Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Fourth Quarter and Fiscal Year 2019 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 fourth quarter and fiscal year 2019 financial results conference call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army and its 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 covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 on March 04, 2020 and in any subsequent filings with the Securities and Exchange Commission. 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.

Good afternoon and thank you for joining us today. I will begin by discussing the progress we made in fourth quarter, then I will hand the call over to John Landry, our CFO, to provide financial details of our fourth quarter and 2019 results and as well as our 2020 guidance, after which I will update you on our key areas of focus for 2020 before taking questions. Fourth quarter was a pretty good quarter for us across the board. We delivered on our revenue, gross margin and operational expenses guidance. Big picture revenue grew by 11% led by 21% growth in disposables. Gross margins were 45.1% and our cash burn improvement program is in place for 2020. Operationally, we completed a 10% expansion of the U.S. field sales organization. The installed base grew in line with our expectations. The turn rates in our gold ED accounts continue to perform well. Our product development efforts are progressing according to plan, and we completed a limited market release of two new high clinical value products, disposable products. We have our national sales meeting in early January and I like what I'm seeing with our U.S. field teams. Their energy is good. They're excited about the new disposable products we launched in the first quarter. And as these reps gain more time in the territory, their pipelines are developing nicely. The fourth quarter expansion went smoothly. We liked the talent level of the new hires and are pleased with how our legacy reps have grown and matured as medical technology sales professionals. Speaking of the new disposable products, we completed our limited market release of both the ProSoft patient interface and the integrated aerosol drug delivery Hi-VNI technology disposable in the fourth quarter. As a reminder, these products will provide additional clinical…

Thank you, Joe. Revenue in the fourth quarter of 2019 was $13 million, representing an 11.3% increase over revenue of $11.7 million in the fourth quarter of 2018. Total U.S. revenue was $9.8 million, representing an increase of 8.7% over the fourth quarter of 2018, primarily due to a 21.7% increase in disposable revenue, as a result of a larger installed base of Precision Flow units, slightly higher turn rates and higher average selling prices. This increase in disposable revenues is partially offset by a decrease in capital revenue on a year-over-year basis. Total international revenue was $3.2 million, representing an increase of 20.2% over the fourth quarter of 2018, primarily due to an increase in disposable revenue as a result of the larger installed base of Precision Flow units and higher average selling prices and to a lesser extent increases in service and other revenue. Capital revenue including revenue from both product sales and lease revenue was $2.9 million in the fourth quarter of 2019, representing a 10.3% decrease over the prior year. U.S. capital revenue is $1.9 million, as compared to 2.3 million in the fourth quarter of 2018, primarily due to lower average selling prices as a result of mix. International capital revenue is $982,000 in the fourth quarter of 2019, an increase a 46,000 over the fourth quarter of 2018. Disposable revenue is $9.7 million in the fourth quarter of 2019, representing a 21.4% increase over the fourth quarter of 2018. It was primarily driven by an increase in our worldwide installed base of Precision Flow units and higher average selling prices. During the fourth quarter of 2019, we sold roughly 96,000 disposables worldwide. Disposable revenue was $7.7 million in the U.S. compared to $6.4 million in the fourth quarter of 2018, representing 21.7% growth year-over-year.…

Thanks, Johnny. Before opening the line for questions, I'd like to review how we intend to focus our efforts in 2020. First, we intend to drive top line growth by executing on our Gold ED strategy, increasing the installed base and launching the new Oxygen Assist Module system in the U.K. and EU. Second, we intend to improve our gross margin by 200 basis points to 300 basis points by selling the two new high clinical value disposables, the ProSoft patient interface series and the integrated aerosol drug delivery Vapotherm disposable, reducing our direct product costs and leveraging our overhead and production capacity. Third, we intend to reduce our cash burn by revenue growth, gross margin expansion, leveraging our previous operational expense investments and driving working capital efficiencies. Lastly, we intend to plant the seeds for future growth and margin improvement by continuing to develop our next generation Vapotherm platform, expand the sales force yet again in the second half of the year, and publish more clinical evidence on our effectiveness at providing ventilatory support for hypercapnic patients as compared to BiPAP. The more U.S. investors understand what we do and how we make the clinicians and patients feel, the clearer you will understand the opportunities and challenges in front of us as we attempt to change clinical practice. To provide you with a little more insight into this, I want to share a patient story with you from last quarter. It comes from one of our new customers. We have just started using Hi-VNI Technology at the hospital. And I recall learning that it could reduce CO2 in patients. Shortly thereafter, I had a women in the emergency department in her mid-40s who presented with pneumonia, who is on 4 liters nasal cannula with the respiratory rate in the…

