Vapotherm, Inc.
Q4 2018 Earnings Call Transcript

Published: 13 Mar 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Fourth Quarter and Fiscal Year 2018 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.

[Mark Klausner:]

Good afternoon, and thank you for joining us for the Vapotherm fourth quarter and fiscal year 2018 conference call. Joining us on today's call are Vapotherm's Chief Executive Officer, Joe Army; and it's Chief Financial Officer, John Landry. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit the Events link in the IR section of our website, vapotherm.com. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those indentified in the Risk Factors section of our most recent prospectus filed with the Securities and Exchange Commission on November 15, 2018 and the Form 10-K for the year-ended December 31, 2018, which we anticipate filing in the upcoming weeks. 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 Accepted 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 Chief Executive Officer, Joe Army.

[Joe Army:]

Thank you, Mark. I appreciate it. Good afternoon, everybody. Thank you for joining us on today's call. So, given that this is our first call as a public company, I'm going to start by providing an overview of Vapotherm, and then I'm going to walk you through our fourth quarter and the full-year results. Then, I'm going hand the call over to our CFO, John Landry, and he is going to walk you through a financial review. And then, I'm going to talk to you about our strategic priorities for 2019. Then, we’re going to open it up for some Q&A. Vapotherm is an advanced respiratory technology company focused on development and commercialization of our proprietary Hi-VNI Technology. This technology is used to treat patients of all ages suffering from respiratory distress. Hi-VNI delivers noninvasive ventilatory support for the spontaneously breathing patients. We do that by providing heated, humidified, oxygenated air at very high velocity to patients through a comfortable small-bore nasal interface. Our Precision Flow system, which is really the embodiment of Hi-VNI Technology is a clinically proven alternative to the current standard of care for the treatment of respiratory distress in a hospital setting. That's noninvasive positive pressure violation. More than 1.7 million patients have been treated with our Precision Flow systems and we've got a global installed base of over 14,000 of those systems. And as razor-razorblade business, this is very important to us. So, patients with respiratory distress have severe difficulty breathing and they are unable to sustain enough oxygen in their bloodstream or effectively remove carbon dioxide from their blood as they breath. And respiratory distress is caused by a big range, a wide range of serious underlying conditions including COPD, CHF, pneumonia, asthma, just to name a few. The market for the treatment of respiratory distress is large and growing. We estimate over 12 million patients who suffer from respiratory distress each year in the U.S. and in the markets in the international area where we’ve got distribution that they could benefit from our Hi-VNI Technology. We think that the total addressable market for Precision Flow today exceeds $1.5 billion. One of the things I really like about this business is demographic trends. We have an aging population and a growing rate of COPD and heart failure. And those are -- we are on the right side of that. It's going to continue to be a growing patient population that we stand available to treat and health. So, Hi-VNI competes with non-invasive positive pressure ventilation or NIPPV that is a non-invasive ventilation technology. This is the current standard of care for respiratory distress, it’s the gold standard. In contrast to NIPPV, our technology, Hi-VNI, delivers a high velocity of heated, humidified, oxygenated gas to patients. And we do it through a very simple, very comfortable, very easy for the patients via nasal interface. We reduce the work of breathing. That Precision Flow is clinically proven alternative to NIPPV and also provides a number of other benefits to the patient, the clinician in the hospital that are very important, improving patient comfort and compliance, they wear it longer. Having hospitals able to admit patients to lower care intensity settings, these are also settings that have less capacity constraint. So, we are able to put people in places other than the intensive care unit. We also help reduce the risk of NIPPV related complications and we allow for more efficient administration and improved patient monitoring in that setting. We've got a compelling body of clinical data that documents the efficacy and the benefits of Hi-VNI for respiratory distress. In November, we announced that FDA granted our de novo request for expanding the labeling on our Precision Flow Hi-VNI system. So, now, I want to shift gears and I want to provide you an update on our 2018 results. So, 2018 was a solid year for Vapotherm. For the full-year, revenue increased by 19%. It was driven by growth in disposables that’s really tied to growth in our installed base of Precision Flow units worldwide. As I mentioned earlier, this is a razor-razorblade business. And really staying focused on increasing that installed base is what we’re all about. We expanded the number of U.S. sales territories in the fourth quarter of 2018. So, we’re beginning 2019 with 52 sales territories, up from 42 at the beginning of 2018. You might remember that in 2017 and 2018, our sales strategy in U.S. involved a one-to-one ratio between direct sales reps and clinical educators. So, going forward, we shifted the focus of those clinical educators; we really refined them. They are now really targeting larger, higher volume accounts. That’s really where the best use of that investment comes from. So, outside of our commercial expansion, we had a number of other important milestones in 2018. I mentioned earlier, in November, we announced the de novo grant from FDA that expanded our labeling for Precision Flow Hi-VNI. That expanded indication identifies our system as a High Velocity Nasal Insufflation device that augments breathing of spontaneously breathing patients suffering from respiratory distress in a hospital. So, this establishes Hi-VNI technology as a mask-free form of noninvasive ventilation. FDA also created a whole new classification regulation and our system is the only product that’s listed to date in that system. Moving on to our clinical trial effort, in the July edition of the Annals of Emergency Medicine, the Doshi study was published. This was a significant trial for us It showed that the Hi-VNI has the same clinical results as NIPPV in the management of acute respiratory distress, patients that show up in emergency department. So, it’s aimed at preventing patients from being intubated and going on mechanical ventilation. This all commerce study was a big part of our de novo submission to FDA. It was a multi-center 204-patient randomized controlled trial against the current standard of care, against NIPPV and is proven to be very useful in helping physicians understand how to deploy and use high Hi-VNI Technology in their critical care settings, especially in their emergency departments for patients in respiratory distress, whatever their underlying costs. So, next up on the clinical front, in December, the study conducted by Reynolds, Ives and their colleagues on the use of our IntellO2 module in premature babies using Hi-VNI technology was published in the Archives of Disease in Childhood

