Good afternoon, ladies and gentlemen, and welcome to the Vapotherm First 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 First Quarter 2020 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. 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 4, 2020. Our current report on Form 8-K filed with the SEC on April 13, 2020 and our quarterly report on Form 10-Q for the quarter ended March 31, 2020, which was filed with the Securities and Exchange Commission on May 5, 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 our first quarter results, then I will hand the call over to John Landry, our CFO, to provide financial details of our first quarter 2020 results, after which I'll update you on our key areas of focus for second quarter and the remainder of the year before taking some questions. First quarter was a big quarter for Vapotherm as we generated $19.1 million in revenue, a 55% increase over the first quarter of 2019. In the quarter, we grew our worldwide installed base by nearly 1,300 units. 2Q looks to be even better, as in April alone, we estimate that we have already generated between $19 million and $19.3 million in revenue and grew the worldwide installed base by over 2,200 units as compared to nearly 1,300 during the entire first quarter of 2020. Apart from the strong recent financial results, I believe our business was significantly and sustainably transformed over the past quarter, and I see a very different business than I did 60 days ago for three primary reasons. First, I believe the pandemic fundamentally altered the awareness and usage of our technology. Second, I believe we made significant progress with the development of our Oxygen Assist Module. Lastly, we were able to improve our gross margins in spite of strong headwinds and scale our business ahead of expectations. Let me provide a little color on each of these important changes. At the beginning of the pandemic, high velocity/high flow oxygen therapy was not viewed as a first-line therapy for treating the respiratory distress experienced by many COVID-19 patients, as physicians believed patients who required more than supplemental oxygen would need to be placed on a mechanical ventilator. Now the CDC, WHO, NIH, Society…

Thank you, Joe. Revenue in the first quarter of 2020 was $19.1 million, representing a 55.4% increase over revenue of $12.3 million in the first quarter of 2019, primarily as a result of increased sales of our single-use disposables due to a larger installed base of Precision Flow units and increased utilization due to the COVID-19 pandemic, which also resulted in an increase in Precision Flow unit sales. Total U.S. revenue was $14.3 million, representing an increase of 42.7% over the first quarter of 2019 revenue of $10 million, while international revenue was $4.8 million, representing an increase of 112.1% over the first quarter of 2019 revenue of $2.3 million. Capital revenue, including revenue from product sales and lease revenue, was $6 million in the first quarter of 2020, representing a 125.3% increase over revenue of $2.7 million in the first quarter of 2019, due to strong worldwide demand for our Precision Flow units. Geographically, U.S. capital revenue was $4.2 million in the first quarter of 2020, representing a 95.4% increase over revenue of $2.2 million in the first quarter of 2019, while international capital revenue is $1.8 million in the first quarter of 2020, representing an increase of 254.3% over revenue of $505,000 in the first quarter of 2019. Disposable revenue was $12.4 million in the first quarter of 2020, representing a 37.8% increase over revenue of $9 million in the first quarter of 2019, and was primarily driven by increased worldwide demand for our single-use disposables as a result of our increase installed base of Precision Flow units worldwide and increased utilization due to the COVID-19 pandemic. In the first quarter of 2020, we sold roughly 126,400 disposables worldwide. Disposable revenue was $9.7 million in the U.S. compared to $7.5 million in the first quarter of 2019, representing…

Thanks, John. Before opening the line up for questions, I'd like to review how we intend to focus our efforts in 2020. First, we intend to support hospitals around the world dealing with the COVID-19 pandemic, and will work to manage our supply chain in a manner that puts us in the best possible position to do this. We believe it is likely that the growth in the installed base and disposable utilization will revert to more normalized historical levels in late 2Q, early 3Q. Recall that 3Q is our slowest quarter seasonally, but volumes pick back up in 4Q when RSV and flu season starts. This year, we will be planning for the possibility of a return of COVID-19 as well. Our focus will continue to be on the largest Gold EDs as that is where these patients show up in the system. We expect to heavily focus on educating all the net new users and sharing with them how to use our high velocity technology on hypercapnic patients as well as the hypoxic COVID-19 patients. And we're also planning to execute on an expansion of our U.S. field organization in the back half of the year as we historically have done. Secondly, we intend to focus on new product development. We plan to start an OEM Neonate IDE study in the U.S., and move into an expanded NICU OAM limited release in the UK, and potentially certain European markets as we move through the year. We also plan on offering the OAM to some of our European customers for use with hypoxic adult COVID-19 patients in the coming months. Additionally, we plan to turn a great deal of attention to the next-generation system in the back half of the year. Recall the next-generation system is designed to provide…

[Operator Instructions] Our first question comes from the line of Bob Hopkins of Bank of America. Please go ahead. Your line is open.

