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Vapotherm Inc (NYSE:VAPO)
Q3 2020 Earnings Call
Nov 4, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Third Quarter 2020 Financial Results Conference Call. As a reminder, this call is being webcast live and recorded.

It is now my pleasure to introduce your host, Mr. Mark Klausner of Westwicke. Please go ahead, sir.

Mark Klausner -- Managing Partner

Good afternoon, and thank you for joining us for the Vapotherm third quarter 2020 financial results conference call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army; and its Senior Vice President and Chief Financial Officer, John Landry.

I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit the Events link in the IR section of our website, vapotherm.com.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements. These statements are based on the current expectations of management, and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors section of our annual report filed on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission or the SEC on March 4th, 2020, and our quarterly reports on Form 10-Q for the first, second and third quarters of 2020 as filed with the SEC on May 5t, 2020, August 4th, 2020 and November 4th, 2020, respectively, 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.

Joseph Army -- President & Chief Executive Officer

Thank you, Mark. Good afternoon, and thank you for joining us today. I will begin by discussing our third quarter 2020 results. Then I'll hand the call over to John Landry, our CFO, to provide the financial details of our 3Q results. After which, I'll update you on our key areas of focus for the remainder of the year before taking questions.

3Q was another good quarter for Vapotherm as we generated $30.6 million in revenue, a 183% increase over 3Q 2019, increased our worldwide installed base by more than 2,700 units to approximately 25,000 units, and opened 43 net new gold and silver accounts in the U.S. In addition, we printed a 50.8% gross margin for the quarter, despite continued significant headwinds.

On our 2Q call, I stated my belief that our business had been significantly transformed as a result of two factors; one, the increased awareness and usage of our high velocity therapy; and two, our continued progress in developing the Oxygen Assist Module or OAM for short and our next-generation system. With another quarter under our belt, I'm increasingly confident in our ability to sustain this transformative momentum post COVID-19.

Today I'll update you on what I'm seeing in our business that's driving my thinking on this, as well as provide an update on the work we've been doing on our products pipeline during 3Q.

2Q was incredibly hectic, as we devoted a substantial amount of our energy to rapidly ramp our capacity in an effort to meet all customer needs in the midst of a significant surge in COVID-19 hospitalizations. 3Q was primarily about working to settle down and prepare the organization for sustainable long-term growth. We focused on three things this quarter; first, we ramped production capacity in an effort to meet all future customer demand; second, we expanded our clinical education efforts to teach new customers how to use our equipment on both Type 1 hypoxic and Type II hypercapnic patients; third, we continued to work on our future growth drivers, the Oxygen Assist Module and the next-generation system.

We expanded our maximum theoretical production capacity by adding new lines, which are fully qualified and ready to go. We developed the capability to run three shifts per day. In the event, we experienced a significant surge in demand for our capital units. This reduced our need for over time and settled our production team down for the long haul. We now believe we are in a position to meet all potential future customer demand without burning our team. We also expanded our warehouse capacity by 40%, and it implemented all applicable safety measures in an effort to keep our people safe. Importantly, we made all these changes while not adding material to our fixed cost base.

On the clinical education front, our field team is focused on implementing and educating both our new and existing customers on how to use our high velocity therapy on patients suffering from both Type 1 respiratory distress, such as those with COVID-19, and Type 2 respiratory distress, such as those with COPD. We believe this continued focus on education will help drive the broader adoption of our technology, especially when customers experience firsthand how our high velocity therapy is different from traditional high flow therapy, and how it could be used to help patients beyond COVID-19.

To give you a sense of the success we are having, I'd like to share with you a story from a Gold ED hospital in the New York metro area. This hospital became a customer during the initial COVID-19 surge. We believe our team did a great job getting them up to speed quickly on high velocity therapy, so they could treat the respiratory distress experienced by the surge of COVID-19 patients, most of whom were hypoxic.

As the surge subsided, our team was able to educate this customer on the full clinical utility of high velocity therapy, including Type 2 patients in respiratory distress. This customer now uses us in adult ICUs, the general care floor, pediatric ICUs and the ED, and recently converted to our new ProSoft nasal cannula and aerosolized disposable patient circuit, which is intended to deliver aerosol medication without disrupting therapy. In addition, the customer will be trained in the NICU soon, and has just placed an order to expand their fleet of Precision Flow units and Vapotherm Transfer Units further.

