Itamar Medical Ltd.
Q2 2020 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Itamar Medical Ltd. Earnings Conference Call. At this time, all participant lines are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Leigh Salvo, Investor Relations. Please go ahead.
  • Leigh Salvo:
    Thank you and thank you all for participating in today’s call. Joining me are Gilad Glick, Chief Executive Officer and Shy Basson, Chief Financial Officer and U.S. Chief Operating Officer. Earlier today, Itamar Medical released financial results for the quarter ended June 30, 2020. A copy of the press release is available on the company’s website. Before we begin, I would like to remind everyone that during this conference call, Itamar will make certain statements that are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives and expectations for future operations, and are based on management’s current estimates and projections of future results or trends. Because such statements deal with future events, they are subject to various risks, uncertainties and actual results, expressed or implied by such forward-looking statements, could differ materially from Itamar’s current expectations. Factors that could cause or contribute to such differences include risks and uncertainties and assumptions discussed from time-to-time by Itamar in reports filed with, or furnished to, the SEC, including the latest Annual Report on Form 20-F. Except as otherwise required by law, Itamar undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. In addition, during this call, statements may include in addition to financial results prepared in accordance with the International Financial Reporting Standards, or IFRS or issued by the International Accounting Standards Board, or IASB of some measures as defined by non-IFRS financial measures for operating loss and net loss, which are adjusted from results based on IFRS to exclude
  • Gilad Glick:
    Thanks, Leigh. Before we begin the discussion of our results, we would like to thank the entire Itamar team once again for their continued dedication to our customers and their patience during these challenging times. For today’s call, I will cover second quarter financial highlights, recent trends in light of COVID-19, and then updates on our long-term market strategy and positioning. I will then turn the call over to Shy to discuss our financial results in more detail before we open the line for questions. Our second quarter results reflected encouraging growth despite the current environment. Total revenue for the second quarter of 2020 was $8.9 million, an increase of 21% compared to the same period in 2019. This growth came mainly from our U.S. core sleep business and across the vast majority of the sales territories from both existing and many new customers. Despite the impact due to the revenue growth from the WatchPAT ONE line, we are able to stay in the high non-IFRS gross margin profile in the second quarter of approximately 70%. As we have previously discussed in mid-March, we begin to see the impact of the pandemic amplified by the American Academy of Sleep Medicine, or AASM, COVID-19 mitigation strategy guidance, recommending the deferral of in-lab PSG tests and special precautions for the use of reusable HSAT services unless using fully disposable HSAT devices. Importantly, our WatchPAT ONE device continues to be the only commercially available HSAT device that meets that criteria. The general restrictions and limitations posed by the pandemic and amplified by these specific recommendations began to significantly impact the sleep apnea testing market and our revenue mix with multiuse WatchPAT tests declining and WatchPAT ONE orders increasing significantly. This shift in our revenue mix has persisted through the second quarter. While we do not anticipate providing monthly commentary and this level of granularity in the future, given the extraordinary circumstances presented by the COVID-19 pandemic, we continue to feel it is important to characterize this early momentum with the following updates. With respect to our backlog, we are pleased to report that due to recent increase in our production capacity and output and despite continuous growth in WatchPAT ONE demand, our backlog is now normalized. I remain proud of our team’s ability to step up to meet this substantially increased demand. As a result, our WatchPAT ONE production output increased from approximately 3,000 units for the week ended May 22, 2020 to approximately 6,000 units by the end of June doubling our output over a very short period. By the end of the year, we are still planning to get to a production output of approximately 12,000 to 15,000 units a week, which at peak level translate to 750,000 units annually or about 50% of the entire HSAT market – HSAT market pre-COVID-19. We ended the quarter with 291 active centers utilizing WatchPAT ONE in the U.S., representing an increase from the 210 active centers we have previously reported as of May 22, 2020. Considering our sales force ability to onboard multiple new customers in weeks rather than months, we saw consistent on-boarding of over 10 new customers per week on average. This increasing demand for WatchPAT ONE continues to be tempered with softness in demand for multi-use tests, which has persisted since the onset of the pandemic in the U.S. Patients continue to have limited access to clinics and physician practices and we are cautious in our outlook on multiuse tests towards the second half of the year. Regarding recent trends outside the U.S., as we reported during our previous earnings call, volumes in Europe were negatively impacted