[John Landry:]

Thank you very much, Joe. Revenue for the fourth quarter of 2018 was $11.7 million, representing a 12.3% increase over revenue of $10.4 million in the fourth quarter of 2017. Total U.S. revenue was $9 million, representing an 11.5% increase over the fourth quarter of 2017, while total international revenue was $2.7 million, representing an increase of 15.1% over the fourth quarter of 2017. Capital revenue, including revenue from both product sales and lease revenue, was $3.3 million for the fourth quarter of 2018, representing a 6.5% increase over the prior year quarter. This increase was a result of product mix, partially offset by lower fourth quarter 2018 capital unit volumes when compared to the fourth quarter of 2017. The fourth quarter of 2017 represented a difficult comp for us, as it included a significant number of capital units that were delayed from the third quarter into the fourth quarter due to the major hurricanes that hit the southern U.S. in the third quarter. U.S. and international capital revenue were $2.3 million and $900,000, respectively, for the fourth quarter of 2018. Disposables revenue was $8 million in the fourth quarter of 2018, representing a 16.9% increase over the prior year, and it was primarily driven by an increase in our installed, the Precision Flow units worldwide. During the fourth quarter of 2018, we sold approximately 82,000 disposables worldwide. Disposable revenue was $6.4 million and $1.6 million in the U.S. and international markets in the fourth quarter of 2018. Worldwide service revenue was $459,000 in the fourth quarter 2018, which is generally in line with our worldwide installed base. Of this amount, $363,000 was generated in the U.S. and 96,000 in our international markets. Gross profit for the fourth quarter of 2018 was $4.8 million, an increase of $1.3 million over gross profit of $3.5 million in the fourth quarter of 2017. Gross margin was 41.2% in the fourth quarter of 2018 in comparison to 33.2% in the fourth quarter of 2017. The improvement in gross margin was driven by the absence of nonrecurring supply chain expenses, favorable sales mix, reductions in direct material costs and to a lesser extent the launch of our second generation Vapotherm Transfer Unit or VTU for short, and improved overhead absorption compared to the same period in the prior year. Sales and marketing expense was $9.6 million for the fourth quarter of 2018, an increase of $2 million over the prior year. This year-over-year increase was primarily the result of an increase in U.S. field headcount from the fourth quarter 2018 expansion and investments in medical education and digital marketing initiatives. Research and development expense was $2.7 million for the fourth quarter of 2018, an increase of $600,000 over the prior year. This increase was driven by new product development initiatives related to the Precision Flow Hi-VNI system, our IntellO2 module, and our next generation Hi-VNI technology platform. General and administrative expense was $3.4 million for the fourth quarter of 2018, an increase of $1.3 million over the prior year. This year-over-year increase was primarily due to IPO-related expenses, public company costs and increased facility costs as we consolidated our operations into a larger facility in Exeter, New Hampshire. Net loss for the fourth quarter of 2018 was $12.9 million or $1.39 per share, compared to $9 million or $12.38 per share in the fourth quarter of 2017. Adjusted EBITDA for the fourth quarter of 2018 was a negative $10.2 million compared to a negative $8.2 million in the fourth quarter of 2017. Adjusted EBITDA adjusts for foreign currency gains and losses, interest expense represented on a net basis, loss on debt extinguishment, changes in fair value of warrant liabilities, depreciation expense and stock-based compensation. Adjusted EBITDA decreased by $2 million in the fourth quarter of 2018 as compared to the fourth quarter of 2017 due to higher operating expenses, specifically sales and marketing expenses, and general and administrative expense related to the IPO. As of December 31, 2018, cash and cash equivalents were $58.2 million compared to $13.2 million as of the end of September 2018 and $26.5 million as of the end of December 2017. We completed initial public offering in November 2018, which resulted in net proceeds of $57.4 million. Now, turning to guidance. For the full year 2019, we expect revenues to be between $49 million and $51 million, which represents a year-over-year increase of 16% to 20%. For the full-year 2019, we expect gross margin to be in the range of 41% to 41.5%. For the full-year 2019, we expect operating expenses to be in the range of $64 million to $66 million. This includes anticipated stock-based compensation expense of $4 million of which $1 million is related to one-time IPO-related charges. Please note that our operating expenses are typically highest in the first quarter of the year due to certain sales and marketing related activities that take place in that quarter. For the first quarter of 2019, we expect revenues to be between $11.8 million and $12 million, representing growth of 10% to 12% over the first quarter of 2018 respectively. This concludes my remarks. I'll now turn it back over to you, Joe. Thank you.

[Joe Army:]

