Vapotherm, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Vapotherm Inc. fourth quarter and fiscal year 2020 financial results call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Mr. Mark Klausner. Thank you. Please go ahead, sir.

Good afternoon, and thank you for joining us for the Vapotherm Fourth 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 factor section of our annual report filed on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or the SEC, on February 24, 2021, 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.

Joe Army Good afternoon and thank you for joining us today. I will begin by discussing our fourth quarter results and full year 2020 accomplishments. Then John Landry, our CFO, will provide the financial update of our fourth quarter results. I will then update you on our key areas of focus for 2021 before taking questions. 4Q was another strong quarter for VaporFirm. We generated $40.9 million in revenue, a 214% increase over 4Q 2019. increased our worldwide installed base by more than 3,800 units to 28,650 units and are now in over 450 gold and silver ED accounts, which are the top 2,000 emergency department hospitals in the U.S. as measured by respiratory discharges. In addition, we printed a 50.6% gross margin for the quarter. Before digging too deep into our fourth quarter performance, I would like to take a step back and discuss the significant progress we made as a company in 2020. This past year was transformational for VapoFirm, and I believe our accomplishments are best understood in a longer-term perspective. Going into 2020, we outlined a set of objectives that we were focused on as an organization. As a reminder, these objectives were, first, driving top-line growth. Second, improving our gross margins. Third, reducing our cash burn. And fourth, planting the seeds for growth. We achieved each of these and I'm confident we would have done so even without COVID. In March, we, like all other companies, were forced to quickly adjust our efforts to respond to the challenges of COVID. First, we focused immediately on ensuring the safety and security of our employees and their families. Next, we recognized our product's ability to help customers treat their COVID patients who were in respiratory distress and put significant effort into securing our supply chain and building significant capital and disposable production capacity to support the anticipated needs of our customers. I'm incredibly proud of how the Vapotherm team responded to these challenges. and what we were able to deliver for our customers as they worked tirelessly to treat patients impacted by the pandemic. Not only that, we were able to rapidly scale our operations mid-pandemic to meet the needs of our customers without sacrificing quality or significantly increasing our overhead spend. Overall, COVID-19 has materially transformed our business both operationally and financially. And I would now like to review our key accomplishments in 2020 that I believe put us in a great position going into 2021. First, and most importantly, by meeting our customers' needs during this pandemic, we were able to increase customer loyalty and significantly expand our installed base. We finished the year with nearly 29,000 units in our installed base, an increase of over 12,000 units, or 73% over the installed base at the end of 2019. To give you some context, prior to COVID, we're expected to achieve an installed base of this size in 2024. As I've shared with you before, the growth of our installed base is the key metric that I watch as each of these units drive significant recurring revenue, which we can grow over time. Aided by our expanding installed base, we were able to drive increased awareness of our products, particularly in our key targeted gold and silver ED accounts, which we expect to benefit from for years to come. As of year end, we were in over 450 ED gold and silver accounts in the U.S., which reflects a 50% increase in the total number of ED gold and silver accounts we were in as of the end of 2019. These accounts are important to us as over 50% of all hospital admissions are from patients who present in the ED. Gold and silver ED accounts are especially important to us as they are the largest accounts in the U.S., treat the greatest number of patients, and are highly referenceable accounts. We believe increased customer loyalty and awareness of the clinical benefits of our products And these accounts will help drive adoption in all areas of respiratory distress, including Type 1 respiratory distress patients, like COVID patients who can't get enough oxygen in their system, and also Type 2 respiratory distress patients, like COPD patients, who can't get rid of the carbon dioxide from their body. Second, we made solid progress on new product initiatives during the year. regarding the oxygen assist module, or OM, we completed a limited launch in the UK, select European markets, and Israel. This clinical experience confirmed our belief in the benefits of this technology in the neonatal patient population. This clinical experience also demonstrated there's a significant unmet clinical need in adult patients, which makes the market for this technology much larger than we expected at the beginning of 2020. During the year, we were also able to expand the own software to operate with both the Medtronic Nelcor and Massimo SpO2 sensors to improve the user experience. We also made good progress on the development of our next-gen platform, HVT 2.0. As a reminder, this device has an internal blower, which will allow us to access areas of the hospital that do not have pipes in air, and allow us to serve patients in respiratory distress outside the hospital in a home setting. While the initial market focus of this product will be in the hospital setting, we expect to learn a great deal about clinical utilization and patient needs that will inform our strategy when we're ready to launch into the home. We currently expect to launch the HVT 2.0 in the second half of 2021. Third, We expanded our capabilities as a company by acquiring a small technology company called HGE Digital Health, or HGE, for an initial payment of $6 million plus revenue-based earnouts. HGE is a remote patient monitoring platform empowering COPD patients and providers to manage day-to-day symptoms, prevent exacerbations, lower costs, and improve quality of life. Initially, this product will be piloted as a service to our current hospital customers to allow them to monitor patients after discharge with the goal being to improve COPD readmission rates. We believe this platform may also give us some deeper insight into the home market and home patient needs that we will use as we continue to refine our service offering for the home. We are currently in the very early innings of this technology platform. And while the revenue contribution from HGE is currently immaterial to our financials, we are very excited about the potential opportunity. Overall, I am incredibly proud of how we executed despite the unprecedented operating environment. It could not be more excited about where we sit going into 2021. After John details our financial results, I will spend some time outlining how we are going to address the opportunity in front of us. Johnny?