in April and May. These volumes were almost back on plan as the United Kingdom, Italy and Germany opened up and started to shift to our WatchPAT ONE offering, but we continue to expect a variable environment in Europe over the remaining of the year. In contrast to our expectations in Europe and U.S., the pandemic is being managed differently in Japan in our view and our Japanese distributor has not experienced an impact on sales due to the pandemic. While we are expecting localized outbreaks to be ongoing in the U.S. and parts of Europe for the remainder of the year and this for our ability warrants a cautious near-term outlook. We remain very confident in our long-term value proposition and market opportunity. Additionally, as we look ahead to 2021, we would like to note that as we had anticipated, proposed reimbursement rates have once again declined in the proposed rule issued by CMS recently, which is likely to be finalized in November and go into effect January 1, 2021. This does not come as a surprise to us given that it represents the third year of their 4-year plan to reevaluate payment in home sleep apnea testing devices. To provide some additional color, the global code 95800 for WatchPAT declined approximately 4% in the proposed rule, whereas the global code 95806 for competitive HSAT’s devices do not have sleep time technology declined approximately 21%. Importantly, we have observed the rates for HSAT devices that do not have sleep time technology have been declining more rapidly. At this time, I would now like to turn to our long-term growth drivers, core sleep, cardiology, international expansion and direct-to-consumer. As a result of the pandemic, we would like to highlight an additional growth driver, the shift to home-based solutions. I would like to go into more detail on each of these, starting with the shift-to-home based care. We reiterate our view that this pandemic has the potential to serve as a catalyst for migration from in-lab polysomnography, or PSG, to home sleep apnea tests using a digital care platform from clinic visits to telehealth and from a procedure and waiting list mindset to population and throughput management within the sleep medicine markets for years to come. Whereas the U.S. market has been traditionally dominated by PSG, results from recent survey of 300 sleep centers across the U.S. published in late July, have shown that approximately 70% of sleep centers have shutdown their in-lab testing operation and 79% have an active HSAT program. We expect the composition of the sleep test market to stabilize around 50% home sleep apnea test over time. We remain focused on our vision of reaching many of the 80% of undiagnosed patients estimated to have sleep apnea in the U.S. and other parts of the world that have never been diagnosed. And this shift-to-home based care is likely to accelerate the execution of this vision. The core sleep channel has been critical during the shift-to-home based care in the past few months. The significant increase in WatchPAT ONE orders in the second quarter is a testament to this interest in remote solutions among both new and existing core sleep customers. We see a great opportunity in the core sleep channel and continue to direct our marketing and professional education efforts towards how we can help clinics and practices with the current AFib [ph] guidance and the remote solution we provide. Turning to our next growth driver, cardiology, we remain excited about the unmet clinical need that was further substantiated by recent published data, demonstrating for the first time that sleep apnea management has significantly improved the properties of the heart condition in AFib patients. Nevertheless, cardiologists and in turn, their associated partners, continue to face COVID-19 related pressures and near-term priorities that take precedence over other aspects of their business. As this environment is likely to remain a bit challenging with this channel, we remain focused on our direct sales force opportunities. While the BioTelemetry partnership has been de-prioritized due to COVID-19 dynamics, we continue to highlight our recent collaboration with BetterKnight and our turnkey solution, which eliminates any hassle for cardiologists by providing them with end-to-end functionality from screening throughout billing. Turning to the direct-to-consumer channel and our partnership with Lunella, a SoClean subsidiary, this continues to be an important channel. While we are appreciative of Lunella’s recent efforts, they have been facing a challenging consumer discretionary spending environment due to the pandemic. For this reason, we no longer anticipate Lunella will meet their annual contractual minimum commitment for 2020. As such, we are in discussion with SoClean regarding the terms of our agreement. Finally, regarding our last growth driver international expansion, we continue to make progress outside the U.S. We remain focused on our work with SIP societies and government agencies as we pursue market opportunities in France, Germany, and Australia. To close, we remain grateful for the strong team we have assembled at Itamar and our investors who share our commitment to medical innovation and our vision, which is immense. We are constantly reminded of the wide open opportunity we have to disrupt the status quo with our digital and home-based sleep apnea management solutions. We are also eager to help the estimated 80% of those with undiagnosed and untreated sleep apnea. And with that, I would like to turn over to Shy Basson, our CFO and U.S. COO for more detailed review of our second quarter 2020 financial results. Shy?