Post surge, disposable turn rates in this hospital have ramped as we'd expect for a net new account. I am really encouraged by the trends I'm seeing in this and other customers, which gives me confidence that we can use the increased access and awareness driven by COVID-19 to support long-term growth.

Our third focus with our continuing work on our future growth drivers, primarily the Oxygen Assist Module or OAM and our next-generation system. We recently updated the OAM software to operate with both the Medtronic Nellcor and Masimo SpO2 sensors to improve the user experience, and the early clinician feedback from the limited market release continues to be positive on both neonate and adult populations in the United Kingdom, Europe and the Middle East. Recall that the OAM device is designed to help caregivers maintain patients within a physician prescribed oxygen saturation range, while requiring significantly fewer manual adjustments to the equipment.

Our pre-pandemic strategy was to focus on the neonatal patient population, as our clinical data is strong. However, based on the clinical experience in the U.K., Europe and the Middle East, we now believe there is a significant unmet clinical need in both neonate and adult patient populations. We expect to moving a full market release with this product in the U.K., Europe and the Middle East in 1Q 2021, and are continuing to work with FDA on the appropriate regulatory pathway in the U.S.

We believe we've made good progress on our next-generation system, especially given the fact that our team was restarting from a hard stop in late first quarter. While the initial version of this device will be optimized for the hospital setting, we expect to learn a great deal about clinical utilization and patient needs that will inform our strategy when we're [Phonetic] ready to launch a home-specific product.

I also want to throw in a plug for our new FELIX-1 portable negative pressure mask. This idea came from a respiratory therapy leader in New York City and can be used with a variety of respiratory support devices, including our high velocity therapy, and may mitigate the risk of transmission of potentially infectious particles to caregivers treating COVID-19 patients.

We are proud to be donating all of the profits from this product to non-profit funds set up by the American College of Emergency Physicians, American Association of Respiratory Care and Emergency Nurses Association.

Lastly, I want to thank all our teammates and partners around the world for their extraordinary efforts to serve our customers and their patients on the front lines during this crisis. This has been remarkable to see what they've accomplished in a very uncertain and stressful period. We believe they have repeatedly and successfully navigated the day-to-day challenges of scaling our capacity significantly, while adapting to significant change at work and at home made necessary by the COVID-19 pandemic, and I've never been prouder of our team.

Now I will turn it over to John Landry, our CFO, to provide a financial review. Johnny?

John Landry -- Senior Vice President & Chief Financial Officer

Thank you, Joe. As mentioned, revenue in the third quarter of 2020 was $30.6 million, representing a 183% increase over revenue of $10.8 million in the third quarter of 2019 or the prior year. U.S. revenue was $25.5 million, an increase of $17.5 million or 218% over the prior year, while international revenue was $5 million, an increase of $2.3 million or 81% over the prior year.

Our worldwide installed base has now grown by approximately 8,200 PF units year-to-date, including third quarter's growth of approximately 2,700 PF units. As of the end of the third quarter, our worldwide installed base consists of approximately 24,800 PF units, which reflects growth of 50% since the beginning of the year. Our U.S. disposable utilization rate in the third quarter of 2020 was 1.92, as compared to 1.66 in the prior year. This is the third quarter in a row where our U.S. disposable utilization rate exceeded our historical experience by approximately 0.25 turns. 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 installed base, we continued to believe that turn rates are likely to return to more normalized level once COVID-19 cases begin to moderate and may even be slightly lower than historical averages as the newly installed PF units become productive. U.S. disposable average selling prices increased in the third quarter, 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 this year.

The international disposable utilization rate in the third quarter of 2020 was 1.63, as compared to 1.80 in the prior year. Recall that we use a distributor network internationally, which results in slightly lumpier disposable utilization rates, especially in the third quarter of each year, due to seasonality. Gross profit in the third quarter of 2020 was $15.5 million, an increase of $10.7 million over gross profit of $4.8 million in the prior year. Gross margin was 50.8% in the third quarter of 2020, compared to 44.5% in the prior year. We improved gross margin faster than anticipated due to improved overhead absorption.