Thank you, Joe. As mentioned, revenue in the fourth quarter of 2020 was $40.9 million, representing a 214% increase over revenue of $13 million in the fourth quarter of 2019 or the prior year. U.S. revenue was $33.6 million, an increase of $23.8 million, or 242%, over the prior year, while international revenue was $7.3 million, an increase of $4.1 million, or 129%, over the prior year. Our worldwide installed base grew by approximately 12,100 PF units in 2020, including fourth quarter's growth of approximately 3,800 PF units. As of the end of the fourth quarter, our worldwide installed base consisted of 28,650 PF units, reflecting 73% year-over-year growth. Our monthly U.S. disposable utilization rate for the fourth quarter of 2020 was 2.43 as compared to 2.09 in the prior year. This is the fourth quarter in a row where our U.S. disposable utilization rate exceeded our historical experience by at least 0.25 turns per month. 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 install base, we believe that utilization rates will be lower than historical averages until the significant number of newly installed PF units become productive. U.S. disposable average selling prices increased over prior year due to the continued uptake of the ProSoft nasal cannula and aerosolized disposable patient circuit, both of which were launched in the first quarter of 2020. The monthly international disposable utilization rate for the fourth quarter of 2020 was 1.67 as compared to 1.69 in the prior year. Recall that we use a distributor network internationally, which results in slightly lumpier disposable utilization rates. Gross profit in the fourth quarter of 2020 was $20.7 million, an increase of $14.8 million over gross profit of $5.9 million in the prior year. Gross margin was 50.6% in the fourth quarter of 2020 compared to 45.1% in the prior year. We improved gross margin faster than anticipated due to improved overhead absorption and a higher mix of U.S. revenue. Recall, we significantly increased our production volume beginning late in the first quarter of 2020 to meet increased customer demand for our products, especially capital equipment. Operating expenses were $33 million in the fourth quarter of 2020, an increase of $14.4 million, over $18.6 million in the prior year. The increase in operating expenses was primarily due to commissions earned on increased revenue and increased headcount in the worldwide sales and marketing organization general and administrative expenses, and new product development costs. Net loss in the fourth quarter of 2020 was $17.2 million, or 67 cents per share, compared to $12.5 million, or 60 cents per share, in the prior year. Please note that the net loss in the fourth quarter of 2020 reflects a loss on debt extinguishment of $4.2 million related to our debt refinancing. Adjusted EBITDA for the fourth quarter of 2020 was a negative $9.1 million compared to negative $10.8 million in the prior year. Adjusted EBITDA adjusts the foreign currency gains or losses, net interest expense, taxes, loss on debt extinguishment, gain on litigation settlement, depreciation and amortization expense, and stock-based compensation. The $1.7 million decrease in adjusted EBITDA loss in the fourth quarter of 2020 as compared to the prior year was primarily due to higher revenue and gross profit, partially offset by higher operating