, thanks. So I'll take that one. And we tried to reflect a little bit of the answer in our prepared remarks, but let me go into a little more detail. When we really got into the heart of the second quarter, our country and really most of the world once going into pretty strong lockdown. You had shelter in place orders.

Physicians were not seeing patients, most restaurants closed, nobody's certainly going on the cruise ship, and the decrease in travel, and the world is pretty well chronicled. And that hit our business pretty hard. We have a freedom and mobility product.

And a lot of the homecare providers turned their focus to treat those acutely ill COVID patients, try to not touch the current patients and do the swap outs of POCs that they had been engaged in. And, we've talked about on our retail side, while we still had strong liens and we were able to execute a considerable amount of retail sales.

People were very careful about spending money for a product that they're not able to use all the benefits, obviously, not only reduced travel but also just being stuck in their home.

And I think you have to realize, or I'll remind you that that's particularly true with oxygen patients, because you've got a respiratory pandemic, and oxygen patients are particularly vulnerable to a disastrous outcome, if they were to contract COVID-19. So we saw that hit our business pretty hard in the second quarter.

Now, in the third quarter, we did see a little bit of stabilization. The variability within the quarter that you don't see everything outside, we reported by the whole quarter, but within the quarter, it was a lot more stable than the second quarter, which was a pretty difficult for our ops team to deal with the swings in demand.

In addition, we started to see some growth sequentially that I think is a direct result of some of the easing of restrictions, the shelter in place orders were relaxed, restaurants started to open on a limited basis, people that have just been stuck in their homes were dying to get outside and just go for a walk and get some fresh air.

And so certainly, we saw improvements in our businesses in the third quarter versus the second quarter. I think that's a reflection of the demand for our product and the place that it plays.

And I'm particularly pleased with that, I'll say on the domestic front, because you still have the uncertainty throughout the entire quarter of competitive bidding and how that was going to be resolved. Now, as we look ahead in the fourth quarter, we've already got some signals that things could tighten up.

If you're watching the news, you've seen that the UK, they're going to tighten down for the next month. France is doing the same thing. And so, that we expect will have a negative impact on our international business. You're also seeing the prevalence of cases go up in the United States here, as we get into the fourth quarter.

And there's talk of what do we need to do to control that and curb that. And so, these are things that we think will be headwinds in the fourth quarter. And while we would love to continue the trend of sequential growth, we have to acknowledge that those things are out there and there's those signals.

And that really leads to Allie's comments of, we don't expect that our revenue in the fourth quarter would be higher than the third quarter. And so that's the big driver. You've also got -- I'll say, put in the pop the fourth quarter is usually in normal times, just seasonally a slower time. So that's part of it, as well.

So I think you'll see some impact. I've said many times in the past, this does have a big negative impact on our business, but not nearly like the travel industry. Glad I'm not the CEO of one of the travel companies. But it does definitely have an impact in a negative way..

Great. Thank you for all that detail. Just one quick follow-up. I think, you had previously mentioned that you relaunched the New Aera product a few months ago. So if you could share any updates on how that's been progressing, and how significant of a revenue contribution that is right now, that'd be really helpful. Thank you..

Yes. We actually started a limited launch at the very end of 2019 and at the beginning of this year. And things progressed nicely in the limited launch. But then COVID-19 kind of smacked that just like it did our POC business. So, it's had a similar negative impact on that as it did on POCs.

We are continuing to market and sell the product and learn how it fits in the market in its current state. But it's not a material contribution right now at all. I'd say we're still in a learning phase with positioning and the right patient.

But I would also like to remind everyone that the real exciting part of New Aera isn't the product in its current configuration, and its current configuration, it really hooks up to a tank or stationary concentrator. And of course, our vision and our mission is to obsolete tanks over the long-term.

So, what we're more excited about is actually integrating that into our POC and other products in our product pipeline, that's more of a medium to longer-term play. And that's where I think we'll deliver the real value from that technology in the innovation that it lets us deliver in new products and integration into our POC..

Great. Thank you..