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

Just wanted to walk through maybe first the growth drivers, both in the fourth quarter and then what you guys assume for 2020. And it's kind of a multi-faceted question. So growth within new versus existing accounts and that's particularly augmented by that penetration into the ED channel that you guys keep referencing. So as we think of 2020, now that you've seen some good traction in EDs in 2019, should that have a bigger impact or how should we think about that scaling up?

Hi, Margaret, it's John speaking here. Good afternoon. So in terms of our fourth quarter progress, in terms of the ED, specifically, that was a major driver for us for the growth in the fourth quarter, continuing along with our ED program specifically focusing in on the Gold accounts in particular. Those were very helpful and a big driver for our revenue in the fourth quarter. In terms of those ED Gold accounts that typically going into the current customers, where we are expanding our installed base in those ED Gold accounts and they're typically ordering larger volumes to make sure they have enough equipment for the patients when they arrive in the ED, as well as move to other areas of the hospital. So, that's been a key focus for us in 2019. We saw a nice progress again in the fourth quarter '19 and look to see more of the same going into 2020.

Okay. So from your perspective, do you think that some of these placements are paying off in terms of additional orders? So, maybe they ordered 50 in 2019. And the second sale, as you go into 2020, they would order another 50 or 100. And you think that's the same, or could it kind of be expanded, I guess, beyond the benefit you saw in '19?

So from a modeling perspective, we're modeling it to continue, as we've seen it in 2019. We are seeing a little bit of an uptick in our utilization rates that we posted in the fourth quarter of 2019, three of the last four quarters had a slight uptick versus historical purchasing patterns. We attribute that to the ED Gold progress -- Gold account progress. We expect to see it continue. We expect to see reorder rates and potentially a slight uptick, but there are a couple of quarters in 2019, the first quarter and the fourth quarter, which are the flu season in the first quarter and the fourth quarter is the start of the flu season, particularly RSV. So, it's tough to drive a very specific conclusion that this is the direction we're going to go into, but we're going to leave it -- we're going to leave our modeling as is going forward from a DPC utilization perspective.

Okay, that makes sense. And then, in terms of the aerosol delivery products, how should we size that market for us, the initial launch plan for you guys as well as the impact in the near term, whether it's units or ASPs?

Well, I'm not sure I think it's -- I don't think you're going to see a whole lot of impact, Margaret, in the near term because we've just begun our limited market release in one country and in a handful of accounts. Remember, a lot of what we're doing right now is to really dial-in on what is the appropriate business model here. There are three pieces that we're trying. So, we're going to really work hard to make sure we get that right before we begin to move beyond that in any shape, form or manner. So if I was you, I would be thinking about it, starting to maybe start to show up in our P&L later in the second half of the year. I think that's probably right. And in terms of sizing the market, like I said, we are still early in the limited market release. So, we're going to be talking to you folks again in another 60 days with our first quarter number. So, I think we will have a little bit more understanding then, and we will be able to share a little bit more with you there to be able to size it.

Right, and then just if I could, one last question. Just a follow-up, John, on your last comments at the end, you kind of reflected a little bit of an accounting change for the placement revenue. So, can you give us a sense of how big of a change that will be, and how should we think about that growth by category throughout the year? Thanks.

Sure. So from an accounting change perspective, it's a reclassification of the recurring revenue between disposables and capital. It's a relatively immaterial amount -- very small amount. We'll provide a little more color after the first quarter call in terms of the magnitude of that. But from an accounting perspective, it's a material to our financial statements.