Thanks, Johnny. Before opening up the line for questions, I want to review our 2019 strategic priorities. And they are expanding our worldwide channel, launching a couple of very interesting new products, growing our compelling clinical data set, and continuing to improve our gross margins. So, let me start with the expansion of our worldwide channel. And as I mentioned earlier, in 2019, we started the year with 52 territories in the U.S., many of which were filled late in 2018. We expect these territories to ramp to full productivity in the back of the year, and they're going to help contribute to our growth of the Precision Flow installed base, and we are also planning on another expansion in late 2019. Continuing on with our 2018 efforts, our U.S. field team this year is going to be highly focused in the emergency department. The ED has high growth potential because it's the gateway to the hospital and accounts for over half of all respiratory ICU admissions into a hospital. So, you know the ICU is a capacity constraint area of the hospital and it is very expensive place to treat patients. So, by focusing on ED, we are helping our hospitals move patients into less intensive care settings, and they generally have more capacity, they are lower cost settings and they also have significantly higher patient satisfaction scores staying in those places rather than the ICU. So, there are couple of different tactics that we've taking to drive our value in the ED department. So first, when we offer an ED guarantee program in which we offer a money back guarantee to the hospital if a patient who is intolerant to NIPPV, in other words, they can't wear the mask, if they go on to our Hi-VNI Technology and they fail and have to be intubated, we give them back their money for that disposable. And to date, we've had to refund less than a handful of disposables. This is pretty exciting. And as I see the number of hospitals participating in this program increase, we can envision a time when we're going to publish the refund rates as the sort of a real-world registry that documents the value to our customers. Secondly, We increased our ED physician-to-physician medical education efforts last year. Well, we say that, we didn’t have any. We actually started them, we’ve built an ED bureau [ph] in the back half of the year. We’re also expanding our continuing education unit programs where respiratory therapists can obtain CEU credits, while they learn about Hi-VNI. Our emerging digital market activities, they are all focused on educating ED physicians, RTUs and nurses on Hi-VNI Technology. So, we’ve seen some results from these new programs, it's early but it is interesting. Finally, with this growing body of clinical data, we are studying how to help clinicians think about incorporating Hi-VNI Technology into practice guidelines. We think that could be important in the future. So, transitioning to our worldwide channel, we are very pleased to announce that we acquired our UK distributor Solus Medical on February 28th. The UK is our largest market outside the U.S. and Vapotherm made up the vast majority of Solus’ bag. The UK is where the Reynolds and Ives , IntellO2 study was completed. And where the majority of the UK installed base being in the queue, [ph] UK is going to serve as a great location for the initial launch of the IntellO2 technology late this year. Moving on to our second strategic initiative, the launch of new products. There are number of things we’re excited about on that front including the launch of the new precision for Hi-VNI system that occurred earlier this quarter. This is the first Precision Flow system to carry the expanded de novo labeling from FDA. And this system features updated hardware and software. There are new EU guidelines that we had to meet. In addition, we’ve continued to improve that design from a quality and from a cost point of view. Later this year, we’re going to launch our next generation of Hi-VNI patient interfaces. They are designed to improve patient comfort and strengthen our already high user friendliness. We can do that through color coating, new packaging and then crush resistant technology. We also expect to launch an integrated aerosol drug delivery Hi-VNI disposable. This product is going to enable continuous delivery of selected inhaled drugs that are used by respiratory distress patients. One