Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Second Quarter and Fiscal Year 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 second 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 on March 4, 2020; 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; our quarterly report on Form 10-Q for the quarter ended June 30, 2020, which was filed with the Securities and Exchange Commission on August 4, 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 second quarter 2020 results. Then I will hand the call over to John Landry, our CFO, to provide the financial details of our 2Q 2020 results. After which I will update you on our key areas of focus for the third quarter and the remainder of the year before taking questions. 2Q was another big quarter for Vapotherm as we generated $35.2 million in revenue, a 193% increase over 2Q 2019. We increased our worldwide installed base by more than 4,100 units to approximately 22,000 units and opened 65 net new gold and silver accounts in the U.S. In addition, we printed our first 50% gross margin quarter despite significant headwinds and expect to continue to improve our gross margin by executing on our three-point plan. We are pleased with the growth of our worldwide installed base and have our field team focused on implementing and educating both our new and existing customers on how to use our high velocity therapy on patients suffering from both Type 1 respiratory distress, such as COVID-19 patients, and Type 2 respiratory distress, such as COPD patients. We believe this continued focus on education will help drive the adoption of our technology, especially when customers see how our high velocity therapy can be used to help patients beyond COVID-19. On our 1Q call, I stated my belief that our business has been significantly transformed based on increased awareness and usage of our high velocity therapy and our continued progress in developing the Oxygen Assist Module, or OAM for short, and the next generation system. With another quarter under our belt, I am growing increasingly confident in our ability to sustain this transformative momentum post COVID-19. Today, I will update…

Thank you, Joe. Revenue in the second quarter of 2020 was $35.2 million, representing a 193% increase over revenue of $12 million in the second quarter of 2019, and a $16.1 million or an 84% increase over revenue of $19.1 million in the first quarter of 2020. U.S. revenue was $25.7 million or 73% of revenue, while international revenue was $9.5 million or 27% of revenue. While revenue was strong across the board, I’d like to point out the following highlights. Our worldwide installed base grew by approximately 4,100 PF units in the second quarter, bringing our year-to-date worldwide installed base growth to 5,400 units, which is more than 4.5x the 1,200 we grew our installed base in the first half of 2019. Our U.S. disposable utilization rate in the second quarter of 2020 was 2.15 as compared to 1.9 in the second quarter of 2019. This is the second quarter in a row where our U.S. disposable utilization rate exceeded our historical experience by approximately 0.25 turns. The international disposable utilization rate in the second quarter of 2020 was 2.7 as compared to 2.14 in the second quarter of 2019. We believe this increase in worldwide disposable utilization rates is largely due to the increased usage of our technology for the treatment of respiratory distress experienced by many COVID-19 patients. The ProSoft cannula and Aerosol’s DPC, which were launched in the first quarter of 2020, helped increase our U.S. disposable average selling prices in the second quarter due to increased clinical utility for the customer. Gross profit in the second quarter of 2020 was $17.6 million, an increase of $12.1 million over gross profit of $5.5 million in the second quarter of 2019. Gross margin was 50.1% in the second quarter of 2020 compared to 45.5% in the second…

Thanks, John. Before opening the line for questions, I would like to review how we intend to focus our efforts for the remainder of 2020. The play is very simple. First, ensure our production capacity and supply chain is prepared to support all customer needs in the fall. Earlier in 2Q, we announced plans to increase our capital equipment manufacturing capacity significantly. We have recently completed the space expansion, and the production lines are set up and qualified. We have begun hiring and the supply chain is ramping. We are in a fortunate position in that a number of our critical suppliers are now shaking loose capacity as the mechanical ventilator contracts from the U.S. government are ramping up, which may make availability of parts smoother. Second, one of our key initiatives in the second half of the year is training and educating all the net new users and sharing with them how to use our high velocity technology on hypercapnic patients as well as hypoxic patients, including COVID-19 patients. To achieve this goal, we recently completed an expansion of our U.S. clinical field team to better support the implementation and training in our net new and expanded current customers. We expect later this year we will expand our sales team, as has been our historical practice. Our focus will continue to be on the largest gold EDs as that is where patients in respiratory distress, including those with COVID-19, show up in the system. Third, we intend to focus on new product development. In 3Q, we plan on an expanded NICU and adult OAM limited market release in the United Kingdom and Europe. We also plan on fully launching OAM in the fourth quarter in the U.K., Europe and certain Middle Eastern markets in both the neonate and adult…

[Operator Instructions] Our first question is from Bob Hopkins with Bank of America/Merrill Lynch. Your line is open.

