Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Third Quarter 2020 Financial Results Conference Call. As a reminder, this call is being webcast live and recorded. It is now my pleasure to introduce your host, Mr. Mark Klausner of Westwicke. Please go ahead, sir.

Good afternoon, and thank you for joining us for the Vapotherm Third Quarter 2020 Financial Results Conference Call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army; and its Senior Vice President and Chief Financial Officer, John Landry. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit the events link in the IR section of our website, vapotherm.com. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements. These statements are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report filed on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission or the SEC on March 4, 2020, and our quarterly reports on Form 10-Q for the first, second and third quarters of 2020 as filed with the SEC on May 5, 2020, August 4, 2020 and November 4, 2020, respectively, and in any subsequent filings with the SEC. Such risk factors may be updated from time to time in our filings with the SEC, which are publicly available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, unless required by law. This call will also include references to certain financial measures that are not calculated in accordance with generally acceptable accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website. With that, it's my pleasure to turn the call over to Vapotherm's President and Chief Executive Officer, Joe Army.

Thank you, Mark. Good afternoon, and thank you for joining us today. I will begin by discussing our third quarter 2020 results. Then I'll hand the call over to John Landry, our CFO, to provide the financial details of our 3Q results, after which I'll update you on our key areas of focus for the remainder of the year before taking questions. 3Q was another good quarter for Vapotherm as we generated $30.6 million in revenue, a 183% increase over 3Q 2019, increased our worldwide installed base by more than 2,700 units to approximately 25,000 units and opened 43 net new gold and silver accounts in the U.S. In addition, we printed a 50.8% gross margin for the quarter despite continued significant headwinds. On our 2Q call, I stated my belief that our business have been significantly transformed as a result of two factors: one, the increased awareness and usage of our high velocity therapy; and two, our continued progress in developing the Oxygen Assist Module, or OAM for short; and our next generation system. With another quarter under our belt, I'm increasingly confident in our ability to sustain this transformative momentum post COVID-19. Today, I'll update you on what I'm seeing in our business that's driving my thinking on this, as well as provide an update on the work we've been doing on our product pipeline during 3Q. 2Q was incredibly hectic as we devoted a substantial amount of our energy to rapidly ramp our capacity in an effort to meet all customer needs in the midst of a significant surge in COVID-19 hospitalizations. 3Q was primarily about working to settle down and prepare the organization for sustainable long-term growth. We focused on three things this quarter: First, we ramped production capacity in an effort to meet all future…

Thank you, Joe. As mentioned, revenue in the third quarter of 2020 was $30.6 million, representing a 183% increase over revenue of $10.8 million in the third quarter of 2019 or the prior year. U.S. revenue was $25.5 million, an increase of $17.5 million or 218% over the prior year, while international revenue was $5 million, an increase of $2.3 million or 81% over the prior year. Our worldwide install base has now grown by approximately 8,200 PF units year-to-date, including third quarter's growth of approximately 2,700 PF units. As of the end of the third quarter, our worldwide installed base consists of approximately 24,800 PF units, which reflects growth of 50% since the beginning of the year. Our U.S. disposable utilization rate in the third quarter of 2020 was 1.92 as compared to 1.66 in the prior year. This is the third quarter in a row where our U.S. disposable utilization rate exceeded our historical experience by approximately 0.25 turns. We believe this increase in U.S. disposable utilization rates in the quarter was largely due to the increased usage of our technology for the treatment of respiratory distress experienced by many COVID-19 patients. Given the significant increase in the installed base, we continue to believe that churn rates are likely to return to more normalized level once COVID-19 cases begin to moderate and it may even be slightly lower than historical averages as the newly installed PF units become productive. U.S. disposable average selling prices increased in the third quarter due to the continued uptake of the ProSoft nasal cannula and aerosolized disposable patient circuit, both of which were launched in the first quarter this year. The international disposable utilization rate in the third quarter of 2020 was 1.63 as compared to 1.80 in the prior year. Recall that…