of our more interesting development projects is the IntellO2, as I’ve mentioned this for a couple of times now. Our goal is to get the CE Mark and begin a limited market release in a handful of international markets before the end of 2019. We’re studying the impact of IntellO2 on the total addressable market but our early work is showing that it looks like it’s going to expand our total addressable market by a meaningful amount. We’re also focusing on the development of our NextGen Hi-VNI system. This system is designed to eliminate the need for wall air. We do that by incorporated and integrated air source into the platform. This is particularly excited because it will allow Hi-VNI to be used throughout the entire care continuum from ambulance to ICU to home. And some of you may have noticed, we took the first step last year when we submitted to the Gen 0 510(k) to the FDA. We made good progress on the commercialized version and expect to file our 510(k) on that NextGen in 2020 and expect to do our first patient late in 2020. Our third strategic initiative for 2019 is to expand our large and compelling clinical data set. Our investments in clinical trials will generally be focused in two different areas. One, studies that continue to build the clinical evidence for our Hi-VNI technology versus the current standard of care, BiPAP or NIPPV in our current patient populations and in the current care settings. The second area where we’re investing capital is studies that document the clinical value in new patient populations and new care settings. And we’re going to invest in clinical studies, where we have a distinct and unique clinical advantage. And our intention is to publish new data throughout the year. So, to that end, last week, a study on congestive heart failure patients was e-published in the American Journal of Emergency Medicine. This is an interesting subgroup analysis from the Doshi ED randomized controlled trial. It looked at 42 patients that presented with the CHF emergency department setting and it showed that Hi-VNI was as effective as the current gold standard, NIPPV, in treating these very sick respiratory distress patients. So, we’re looking forward to sharing this important information with clinicians all around the world. I would like to share with you our latest clinical trial that we just kicked off. Patients who are recovering from CHF, COPD, big surgery, they often face a long recovery period. And the clinical data suggest that getting these patients up and moving, getting them ambulating as soon as possible in recovery process that can lead to quicker recovery and shorter lengths of stay. But, it's hard to ambulate these patients because many times they have compromised respiratory systems and the technology available to mobilize them just isn't designed for this purpose. The customers have been reporting the use of our VTU, you remember the VTU 2.0 I talked about earlier to ambulate these patients. So, we’re going to do a feasibility study and we're going to go take a look at how Hi-VNI may be able to help clinicians provide that respiratory support that these patients need early in the recovery process to get them up and moving. So, we've started enrolling patients. And given that this is a feasibility study in the end is pretty small, we expect to have the results in 2019. Our final strategic initiative is to continue to improve our gross margin. We’re going to keep running the same three-pronged play that we have, to drive gross margin improvement that we’ve used to date, and it's really simple, launching new products that have more clinical value, reducing our product costs and scaling our production volumes. So, taking these in order, we have several exciting new products lined up for 2019 that I have already touched on. And to reduce costs, we’re more efficiently sourcing materials and components from tier 1 suppliers and then redesigning the product for improved quality and ease of manufacture. Lastly, we expect to see leverage from increased volumes that are tied to our revenue growth. We have a lot of room to grow into that capacity at our factory. And as we grow revenue, we will leverage our overhead cost and improve those margins. So, in summary, we have a good 2018, we are looking for more of the same in 2019. On a personal note, 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.