expenses. As of December 31, 2020, cash and cash equivalent scored $113.7 million compared to $139 million as of September 30, 2020, and $71.7 million as of December 31, 2019. In the fourth quarter of 2020, we used cash of $25.3 million, of which $15.1 million related to the acquisition of HGE and our debt refinancing. Excluding these two transactions, we used $10.2 million in cash to fund operations and working capital. Before I provide guidance, I'd like to discuss our perspective on the current operating environment and trends we are seeing in the business. To start the first quarter of 2021, we saw near-peak COVID-related hospitalizations across the U.S. and Europe, resulting in increased demand for our capital and disposables at levels we experienced in late fourth quarter. Beginning in mid-January, we saw a decrease in U.S. hospitalizations from the peak experienced in early January and reduced demand for our products. In addition, we have not seen meaningful flu-related cases or hospitalizations in the U.S. quarter to date Recall, U.S. disposal utilization rates are highest in the first quarter each year due to the impact of the flu. Based on the current environment, we expect revenue in the range of $30 million to $33 million in the first quarter of 2021, an anticipated year-over-year increase of 57% to 73% over the prior year. Our current expectations are that vaccination efforts will be successful and will result in a declining number of COVID cases and hospitalizations in the last three quarters of the year. Despite the decrease in COVID-19 cases, the potential for reduced flu cases and the expectation that utilization rates will be lower than historical levels, given the significant increase in the install base, we expect that disposables will show year-over-year growth in the U.S. Our planning assumption is that there will be very limited budget dollars available for capital equipment for the last three quarters of the year. As a result, we expect capital sales to decrease significantly year-over-year, given the COVID-driven demand we experienced in 2020. As a result, for the full year 2021, we expect revenue of $82 million to $88 million, representing a two-year compounded annual growth rate of 33% at the midpoint of this range. For the full year 2021, we expect gross margin between 46% and 48%, which is lower than 2020's gross margin of 50% due to reduced revenue and production volumes. We increased production capacity to meet customer demand, which was over 2.3 times our original 2020 revenue guidance, without adding substantial overhead, and we expect to be able to scale further without increasing our fixed overhead spend. Longer term, our strategy to improve gross margin remains the same. Increase average selling prices, reduce cost, and increase volumes. We expect 2022 gross margin to be above 2020 levels, and our long-term target of mid-60s is still intact. From an operating expense perspective, we expect operating expenses to be between $97 and $99 million in 2021. Due to the significant impact of COVID, we are providing revenue guidance for the first quarter, but going forward, we will update our annual guidance for revenue, gross margin, and operating expenses, but will not give quarterly guidance. With that, I'd like to turn the call back to Joe to discuss our key areas of focus for the remainder of the year.