Recall we significantly scaled production beginning late in the first quarter of this year in order to meet increased customer demand for our products, especially capital equipment. This provided us with a significant tailwind through the third quarter, which we expect to normalize given our current inventory position. These tailwinds continued to be partially offset by headwinds in the form of higher labor costs, increased supplier freight and expediting fees incurred to meet the rapid increase in production capacity at a much higher mix of capital equipment revenue than we recorded in the third quarter of 2019.

Operating expenses were $26.7 million in the third quarter of 2020, an increase of $10.2 million over $16.5 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 associated with our next-generation system, partially offset by reduced worldwide T&E due to COVID-19.

Net loss in the third quarter of 2020 was $12.4 million or $0.49 per share, compared to $12.8 million or $0.65 per share in the prior year. Adjusted EBITDA for the third quarter of 2020 was negative $8.2 million compared to a negative $10.6 million in the prior year. Adjusted EBITDA adjusts for foreign currency gains or losses, net interest expense, depreciation and amortization expense and stock-based compensation. The $2.4 million decrease in adjusted EBITDA loss in the third 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 September 30th, 2020, cash and cash equivalents were $139 million, compared to $148.3 million as of June 30th, 2020, and $71.7 million as of December 31st, 2019. In the third quarter of 2020, our cash burn was $9.3 million. In October, we refinanced our debt facilities and entered into a $52 million facility with CIBC Innovation Banking, consisting of a term loan of $40 million and a $12 million revolving line of credit. At closing, we paid off in full the outstanding balances on our previous term loan and revolving line of credit. This new term debt facility reduces our interest rate by over 500 basis points and our interest expense by approximately $2 million per year.

Before we provide our guidance for the fourth quarter and full-year 2020, I would like to discuss our perspective on the current operating environment and trends we are seeing in the business. A couple of weeks ago, our expectation for Q4 disposable utilization was based on a light flu and RSV season and modest COVID impact on our business. Our hypothesis was that better hygiene practices, social distancing and increased rates of flu vaccination would likely lead to a light flu season this year in the U.S. and Europe, similar to what was experienced in the Southern Hemisphere.

In addition, we are expecting the RSV season to be soft, given that kids are not spending as much time in person at school in the U.S. We still believe our hypotheses regarding flu and RSV are correct. However, we have recently seen an increase in COVID-related hospitalizations across the U.S. and Europe. As a result, we now believe the impact of COVID hospitalizations during the quarter will offset reduced flu and RSV activity, and the net result in disposable utilization will be similar to what we've seen in a normal flu season. Should COVID hospitalizations rise sharply, the net result may be similar to what we have seen in any severe flu season.

On the capital equipment front, sales have been dynamic on a month-to-month basis, and difficult to predict, going back to March. Generally, we have seen significant increases in capital equipment sales in geographic areas where COVID has seen its first wave of outbreaks. We have not typically seen meaningful increases in capital equipment sales in geographic areas when COVID outbreaks have occurred a second time. As it's difficult to predict what geographic areas will be impacted by COVID outbreaks, it remains difficult to predict our capital equipment sales.

In addition, we believe some of our capital equipment sales that typically would have occurred in the fourth quarter of this year were moved into the third quarter, as hospitals prepare for the fall and winter. As a result, while capital equipment sales in Q4 will grow over Q4 2019, we have not factored in a significant impact from COVID. In the event that we see a stronger-than-anticipated flu or RSV season or new geographic areas are impacted by COVID for first time in Q4, capital equipment sales will likely be above our current expectations.

Overall, we expect revenue in the range of $18 million to $20 million in the fourth quarter of 2020, and the anticipated year-over-year increase of 38% to 54% over the prior year. For the full-year 2020, we expect revenue of between $102.8 million to $104.8 million, an increase of 114% to 118% over 2019.

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.

Joseph Army -- President & Chief Executive Officer

Thanks, John. Before opening the line for questions, I'd like to review how we intend to focus our efforts for the remainder of 2020. The play is very simple, and it's more of the same from the third quarter. First, we plan to continue educating our net new gold hospitals on how to use our high velocity therapy on patients experiencing Type 2 respiratory distress. Given what we've seen to date, we believe these efforts are paying off, will set the stage for long run future growth across our business.