[Operator:]

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

[Bob Hopkins:]

Hi. Thanks and good afternoon. I apologize for the background noise. I’m at the orthopedic meeting in Las Vegas and there's nothing quiet about Las Vegas. So, Joe, congrats on a good end to the year and a good year. I guess, the first question I want to ask is really big picture. You grew very high teens in the -- for the year, you are projecting another year of kind of similar type of growth, high teens, but you have an awful lot going on in terms of the de novo label, new products, new hires. What would hold you back from accelerating growth in 2019 over 2018? Maybe there's some conservatism in those numbers. But, it seems to me like there is a lot of good things going on at the company and it wouldn’t be too outrageous to suggest that you could have a growth acceleration year rather than kind of a flat growth year. Thank you.

[Joe Army:]

Hey, Bob, it's good to hear you. And have fun at AOS. I always enjoyed that show when I was at Salient. In terms of your question, first and foremost, we have learned very carefully from everybody that when we give a set of numbers to Wall Street, we better be prepared to fully deliver on those numbers, barring some end of the play kind of an outcome. So, we are very focused on making sure as a new public company that whatever we give you, we’re going to be able to deliver on. If we were in fact to outperform the guidance that we've given you, some of the factors you touched on would in fact be the reasons why. The recent expansion of that sales force would have then coming up the curve quicker than what we had planned on. The effect of this de novo labeling and the new QAV categories, our ability to talk about mask free NIV throughout the ED space, with ED docs are on the country's proven to be pretty important to well as the dose ED clinical trial. So, there's a lot of factors that you touched on it, if we in fact were to over perform I’m sure it's going to be those that are the reason why.

[Bob Hopkins:]

Are there any other kind of headwinds to the business in 2019, that we should be considering as we think about the model I mean challenges in delivering on the growth? And then lastly for John, just wanted to get a kind of refresh sense from you, as you think about the business and where you’re taking it long-term from a margin perspective. And I know it's one of the top priorities of the Company, but can you just give us any updated sense of long-term, if you execute on your plan, where you think you can take the gross margins of this business?

[Joe Army:]

So, Bob, the headwind question is a good one if when we think it of a lot about and we worked to put some factors, and some headwinds into the plan. In the fourth quarter, late fourth quarter we retooled that sales team in terms of expansion. It was a 25% growth were doing that all of our managers who are hiring people while they were going and driving a number. Anytime you redraw territory lines you have the potential to create confusion and a bit of a distraction part of the sales force. I was very proud of our field leaders to see their ability to stay focused and go deliver despite that significant expansion and retrying the territory lines, but that's always something that we think a little bit about every time you go to extend sales force you run some risk around losing a step. In terms of looking at other competitive technology that would be another potential headwind, we continue to hear rumors of Phillips bringing their non invasive positive pressure system incorporating a oxygen delivery channel into that. We competed against that technology or those types of technologies in Europe for many years now and done so successfully. But you never want to underestimate that they bring that into the U.S. at some point that certainly create a bit of a conversation piece with a number of our customers. But seeing in any particular that gives us a lot of heartburn right now. But as we all know, anything can happen. So may be John you can address the margin part of that question.