Your next question comes from the line of Jason Mills from Canaccord Genuity. Your line is open.

Couple of questions, Joe, or you can hand it over to John whichever. I wanted to start by just asking your perspective on sort of the topic du jour coronavirus. And just be interested to hear your perspective specifically on what clearly is an evolving situation both from VAPO's perspective as well as sort of your perspective on it overall. Could this potentially be a positive for you from a capital sales perspective? I certainly don't want to get out of my skis here on it, but just would love your perspective, as I'm sort of thinking about this from the standpoint of expanding treatment volume with this crisis as fast as possible, if I'm a hospital, and Joe, the Philips NiPPV capital being two times to three times more expensive versus Hi-VNI. This seems to set up well for you and would love your perspective.

Well, it's something we've given a lot of thought to. These patients show up in the hospital with pneumonia. And COVID-19 at the end of the day is a form of pneumonia, right, and they are in respiratory distress. So, it's reasonable to expect that to the extent that hospitals that are customers of ours now are experiencing COVID-19. Pretty good chance that they're going to be using our technology on those patients would be my guess. In terms of what it would do to our business, we spent more time thinking more about making sure we got our supply chain ducks in a row. As you know, we've spent last couple of years getting most of our supply chain organized, so that it's really a domestic U.S. focused supply chain, and our factory here is in New Hampshire. So, we've bumped up our production a little bit. We've bumped up our safety stocks a little bit. We're going to make sure that we are going to be able to meet the needs of whatever our customers need. We're going to be communicating with them in the next 24 hours, letting them know that, making sure that they understand that there is no need to buy extra products. We're going to be able to take care of whatever they have. And I've talked to some of these customers in the last 24 hours, 48 hours. And what I'm hearing from them is kind of a mixed bag. I'm hearing in some hospitals, they're not doing a whole lot. They are looking at it a lot like the flu. And in some hospitals, they are doing more -- doing a little bit more planning and preparation. So, I don't -- I think it's probably from a supply chain point of view, we're all set, not a problem. I would be really surprised, if I had an issue there. From a where we sell more boxes and that kind of thing, it became hard to press, Jason. If they're not already using our technology now, this should be pretty, pretty rough time to go learn how to do it, right. I mean this one is for keeps. So, I would really not expect to see that. So, if there is anything, it could be a bump. But on the other hand, if it lasts for a while or it gets more serious, I just saw that Italy just closed all their schools in the country for two weeks. So, we think about that kind of thing too, and does that create complexity for our employees and our workforce and how do we plan for that, which I think we're doing a pretty good job of. So net-net, we're in a wait-and-see category and we just want to be prepared to support our customers.

Good perspective, Joe. I appreciate that. Just moving on, wanted to talk a little bit about your overall philosophy. It seems clear to us. I think a lot of your investors that you're really focused on the disposable revenue growth and for good reason, obviously. And so, what does that imply as we not only look at 2020, but over the next couple of years? With respect to your capital sales strategy, you clearly have had various models that you're willing to deploy to increase your installed base with the latter comment being the chief focus. So talk to us, maybe a little bit about if you want to sort of confine the comments within the context of your guidance where we talk about how we should think about the capital revenue growth comparing to the disposable revenue growth. Clearly, the latter being the focus and tell me if I'm wrong about that, but any comments there would be helpful.

Got it. So, I'm going to talk briefly about the business model. And then, Johnny is going to talk to you a little more about the modeling. I will tell you the business model hasn't changed. We are working with some larger accounts which means we're placing a few more boxes. We've got more reps, so that I would place in a few more boxes. But at the end of the day, we're very focused on growing that installed base. Last year, that installed base grew 18% plus and I think the disposables grew into the low-20s. So selling capital equipment is an important part of what we do and we're going to continue to do it. There's a lot of value around this technology, but at the same time, if there is an opportunity for us to increase that installed base and get those disposables turning, we really want to do that, Jason, because 70%, 75% of our revenue today comes from that recurring revenue stream and we really like that a lot. John?