Secondly, we plan to focus on new product development. In 4Q, we plan to expand the NICU and adult OAM limited market release in the U.K., Europe and the Middle East. With respect to the U.S., we hope to have finalized our OAM neonate IDE study design and regulatory pathway with the FDA by the end of the year. We also plan to submit the next-generation system for regulatory clearance for both the hospital and home settings and spend more time thinking about the elements we will need in place to serve respiratory distress patients in the home.

Lastly, we plan to continue to run our three-pronged gross margin improvement plan, leverage our operating expenses and drive working capital efficiencies over time.

To provide a little more insight into how impactful our high velocity therapy is at treating the respiratory distress experienced by many COVID-19 patients, I want to share one of the many patient stories with you from last quarter that comes from a VA hospital, as relayed to me by one of our sales professionals. This week we visited a VA hospital for Military Week. Hearing the success stories from the RTs and the doctors on how they have successfully used high velocity therapy to treat respiratory distress from all corners, including COVID patients, was incredible.

One of the head pulmonary doctors told me a story about a COPD exacerbation patient, who's respiratory distress he had successfully treated using Vapotherm. He stated this was a very sick patient, who not only had a Vapotherm in the room but also had a vent and BiPAP. At first he told me they intubated the patient, and peak pressures were very high, no matter the motor ventilation. He told me they even estimated the patient to BiPAP, because his CO2 level of 112 made him uncomfortable, but the patient continued to decline and his CO2 continued to rise. The doctor told me that he then put the patient on Vapotherm device and within 45 minutes his CO2 was in the 80s. Continuing the therapy on 40 liters, he told me that after six hours, the patient had completely turned around. This was a true "Aha! Aha! Moment" for the doctor and a few others in the building. It also gave us an opportunity to educate on different liter flows and how Vapotherm is different from common high flow nasal cannula.

In conclusion, I'm feeling good about how we performed in 3Q and how we're setup for the remainder of 2020 and beyond. Our installed base continued to grow materially faster than anticipated, and we are beginning to see these net new gold accounts use our high velocity therapy on Type 2 patients and expand usage throughout the hospital. We believe there is significantly more awareness with the benefit of our technology than there was at the beginning of the year. Revenue has significantly exceeded our expectations for this point of the year, and our gross margin improvement plan is ahead of schedule, despite strong headwinds. Our key product development initiatives, including OAM and the next-generation system, are progressing nicely.

Lastly, I want to reiterate how, very proud of our team for working to meet the needs of our customers, I am. Thank you for trusting us with your capital. It means a lot to us.

Now I'd like to open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Margaret Kaczor with William Blair. Your line is open.

Margaret Kaczor -- William Blair -- Analyst

Hey. Good afternoon, guys. Thanks for taking my questions. First off for me is, just a follow up on the quarter. You just saw strong capital sales this quarter, but you also referenced some geographies that second waves aren't driving significant capital demand. So I know this is really hard to parse out, but how much of that Q3 demand was COVID related versus expanding within accounts? And ultimately when do we get to a good quarterly run rate range? We think about kind of the post COVID Vapotherm.

Joseph Army -- President & Chief Executive Officer

Hey, Margaret. It's Joe. I'll take a shot at that and will let to John follow up with what he has got. So within the third quarter, an awful lot of that capital equipment sales did in fact come from COVID in the Southern tier, in Texas, Florida, Arizona and so forth in the Sunbelt. So in that July spike, we were busier than [Indecipherable] our how getting products out the door.

The disposables themselves -- I mean, we're feeling pretty good about our ability to predict at least within a relevant range, how those disposables are performing. But capital equipment sales, that one was -- if we hadn't had the inventory on the shelf that we put on at the end of the second quarter, we have been in a world ahead, and then we've been able to take care of the customers because our ability to predict this is very, very limited. You just don't know where it's going to show up.

John Landry -- Senior Vice President & Chief Financial Officer

And then, I think...

Joseph Army -- President & Chief Executive Officer

And also what you said is, we did see what we believe to be a fair amount of capital equipment that we booked in the third quarter actually was would -- typically would have been in the fourth quarter. The lower hearing from new accounts as they were all getting nervous and getting ready to see if they were going to get whacked here in the fall.

Margaret Kaczor -- William Blair -- Analyst

Got it.