[John Landry:]

Hi Bob, it's John. So in terms of our long-term gross margin profile given our mix of disposable revenue, capital revenue and mix of the business between U.S and international, we’re targeting a 65% to 70% gross margin profile at scale.

[Operator:]

Your next question comes from the line of Margaret Kaczor from William Blaire. Please go ahead. Your line is now open.

[Margaret Kaczor:]

So, the first one that I wanted to focus on is a little bit more on the ED as since you've referenced that’s the focus over the reps in U.S at least this year. And so, first, can you maybe remind us penetration into the ED channel at year end? And then maybe the traction that you have seen from the clinical data you referenced at Omni 2018, and as you look at that money back guarantee within the ED? Can you give us any kind of feedback that you saw from the trial versions of putting that into some market in 2018 and before that if you did?

[Joe Army:]

Margareta, it's good to hear you. In terms of penetration rates, the number it is a very, very small number it's a single digit number. There is so much room for us to run it's not even funny. So we have a lot of room left to go. In terms of how the piloting of our ED guarantee program went, it was quite interesting because as the field teams started to use this, the customers would react in a very particular way in a way, we go you are willing to -- the message being, you're willing to stand behind your products to that degree, your technology to that degree that you give us a money back and often times that's as far as they took it. Then they would just begin the sale process and move through it, what we had to do is because I'm going to remind the field team that this is really important information that we are going to get for this sort of real-world registry and we really need to sign these people up. So, the reaction has been pretty interesting and we've been thinking about other ways to expand that particularly as we begin to think about the launch of the IntellO2 in Europe, selected parts of Europe in late 2019. There are other ways that we could adapt that whole concept of the performance guarantee.

[Margaret Kaczor:]

And then in terms of drivers of that business, is that going to be more new accounts and that facilitate to drive those new countered option? Or is it going to be going deeper within the existing accounts and getting numbered under by their 5th or 10th Precision Flow?

[Joe Army:]

And a lot of times we are seeing it more and more in new accounts, but it also works with existing customers as well. If you think about it, very early at a using our technology membership before we show up we have to teach them because this is the mask-free form of non-invasive ventilation, and for 20 years clinicians were trained but the only way you really would benefit respiratory distress patients put them on non-invasive ventilation, put them on BiPAP or NIPPV. And this is really a way to help the clinicians understand along with reminding them, it's a mask-free form of NAV, to get comfortable to go try it. This is they start putting on patients, they have an "aha moment" and then that leads to continued validation or adoption. But it happens in both net new accounts as well as existing accounts.

[Margaret Kaczor:]

And then if you look at international for bit I mean you guys talked about the UK acquisition as a distributor. Can you give us a sense of kind of how big that acquisition was? Why was the UK the first to target? Was it IntellO2 or something else? And then, I assume this is more than just ASP increases, so what kind of strategic changes do you think you'll be able to incorporate in that market with some more direct feet on the street?

[Joe Army:]

Well, this was really a very, very opportunistic acquisition on our part. Solace has very similar culture to ours. They have a big footprint in NICU and when we kept thinking about the two principal investigators, the two centers that used, that did the IntellO2 study. Dr. [Reynolds] and Dr. Ives and their institutions Oxford and St. Peters. These are major institutions in the UK in the neonatology world. And it seemed to us to be an absolutely wonderful place to go begin the process of launching this into end of the market. And to be able to do it with a direct organization in an English speaking country quite frankly, it's really going to allow us to test some different business models that were looking at there. So, we are pretty excited about it, we are delighted that these people are on board with us, and if we really don't mind picking up the full ASP either Margaret to tell you the truth. I think, John, has something to add to that.

[John Landry:]

Yes, hi, Margaret. I mean the last piece of your question this isn’t included in the guidance that’s been provided.

[Margaret Kaczor:]

John, since you turn back in and last question for me. But as we look at the seasonality of the business this year, can you walk us through some of the comps that you gave us the Q1 guidance range? So how should we think about the traditional seasonality of your business relative to the rest of the year?