Yes. I agree with that, Joe. So, selling capital is something we have done, and we will continue to do. So from a modeling perspective, as I think about the guidance, we don't break out specifically capital disposable or service revenue independently of each other for external purposes. In terms of -- directionally, I think we grew our installed base. As Joe mentioned, 18%, look to be in the mid-teens this year as well to drive that disposable utilization -- drive that disposable revenue up year-over-year and continue to grow that and make sure we have an installed base that continues to support the growth in our disposable revenue stream, as a percentage of total revenue.

That's helpful, guys. I appreciate that. And then, I sneak in a multi-part third question, just because that's what I do I guess. But anyway specifically to product development and future pipeline, first, Joe, on the OEM in the United States, talk to us about what we should expect to hear from you with respect to your conversations with the FDA and plans to get that product ultimately to the U.S. market. And then, also talk to us a little bit about the next generation platform and what that will entail and how you think it could be incrementally disruptive to the competitive landscape in your favor. Thanks for taking all the questions.

So, Jason, just for the record, that was the third question, but you asked it in two parts at least. So, I think -- not a whole lot that I'm going to be able to share with you beyond that. We have met several times with the FDA in having very -- what we would characterize as very productive conversations with them. This is a complex piece of work. There is no other closed loop control system that's cleared in the United States in the respiratory space. So, it's new ground for FDA. I would tell you the big thing to watch for from our side, as we work through this with FDA, is it will be our intention that we'll start an important clinical trial here in the United States. My expectation is, we will start that in the back half of 2020. So, I think that would be the thing to watch for there. And of course, we'll let you know when we get that thing running. And with respect to our next-gen system, I think we're feeling pretty good about that. Guys made a lot of great progress on it in 2019, and we're still looking at having it on our first patients here by the end of this year, early next. And we think that it's going to be a pretty cool product. So, can't wait to get it out in the market.

Your next question comes from the line of Marie Thibault from BTIG. Your line is open.

Yes. Joe, I wanted to start, you sounded really optimistic when you talked about the progress your reps are making. And I just wanted to see if I could dig a little bit deeper on that. And if you could just talk about kind of the productivity ramp you're seeing with these reps, as they're starting to I think lap their one-year anniversaries with the firm.

So, just to be clear, I'm a generally optimistic person to begin with, right? So I wouldn't read a whole lot into that. I would tell you that I am pleased with what I'm seeing out of the field. I think that the teams have really settled down. I think that our leaders have done a really good job. It was great to see two-thirds of our legacy B2B reps in the third quarter delivered on their commitments around installed base, and we saw similar in the fourth quarter. We just completed a 10% expansion and there was no drama. I mean it was pretty quiet and pretty chill and everybody went to work and we had our national sales meeting in middle of January, and that was good. And now they've got two very cool brand new disposable products with much higher clinical value to go and sell in the bag. So I don't know -- I'm feeling good about what they're doing, I like what I'm seeing and let's go see some more.

Yes, sounds good. No drama is a good thing. Joe, just to touch on the two new disposable products, the high clinical value products you have there, I'd love to hear a little bit more about how that launch is going to progress throughout the year, now that you're done with the limited market release.

So we -- great question. So, we kicked that off at the national sales meeting and we really started shipping product to customers in our full market release fashion in the early part of February. But if you recall that one is a ProSoft line of advanced cannulas that are made of a very soft material and we're getting really good feedback from both our customers as well as we're actually hearing from patients about how much -- how they like this. And the second one is our aerosolized disposable patient circuit where we've actually integrated aerosolized drug delivery into the disposable and that's gone very well as well. I mean, we're getting to see that -- we actually hit the season pretty good because RSV is really where they're going to use a lot of this. So, we like the way both of them are playing out. It's still early days. We don't have a lot of revenue in our plan for this as you might expect, but we feel pretty good about what we've seen so far.

There are no further questions at this time. Mr. Joe Army, I'll turn the call back over to you.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.