Thanks, John. Before opening the line for questions, I'd like to review our objectives for 2021, which are as follows. One, ensure the current installed base is productive. Two, grow the installed base. And three, launch HVT 2.0, which may help us significantly expand our total addressable market. Let me walk you through each of these in a little more detail. Our first objective is to ensure the current installed base is productive, especially all of the precision flow units that were installed in 2020. To do so, we will educate our customers through our one hospital, one day program on how our technology not only treats type 1 respiratory distress patients, like COVID patients, but can also help treat patients suffering from type 2 respiratory distress, like COPD patients. Published clinical data on the use of high-velocity therapy on type 2 respiratory distress patients, like the study just published in Critical Care Explorations and the ongoing HYPERACT study you've probably seen on clinicaltrials.gov, will become key parts of that program. If we can't conduct education in person, we direct clinicians to Vapotherm Academy, which is an online educational tool used by over 26,000 clinicians to date. Each productive precision flow unit provides us with an important footprint in the hospital that generates a durable recurring revenue stream that we want to grow over time. We will accomplish this by continuing to focus on ED gold and silver accounts, where we have seen higher disposable utilization rates than in non-ED accounts over the past few years, and by launching high-value new products with increased ASP or create incremental revenue streams such as the oxygen assist module and potentially HGE for the hospital and home. Our second objective is to increase our installed base. The focus here is to continue to drive the growth of our installed base in both existing and new accounts by leveraging our expanded sales force in both the U.S. and internationally. With a larger and more tenured global sales force, We think we can leverage the expanded awareness of our products for both Type 1 and Type 2 respiratory distress to continue to increase our penetration in gold and silver ED accounts in the U.S. and in our international focus markets. A final objective is launching HBT 2.0 worldwide. We were recently notified by the FDA that we received an emergency use authorization for the HVT 2.0 for use in treating COVID patients in respiratory distress during the pandemic in the event we can't meet demands with our precision flow. The HVT 2.0 EUA doesn't change our overall timelines for full market release. However, it provides us with an additional way to serve our customers in the event COVID demand exceeds our ability to supply precision flows into the market. We expect to move the HVT 2.0 into full market release in the second half of 2021. And our initial focus will be on the hospital market where we have an existing customer footprint. The ability to break free from wall air will allow us to expand into areas of the hospital that don't have piped in air. In the US, we estimate that roughly 50% of the hospital beds don't have piped in air throughout the facility. and HVT 2.0 will allow us to more effectively address those hospital beds. In addition, we will use the second half of the year to learn how our HVT 2.0 might be able to help patients in the EMS setting, and when coupled with HGE, how it might be able to help patients in the home. We expect both EMS and the home to significantly expand our total addressable market long term, and we are targeting limited market releases for EMS and the home beginning in 2022. Before I close, I'd like to let you know that we'll be hosting our first ever investor day in 2Q. I look forward to sharing more about our business with all of you then. In closing, the following patient story I'm about to share came to me from one of our field team members. I spent the day with a customer to help them with patient selection in the ED. The respiratory therapist, or RT for short, that was on call in the ED came in to get a BiPAP to go to the ED. She did not know what was going on with the patient, so I asked if I could follow her down with a vapor serum and see if he would be a good patient to put on high-velocity therapy. When we got to the ED, the physician said he ordered BiPAP because the patient's CO2 was high. I then explained how Vapotherm worked and he said to give it a try and just leave the BiPAP outside the door just in case he needed it. The patient did not have increased work of breathing and his saturation was fine, but he was confused and sleepy because he was hypercatalytic and combative when he was woken up. He most likely would not have tolerated the BiPAP mask. The RT put him on high-velocity therapy and the doctor said to do another arterial blood gas draw in an hour. The nurse came in and asked for a quick in-service. While I was in-servicing the nurse, the patient sat up, looked right at the nurse and said, what happened and where am I? The nurse said, oh, my God, that was so fast. She could not believe how fast it worked and how the patient sat up and looked her in the eye because when he came in, he could not make eye contact. This happened only five minutes after he was put on Vapoprim. She called the doctor and he was shocked as well at how quickly Vapoprim helped his patients. I went back an hour later, and the patient was sitting up in bed eating breakfast, yelling for the nurse. A second arterial blood gas was not needed because the patient looked so good. The RT was also pleasantly surprised because she knew he would not tolerate the mask, and she would have been going back and forth to put the BiPAP mask on. In conclusion, I'm incredibly proud of the effort our entire organization put in throughout 2020, and the results of those efforts have been amazing. We are going into 2021 with a huge amount of wind in our backs, having transformed our size, scale, and capabilities going forward. We are excited about the opportunity to leverage the momentum we've created this year to drive further adoption of our high-velocity therapy in both type 1 and type 2 patients in all areas of the hospital and begin our move into the home care setting. Lastly, I want to reiterate how very proud of our team for working to continually meet the needs of our customers. Thank you for trusting us with your capital. It means an awful lot to us. Now I'd like to open it up for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To try your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question is from the line of Bob Hopkins from Bank of America. Your line is now open.