[John Landry:]

Sure, so from the seasonality perspective, Margaret, the fourth quarter of each year is a typically the highest of revenue quarter for us, it’s generally tight around capital equipment revenue in the year end due to the yearend budgeting cycle of hospitals. The next highest quarter is generally the first quarter of the year that’s due to the higher disposable cell through due to the flu season, particularly in the U.S. and North America. Then second and third quarters of the year typically that software given at the flu subsides in the U.S.

[Operator:]

Your next question comes from the line of Jason Mills from Canaccord Genuity. Please go ahead. Your line is now open.

[Jason Mills:]

Joe a bunch of questions for you, I will try not to be too verbose, but start with some of the more big picture question, specific to the ED, the really try to tie end the new next generation, the x wall air product that you have coming down the pipeline. Perhaps I shouldn't be tying these two together and I think you’re targeting the ED to do well in the ED even before that products comes down. But how important is that product for you to reach a tipping point? If you think about entering the ED those are going elsewhere and be able to ambulate those patients and get them move in with your new next generation seems important. Maybe talk about the product cycle there and how important that might be for you to just tip that ED in a big way?

[Joe Army:]

Jason, it's good to talk to you, and hope all is well. The next generation technology is still going to be in late 2020 we will be putting first patient. So when I think about that, there is an awful lot of ED patients that we are going to treat between now and then. I think you're right that once we've integrated this, this air source capability, it's going to allow us to move those patients throughout the entire. All EDs are going to have wall gas, but not all hospital beds general floor beds, stepped on units are going to have that wall gas. So, it will make it much easier to move those patients throughout the care continuum. But I have to tell you, I think right now with the tools that we have in our kit, we have a lot of opportunity in front of us between now and the end of 2020 to go open up EDs across the country.

[Jason Mills:]

I didn’t anticipate you would be waiting and I just wanted to tie those two together. So next question on new products in IntellO2, look forward to seeing early progress in the UK, the U.S. obviously a big market for you, what’s the pathway for IntellO2 in the U.S.? And have you worked out at this point in time, definitively the model you're going to use, the model with which you will sell that to customers?

[Joe Army:]

So, it's way too early for us to talk about U.S. business model for IntellO2 because we haven't even had an opportunity go and try out something in Europe, but the beauty of that Solace acquisition is. We got the idle test bed now to really shakedown and try out some very interesting business models. In terms of the pathway to get it cleared in U.S. this is the nontrivial exercise, it’s going to be hard. FDA has not cleared it a closed-loop control system in the United States in this department and this division in respiratory and anesthesia. We met with them on several occasions and we have a pathway that we think it’s going to work, but it is it’s going to take a lot of work, were coming up to, to do more clinical work we’re going to have to continue to educate and develop and refine. But if you're ever going to bring a closed-loop controller into the NICUs in the United States, this is the technology to do it with. We create asymmetric risk Jason. If you think about it, it's kind of like lane assist, that's really what we're doing is. We're going to put in lean assist on the delivery of oxygen to these babies, and we're going to do it in a setting where if it goes wrong from the FDA's point of view -- if things go wrong, while we fall back to exactly what we already have today, which is a nurse covering two babies with an independent monitor and from a safety point of view, we are very, very comfortable with that. So long load hold, lot of work to do, but we like that pathway. We think it makes a lot of sense and we are confident that we will be able to get there when FDA given the appropriate time.

[Jason Mills:]

And a huge opportunity if you get there, right, Joe?

[Joe Army:]

I really like the IntellO2 platform a lot. I like what it does for our patients. I like what it does for our business model. I like what it is does for our margins and I like what it does for a total addressable market.

[Jason Mills:]

And last question for me I could ask 10 more, but I will ask one more to John and get back in queue. John, just with respect to the guidance, could you talk a little bit about the growth implicit for capital through the year and the growth implicit for the disposables and also maybe service for the year inherent in that guidance range?

[John Landry:]

So, we don't actually break it down between the guidance between the different lines whether it's capital disposable to service. So, we're looking at the 16% to 20% overall sort of general ballpark directions, it will be sort of consistently aligned to across those three categories.