John Landry -- Senior Vice President & Chief Financial Officer

Hi, Margaret. It's John. I would agree with that. I think, what we saw is obviously a lot of COVID demand in regards to second waves and where we've seen it. Typically, we see the capital equipment sales in areas of the world or the U.S. where COVID strikes for the first time. We haven't seen it to a greater extent where we've seen second waves in different geographic regions of the world, and that's where the most [Phonetic] take place, but it's been more typically aligned with first waves at this point in time.

Margaret Kaczor -- William Blair -- Analyst

Okay. And so that gets me to the last part of the question, which was what point do we get to kind of a good quarterly run rate post COVID? And as Q4 then that number where you guys aren't assuming that much from a capital perspective, not related to COVID?

John Landry -- Senior Vice President & Chief Financial Officer

Yeah. That's right, Margaret. So as we took a look at the capital and thought about our guidance for the fourth quarter, in particular, as Joe mentioned, we feel pretty good about where we're thinking disposables, and that business will be given our experience and hypotheses around flu, RSV season and COVID hospitalizations. On the capital side, it is a bit more of a wild card. To predict it, we did developing our guidance with more thought process around a modest impact from COVID-19. In the fourth quarter, we expect to see growth over the fourth quarter of 2019, but obviously a sequential decline from what we saw here in the third quarter, and which we expected, of course. Suspect most of that was front-loaded here in the back half of the year into Q3.

Margaret Kaczor -- William Blair -- Analyst

Okay. And then, if I can, as we look forward, you guys did give that examples of that New York hospital. Can you give us more color that was -- it sounds like maybe a non-customer pre-COVID, and then you were able to convert and really cross the hospital with months or at least a fairly rapid time period. So, is this a typical experience in most of the accounts. What convinced them to be able to do so other than kind of that "Aha! Aha! Moment"? And are these things were next-gen updates or kind of what gets you to there or is it clinical and economic data and so on? Thanks guys.

John Landry -- Senior Vice President & Chief Financial Officer

So just, kind of, to make sure I'm getting that right, Margaret. The question would be that New York hospital what I shared with you, is that kind of a one-off or we starting to see more and more of that? Is that your question?

Margaret Kaczor -- William Blair -- Analyst

Correct.

John Landry -- Senior Vice President & Chief Financial Officer

Yeah. So if -- I wouldn't have told you the story if it was a one-off. I wouldn't call it a we see these every day, but we're seeing more and more of this. That field team has done an absolutely phenomenal job this summer out in the field teaching all of these net new customers how to use this technology, particularly on Type II hypercapnic patients. That's really the play that we've been running over and over and over again, because this was a tremendous opportunity for us to expand our installed base, but we were really, really focused on making sure that they're using it on both types of patients, and that's what we're beginning to see. We were pretty -- we like what we're seeing with respect to that particular account and others like it.

Margaret Kaczor -- William Blair -- Analyst

Okay. Great. Thanks very much, guys.

Operator

The next question is from Bill Plovanic with Canaccord. Your line is open.

Bill Plovanic -- Canaccord -- Analyst

Great. Thanks. Good evening, and thanks for taking my call.

Joseph Army -- President & Chief Executive Officer

Hey, Bill. How are you doing?

Bill Plovanic -- Canaccord -- Analyst

Hey, good. A couple of questions here, and I think most of these questions were in around campaign problems, right, when you have a lot of systems in the field and you drive utilization and how much longer where the extra capital sales continue. To hone in on some of the questions, one, capital sales, what was the mix of new -- like totally new accounts versus units going into existing, and then how many gold accounts did you sign up in the quarter? And then I have a couple of follow up questions.

John Landry -- Senior Vice President & Chief Financial Officer

Sure, Bill. This is John. Good to speak with you. In terms of the mix of new accounts versus existing accounts, it follows roughly the same model that our business has historically seen. Roughly two-thirds of those capital equipment sales went into existing customers as we continue to go deeper and wider into the book. And then, I guess in regard to the number of ED Gold and Silver, as we add another 43 this quarter bringing us to almost 150 for the first three quarters of the year.

Bill Plovanic -- Canaccord -- Analyst

Excellent. And so just two-thirds went into existing accounts and one-third went into new accounts?

John Landry -- Senior Vice President & Chief Financial Officer

Correct.

Bill Plovanic -- Canaccord -- Analyst

For the capital [Phonetic]. Okay. I just want to be clear. That's a pretty big number. And then, the R&D went up sequentially, and I'm -- is that programs to support the Vapo 2.0 or is that queuing up for the OAM trials, or what specifically? Because, it was a pretty good jump sequentially.