Hi there. You've Brad Bowers on for Bob today. Thanks for taking our questions. Just a couple for me. I just want to kind of think, make sure I'm thinking about guidance in the right way. You know, so we have the Q1 guide and then it looks to me like if you take a disposables run rate as, as it kind of exists, it's, We're looking at capital sales maybe only slightly above what we had in 2019. Would you think of it as sort of a conservative estimate for the capital sales? And it seems like it's a pretty steep drop off from Q1 to Q2. So just kind of want to make sure I'm thinking about that right.

Yeah. Hi, Brad. It's John from VaporGum here. So let me touch base on the guidance, and I'll do it in a couple of chunks, if that's okay. First, I'll take a look at 2021 in total. And what we're thinking about is, if you recall, historically, we're generally a 75-25 split, and that's generally 75% U.S. revenue, 25% international, and the same with recurring revenue versus capital and service. So as we think about the business this year, as COVID starts to subside and move away from us, we expect that to continue for us here in 2021 and beyond. So the other item is with regard to the quarter specifically. What we're seeing here in the first quarter is unlike that 25% or so from capital and service, we are seeing a little bit higher capital contribution in the first quarter than that typical 25% split. So we're thinking more in the 35% to 40% split with the balance coming from RECURRING REVENUE STREAM. AND WITH CAPITAL, AS I MENTIONED IN MY REMARKS, WE EXPECT BUDGETS FOR HOSPITALS TO DECREASE OVER THE COURSE OF THE YEAR. SO THE LION SHARE OR, YOU KNOW, 70-ISH PERCENT OR SO OF THE CAPITAL EQUIPMENT REVENUE WE'D EXPECT TO HAVE BOOKED IN THE FIRST QUARTER. AND IN THE FIRST QUARTER, GIVEN THE STRENGTH WE'VE SEEN INTERNATIONALLY, WE EXPECT IT TO BE A LITTLE BIT HIGHER THAN THE 25% WE'VE TYPICALLY SEEN, MAYBE MORE 30, 33% RANGE. That's how we're thinking about the guidance based on what we're seeing in the marketplace right now and how we're thinking about capital revenue and recurring revenue streams going forward here in 2021 and near term in Q1.

Got it. That's helpful. And then just one quick follow-up. Is HVT 2.0, is that launch contemplated in your guidance and do you expect it to be a meaningful contributor in 2021? Thank you.

Sure, Brad. So we have very minor revenue in here for 2021 from HVT 2.0. It's more of a 2022 revenue contributor than 2021. Thank you.

You're welcome.

We have our next question from from William Blair. Your line is now open. Again, Margaret Keezer, your line is now open.

Oh, sorry about that. I was on mute. Hopefully you guys can hear me now. so first off thanks for for providing the guidance i know it's a little uh tough for you guys given the recent ebbs and flows of demand but i'm going to take a second crack at just understanding a little bit more of what you guys are implying so uh you know if i ran some of the numbers uh through our model given what's implied in q1 and some of your commentary around systems and consumables for for q2 to q4 Does that get capital unit sales that are maybe below the quarterly 2018-2019 rates? And then, you know, would that be a good base to assume for 22? Or is that not accounting maybe for the leases versus the outright sales?