[Operator:]

Your next question comes from the line of Sean Lavin from BTIG. Please go ahead. Your line is open.

[Marie Thibault:]

Hi, this is Marie Thibault on for Sean Lavin tonight. Congrats on reporting your first quarter as a public company, nice to see you. I had a couple of questions. I would love to hear a little bit more about your digital marketing efforts. And I know you mentioned that as part of your investments in sales and marketing for the years. So I'd love to hear if you're extending and kind of how that program?

[Joe Army:]

Well, that's a really good question. And I'm not crazy about answering it because I really don’t want the rest of the world and all of our competitors to get any good at this. With that being said, you know, I'm a little bit of a dinosaur when it comes to this all digital thing. I don't have a Facebook account, I don’t -- it's just never occurred to me. The clinicians would learn about new technologies on Facebook, and yet they do. And so, we've gone through a bit of an exercise over the past 18 months, where we've invested in and we've built up our capabilities in it, and we're going to continue to do that. And it's all focused on education whether it'd be CEU, CME programs, whether it would be helping the clinicians come on to our website and then work their way through the clinical data that’s on the website. And then when they come out of the other end of it, they are looking for a field representative to contact them. They are much further along on the education process and much more deeply knowledgeable about how Hi-VNI is a mask-free form of non invasive ventilation. So, it's an area that we’re going to continue to invest capital in, and we like to return and we’re seeing on this. And we see a lot of potential for this in the future for communicating even more robustly with our customers.

[Marie Thibault:]

One question I guess mentioning that UK distributor and I’m wondering, if this is strategy you’re going to see following as you're going to impress the world. Should we expect to hear in the future about more distributor acquisitions or territory expansion all U.S.?

[Joe Army:]

This was a really unique opportunity in a unique set of circumstances in that the vast majority of these guys back was, was our Hi-VNI technology. The values of those companies lined up incredibly tightly and we've known these guys forever and a day. So and coupled with strategic intent around the IntellO2 launch coming really in the UK and other international markets in Europe. So, it's really not something that we're going to go pursue aggressively. If there is an opportunistic situation that has a strategic value as well as the financial value, I think we would consider it. But I think we've got lot on our plate right now and we are going to just go and execute on that.

[Marie Thibault:]

Last question for me on the congestive heart failure and COPD feasibility study that sounds really intriguing like lot of potential there, I’m curious what kind of end results would be? Would that be sort of an addition to the label? Would that just be something you can talk about more with clinicians and respiratory therapist? How do you envision that playing out?

[Joe Army:]

Let’s talk just briefly about the label. Right now, we treat undifferentiated respiratory distress, which means, if you show up in emergency department and you're in respiratory distress for whatever reason. We are now the mask-free form of non-invasion ventilation where we can treat you. If you’re spontaneously breathing patient, we’re going to treat you. So, it doesn’t matter the underlying cause whether it's CHF, COPD, asthma, dyspnea. You name it, doesn't matter, we’re going to take care of the symptoms, right. In terms of the CHF paper that was published last week, EPUB, it was really interesting about business that all the clinicians that have been trained for the last 20 years have been trained at really the only way to resolve respiratory distress in CHF patients that are in exacerbation is. You go put pressure on them because the concept is they have wet lungs and we’re driving the fluid back across the lungs. And what was so interesting about this study that we're able to use mask-free NIV to do that, which is not a pressure-based therapy, it’s a velocity-based therapy. So, it's pretty interesting, I mean its 42 patient, so it’s a reasonable sized. And really what it's done is given clinicians permission to use Hi-VNI on that patient population. Anyhow, it's a nontrivial patient population is well over 1 million of these CHF patients that show up in the emergency department each year that are experiencing respiratory distress. So, it's cool, gives us more to talk about to these ED physicians.

[Operator:]

That concludes our question-and-answer session for today. I will now like to turn the call back Joe Army for closing remarks.

[Joe Army:]

Well, I just like to thank you all very much for joining us today and we look forward to updating you on our next quarterly call. Have a good one.

[Operator:]

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