John Landry -- Senior Vice President & Chief Financial Officer

Sure, Bill. In regard to that level of investment in R&D and the sequential increase that's tied to our HVT 2.0, our next-generation system, which we're targeting to -- which has the ability to break away from the meat of -- be connected to wall gas. It'll have an internal blower capability, which will allow us to access areas of the hospital that don't have pipe there, will be -- also allow us to potentially tackle patients in respiratory distress outside of the hospital, whether they may be in a home setting or in transport to a hospital facility.

Bill Plovanic -- Canaccord -- Analyst

And then lastly, it's just -- regulatory wise, what do you think the pathway on the OAM is going to be in the U.S.? I know you're in discussions. Is this going to be a big trial or is it a small trial, and what type of follow-up do you think it could be at this point? And then, really the same question on the 2.0, because if my understanding the 2.0 will also integrate the OAM. So, I don't know if it's -- it will be one trial, where it be the 2.0 with OAM, but any color would be helpful. Thank you.

John Landry -- Senior Vice President & Chief Financial Officer

Alright. Well, let's unpack that, first of all and talk about the clinical trial that we did at Oxford and St. Peter. So that was roughly 30 patients. Okay. And they were each on the technology -- either on our technology or on the control for 24 hours, Bill. So in terms many kind of follow up there is really not a lot of follow up in that study. That study was very, very conclusive around the clinical efficacy of the technology, even at that size.

So, as you know that the FDA has designated the Sprinkler [Phonetic] technology, we continued to dialog extensively with them. We are liking the direction that those conversations are taking. Our focus here in the fourth quarter is on finalizing the NICU IDE study and getting it cleared from FDA, and that will inform us a lot more in terms of the overall regulatory pathway, but we like where we're at with these guys, so far.

Outside the United States, you make a good point about the OAM technology being integrated into the next generation, and it's our intention here and later this quarter, during the fourth quarter to be able to file that for regulatory clearance in Europe and outside the U.S. So that entire OAM platform will already be integrated into the next-gen outside the U.S.

Bill Plovanic -- Canaccord -- Analyst

Great. Thank you.

Operator

[Operator Instructions] Our next question is from Marie Thibault with BTIG. Your line is open.

Marie Thibault -- BTIG -- Analyst

Hi, Joe. Hi, John. Thank you for taking the questions this evening. I wanted to stem my first question on the training and education angle, really encouraging act that you told us about, Joe, and certainly something that's key to my thesis on Vapotherm. So I've not -- if you could give sort of a progress update on how many of the new accounts your field team has been able to touch at the point in terms of training and education, and how long you think that process might take as we ease out of the COVID wave? Thank you.

Joseph Army -- President & Chief Executive Officer

Well, we've touched them all, Marie. So first of all, it's good talking to you. Thank you for asking the question. We've touched them all in terms of spinning them up and teaching them how to use it on Type 1 patients. Our people were all over those accounts, where that initial surges took place. Our people in there building gear, teaching them, training and getting them set up. And for the ones where we couldn't physically get in the hospital, we use our Vapotherm Academy with our distance learning tool. We've traded over 17,000 clinicians with that tanks sine the beginning of the year.

So we're touching them in multiple ways. Really the play here since the last time we all spoke was the expansion of that field clinical organization and then full court press driving them into all of those net new accounts, teaching them about how to use our technology on Type 2, and we're feeling very good about that right now. We like the progress that we're making. There is always going to be some accounts that's going to take us longer to get to in others, either because they are in the midst of another surge or because that -- it's just they're entrenched in their old or the previous technology. But as far, we're pretty happy with the way it is going and are confident. We're just going to keep running that play over and over and over again. We like this a lot.

Marie Thibault -- BTIG -- Analyst

Alright. That's really helpful, Joe. Thank you. I wanted to use [Phonetic] my follow up on disposables. John, you gave us some good commentary on how you think about Q4 disposable turn rates being similar to a flu season, given some of the offsets with COVID this quarter. But could you walk us through kind of the Q3 cadence? And as I think of it sequentially between Q3 and Q4, do you envision higher hospitalization from what you've seen so far in the Q4? Thank you.