Thank you. Our next question comes from Danielle Antalffy with SVB Leerink. Please proceed with your question..

Hi, good afternoon, everyone. Thanks so much for taking the question. Scott, just a quick question for you. And it's about the long-term, how to think about the long-term mix of rental versus direct.

You're seeing actually pretty decent growth, I understand off a small base, but it seems like March gross margins were a little bit better lately in the rental business.

So does it make sense to more aggressively push the shift to rental longer-term? Or how should we be thinking about that? And then I just have one follow-up?.

Yes. We're very pleased with the progress we've made in rentals. Our gross margins a couple years ago, were really hit by the last round of competitive bidding. And we had to focus on delivering some operational efficiencies, to really make it attractive financially for us.

Now, Allie reflected that our gross margins are now in the 50s, I think our team's done a lot of great work. We do see that as a bigger part of our future. It falls right in line with our goals of driving efficiency and margin expansion in the company. It gives us better lead utilization, when we can use more of the leads for rentals.

And while I don't want to, predict what mix it might be in the future, I'll say we are going to continue to pursue rentals.

The tough part about rentals, though, in the short-term, as far as its impact on the P&L is, you've got to recognize that the rental revenue recognition is over time and not up front, like a cash sale, whether that be B2B or retail sale. So, you add a retail sale today, it's at least a couple thousand dollars.

You had a rental today and it's $100 plus this month, but then it's $100 next month, and the next month, and the next month. So, as we continue to expand that rental base and build that annuity, it should have a meaningful contribution in the future, it'll be more meaningful as we go.

And it certainly expands our market access by allowing patients to use either Medicare or their insurance benefits to help pay for the product. While I don't want to make predictions about where the numbers land, because it's hard to predict mix over time.

I will say that, when we did execute our IPO, back in 2014, rental revenue was about 40% of our total revenue then. So we've already been in a spot where it was a significant part of our revenue, and of course, that got knocked off with competitive bidding.

We have reimbursement cuts, but we've weathered that storm and we're ready to go climb that mountain and cliff. [ph].

Got it. Thanks so much for that. And then just specifically as it relates to the pay, and I'm sorry, if you gave this in the prepared remarks, and I missed it. But what is that going to contribute in Q4? I imagine it's relatively small.

But you guys called it out with press releases, so just curious about what to expect? And how to think about that contributing in Q4? And is that something that carries into 2021? Thanks so much..

Yes. I'd love to give you a number. But I'll tell you up front, I can't. It's just too big a wildcard, especially with the lockdown in the UK here over the next month. We're excited that at least these disputed tenders, some of them got resolved in a difficult time.

As everything was kind of shut down in Europe, we kind of feared that nothing would move on this, it's probably not top of everyone's list to dust-off or finish-off resolve those tenders. But there was progress made where contracts were awarded and people were ready to go execute.

Normally, with that resolution in the third quarter, you'd start to see those get fulfilled in the fourth quarter. I think it'll probably get pushed out.

And I just, kind of playing the odds here because of the shutdown in the UK that I think that's probably going to push out more into the first quarter, and it might even flow into the second quarter just depending on how things go.

Obviously, these wildcards are a good reason why it's really difficult to give guidance right now, because things change so quickly, so it would be wrong for me to just speculate when we don't know for sure how it's going to go..

Thank you. [Operator Instructions] Our next question comes from Matthew Mishan with KeyBanc. Please state your question..

Good afternoon, guys.

Scott, this might be a little hard to estimate, but any sense of kind of where new patient volumes or new oxygen prescriptions from the doctor's office are as like a percentage of where they were pre-COVID? And then how far down is that? And did that improve? Do you think that it's improved 3Q versus 2Q?.

Yes, I'll give you some kind of wild numbers of what we've heard in the market. And let me say that it varies by geography. Obviously, there's some places that are hit harder in the U.S. and they have spikes, and things tend to ebb and flow. But we've heard that things are in the 40% to 60% range as far as a capacity versus previous total capacity.