Hey, guys. You got Kyle Pezzi on for Bob. Just one quick question for you, as we think about the quarter, back on the 1Q release, it seems like you had a really strong April result, but it appears that revenue really dropped off in May and June. And I think that was kind of obviously counter to expectations. So I just wanted to make sure I understand kind of what happened that caused that? I just want to make sure that I understand your views on, I guess, demand going forward as well?

Sure. Kyle, it’s Joe. Good talking to you and thanks for the question. So on our last call in early May, we communicated that while we had a strong April, we thought that capital sales volumes are going to begin to return to a more normalized level in the back part of the second quarter. And what we have observed is that there appears to be a relationship between our capital demand and spikes in COVID-19 hospitalizations. And it’s especially pronounced, Kyle, when those spikes are occurring in those markets for the first time, like New York City. In the U.S., we saw increased capital demand beginning in late March, which continued into April. And the rate of new COVID cases plateaued, the demand for capital equipment wasn’t as significant, but we continue to serve the customers’ disposable needs. And I think with – John mentioned a little bit about third quarter started out strong in Arizona, Florida and Texas, I guess, right? And we are expecting when we look at the third quarter, we think we could see something – somewhat similar. It all depends, though, on how the COVID-19 hospitalizations trend. We were very surprised to see the trend upward in July. That’s – arguably, July and August are our two weakest months in the year from a seasonality point of view. So again, just to recap, on the May call, we had told you guys that it was our expectation, and we thought we would see demand regress to the mean and move to a more normalized basis. And I think that’s, in fact, what we saw.

Got it. That’s helpful. Thank you very much.

Our next question is from Margaret Kaczor with William Blair. Your line is open.

Hey, good afternoon guys. Thanks for taking my question. Got a few here. Maybe the first one to start out with, obviously, the installed base is a leading indicator for utilization and so on. But I think what was impressive to us was just the utilization and the disposable turns were so high. So can you give us any sense over how much of that is inventory stocking? How much of that is COVID patients? And how much of that could be just true utilization of other types of patients just in respiratory distress?

Margaret, it’s Joe. It’s good talking to you. Thank you for the question. So you got a lot packed in there. Let me see if I could take it apart one piece at a time. So we give you guys quarterly turn rates, but we model our business on monthly turn rates, right, because as we move further into the summer, we see fewer and fewer respiratory distress cases in the hospital. And it kind of makes sense, the kids get out of school, flu seasons tailed off. And you really don’t see it. So by the time you get into June, July, August, these are our three lowest turn rate months because the census simply isn’t there in the hospital. So what we saw, there’s clearly a COVID element to this. When we got started in sort of the middle of March, we were very concerned that hospitals were going to be stocking. And we wanted to make sure that we could get disposables into the hands of every single customer that needed it. And so we put a process in place where we weren’t letting them buy more than a modest percentage above what their – sort of their tough flu season historical patterns had been. If they needed more, they had to get on the phone and talk to us about actual census, they had to share data. So I feel pretty confident that when I look in that second quarter, in the quarter as a whole, I don’t think there was a ton of stocking. We saw our turn rates for June were a little bit softer than what we had historically would seen. And we kind of said, okay, there’s a bit of that, they’re working it through the system. But conversely, the turn rates in July, which are normally very low, were pretty robust. So I think we’ve got a pretty good process in place to prevent stocking to make sure we can meet all customer needs around the world. I don’t feel like stocking is a big problem for us. I can tell you, anecdotally, in the cities that experienced the wave first and settled down the quickest, I’m now hearing – and then we flooded the zone. The last 60 days, we flooded the zone with our clinical people teaching all of these hospitals that are new users how to use it on Type 2 respiratory distress. Because remember, this is like a whole new world for them, and they’ve never considered being able to use the technology on those type of patients. And the stories that we’re hearing out of those markets are very positive. That’s what gives me that confidence that – those historical turn rates, I’m very confident that we’re going to see them from that new installed base that we have built.