Joseph Army -- President & Chief Executive Officer

Sure. Hi, Marie. It's nice to speak with you again. In terms of the seasonality that you point out, typically Q3 is our seasonally lowest quarter of the year from both capital and disposable perspective here in the Northern Hemisphere. This year is obviously different for us. We had quite strong demand here in the third quarter. And as we look at our disposables, as we think about the fourth quarter, we see them kind of roughly in line with where we saw them in third quarter, as we think about in terms of volumes going into the fourth quarter as compared to third quarter sequentially. That factors in those items we talk -- we spoke about on the call regarding our expectations around, like flu, RSV season being offset by the COVID hospitalizations, now that we're seeing now. Should COVID hospitalizations spike or dramatically increase from these levels? We would expect to see revenues above where we guided to. Our baseline assumption assumed COVID hospitalizations ongoing at sort of the rate that we're seeing now.

Marie Thibault -- BTIG -- Analyst

That's very helpful. That's it from me. Thank you.

Joseph Army -- President & Chief Executive Officer

Thanks, Marie.

John Landry -- Senior Vice President & Chief Financial Officer

Thanks, Marie.

Operator

Oour next question is from Bob Hopkins with Bank of America Merrill Lynch. Your line is open.

Brad Bowers -- Bank of America Merrill Lynch -- Analyst

Hi there. You actually have Brad Bowers [Phonetic] on for Bob today. Just a quick question. I was just wondering if you could give any color on some of the trends you've seen so far into Q4? And also if you could explain a little bit more why you think that second wave would see as many capital units being sold? If you could give a little bit of color on why you think that might be and why it will continue in the Q4 when we're seeing COVID spiking up again? Thank you.

Joseph Army -- President & Chief Executive Officer

Sure, this is Joe. I'll take a stab at that, and I'll have Johnny answer some of that. So if you had asked us for our guidance three weeks or four weeks ago, there was not a whole lot of talk about COVID, it just wasn't, and we really weren't seeing alive within the business. This business has really -- if you think about our business, it's really two different things, right. The disposable component to this is increasingly, I mean, it's always been very predictable. But even in the midst of COVID, we've done a pretty good job of being able to predict this. It's not really hard to stay ahead of it, whether it'd be from a production inventory point of view or whatnot.

And we know that as COVID hospitalizations increase, we're treating those patients. We've been doing a heck of a job treatment and taking good care of them. The real wildcard here, the thing that's really, really unpredictable is the capital equipment sales, right. Because it can come on very, very quickly and you just don't see it. It just comes -- it comes on very, very quickly, and there is no way for us to forecast where the COVID census is going to hit. If you think about it in the first wave, it really hit in New York City. It hit parts of Pennsylvania, New Jersey, New Orleans [Indecipherable].

Second wave is really the Sunbelt, right, during the July timeframe. We just have no idea where it's going to hit next. That said, in the last week or so, we've seen an increase in activity in our international business, particularly in the European and the Middle Eastern sectors. And we're going to begin, we can feel the comment in the U.S. where there's going to be more COVID patients in that hospital. The question really is which geography? If they go into New York City, given how much gear we put in the New York City, those hospitals are ready, and then they are ready. I'll see our disposables go up lot, right. But we're not going to see more capital if they've already got what they need. It goes into a different part of the country that has an experienced a wave yet. Well, I said that on the last call, if you see hospitalizations rise in a new part of the -- in the new part of the country, you haven't seen it before, you can pretty much bet that our -- our capital revenue is going to be impacted by that.

But I hate to say this, I don't mean to be cavalier, but your guess is good as mine with how COVID is going to show up, because I have no idea. The way we've approached this problem is -- I mean, you're trying to deal with the unknowable. So we said OK, then we only have really three things we could do, right, optionality, flexibility and speed. So if we can't forecast it, then we're going to build up some inventory. We're going to add production lines, so that if we get slammed, we're going to be able to go in there and meet every customer need. We've learned how to run third shifts. We've learned how to do weekend work. All of that has created that optionality to make sure that we take care of those customers, and get them whatever they need, whenever they need it, and do it in a really short timeframe.

So that's the best I could do on that one.