Hi, Margaret. Thanks for joining today. Just in terms of the capital equipment revenue, we'd expect that over the course of 21 to be slightly higher than what we've seen in prior pre-COVID types of levels, 2019 and prior. So that's, you know, how we're thinking about it for 2021 and beyond. And really the big driver of our revenue, as you know, is disposable revenue or recurring revenue. We're looking at, you know, as we mentioned, about a 33% two-year compounded annual growth rate overall as U.S., recurring revenue goes, so goes the paper firm revenue profile. So we're really expecting the U.S. disposable revenue to really go nicely over a two-year compounded growth rate basis versus what we saw in 2020, which was obviously a heavy capital contribution due to COVID-driven demand.

Okay. So I guess two questions on that. One, you know, Joe, you talked about installed space growth being a focus for 21. So how should we think about that? And then two, John, you just talked about disposable utilization or disposables being a growth driver. But I think in your forward comments, you also talked about utilization being a little bit lower as well as these new systems ramp up. So to what magnitude is your guidance assuming kind of on the high end and the low end for those two drivers?

Sure. So in terms of install base first, you know, clearly we won't see or realize the same type of install base growth we saw in 2020. So we're looking more at pre-COVID types of levels, which were in the mid-teens prior to COVID, if you go back to the 18-19 timeframe. So we're thinking we're going to be in that sort of vicinity for 2021 and beyond. And in terms of the disposable utilization, we do expect to see utilization decrease in comparison to historical averages. In terms of what that looks like on a two-year compound annual growth rate perspective, in particular the U.S., which is a heavier contribution, we see kind of in the low 30s in terms of what the guidance reflects in terms of that two-year compound annual growth rate overall.

Okay. Yeah. So just kind of the last question. I don't take up too many questions. But as we look at, you know, whether it's 2022 or beyond, John, you just talked about kind of a mid-teens growth and installed base, you know, assuming utilization is even class, that means kind of the underlying growth. hopefully should be around kind of the mid-teens or at least double digits for the overall business. So is that what you guys are thinking about? It's not higher given utilization improvements. And then what is HVC 2.0, the HCE acquisition, and all these other things you're doing? Where does that get you? Because it seems like it should be a pretty solid, if not stronger, profile. Thanks, guys.

yeah so longer term margaret so you know we're really going to be focused in on driving the install base on our current revenue uh you know we like what we see here in terms of the install basically we have in 2020 that we realized um you know like what we've seen going into 2021 uh into your point expected to drive that going forward at those new team rates i think the things that we have is you know a tailwind for us in this um you know recent COVID experience is the increased awareness of the technology in the marketplace, as well as in the EV gold and silver accounts, which are very large accounts with a lot of expansion opportunities, which are highly referenceable. So that's a tailwind that we have behind us in terms of a potential headwind. The capital budget dollars for hospitals have been largely focused on ventilator and a number of respiratory devices this year so it's a sort of a wait and see as to what's going to be available for uh that going forward so all in all those with tailwinds and headwinds we see in front of us but we feel good that we'll be able to at least grow at a rate what we've been able to do historically on a go-forward basis with the HVT 2.0, as well as some clinical data that we're working on to help provide additional support to our field teams, especially in the Type 2 respiratory distress sphere. Okay. Thanks, Seth. Thank you.

Once again, Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Next is Maritha Bald from BTIG. Your line is now open.

Hi, Joe and John, thank you for taking the questions. I'll try to fit in a couple here. You know, I think I was most intrigued in your guidance, John, by, you know, the confidence in disposables growing year over year for 2021. So I wanted to try to drill down, you know, is that something you expect to hold true for each quarter throughout the year, or is there going to be a cadence to it and we should sort of look at it as a 2021? I know particularly Q2 and Q4 could put put up some tough comps for you there.

Sure, Marie. Good to hear from you again. First, I guess in terms of the disposables, we would expect to see seasonality in that recurring disposable revenue stream, both in the U.S. and internationally. Again, fourth quarter, second quarter, typically higher than the third quarter, where it's generally a flat season for us. And with the lower utilization rates, we'd expect to see that sort of be the same across each of the quarters in 2021 as well.