Thanks, John. Before opening the line for questions, I'd like to review how we intend to focus our efforts for the remainder of 2020. The play is very simple, and it's more of the same from the third quarter. First, we plan to continue educating our net new gold hospitals on how to use our high velocity therapy on patients experiencing type two respiratory distress. Given what we've seen to date, we believe these efforts are paying off. We'll set the stage for long run future growth across our business. Secondly, we plan to focus on new product development. In 4Q, we plan to expand the NICU and adult-own limited market release in the U.K., Europe and the Middle East. With respect to the U.S., we hope to have finalized our OAM neonate IDE study design and regulatory pathway with the FDA by the end of the year. We also plan to submit the next-generation system for regulatory clearance for both the hospital and the home settings and spend more time thinking about the elements we will need in place to serve respiratory distressed patients in the home. Lastly, we plan to continue to run our three-pronged gross margin improvement plan, leverage our operating expenses and drive working capital efficiencies over time. To provide a little more insight into how impactful our high velocity therapy is at treating the respiratory distress experienced by respiratory distress experienced by many COVID-19 patients, I want to share one of the many patient stories with you from last quarter that comes from a VA hospital as related to me by one of our sales professionals. This week, we visited a VA Hospital for military week. Hearing the success stories from the RTs and the doctors on how they have successfully used high velocity therapy…

[Operator Instructions] Our first question comes from the line of Margaret Kaczor with William Blair. Your line is open.

So first off for me, is just a follow-up on the quarter. You guys saw strong capital sales this quarter, but you also referenced the geographies the second waves aren't driving significant capital demand. So I know this is really hard to parse out, but how much of that Q3 demand was COVID-related versus expanding within accounts? And ultimately, when do we get to a good quarterly run rate range as we think about kind of the post-COVID Vapotherm program?

Margaret, it's Joe. I'll take a shot at that, and we'll let John follow-up what he's got. So within the third quarter, an awful lot of that capital equipment sales did, in fact, comes from COVID in the southern tier in Texas, Florida, Arizona and so forth in the Sunbelt. So in that July spike, we were busier than hell getting product out the door. The disposable themselves, I mean, we're feeling pretty good about our ability to predict, at least within a relevant range, how those disposables are performing. But capital equipment sales, that one was -- if we hadn't had the inventory on the shelf that we put on at the end of the second quarter, we'd have been in the world of hurt. We wouldn't have been able to take our other customers because our ability to predict this is very, very limited. You just don't know where it's going to show up. And then I think the other piece of what you said is, we did see what we believe to be a fair amount of capital equipment that we booked in the third quarter actually was -- it typically would have been in the fourth quarter, but what we're hearing from the accounts is they were all getting nervous and getting ready to see if they were going to get lapped here in the fall.

Margaret, this is John. I'd agree with that. I think what we saw is obviously a lot of COVID demand and in regards to second waves and where we've seen it, typically, we see the capital equipment sales in areas of the world or the U.S. where COVID strikes for the first time. We haven't seen it to as great an extent where we've seen second waves in different geographic regions of the world. Not to say that it won't take place, but it's been more typically aligned with first waves at this point in time.

Okay. And so that gets me to the last part of that question, which was, at what point do we get to kind of a good quarterly run rate post-COVID? And is Q4 then that number where you guys aren't assuming that much from a capital perspective that's related to COVID?

Yes, that's right, Margaret. So as we took a look at the capital and thought about our guidance for the fourth quarter, in particular, as Joe mentioned, we feel pretty good about where we're thinking disposables in that business will be, given our experience and hypotheses around flu, RSV season and COVID hospitalizations. On the capital side, it is a bit more of a wildcard to predict it. We did in developing our guidance, it was more of a thought process around a modest impact from COVID-19. In the fourth quarter, we expect to see growth over the fourth quarter of 2019. But obviously, a sequential decline from what we saw here in the third quarter, which we expect, of course, suspect most of that was front-loaded here in the back -- for the back half of the year into Q3.