  • Shy Basson:
    Thank you, Gilad. Revenue for the 3 months ended June 30, 2020 was $8.9 million, a 21% increase from $7.4 million in the same period of the prior year. Growth was again driven by an increase in WatchPAT sales in the U.S. and Japan. WatchPAT’s revenues for the second quarter of 2020 were $7.9 million, an increase of 20% compared to the second quarter of 2019. U.S. WatchPAT revenues was $6.6 million compared to $5 million in the same quarter in 2019, reflecting a 31% increase driven primarily by the WatchPAT ONE as well as WatchPAT Direct sales. Sales from disposable and renewable products comprised approximately 78% of WatchPAT revenues in the U.S. in the second quarter of 2020 compared to 65% in the same quarter in 2019. Turning our attention to the rest of the P&L, IFRS gross margin for the second quarter of 2020 was 68% as compared to 78% in the corresponding prior year quarter. Non-IFRS gross profit margin for the second quarter of 2020 decreased to 70% compared to 79% in the same quarter in 2019. Gross margin decline was mainly driven by the increase in WatchPAT ONE sales. Total operating expenses for the second quarter of 2020 were $9.2 million, a 24% increase from $7.5 million in the second quarter of 2019. This increase was primarily attributed to the following factors. Selling and marketing expenses associated with the expansion of the U.S. sales team into new geographical territories and verticals as well as additional sales commission resulting from the increase in revenues and R&D expansion associated with increasing personnel to support product development, including our digital health platform. IFRS operating loss for the second quarter was $3.2 million compared to $1.7 million in the same quarter of the prior year. The increase in operating loss was mainly due to the increase in operating expenses partially offset by the increase in revenues. Non-IFRS operating loss for the second quarter of 2020 was $2.4 million compared to $0.9 million in the same quarter of the prior year. IFRS net loss for the quarter was $3.2 million compared to $2 million for the same period of the prior year. Non-IFRS net loss for the second quarter of 2020 was $2.4 million compared to $1.2 million in the same quarter of the prior year. We ended the second quarter of 2020 with $45 million in cash and cash equivalents. Turning to our outlook for 2020, we are not reinstating guidance at this time. Despite encouraging increase in WatchPAT ONE demand due to the current environment and level of uncertainty surrounding the COVID-19 pandemic, we remained unable to estimate the magnitude or duration for the specific impacts on our business. And for that reason, we will not be resuming financial guidance at this time. While we are confident in our ability to weather the impact of the pandemic, we continue to make prudent financial decisions given the near-term uncertainties in this environment. With that, we will now open the line up to questions. Operator?
  • Operator:
    Thank you. [Operator Instructions] Our first question comes from the line of Matthew O’Brien with Piper Sandler. Your line is now open.
  • Matthew O’Brien:
    Good day, gentlemen. Thanks for taking my questions. Just for starters, with the home sleep testing environment that you are seeing, Gilad, you mentioned the survey with sleep centers going – 70% of them are just going to shut their labs now and how was that as compared to maybe pre-COVID type of a ratio? And then those 80 facilities that you have added this quarter, what are you seeing so far as far as utilization uptake and reorder rate? I guess I am just really trying to get my head around the tailwind that you are getting as a result of COVID?
  • Gilad Glick:
    Hey, Matt. Thank you very much for joining and thanks for the question. This is Gilad here. So pre-COVID-19, when we look at claims data, for the last few years, it was pretty stable that roughly 70% of the 5 million estimated sleep tests in the U.S. were performed in-lab PSG, while roughly 30%, two-thirds to the one-third sorry was at home with the slight trend of sleep tests moving from the in-lab to the home environment, but really low single-digit percentage move year-over-year 1% or 2%. So, that was pre-COVID, so really 70
  • Matthew O’Brien:
    Yes, okay. That’s helpful. And then pivoting over to Lunella, the consumer environment, not surprisingly in the U.S. is a little bit soft. Can you tell us what the revenue contribution in the quarter was? And then I think you had expected something in the $3 million to $4 million range this year, what is that potentially going to look like? And then what are your – what’s SoClean’s longer term thoughts about the opportunity given the road bump that we are seeing here to start with?