Okay, okay, that's helpful. And then what are you hearing from some of the ed gold and silver accounts? I know you expanded a lot in that important segment this year. Are you starting to hear from them that they are committing to continuing to use their new systems? You know, I think we just want to gain confidence around the fact that these systems will stay in use this year.

Hey, Marie, it's Joe Army. I'll take that one. So, you know, I had shared with you guys a story on the third quarter call about what we had seen with helping these folks begin to learn how to use this gear on type two respiratory distress. And we had an increasing level of confidence around that. And I can tell you, you know, leading up to the latest surge in the fourth quarter, I continue to feel that. You know, we're adding more and more clinical evidence around this application. And I'm hearing stories from our field team about already, you know, we saw the U.S. hospitalizations start to drop by the middle of January. So our field team has not been sitting around. They went right back to work and teaching people about type 2. And the stories that I'm hearing now that I feel, you know, make me feel pretty positive about how this is all going to wind up. I do think, you know, you're going to see 2021 is going to be a little bit sloppy, but I'm very, very excited about what I get out of the end of 2021 and coming into 2022 with, you know, historical turn rates that are right there for us.

Okay. That's great to hear, Joe. Thank you. And then I guess one last one, if I can. The operating spend, $97 to $99 million this year, it implies some investment. So I'm curious where you're spending. Is this on Salesforce? Is this on clinical work? Or is it really just the new products that you're bringing on board? Okay.

Sure, Marie. The main driver of that is it's really on some investments on the sales and marketing side. We're also investing in new products and also in clinical studies. We want to continue to invest in clinical work, specifically the type 2 respiratory distress support that our field team needs. So that's where the investment dollars are really going into for 2021. All right.

Thank you.

Well, thanks, Marie.

We have our next question from Jason Bednar from Piper Sandler. Your line is now open.

Hey, good afternoon, everyone. Appreciate all the callers on the call. Apologies to dig in here on guidance further, but did want to come back to some of the commentary you made there. You're referencing some very limited capital budget dollars from hospitals to impact as soon as the second quarter of this year. Joe, John, are you hearing that directly from hospitals, or are you simply anticipating that given what's still an uncertain backdrop out there?

Hey, Jason, it's Joe Army. How are you doing? Good job. We're not hearing it directly from hospitals, but we're anticipating it. You know, our reps are suggesting to us that that's what they're seeing. There's an awful lot of respiratory equipment that those hospitals have, you know, in the way of ventilators and other gear. So we're trying to set this thing up and make sure that we're running it in a way that is very achievable. So, John?

Yeah, I would agree with that, Joe. I think we're anticipating that. There have been some anecdotal discussions, but by and large, it's more on the anticipation of what we expect to see here as COVID starts to fade away here with vaccines being rolled out.

Okay. All right. That's helpful guys. Thanks for that. Um, and then, you know, just talking about maybe some of the education efforts that you have, uh, just driving around that type two opportunity. I mean, do you view, I mean, I got a feeling, I know your answer is going to be here, but do you view in person versus virtual education any more or less effective and driving the understanding or the capabilities of precision flow better? Um, again, particularly around that type two opportunity.

Let me tell you something. If you'd asked me that a year ago, I would have told you there's no way that a sales rep could do this virtually. I would have told you absolutely, Jason, it can't happen. But what we're seeing in the field is virtual is turning out to be very, very effective. The other thing that has helped is these people have used our gear on a ton of patients. So they've gotten really good with it. Now, they're hypoxic patients, but they've gotten really good and really confident with the gear. So there's a lot of this coaching and training and teaching them can happen virtually, it can happen in person, it can happen to our clinical teams, and it's happening. So I'm I really like what we're doing virtually. I like what we're doing in person. I can tell you that, you know, in the people that we are adding to the team, we're putting more clinical people on the ground and getting them into those accounts and helping those people really master and think about using it on type two patients.