Okay. And then if I can, as we look forward, you guys did give that example of that New York hospital. Can you give us more color? That was -- it sounds like maybe a noncustomer pre-COVID and then you were able to convert them really across the hospital within months or at least a fairly rapid time period. So is this a typical experience amongst the accounts? What convinced them to be able to do so other than kind of that "a-ha moment?" And are these things were next gen updates or kind of what gets you to there? Or is the clinical economic data and so on?

So just to kind of to make sure I'm getting that right, Margaret. The question would be that New York hospital that I shared with you, is that kind of a one-off? Or are we starting to see more and more of that. Is that your question?

Correct.

Yes. So if I wouldn't have told you the story if it was a one-off. I wouldn't call it a -- we see these every day, but we're seeing more and more of this. That field team has done an absolutely phenomenal job this summer out in the field, teaching all of these net new customers how to use this technology, but particularly on type two hypercapnic patients. That's really the play that we've been running over and over and over again. Because this was a tremendous opportunity for us to expand that installed base, but we were really, really focused on making sure that they're using it on both types of patients. And that's what we're beginning to see. We were pretty -- we like what we're seeing with respect to that particular account and others like it.

Our next question is from Bill Plovanic with Canaccord. Your line is open.

A couple of questions here. And I think most of these questions were around champagne problems, right? When you have a lot of systems in the field, and you drive utilization and how much longer where the extra capital sales continue. But to hone in on some of the questions. One, capital sales, what was the mix of new, like, totally new accounts versus units going into existing? And then how many gold accounts did you sign up in the quarter? And then I have a couple of follow-up questions.

Sure, Bill, this is John. Good to speak with you. In terms of the mix of new accounts versus existing accounts, it followed roughly the same model that our business has historically seen, roughly two-thirds of those capital equipment sales went into existing customers as we continue to go deeper and wider into the book. And then, I guess, in regard to the number of the ED gold and silvers, we add another 43 this quarter, bringing us to almost 150 for the first three quarters of the year.

Excellent. And so just two-thirds went into existing accounts and one-third went into new accounts?

Correct.

For the capital. Okay. I just want to be clear. That's a pretty big number. And then the R&D went up sequentially. And I'm -- is that programs to support the Vapo 2.0? Or is that queuing up for the OAM trials? Or what specifically? Because it's a pretty good jump sequentially.

Sure Bill, in regard to that level of investment in R&D and the sequential increase, that's tied to our HVT 2.0, our next generation system, which we're targeting to -- which has the ability to break away from the need to have be connected to wall gas. We'll have an internal blower capability, which will allow us to access areas of the hospital that don't have pipe to air. It will be -- also allow us to potentially tackle patients in respiratory distress outside the hospital, whether they may be in a home setting or in transport to a hospital facility.

And then lastly is just regulatory wise, what do you think the pathway on the OAM is going to be in the U.S.? I know you're in discussions. Is this going to be a big trial? Or is it a small trial? And what type of follow-up do you think it could be at this point? And then really the same question on the 2.0, because my understanding that 2.0 will also integrate the OAM. So -- and I don't know if it's -- it will be 1 trial, where it will be the 2.0 with OAM, but any color would be helpful.

All right. Well, let's unpack that, first of all, and talk about the clinical trial that we did at Oxford and St. Peter. So that was roughly 30 patients, right? And they were each on the technology -- either on our technology or on the control for 24 hours, Bill. So in terms of any kind of follow-up, there is really not a lot of follow-up in that study. That study was very, very conclusive around the clinical efficacy of the technology, even at that size. So as you know, the FDA has designated this breakthrough technology. We continue to dialogue extensively with them. We are liking the direction that those conversations are taking. Our focus here in the fourth quarter is on finalizing the NICU IDE study and getting it cleared from FDA. And that will inform us a lot more in terms of the overall regulatory pathway. But we like where we're at with these guys so far. Outside the United States, you make a good point about the OAM technology being integrated into the next generation. And it's our intention here later this quarter, during the fourth quarter, to be able to file that for regulatory clearance in Europe and outside the U.S. So that entire OAM platform will already be integrated into the next gen outside the U.S.