  • Gilad Glick:
    Yes. So I think we kind of shared some of that, because we thought it’s important. So, first – to your first question, Lunella has not contributed at all to our second quarter revenue results. And that was – the result of course of the environment that we described and they described together with us. We also believe strongly with dialogue with them very productive dialogue that the minimum commitment of $4.5 million for the year will not be met. We understand that and we think that not unreasonable from their side given the environment. So what we do now we are in dialogue with them to understand how to reshuffle expectations, renegotiate some of the terms in the contract and for instance, I can tell you that they had exclusivity to the direct-to-consumer environment and they single-sidedly waived their exclusivity understanding that we need to operate probably with other people or other bodies that operates in the space and that evaluation I hope will come to fruition in the next few weeks or months.
  • Matthew O’Brien:
    Okay. Thank you so much.
  • Gilad Glick:
    Thank you, Matt. Highly appreciate your…
  • Operator:
    Our next question comes from the line of Josh Jennings with Cowen. Your line is now open.
  • Josh Jennings:
    Hi. Good morning or good afternoon, gentlemen. I just wanted to start with just your outlook in the back half, understand that there are many unknowns still with the pandemic, but just wanted to check in on your view and your cautious outlook just are you seeing anything sequentially that’s making you more cautious in June and early – excuse me July and early August versus what you experienced in the second quarter or are you just some of the many other med-tech management teams just overall cautious because of the uncertainty as we move into the third, deep into third quarter particularly in the fourth quarter with the risk of a second surge?
  • Gilad Glick:
    Yes. Thanks, Josh. So no, we have seen similar trends going from May to June to July in which we have seen uptake in WatchPAT ONE sales and overall sales. It’s demonstrating our results. It’s the only reason we have decided not to reinstate guidance at this time is because we still believe the macro environment is shifting and it will be less conservative for us to try to predict with high confidence exactly what will happen moving forward, but no trends have suggested any different dynamic that we have seen since the onset of the pandemic.
  • Josh Jennings:
    Great. Thanks. And just a follow-up, you have described the renewed traction you are getting in the core sleep channel the cardiology channel is a little bit stunt because of the pandemic. But as you called out during this – during your prepared remarks, it’s a big growth opportunity just how are you strategically thinking about pursuing both of those channels and how can you balance the renewed demand from the core sleep channel with the cardiology channel opportunity? Not acutely, but more as we move out and away from the pandemic in normalized times, you need to build out more robustly your sales force or are there any hurdles there to be able to attack both of those channels simultaneously? Thanks for taking the questions.
  • Gilad Glick:
    No, thank you. Yes. So I – as I always believed and I think that last quarter even strengthened that position, the clinical and economic benefits of integrating sleep apnea management to cardiovascular care continuum and cardiovascular patient is ultimately very beneficial again from clinical and health economic perspective. Therefore the size of the market – the lack of penetration of anybody into this market and the clear benefits have not changed and they are the fundamentals behind our strategy. Actually, in the last quarter, as we mentioned, there were two significant papers that were launched showing that management of sleep apnea reverse remodel, the cardiac tissue may see patients. I mean it’s as good as some therapies. And that’s of course keeps strengthening the evidence that’s the right thing to do. And therefore with our solution, we believe that the large – largest opportunity ahead of us between the 35,000 cardiologists out there, the 92 million patients with diagnosed cardiovascular disease and the evidence of the benefit of managing their sleep apnea is tremendous. It’s encouraging to see that the sleep docs – the core sleep docs are embracing our technology now more than before, which will facilitate the foundation for more collaboration between the cardiology department and the sleep department using our products. So, I am encouraged over the long run and have not – I don’t – nothing changes even further strengthens.
  • Josh Jennings:
    Excellent. Thank you.
  • Gilad Glick:
    Thank you.
  • Operator:
    Thank you. Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open.
  • Jeffrey Cohen:
    Good morning, Gilad and Shy. How are you?
  • Gilad Glick:
    Hey, Jeff. Thanks for calling.