All right. That's helpful too. You know, maybe one more last one here, just to sneak one more in. Maybe for your Salesforce and your team out there, I mean, With the kind of this maybe sloppy year, as you put it, Joe, I mean, maybe could you speak to how Salesforce incentives are aligned with your expectations and your goals for the year, both with respect to kind of growing that install base and also growing that consumables number year over year? You bet.

So, you know, The majority of our rep comp is tied to disposables, as Johnny's told you guys over and over again. So the fact that we're confident we're going to grow disposables over 2020, you know, that creates a lot of alignment. And in terms of the Salesforce alignment, we're very sensitive to that. We want to make sure that we have great people that are very talented, they're very experienced, and we want to make sure that they're going to be able to make money and gain access and continue to grow. So I like the way we've got that aligned. I think that our field leaders did an excellent job with doing that. And at the same time, you know, the ability to start to see operating leverage show up, you know, we're balancing all those things. So I like the way it's come out.

All right. Great. Thanks, guys. Appreciate it.

Thank you. Have a good one.

We have a follow-up from Bob Hopkins from Bank of America. Your line is now open.

Hi there. Sorry to jump back in again. Just one question. We heard of a company, we heard of Massimo talk about adding a high flow capability to their platform. So we were just wondering if there is anything that we should be thinking about on that impact in competition going forward. I mean, again, the numbers you talked about for capital seem to be reasonable, but just wanted to hear if you have been seeing increased competition. Thank you.

Well, you bet. Thank you. So Massimo's announcement validates what we've been saying all along about high flow, high velocity, effective and versatile fuel for respiratory distress. We have high regard for Massimo as a company, and it would be foolish to underestimate him. But we're familiar with the soft flow product, and we're very comfortable with how we stack up against it. And beyond that, we have no further comment.

Next in line is Bill Provanek from Canaccord. Your line is now open.

Hi, Joe and John. John on for Bill tonight. Thank you for taking my question. Just quickly on the OAM in the U.S., any expectations for the U.S. IDE in terms of timeframe? And are you using any feedback or learnings from your OUS launch in those discussions?

Well, you know, the first let's just kind of break that into two pieces, right? The OUS has gone very well. We like a lot what we're learning. You know, we were originally thinking about this as a device that's really going to be aimed at the NICU at neonatal patients but what we learned during our limited market release is that there's actually a really interesting application in adult population which has implications for our TAM and so you know clearly that has been a very important lesson learned for us we continue to have you know very productive conversations with FDA as we nail down the shape and size and parameters of our IDE clinical trial. Having been designated as a breakthrough technology, we think that that's going to turn out to be pretty important and pretty useful. But beyond that, I don't have any further comment around timing here in the United States.

Okay, thank you. And then just overall, how do you see your penetration today as the overall opportunity, given the awareness? And how close do you feel like you're becoming to the standard of care?

Well, I think we have a ways to go to get to standard of care. I can tell you in certain settings, we're a standard of care, right? But, you know, we're less than 10% penetrated around the world. We have a lot of room left to run. And, you know, we look at that as being a pretty good quarter, pretty good year. 2020 was a big, big change for us but there's an awful lot of hospitals left to go you know we're only in 450 of the gold and silver eds in the united states well that means there's another you know 1550 to go get just to be in the top 2000 so there's a lot of room left to run and you know we got a lot of work to do thank you for your questions you bet thank you

No further questions at this time. I turn the call back over to the company for closing remarks.

Well, again, we want to thank everybody for their time this evening and for your interest in Bapleturn. It means a lot to us, and we look forward to coming back to you here in the May timeframe to talk to you about the first quarter. And just to remind you, we will be hosting our first ever Investor Day in the second quarter, and John will be updating everybody on that date. So thank you again.

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