Hey, John and Joe, this is Kyle Pezzi on for Bob. I just had 2 quick questions. So obviously you're having a pretty incredible opportunity here to expand your presence and place units and potentially have a real long-term opportunity. But I just kind of wanted to hear your thoughts on the sustainability of this growth kind of longer term and kind of your views on the ability to penetrate that previously penned $1.5 billion opportunity. So just wanted to kind of get your views there and how quickly you think you can penetrate that versus what you thought previously. And then also wanted to get your views on the impact of disposable utilization in light of placing so many units in a short period of time. Thanks.

Thanks for your question, Kyle. This is Joe. So as I mentioned in my prepared remarks, I think this transformed the business. I think this is a different company than it was 60 days ago. And I really think that it has a lot to do with how many of these new systems that we were able to crack, how many new physicians that were just simply not aware of us, they didn't know what Vapotherm technology was able to do. They've all had their own ah-ha moments on hypoxic patients. So in terms of the sustainability of it, certainly, I don't think that the rate of capital equipment growth will continue like it is in April. I mean, you saw those April numbers. Those are pretty big, right? But there's no question in my mind that there is at least a year, probably 2 years that we've been able to make up in terms of our growth plan. And now the question is, what are we going to do about it? We're going to go send our entire field organization into those hospitals and help show all those physicians how to use that technology, not only on hypoxic patients but on hypercapnic patients as well, Type 2 respiratory distress. And so that's the plan, particularly as it relates to that disposable business, because, Kyle, remember, typically speaking, not this quarter, but typically speaking, 75% of our revenue comes from single-use disposables and it's very, very stable and predictable. So we are a disposables company and we're going to continue to do that. But I certainly think that it has changed our business for the better.

Got it. And then just wanted to follow up on the, I guess disposable utilization. Obviously placing a ton of units here, so just will that kind of have a dilutive effect to utilization in the near term? Or is that the wrong way to think about it?

Yes, it's an interesting question, Kyle. So historically we typically see a turn rate of about 2.2, 2.25 in the first quarter of the year. This quarter we saw about 2.5 in the first quarter. Obviously, much of that increase was likely related to COVID-19. As we've noted in the past, we've begun to see our ED approach yielding slightly higher turn rates. But given the uncertainty around COVID-19, we aren't going to change our models from our historical turn rates. But to your point, it is possible that we might see lower average turn rates over the course of the year as there's such a significant number of these newly installed units that are coming online.

Got it. That's helpful. And then one last question for me. Obviously, I think historically you've said in terms of going cash flow positive, you'd need to reach roughly $100-plus million in revenue, maybe $120 million, $130 million. And obviously, kind of April is tracking really well and it looks to me like you should be able to get close to cash flow positive in the second quarter. But I just wanted to kind of hear your reaction to that and kind of understand your views on what would prevent that from happening.

Yes. No, it's a good question, Kyle. I think from our perspective, we have indicated it's roughly about $125 million or so to cash flow breakeven. I think in terms of this upcoming quarter, not ready to provide any granularity in terms of what that cash flow is going to look like or profitability. But the $125 million is still a good number from a cash flow breakeven perspective.

Our next question comes from the line of Cecilia Furlong of Canaccord.

I wanted to ask about the Gold ED account penetration and just growth within the quarter. Can you just talk about those accounts specifically, where you were previously and really the room to grow beyond this going forward, kind of where you are in that penetration cycle?