  • Shy Basson:
    Hey, Jeff. Thanks.
  • Jeffrey Cohen:
    So, firstly, for Shy, could you talk a little bit further about the U.S. sales organization and the costs there and mid-level management and territories and how you perceive that looking over the back half of the year and into 2021?
  • Shy Basson:
    Yes. So, Jeff, you would see that we have increased our number of territories back then mid Q1 to 32 territories. We have actually increased the sales organization and that’s reflected in our operating, sales and marketing expenses, you would say that they grew from Q1. Everybody is on board. We have continued in Q2 due to remote training, due to the pandemic and we actually see a lot of utilization and results ended in a 31% growth within the U.S. sales in Q2. We don’t anticipate at this point of time we think that at a level of 32% in Q3 we will not increase at this point of time our sales force. We have enough people on board. So therefore we don’t anticipate the expenses to grow over there. Other than that, I can tell you this from a KPI perspective from our U.S. sales organization, we are very happy of what we are seeing.
  • Jeffrey Cohen:
    Got it. And then secondly, Gilad, could you talk about arterial health and if there is any read into the strength in EndoPAT for the quarter and also talk about your previous comments around the back half of the year, does it feel like a traditionally strong Q4 for you and other med-tech combinations in other case pulled forward or pulled flat for the year? Thank you.
  • Gilad Glick:
    Thank you, Jeff. Can I ask you just to repeat the first question? You said something and then EndoPAT and I missed the first question. Can you please repeat the first item?
  • Jeffrey Cohen:
    The strength in EndoPAT for the quarter, any read into that?
  • Gilad Glick:
    Sure. Yes. So, EndoPAT continue to be a Gold standard in pharma trials. And then we are very fortunate to have strong base of customers led by AstraZeneca who uses EndoPAT for their endothelial function marker in their trials that continued to move forward. As we indicated before, we are not – this is not a growth driver for the company. It’s not something we expect to drive growth, but it’s a stable part of our business. It’s very profitable. So, this kind of a roughly $1.5 million to $2 million a year coming from pharma trials is we expect that to continue, but not to be as a growth driver. With regards to their future, again, with the absence of guidance, of course, everything I say it’s a personal perspective right now, but we are – since the trend from the June into July have continued we feel kind of confident, if you will, that the – what we see the analyst consensus out there is reasonable in our point of view. And to your point, our fourth quarter supposedly should be is always stronger and there is no indication that, that should change. So, we do believe our fourth quarter close will be the strongest quarter that we had. But again, given the unprecedented circumstances, we just don’t know what will happen with the pandemic, and how individual geographies will behave and therefore we are cautious about that.
  • Jeffrey Cohen:
    Thank you.
  • Gilad Glick:
    Thank you, Jeff.
  • Operator:
    Thank you. Our next question comes from the line of Ben Haynor with Alliance Global Partners. Your line is now open. Mr. Haynor, your line is now open.
  • Ben Haynor:
    Good day, gentlemen. Can you hear me?
  • Gilad Glick:
    Yes. Hi, Ben. Good day.
  • Ben Haynor:
    Sorry about that – was on mute for a second. So, just curious on how the demand has been on the software side? Have you seen a lot of demand on sort of total sleep solutions, how has that looked just given the shift to HST?
  • Gilad Glick:
    So, Ben, I assume you are talking about our kind of WatchPAT Direct offering and that’s the offering in which what we know it’s also called in the market mail order in which we are not only providing the devices, but also the logistic services around them. Demand in that section of the market has – of our business has been spectacular pretty much. The lack of availability of personnel for sleep practices and sleep lab have translated into really large demand of our WatchPAT Direct services. We have seen a big increase, actually almost triple-digits in this business over the last few months. And we think that trend is here to state, because more and more sleep labs understand sleep practices understand that actually they can increase their market share by deploying good home sleep apnea tests program, but the limit with the amount of personnel and space to run it so they turn into the mail order services like our WatchPAT Direct to fulfill it and that translate into our business results.
  • Ben Haynor:
    Okay, great. Thanks for the color there. And then just going back to the previous question on EndoPAT, I know it’s been used in pharmaceutical trials, but just given the importance of preservation in endothelial function with COVID. Is there any opportunity there maybe for hospitals to use it to sort of triage patients to figure out how they might – how critically they might want to treat them or is that just too far out there?