So we're running about half throttle that's what we've heard. We've heard similar things in Europe in that 40% to 60% range. We certainly heard that backed up better in the third quarter, as things tended to loosen up a little bit. If I went back to the second quarter, I would say, that's probably less than 20%.

So things didn't get a little better in the third quarter. Fourth quarter is kind of a wild card here, seeing how things go.

I think, given the shutdowns in the UK and France that I mentioned in my prepared remarks, I would say, pretty solid bet that it's going to go south as far as the percentage of assessment centers that are open in the fourth quarter versus the third quarter, because they said we're tightening up. In the U.S., don't know, we'll have to wait and see.

But like I said, we've heard 40% to 60% is where things are running. That's kind of an average across the country..

Okay, thank you for the color there. And then I'm just trying to understand the rental customer versus the DTC sale.

How incremental is that? Or is there some level of cannibalization that's going on between the two?.

Yes, I'll take that one. So it certainly, when a patient calls in they're just responding to our advertisement for a POC, they're not necessarily thinking about using their Medicare benefits versus paying for cash.

So when somebody calls in based on our criteria of the number of months remaining, and what insurance coverage they have, that determines whether they're eligible for to come on to our rental service for a POC, or whether their only opportunity is to buy for cash.

So say, for example, somebody has already been on oxygen 30 months, they only have six months remaining of their benefits. We would bring them on to our service rolls to only get six additional months of reimbursement. So we do have a cut off that's applied to all patients.

And then of course, we don't have a significant amount of private insurance contracts. So depending on whether they have out of network benefits that would be reviewed to determine, if they qualify for a rental or a cash sale. So, that's a critical part of the decision making is the number of months and then what products they're interested in.

The G4 and the G5 products, our latest two products are only available for a cash sale, and the G3 product is available under rentals. So depending on how important the characteristics on patient preference that also drives the patient's decision to buy versus rent the product using their insurance benefits.

So certainly, as we've seen with the COVID-19 PHE, the willingness to pay has been reduced from consumers for a cash option. And so that's been impacted, both just by their frequency of travel and leaving their home, as well as just consumer confidence. So that certainly has had an impact and reduced the close rate.

Now, as you can imagine, if somebody's spending over $2,000 to buy a POC, that close rate is lower than somebody who can use their insurance benefits and actually get it under Medicare for their payer, and it only be responsible for a 20% coinsurance.

So with our shift to rental if somebody qualifies for rental services, they're more likely to choose a rental as a lower cost option than purchasing for cash. But of course, those that want the latest and greatest products still have that ability to upgrade and pay out of pocket.

So, there is some level cannibalization as we shift that criteria, but the closed rate on rentals is significantly higher than a cash sale closed rate. So, you make it up from a closed rate perspective significantly, but again, as Scott already mentioned, you don't see that immediately translate to rentals.

But you can certainly see it in our rental patient roles. You see we added over 3,000 rental patients to our rental roles this quarter. So, we've significantly increased that. And we plan to continue to do that in the short-term at least. And we think it's a great way to provide access to the product.

In these challenging times, we know patients have a high preference for POC's and want them if they qualify for them. And so we're happy to do that and increase adoption of our technology..

Okay, excellent. Thank you, Allie..

Thank you. And our next question comes from Mike Matson with Needham & Company. Please state your question..

Yes. Thanks for taking my questions. I apologize, if you've already gone through this. I joined the call a little late. But I did see some commentary about the sales representative headcount being down in the quarter.

I just wanted to ask, what was that driven by involuntary moves, voluntary moves or something else?.

Yes. I'll take that one. So, first of all, on a year-over-year basis, our average headcount was still up about 8% in the third quarter of 2020, versus the third quarter of 2019. So, that was actually a tailwind in that period. But as we said on the call, it was down sequentially from the second quarter.

As I know, you know there is attrition in our business. We have sales reps leave. And because we did minimal hiring in the quarter, that was the reason for the sequential decline in total headcount, as we're continuing to be cautious in these COVID times of expanding that sales capacity too much.