Brad Bowers -- Bank of America Merrill Lynch -- Analyst

Got you. So I mean, I guess, you kind of alluded to this earlier at offering your response, also appreciate all that color there. It's super helpful. But what I think is clarifying to say that if you did see continued increased COVID, I guess, nationally that it would make your Q4 guidance a little bit conservative? Thank you.

John Landry -- Senior Vice President & Chief Financial Officer

No. [Speech Overlap] Listen nationally if it all -- if it shows up in New York City, they've got all the boxes they're going to need to take care of, and these people are in good shape, right. Shown up in Texas; Texas has got a lot of gear now, they are ready to go, those hospitals are ready. That -- if it shows up in a different part of the country, you said nationally, right, but we don't look at it that way, we have to look at like what city is that you're going in and how many of our systems do they have in that city. That's the key variable in forecasting that capital revenue, and that's what I'm telling you, it's so unpredictable.

Brad Bowers -- Bank of America Merrill Lynch -- Analyst

Got you. Appreciate all that. Thank you very much.

Operator

The next question is from Bill Plovanic with Canaccord. Your line is open.

Bill Plovanic -- Canaccord -- Analyst

Yeah. Great. Thanks for taking the follow up. I'm just trying to, kind of, triangulate something on the capital sales. The commentary of two-thirds of the sales are to existing accounts, is that because COVID is rolling into those accounts, and they already have some system so they expand significantly, or you're getting deeper into those accounts and then all the new ones are essentially to COVID? And I'm trying to think, if you did 2,100 systems in the U.S., there would be 1,400 to existing which would be a bigger forward number. And I'm just trying to understand that.

And then my second question is, I think you called it the FELIX-1 negative pressure mask, where does that kind of hit into the revenue segment reporting segments? Just so we make sure we take this out? And any quantification of the size of that I think would be helpful, so that we make sure that we don't put that on a ongoing basis past the COVID issue.

John Landry -- Senior Vice President & Chief Financial Officer

So let's deal with the second one first, because that's the easiest one by far, don't bother modelling it, as it's going to be a very, very low price product. It's designed to help them deal with a problem right now. I would be surprised if we sold this. After we're done with COVID, there is really not going to be a need for this. And it's not going to -- you are not going to even notice it in the revenue lines. So I wouldn't worry about it, right.

The second is the...

Bill Plovanic -- Canaccord -- Analyst

Look, I just wanted to make sure it was in $1 million or $2 million bucks like all this [Speech Overlap] next year.

John Landry -- Senior Vice President & Chief Financial Officer

No.

Bill Plovanic -- Canaccord -- Analyst

Okay. That was the reason for the question on that.

John Landry -- Senior Vice President & Chief Financial Officer

Yeah. Understood. Good question. The other one is, so our split between existing customers and net new customers, it sounds like we put an awful lot of gear to existing customers, and then really getting into the, why. So I want to back up and remind you of our strategy here is to go into the largest emergency departments in the country, right. So that's what our installed bases. And when we think about where these COVID patients show up, Bill, they show up in the biggest EDs in the city, right. And so it only makes sense.

And historically, by the way, just as a matter of historical fact, two-thirds of our capital revenue in any given quarter goes to existing customers expanding their fleet. So this is actually in line with what we've always seen. It's just much, much bigger numbers. And candidly, we're pretty excited about it. We love that current customers are buying this gear because it's just accelerating the path of them sending it throughout their hospitals. So, bottom line is we are in the right place at the right time. We're calling on the right customers. Our focus on these large gold emergency departments, we just -- we were very fortunate that we were already there before this COVID thing struck, which is why they would be buying so many.

Bill Plovanic -- Canaccord -- Analyst

That's very helpful. Thank you.

Operator

Ladies and gentlemen, this concludes the Q&A period. I'll turn the call back over to Mr. Joe Army for any closing remarks.

Joseph Army -- President & Chief Executive Officer

I want to thank you all for your interest in Vapotherm. We really appreciate it, and we look forward to updating you on our progress again next quarter. Have a great night.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Mark Klausner -- Managing Partner

Joseph Army -- President & Chief Executive Officer

John Landry -- Senior Vice President & Chief Financial Officer

Margaret Kaczor -- William Blair -- Analyst

Bill Plovanic -- Canaccord -- Analyst

Marie Thibault -- BTIG -- Analyst

Brad Bowers -- Bank of America Merrill Lynch -- Analyst

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