  • Gilad Glick:
    So, from a curiosity – intellectual curiosity perspective, of course, it’s been published in few papers that COVID-19 with symptomatic patients is impacting endothelial function, because it’s such a broad and sensitive marker of cardiovascular health and damage. So, from that perspective, it’s interesting, but from here to translate it to concrete results in the near-term, I think it’s too early to discuss. And when anything material with considerable future impact will become material, of course, we will discuss it with the street.
  • Ben Haynor:
    So, you are not in contact with any of these pharma companies, biopharma companies that are using – that could use it potentially for some of the therapeutics for COVID?
  • Gilad Glick:
    There is no concrete contract with the pharma company – contact with the pharma company around COVID-19 at that point.
  • Ben Haynor:
    Okay, got it. That’s all I have. Thanks a lot, gentlemen.
  • Gilad Glick:
    Thanks, Ben.
  • Operator:
    Thank you. Our next question comes from the line of Ram Selvaraju with H.C. Wainwright. Your line is now open.
  • Ram Selvaraju:
    Thanks very much for taking my questions. Just a couple of detailed ones first. Can you comment on what percentage of your revenue base is currently constituted by sales in Japan and to what extent you expect that to evolve to higher or lower percentage going forward?
  • Shy Basson:
    So, hi, Ram, this is Shy. We have recorded roughly 900k out of the 8.9 in Japan. If you look historically to our Japanese revenues, we are growing year-over-year single-digits, so up to 5% to 10% every year. Last year, we recorded approximately 3.5%. So we don’t have any anticipation that, that will change. Actually, we are very confident with the revenue in Japan we already have their Q3 order in place. So, we will meet this single-digit growth as we are seeing in the last 2 years from Japan.
  • Ram Selvaraju:
    Okay, thank you. And then with respect to the BioTelemetry relationship, can you describe some of the circumstances that might have to transpire in order for the BioTelemetry relationship to regain its former prominence since you mentioned that it’s being de-prioritized right now?
  • Gilad Glick:
    Yes. Again, with of course staying short of speculation, I think that right now, it’s clear that actually both companies given the really extraordinary circumstances of change that aid to the market, both companies are focusing on other programs. We are very focusing on our core sleep, fulfilling the core sleep demand and educating all those core sleep doctors at this time. That’s our main focus. And they BioTelemetry have few other priorities of their own. So, I think we will have to stabilize the businesses on both sides from growth perspective and then come to the table and understand what will be next steps and reevaluate, right now, that’s not our number one and number two priority.
  • Ram Selvaraju:
    Okay. And then lastly, I was wondering if you could comment, especially in the context of this continuing evidence that there are cardiological benefits to your entire business model and this may potentially be the most important value driver going forward. If you could speculate on perhaps whether there might be the possibility of including home sleep apnea testing, sleep apnea diagnostics formally in some kind of set of guidelines that are promulgated by a major cardiology organization like the American College of Cardiology beyond what has already been suggested?
  • Gilad Glick:
    Yes. So, it’s difficult to tell what I can tell you that there were two nice papers that were published in the last quarter, both of them are kind of the guidelines. The American Heart Association issued paper around more defining risk factors that including sleep apnea for atrial fibrillation strongly suggesting to included as part of the management. So, we keep seeing more and more entrants of sleep apnea today, I would say broader consensus around these cardiovascular management disease condition perspectives. And then I don’t think evidence is the issue anymore to be honest. I think there is from my talking to hundreds of customers, cardiologists, leaders in the space, nobody really challenged the need or the importance based on evidence or fundamentals, I think it’s really implementation and the more administrative barriers and therefore we are strong promoters and suggestive that our WatchPAT turnkey, which is really nothing but sending the patient into the clear pathway and everything else is being falling into place is the right solution. I think the true test will be when this uncertainty with the cardiologist with the sleep doctors around COVID-19 will subside we will see the true impact of that value proposition.
  • Ram Selvaraju:
    Thank you very much.
  • Gilad Glick:
    Thanks Ram.
  • Operator:
    Thank you. Our next question comes from the line of Matthew O’Brien with Piper Sandler. Please proceed with your follow-up.