In terms of the split between voluntary and involuntary, more were associated with us choosing that the person, wasn't performing. I would say that our level of turnover in the quarter was not out of line with previous quarters in terms of the size of the number of terminations.

So I wouldn't say that it was outsized, but certainly, just because of the natural attrition in the sales force it was down a bit from the second quarter..

Okay, thanks.

And then, with the international tenders resolved, what sort of impact do you think that could have on your international growth? I mean, is it possible we could see that business return to growth as a result of that? Or is it not that meaningful?.

Well, we certainly are pretty cautious there. Obviously, we didn't give specific guidance on the international side or the business, especially given the recent lockdowns we've seen in parts of Europe. But certainly, this is something that is an enhancement, if they can execute those tenders in the quarter.

And with the lockdowns, we're not frankly sure if they will be able to or whether that will transition into 2021. So, that's not something that we think it should be factored into model for the fourth quarter..

Okay, thanks. And then just -- go ahead, I'm sorry..

It's really a tough therapy..

Okay. And you're still seeing a quite a bit of cash.

So, would you be open to doing acquisition in this environment, especially with Scott, potentially stepping down at some point? Or is that something that may be sort of on hold until things stabilize and you get a new CEO?.

It's a good question, Mike. And I'll say and we've said this in the past as well, if it's the right match, then we wouldn't necessarily shy away, because it's a pandemic or I'm going to retire. It's all about being the right match.

And there's a lot of people that are involved and some are saying [ph] it’s the right match, it's our whole management team, as well as our board of directors. So it's all about the match. I think as I said, we're in a great position from a cash standpoint, that if the right one did come along, we would investigate it.

It would be de facto just thrown out because of the environment that we're in. But it's going to go under the usual scrutiny of it's got to -- we've got to believe collectively as a board and management, that it's the right thing, and it's a great match..

Okay, great. Thank you..

Thank you. Your next question comes from Margaret Kaczor with William Blair. Please state your question. Margaret Kaczor, your line is open..

Can you guys hear me?.

Yes..

Perfect. Sorry about that. Good afternoon, guys. Just wanted to follow-up a little bit about competitive bidding.

And I know, you provided some commentary, but it wasn't clear to me whether you saw that it would go past the PHE, towards the three year time horizon, and then get rebid after that or potentially would it be a short-term change? And ultimately, the question becomes, what does this do for each new demand on the short-term and kind of what were -- not necessarily '21, but you know what I mean, the next few quarters?.

Yes, it's a great question. And there still is some level of uncertainty on exactly what they're going to do going forward with the competitive bidding program.

As you saw in our kind of prepared remarks, they decided not to move forward with competitive bidding, both because of the COVID-19 PHE, as well as the fact that they didn't see the expected savings in the product categories for 13 of the 15 product categories. So that is very telling.

The bidding program is an expensive administrative burden for the government to go through. And if they're not going to see the expected savings, will they go forward for future rounds, when will they decide that it's appropriate time to bid it out again. And we frankly, don't know.

But I would expect that we'll have these rates in place for at least a couple of years, just in the sense that it takes some time to go through a bidding process. Again, if you remember, we bid last September. So it's been over a year before they announced what they were going to do with the program.

And of course, there was a notice period before the bidding window even opened. So the bidding processes do take a significant amount of time, before they can implement them. We do think that this is a good sign, though, that the rates have likely bottomed and that there isn't a significant risk of additional reductions going forward.

And it also allows all providers to play in the sandbox, so we shouldn't have access issues that we know happens when there are reduced suppliers across with competitive bidding. I also think it's a good thing that they've maintained the higher renewal rates.

But there is a little bit of uncertainty with the new proposed rule of exactly how the rule roll it in for the other areas. And of course, the areas that are currently at the 75/25 blended rate would see a reduction down to the 100% of the adjusted payment amount.

What we're really focused on though, is, driving patient and physician awareness of POCs, and if rentals is the right access point doing that ourselves or through our partners to get back adoption rate up.

So we think that this allows us the flexibility to continue to do that with both our own rentals as well as our partners and kind of create that rental annuity over time..