Okay. So you are kind of hitting on the next set of questions here, which is a sense of new account growth versus recent new accounts. How those guys are ramping versus the existing accounts? And then kind of the New York’s of the world, maybe where COVID has calmed down, what you’re saying is you’re still seeing the same kind of rate of utilization at those hospitals as you would traditionally maybe expect, or at least close.

Yes, as I would have traditionally expect in a non-COVID environment, right? Certainly, they have not turned in as much as they were when New York was up to their necks in COVID patients in those hospitals, those guys were – fight like crazy. But certainly, relative to our historical norms, yes, we like what we’re seeing.

Okay. Yes. And I’ll kind of turn it to both you and John. But as you set Q3 guidance, how should we think about those capital placements? I understand there’s a lot of kind of variability, and maybe that’s the – the true range is really just the upside from installed base. But are you still expecting the same kind of turn rates going forward?

Yes. Margaret, it’s John. So as we think about the upcoming quarter when we put together the $24 million, $28 million revenue range, we expected the low end of that range would be assuming some COVID surges starting to subside across the country. And on the higher end, we’d see them continue. So I think as we look at disposable utilization, we feel good, as Joe indicated, pretty good with where we expect disposal utilization to be in the third quarter. July did start out strong, as Joe indicated as As OVID makes its way through the S, that they’ll determine where it goes from here. I would point out that August is usually a very slow month, and then things have historically picked up in the September time frame as kids go back-to-school and flu and RSV starts to kick in, but with the situation across the country, not sure how that’s going to look this year. So that said, we still feel pretty good about where disposal utilization will be for the third quarter.

Okay. Yes, I know I’m high on my number of questions, but I’ll sneak one more in. In terms of the societies, obviously, you guys have gotten a lot of recommendations for COVID patients to be one of the first-line treatments. What’s the plan here to try to go beyond that? Or can there be? Or is this more a matter of hospitals getting a sense of the system, using it and then realizing this is better after all?

Margaret, it’s Joe. I’ll take that one. I think you make a good point, first and foremost, about all the societies, NIH, CDC and those kind of things, those kind of organizations recognizing it. We do – we are focused primarily on training these hospitals how to use this technology, high velocity, on Type 2 respiratory distress patients. Remember, that’s the fundamental difference. We invented high flow nasal cannula. We have a more advanced form of it, and that technology can, in fact, be used to treat both types of respiratory distress, either Type 1 hypoxic, like COVID-19, or Type 2 hypercapnic, like the typical COPD patients. In fact, that’s why we have – FDA has created a category, a technology code for this, the QAV, and we’re the only technology in that category. So the first and foremost was get those reps out into the street and get them into those hospitals and make sure that we’re training and developing and teaching all of these new users how to handle that technology in those new set of patients. The second element to this is really about this next-gen technology that we’re going to be developing that will allow them to bring it throughout the hospital. And obviously, we’re working closely with our clinical team on developing additional clinical data, particularly around those hypercapnic patients. The question around how do we perform with severely hypoxic patients, I mean that’s asked and I answered 10x over. I mean I’ve got about 1 million stories about these COVID-19 patients, which are the poster children for hypoxic. The really interesting trick is helping all of these new users. And Margaret, I can’t stress enough that being in the ED was the right place, and opening up all of those gold ED accounts has moved us ahead by years. Now teach them about Type 2, and we’re off to the races.

Our next question is from Cecilia Furlong with Canaccord. Your line is open.

Hi, Joe and John. Thanks for taking our questions. I guess I just wanted to start with your commentary around really expanding utilization that you’ve seen within centers. Just where you think that can go longer term? And then kind of in conjunction with that, just the DoD contract that you signed and that introduction of a new customer base. Just the potential you view within that channel as well as just from an overall awareness perspective in driving increased awareness around Hi-VNI?