  • Matthew O’Brien:
    Thanks for taking the follow-up. I just want to decide maybe to talk a little bit about OpEx in the back half of the year and what that should look like? And then what we know as revenue likely coming in less than anticipated, what does that do to the model going forward from a profitability profile perspective? Again, I know it’s that huge, it wasn’t expected to be huge revenues, but certainly pretty profitable revenue. So what does that do going forward?
  • Shy Basson:
    Yes. So, from an orders perspective, we don’t anticipate in the second half of the year we don’t anticipate any material increase. I think we were increasing the sales organization in the U.S. major expenses in Q2, as I mentioned on my previous answer. So, on the contrary, we do believe that Q3 and Q4 actually from operating expenses will have kind of a relief hopefully not hopefully, but sales and marketing will increase only because revenues will increase and it will be tied to commission. So, that goes back into your first question. The second question is with respect to Lunella, as Gilad mentioned, we are in discussions with them and we already took it into factor into Q2 and you see the huge increase in demand in WatchPAT ONE and core sleep business, but we will be able to record a 7.9 million only – excuse me, $6.6 million U.S. revenues representing a 31% growth even without any direct-to-consumer and we took it already within the model into consideration in Q4 – Q3 and Q4. Our models, we don’t anticipate also the operating loss to change significantly if at all due to that.
  • Matthew O’Brien:
    Okay, very helpful. Thank you.
  • Operator:
    Thank you. Our next question comes from the line of Josh Jennings with Cowen. Please proceed with your follow-up.
  • Josh Jennings:
    Hi, gentlemen. I just wanted to – I am sorry if I missed this, but any details you can provide on the WatchPAT Direct channel and what you experienced in 2Q? And then also if you could build out your commentary on Europe, you have CE Mark for WatchPAT ONE and the opportunity there, so you would call out Germany, UK and Italy, but just any other color you can provide on the opportunity in Europe and the opening with CE Mark? Thanks for taking the follow-ups.
  • Shy Basson:
    Yes, Josh. I take the first one on the WatchPAT Direct obviously for the audience on the call, WatchPAT Direct is where we give logistics services from warehouse in Atlanta on behalf of our customers. We are getting the prescription for customers. We are doing the shipping and handling and getting the device, putting the device back and offloading the studies to the cloud directly to the physicians who referred. We have faced tremendous increase in that business, to give you some flavor, 80% as of the beginning of the year, just grew in that business and if we compare it to Q2 of 2019 more to one having the 40% increase. We are shipping thousands of tests a month on WatchPAT Direct. And we said previously and we said in so many times, WatchPAT Direct ASP is significantly higher than the ASP that we are seeing in other cost businesses, just because we are doing additional services on behalf of our customers. So that gives us a really good contribution on our top line and on our gross margins as well.
  • Gilad Glick:
    With regards to Europe, yes, we received a CE Mark and that allow us to operate in the European market. We do see uptake in particular in the UK and the Netherlands. That said, the impact is somewhat moderate, because the fundamental market conditions for home sleep apnea testing in Germany have not changed. It’s the market dominated by in-lab polysomnography. It’s practically came to a halt. And it’s driven by reimbursement policies in Germany and the HST market is just starting. As I mentioned in our notes, we are working with both the physician association as well as the regulators to try to relax those restrictions and allow the German population to benefit from home sleep apnea testing in general for a larger extent, similar situation in Australia, by the way. In France, although it’s a market that is strongly dominated by home sleep apnea test, until now, Itamar had very little access, because the guidelines are specifically calling for airflow. So, the naming their way to measure which the U.S. have reversed almost a decade ago, weare working again with the physician association then to regular to change it. It’s a little bureaucratic like you would expect in Europe and therefore are impacted that at that time is moderated. And once we sold them, of course, we will share the news with the markets.
  • Josh Jennings:
    Thanks again.
  • Gilad Glick:
    Thank you very much.
  • Operator:
    Thank you. This concludes today’s question-and-answer session. I would now like to turn the call back to Gilad Glick for closing remarks.
  • Gilad Glick:
    Yes. I want to really thank everybody who called today. We appreciate your attention. We appreciate your support and we wish everybody healthy and good continuation of the week and the month. Thank you.
  • Operator:
    Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

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