[Operator Instructions] Our next question is from Marie Thibault with BTIG. Your line is open.

I wanted to spend my first question on the training and education angle, really encouraging anecdote you told us about, Joe, and certainly something that's key to my thesis on Vapotherm. So I'd love if you could give sort of a progress update on how many of the new accounts your field team has been able to touch at this point in terms of training and education? And how long you think that process might take as we ease out of this COVID wave?

Well, we've touched them all, Marie. So first of all, it's good talking to you. Thank you for asking the question. We've touched them all in terms of spinning them up and teaching them how to use it on type one patients. Our people were all over those accounts where the initial surges took place. Our people were in their building gear, teaching them, training and getting them set up. And for the ones where we couldn't physically get in the hospital, we used our Vapotherm Academy, a distance learning tool, we've trained over 17,000 clinicians with that thing since the beginning of the year. So we're touching them in multiple ways. Really, the play here since the last time we all spoke was the expansion of that field clinical organization and then full-court press driving them to all of those net new accounts, teaching them about how to use our technology on type two. And we're feeling very good about that right now. We like the progress that we're making. There's always going to be some accounts that's going to take us longer to get to than others, either because they're in the midst of another surge or because it's just they're entrenched in their old -- the previous technology. But thus far, we're pretty happy with the way that is going and are confident we're just going to keep running that play over and over and over again. We like this a lot.

All right. That's really helpful, Joe. I wanted to use my follow-up on disposables. John, you gave us some good commentary on how you think about Q4 disposable turn rate being similar to a flu season, given some of the offsets with COVID this quarter. But could you walk us through kind of the Q3 cadence? And as I think of it sequentially between Q3 and Q4, do you envision higher hospitalization from what you've seen so far into Q4?

Sure. Marie, nice to speak with you again. In terms of the seasonality, as you point out, typically, Q3 is our seasonally lowest quarter of the year from both capital and fiscal perspective here in the Northern Hemisphere. This year, it was obviously different for us. We had quite strong demand here in the third quarter. And as we look at our disposables, as we think about the fourth quarter, we see them kind of roughly in line with where we saw them in the third quarter as we think about in terms of volumes going into the fourth quarter as compared to third quarter sequentially. That factors in those items we spoke about on the call regarding our expectations around like flu, RSV season being offset by the COVID hospitalizations that we're seeing now. Should COVID hospitalization spike or dramatically increase from these levels, we would expect to see revenues above where we guided to. Our baseline assumption assumed COVID hospitalizations ongoing at sort of the rate that we're seeing now.

Our next question is from Bob Hopkins with Bank of America Merrill Lynch. Your line is open.

You actually have Brad Bowers on for Bob today. Just a quick question. I was just wondering if you could give any color on some of the trends you've seen so far into Q4. And also if you could explain a little bit more why you think that second wave wouldn't see as many capital units being sold, if you could give a little bit of color on why you think that might be and why it would continue into Q4 when we're seeing COVID spiking up again.