Okay. I appreciate that commentary. I'm sorry to bring it back to HME budgets.

But, this is one thing to think about is how have HME budgets responded to the pandemic? And potentially does that change demand as we go forward, because maybe they don't have kind of the cash or the capital they need to be able to invest in POCs? Is that a risk for you guys or just kind of business as usual?.

Yes. I think over the long-term, Margaret, things don't change. We've certainly absolutely seen in the short-term, that budgets have been shifted, to try and acquire as many stationary concentrators as possible, because, higher flow, continuous flow is a primary treatment for COVID-19 patients. So, no question in the short-term budgets have shifted.

In the long-term, we don't see our opportunity changing, if you look out into the future. It's not clear when the pandemic is going to pass, but eventually it will pass. And POCs just have so many advantages over tanks and the delivery model. To me and our team, there's no question they're going to dominate in the future.

Might this slow down adoption a little bit to the pandemic? Yes, absolutely. I mean, we've seen that reflected in our sales as the market leader, that people have shifted their focus on the short-term, but long-term opportunity is unchanged for us..

Okay. And I know, you guys aren't trying to guide to 2021. But I'll still ask the question anyways, that, let's say that we do get a vaccine in the spring time or the summer time.

What's the outlook for the various business segments at that point? You think immediately open-up from a patient assessment center? Or will it be more gradual, if you guys can provide any commentary in terms of where the street estimates are relative to your own expectations? If they're aggressive or not, that's even better? Thanks, guys..

Sure. I'll keep it pretty high level, since we are giving guidance today on 2021. Just given that we do see a lot of variability in the scenarios and how this could play out both in the U.S. and in Europe, which are our two primary markets.

And certainly, how we get to a vaccine and what the consumer confidence is, at that time, how the economy's doing those all have impacts on our business, and frankly, patient's willingness to get back to traveling. They feel safe enough to be able to return to travel.

As Scott mentioned, these patients are already having underlying health conditions with COPD. And so they are more risk adverse than the average person. So, I think all of that plays into it. So, it's not just, on the magic date that a vaccine is available, all of a sudden, the markets open. I think, that's a starting point for a gradual return.

Now, I would say that, clearly, these patients need oxygen. The fact that they aren't all getting the treatments that they need at this point, because of the pandemic, there's only so long that you can hold off on that. But people can choose to say, alright, I'm going to stay home. So for now, thanks or okay.

And that's why we really are focused on increasing rentals, because we know that there still is strong patient preference for POC's, but there may not be a willingness or ability to pay across the patient population. So, that's really our lever that we can pull short-term.

So, I would expect, looking across the four segments that rental revenue is where we have, I think the most control and the most ability to execute there in these challenging times. So, I would expect that to continue to be outperforming versus the other segments.

And looking at the domestic B2B channel, obviously, they still have the continued challenges they've had for years, restructuring their business, and removing locations and trucks and drivers. So, while they now don't have the competitive bidding overhang, they still have challenges.

Now, we do think that there will be providers who will see the benefits of POCs, see this as an opportunity for them to continue to grow their businesses and grow their rental roles in these uncertain times. And we think that those people will grow their businesses and want to use our POC to do it. So, we see those as opportunities.

But the exact timing of that and how that will roll out, we're not going to put a prediction on that today. In Europe, most of the focus is with the large gas companies and large accounts over there, that's where the majority of the business is.

And there, it will really be down to the assessment centers, the flow of new patients and their focus on POCs and ambulatory solutions versus servicing COVID-19 patients..

Okay. Thanks very much, guys..

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks..

Okay, thank you. 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.

While the COVID-19 PHE has created a challenging impact on our financial performance, given our strong balance sheet, we believe we have the ability to continue to execute on our plan to deliver attractive revenue growth with improvements in operating leverage long-term.

With that, I would like to thank our employees for the extraordinary effort they make every day to take care of patients who require oxygen therapy. Thank all of you for your time today..

Thank you. This concludes today's conference. All parties may disconnect. Have a good day..