So Cecilia, it's good hearing from you and I hope all is well with you. I think the way to think about it is, historically, 60% to 65% of our capital equipment revenue comes from current existing customers. We also know that when we put our products, our systems into Gold ED accounts, we know for a fact that the turn rates are higher there than they are any other place we have. So what we see as a direct result of COVID-19, is a couple of things. One, we just opened up a whole bunch more of these really, really big EDs. But two, they didn't treat those EDs just, or they didn't treat those patients just in the emergency department. They took them up to the ICU. And so now we've seen more particularly critical care physicians get educated on our technology, which I think serves to open up further pathways of growth. You think about it, once these get into the ICU, then you could see them going to the PACU, the pediatric ICU. There are many other places in the hospitals that they go. So I'll tell you that we're very pleased with the success that we had here in the first quarter with opening up these Gold EDs. We think it's the right play, and we've got a lot left that we have to go do. This is the top 1,000 hospitals in the United States, and right now I think we might have sort of 300 of them. And that means that there's a lot left to go. And then the ones right behind that, the silver ones, the second largest 1,000. There's a tremendous amount of opportunity that we have to go get.

Great. Thank you. And I guess just tying into that, too, can you talk about sales force expansion at the end of 2019? But then also, has this impacted your thoughts just on how you expand yourself as far as in 2020, maybe potentially accelerate that? Or how are you thinking about sales force growth going forward?

Well, as we mentioned during our prepared remarks, we're going to begin that sales force expansion. We're probably going to start it a little bit sooner than what we normally would, Cecelia, only because the world's a really different place with COVID-19. And so having to interview everybody distance-wise and then figuring out how to train them and as we get them all deployed, so we just thought it would be smarter to start that earlier in the game and make sure that when we get to the end of the year, we have that sales force expanded as we were planning.

Okay. Great. And if I could squeeze one more in. Just I was curious if you could update us on your Aerosol DPC, just how that rollout's going and what kind of feedback you're hearing from the field. Thank you again.

Yes. I got to tell you, this is a lot, it's almost like there's the pre-COVID world and the post-COVID world, and this was in the first 2.5 months pre-COVID. I will tell you what. I was so proud of our team. That sales force did an outstanding job at communicating this and letting customers see the value. And it's been very, very well received by our customers, put it that way. And then it's even more interesting because now you can deliver an aerosolized nebulized drug to a patient without having to be at the patient's bedside. You can actually have the whole aerosolization back at the box, 6 feet away from the patient, so that's good. But it was great to see that. I think we just got started with that, but it's certainly been a very positive launch and we're excited about it. And just not to leave out the other side of the equation. But that ProSoft cannula, that has also proven to be very well received by our customers. So we're excited about that, too.

And our next question comes from the line of Marie Thibault of BTIG.

Great job this quarter. I wanted to ask a question on a tremendous April month. Curious whether you're starting to see the demand slow at this point, whether you think there's a couple more weeks left of that. Just curious what the very near term week-to-week trend is at this point.

Well, I can tell you the very near term through the end of April was $19 million and change, right? I don't think that we're prepared to comment any further than that, other than we're going to keep paying attention to our capacity and making sure that every customer need is going to be filled on our end.

Sure. And then when it comes to ordering the can-flow units, we certainly heard a lot in the headlines about federal stockpiles of ventilators and states moving ventilator supply around. Is that something that Precision Flow could become a part of in the future?

I don't know about whether or not it would be something that the government would want to explore. I can tell you that for our money, we were very focused on getting our systems into the hands of clinicians that were experiencing major patient surges at the moment. And so that's how we were able to prioritize that. I think in the middle of a patient surge, putting boxes in a warehouse is probably a bad idea; it's just not good policy, it's not good for your customers, it's certainly not good for the patients. But with the --

Sure. I'm thinking more long term there.

Yes, with the initial surge past, it's going to be interesting to see what the government all decides to do. It's clear they bought a whole lot of ventilators, mechanical ventilators, right?

Right. And then one for John. Understand that you made great progress on gross margins despite some of the headwinds. Do you have any ballpark estimates for how much impact to gross margin some of those headwinds had?

Yes. So I'm not going to break it out specifically, Marie. But we did have a nice tailwind, obviously, in the form of increased volume, which provided incremental leverage on our fixed cost of manufacturing. That was a nice tailwind for us. And on the flip side, we did have headwinds in the way of paying overtime for our manufacturing team. We had supplier freight charges that we had to pay to get the components to us in very short notice and we had expediting fees to get the components to us also as well. So it's a little difficult to predict the timing. But net net, we see nice gross margin improvement. We were up, as you saw, 610 bps on a year-over-year basis.

Great. Thank you so much.

And that concludes our question-and-answer session for today. I will now turn the call back over to Joe Army for any closing remarks.

So 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.

This concludes today's conference call. You may now disconnect.