Sure. This is Joe. I'll take a stab at that, and we want to have Johnny answer some of that. So if you had asked us for our guidance three weeks ago, four weeks ago, there was not a whole lot of talk about COVID. It just wasn't. And we really weren't seeing a lot of it in the business. This business is really -- if you think about our business, really two different things, right? The disposable component to this is increasingly -- I mean, it's always been very predictable. But even in the midst of COVID, we've done a pretty good job of being able to predict this. It's not really hard to stay ahead of it, whether it be from a production inventory point of view or whatnot. And we know that as COVID hospitalizations increase, we're treating those patients. We've been doing a heck of a job treating them and taking good care of them. The real wildcard here, the thing that's been really, really unpredictable, is the capital equipment sales, right? Because it can come on very, very quickly, and you just don't see it. It just comes -- it comes on very, very quickly. And there's no way for us to forecast where the COVID census is going to hit. You think about it the first wave, it really hit in New York city. It hit parts Pennsylvania, North Jersey, New Orleans, that kind of thing. Second wave was really the sunbelt, right? During that July time frame. We just have no idea where it's going to hit next. That said, in the last week or so, we've seen an increase in activity in our international business, particularly in the European and Middle Eastern sectors. And we're going to begin -- we can feel…

Got you. So I mean, I guess you kind of alluded to this earlier, often in your response. I also appreciate all that color there. It's super helpful. But would I be misclarifying it to say that if we did see continued increase COVID, I guess, nationally, that it would make your Q4 guidance look a little bit conservative? And I understand why.

Yes, no. Listen, nationally, if it shows up in New York City, they've got all the boxes, they're going to need to take care of them. These people are in good shape, right? Showing up in Texas. Texas has got a lot of gear now. They're ready to go. Those hospitals are ready. If it shows up in a different part of the country, you say nationally, right? But we don't look at it that way. We have to look at like what city is that year going in and how many of our systems do they have in that city, that's the key variable in forecasting that capital revenue and that's what I'm telling you is so unpredictable.

The next question is from Bill Plovanic with Canaccord. Your line is open.

I'm just trying to kind of triangulate something on the capital sales. The commentary of two-thirds of the sales are to existing accounts. Is that because COVID is rolling into those accounts, and they already have some systems so they expand significantly? Or you're getting deeper into those accounts and then all the new ones are essentially to COVID. And I'm trying to -- because if you did 2,100 systems in the U.S., that'd be 1,400 to existing, which would be a bigger forward number. And I'm just trying to understand that. And then my second question is, I think you called it the Felix 1 negative pressure mask. Where does that kind of hit into the revenue segment reporting segments, just so we make sure we tease it out. And any qualification of the size of that, I think, would be helpful, so that we make sure that we don't put that on an ongoing basis past the COVID issue?

So let's deal with the second one first, because that's the easiest one by far. Don't bother modeling it. It's going to be a very, very low-priced product. It's designed to help them deal with a problem right now. I would be surprised if we sold this -- after we're done with COVID, there's really not going to be a need for this. And it's not going to -- you're not going to even notice it in my revenue lines. So I wouldn't worry about it, right? The second one.

Okay. I just wanted to make sure. I just want to make sure it wasn't $1 million or $2 million. And like all this next year. Okay. That was the reason for the question on that.

Yes. Understood. Understood. Good question. The other one is, so our split between existing customers and net new customers. Sounds like we put an awful lot of gear into existing customers and then really getting into the why. So I want to back up and remind you of our strategy here is to go into the largest emergency departments in the country, right? So that's what our installed base is. And when we think about where these COVID patients show up, Bill, they show up in the biggest EDs in the cities, right? And so it only makes sense. And historically, by the way, just as a matter of historical fact, two-thirds of our capital revenue in any given quarter goes to existing customers expanding their fleet. So this is actually in line with what we've always seen. It's just much, much bigger numbers. And candidly, we're pretty excited about it. We love that current customers are buying this gear because it's just accelerating the path of them sending it throughout their hospitals. So bottom line is we're in the right place at the right time. We're calling on the right customers. Our focus on these large gold emergency departments, we just -- we were very fortunate that we were already there before this COVID thing struck, which is why they would be buying so many.

Ladies and gentlemen, this concludes the Q&A period. I'll now turn the call back over to Mr. Joe Army for any closing remarks.

Well, I want to thank you all for your interest in Vapotherm. We really appreciate it, and we look forward to updating you on our progress again next quarter. Have a great night.

This concludes today's conference call. Thank you for your participation. And you may now disconnect.