So, Cecilia, it’s really good to hear from you. Thank you very much for that question. The first one, this is the 13th quarter in a row where our turn rates in our gold ED accounts are higher than the turn rates in the non-gold ED accounts. And we don’t think that, that’s by accident. Once – the ED is the front door to these hospitals. It’s all workflow-dependent. And if you have a technology that you can use on any respiratory distress patient, Type 1 or Type 2, and it’s very efficient to deploy and it has a high patient tolerance level, it becomes – it improves that entire workflow particularly if you can get the same clinical outcomes, as you would with a normal standard of care, the previous gold standard. So being in those emergency departments and continuing to focus on opening up net new golds, my sense is it’s possible we’re going to see those turn rates continue to increase. Now the other thing that’s happened as a result of this is, if you think about the learning curve in a hospital, you bring a technology in, you got a couple of people who are using it. They’re expanding the use of it slowly. Now pour the COVID-19 jet fuel on top of this thing, where everybody learns how to use it literally overnight, and now it’s going all through the hospital because those COVID patients were transferred everywhere. It’s brought us up into the ICU much faster than what we would normally see in a typical pattern, which has allowed for that to then take hold quicker. We are also seeing it show up in other parts of the hospital already, places like PACU and so forth. So I think that there’s no question in…

Great. Thank you, John. And I guess if I could just ask as well just about your thoughts around your sales force expansion plans, but really more about the sales force composition as you bring on your next-gen system, as you expand into additional centers, greater volume. But just how you’re thinking about really leveraging your sales force going forward?

I have to tell you, I love what we’ve built in our U.S. field organization. I think we have over 70% of these folks now who have – they are now tenured as sales professionals. And they’ve really done a great job at serving our customers through the pandemic. I’m particularly proud of our clinical team, too. That clinical team is really what we just expanded, and we expanded it by a fair amount. It’s not clear to us yet what is going to happen with letting sales reps back fully into the hospital the way it was in a pre-pandemic period. A lot of our sales professionals are still working remotely if the hospitals are still not comfortable with them coming in. So they’re doing a really good job at supporting the customers, but a lot more of it is remote. But our clinical team is spending a fair amount of time in those hospitals training, educating and teaching and coaching. So when we did our latest expansion of our field organization here in the last 45 days, we did it because, like I said, we wanted to flood the zone and get as many clinical trainers into those big net new accounts as we could. But the people that we hired, they’re all clinical experts from the bedside, but they also all have sales force DNA. We use a series of profiling tools to really help us understand, and that group of 12 clinical people have sales force DNA. In the meantime, we are working and developing our next set of training plans for our existing sales force so the sales people, we are doing a lot more clinical training, we’ll be – we’re going to be this summer. For the clinical people, we’re doing a lot of sales training. So we’re going to do another expansion of our field organization later this year. We want to really allow a little bit more time to shake out to see how the hospitals are going to think about sales reps being in there. But what is clear is that they want the clinical people on the ground to teach and train their caregivers. And we’re also using our Vapotherm Academy remote tool to do that. So I think that’s how we’re thinking about that field organization. But man, we feel really good about what we’ve built there.

Great. And if I could just ask one more question. I guess just with the COVID resurgence that you’ve seen in select geographies, especially within the U.S., just the demand that you’ve received for capital. Just your ability to meet that demand, just as you have been scaling your production capabilities. And just how you think about that going forward in Q3 and Q4?

Sure. So with pre-COVID, our theoretical weekly capacity was 100 units a week. At the height of the crisis, we were able to produce somewhere in the order of 500 a week. But the lengths that we went through to scale it fivefold in the middle of the thing was unbelievable. It was like crazy over time. The big gating factors, there are four variables here, there are 4 inputs to this, right? The first is space. The second is production lines themselves, the equipment, the capital equipment and the line configuration. The third element, of course, is parts, and the fourth element was people. While we figured the people piece out, and it was really – we even figured out parts. Where we ran into trouble was space and lines. And so what we announced was a twenty-fold increase from our pre-pandemic levels of our manufacturing capacity. And we got really lucky here because roughly 1/3 of our people are never coming back into the office. They’re going to work from home, and it’s been very successful. We took that space that they used to occupy. And I converted – we converted it into production space. So, now that space is all fitted out, the production lines are in place, they are all validated. And it’s a fully modular production space. So we can reconfigure those lines for whatever we need on that capital front. So if the demand is there, we will be able to satisfy up to a twenty-fold increase. And I mean on a real-time basis, not having to ask customers wait 2, 3, 4 weeks to take delivery of capital equipment. We’ll be able to satisfy it immediately. And the thing is if the demand doesn’t scale that much, we will use that same space in those same production lines, in fact, for the next-generation of our system.

Great. Thank you, Joe.

You bet.

Our next question is from Marie Thibault with BTIG. Your line is open.

Hi, Joe and John. I hope you are well. Thanks for taking the questions. I wanted to ask a prior question, I think Margaret asked, from a different angle. I think when I go back to the revenue number you gave us for the month of April, and note that there were 2,200 units added to the installed base at that point, it looks to me like the capital shipments as you scale to meet demand continued at a decent clip throughout Q2. But on the disposables side, it seems like utilization dropped off pretty dramatically in May and June. My back-of-the-envelope math points to number of disposables used in Q2 being not that much higher than Q1, maybe 12,000 circuits or so sequentially. So with the full quarter of the pandemic happening, that surprised me a little bit. Could you tease that out for me a little bit more? Was there stocking and prepping happening in April or was the drop in hospitalization is really that dramatic?

Well, I will take a shot at a little bit of it, and then will let John give you the real answer, right? First of all, remember that we had a pretty good flu season this year, right? So those first quarter turn rates were reasonably high. And you started to see these patients show up in the U.S. hospitals in March, right. So you’ve already got a very robust first quarter turn rate that’s going into. The second thing to remember is that April’s turn rates, historically – I’m not talking pandemic now, I’m talking just historically how our business works. And with those disposables, they’re very, very predictable. In April, the turn rates are significantly higher than they are in June, always. Kids are out of school in May, right? The flu season is done, and we see those turn rates fall off. By the end of that – by the end – by the time we get into June, as I said, those churn rates are significantly lower historically than they are in April. And then July and August, they’re even lower, right? And then they spiked back up typically in September when the kids go back to school. But I think when you looked at it, scope and scale, there may have been a little bit of stocking, but I don’t think a whole lot because I think the process that we put in place was pretty robust. I think what you saw was everybody is feeling like – at least I know I was, inside our plant, we get to the end of May and like wow, thank God, this is – we’re going to have like three months of clean everything up, get it all oiled up and get ready for the next go-around. And I think you saw a little bit lower than historical turn rates in June, but in July, significantly above what we see historically. So I don’t know. John, how would you answer that question?

Yes. I think you did a nice job there, Joe, in terms of framing it out. I think when I look at the April time frame, it was a very strong demand, above our historical levels, for sure sort of tied part and parcel to the COVID-19 hospitalizations. I think there was some impact potentially from stocking. We did have a process in place, by which we were vetting out large significant customer orders on the disposables side that were significantly outsized compared to historical ordering patterns. So we’re able to work on those and worked closely with the customer to ensure they had what they needed when they needed it. And we experienced that in the month of April and early May. And then as historically has happened, generally, things start to decline in the May and June time frame from a utilization perspective, which we then again saw this year, which was in parallel to the reduction in COVID-19 hospitalizations, especially in the large metropolitan areas in New York and – New York metro area.

Alright. Makes sense. Thank you for serving me through that. I’ll keep it to just one follow-up. Thanks for the update on the next-gen system. I know you mentioned that you look to start doing some work on the home care setting. Any update on the time line of when we might see that system in the home care setting in a market release? I know there’s a lot of investor interest around that product?

There is a lot of my interest in that product. That’s a very interesting application for this technology, right? For us, it’s – that product, in the first quarter, we’re going to start treating some patients in the home. But we’re going to be learning, Marie. We got to go and understand the workflow, make sure we’ve got all that right. We’re going to need to collect some clinical evidence in there. And there’s going to be things about this system because this system is designed specifically for the acute care setting. But there are some things that we have done within it. I want you to – so I had a tour at a pickup truck, right? My wife’s got a Lexus. It was the same frame, the same engine, the same transmission. Everything was the same on that, except a different skin. That’s how I want you to think about Vapotherm 2.0, right, that next-gen system. So we’re going to go do a lot of shake down in 2021, and the idea would be then let’s go get commercial in later in 2022. But we want to make sure we get the right product, the right offering and everything that’s wrapped around it the right way, and especially how we’re going to leverage that field organization.

Alright. Thank you so much.

Thank you for the questions. We appreciate your interest. And 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.

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation and you may now disconnect.