Vapotherm, Inc. (NYSE:VAPO) Q2 2023 Earnings Call Transcript

Vapotherm, Inc. (NYSE:VAPO) Q2 2023 Earnings Call Transcript August 8, 2023

Vapotherm, Inc. misses on earnings expectations. Reported EPS is $-0.29 EPS, expectations were $0.38.

Operator: Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vapotherm Incorporated Second Quarter 2023 Financial Results Call. [Operator Instructions] Thank you so much. I would now like to turn the call over to Mark Klausner. Mark, please go ahead, sir.

Mark Klausner: Good afternoon, and thank you for joining us for the Vapotherm second quarter 2023 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. 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, 2022, and Form 10-Q, which will be filed today, and then 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 Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures, reconciliations of the historical non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website.

With that, it’s my pleasure to turn the call over to Vapotherm’s President and Chief Executive Officer, Joe Army.

Joe Army: Thanks, Mark, and thank you all for joining us. On today’s call, I will review the progress we made during the second quarter, and then John will review our financial performance before I provide my thoughts on the balance of 2023, and turn to Q&A. During the second quarter, our revenue grew significantly, highlighted by strong continuing demand for HVT 2.0. We also continued to execute well against our pathway to profitability initiatives. Gross margins improved significantly. Cash operating expenses continue to decline, and our inventory balance continued to decrease. The combination of these factors provides us confidence that our cash burn will continue to decrease significantly in the back half of the year, and that we have adequate capital to run the business to profitability.

Revenue in the second quarter was $16 million, an increase of 34% compared to the second quarter of last year, excluding revenue from Vapotherm Access, which we exited in the fourth quarter of 2022. Growth was driven by strong HVT 2.0 adoption largely due to existing customers who upgraded their installed base of precision flows to HVT 2.0, and new customer acquisition. Customers are clearly seeing the value of HVT 2.0, it’s intuitive, easy to use, and since it has its own air source can be used throughout the hospital. As a result, our HVT 2.0 pipeline is strong, especially given existing customer demand to upgrade their Precision Flow fleets. Our disposables revenue increased by 38% compared to 2Q, 2022, but came in below our expectations as U.S. DPC turn rates did not recover as quickly as expected.

Despite the positive trends we saw in Q2, we’re lowering our annual revenue guidance as a result of the slower pace of recovery of the U.S. DPC turn rate. We expect to see U.S. DPC turn rates improve with increased utilization of our growing HVT 2.0 installed base and our ongoing efforts to increase awareness regarding, the effectiveness of our technology in treating acute hypercapnic respiratory failure in COPD patients, as well as other non-seasonal conditions, requiring respiratory support. Turning to our gross margin improvement initiatives. Our gross margin improved by nearly 800 basis points sequentially, compared to Q1 as our Mexico facility is fully operational, and nearly all higher cost of disposables inventory built in our New Hampshire facility was burned off in Q1.

We are executing on these initiatives, and seeing the positive impact on our gross margin. As a result of our ongoing focus to reduce our non-GAAP cash operating expenses to pre-COVID levels, we reduced cash operating expenses by another $2.2 million from Q1 and $7.5 million from the second quarter of 2022. This is the fifth quarter in a row of sequential reductions in cash operating expenses since we launched our path to profitability efforts in 2022. We have taken further actions to reduce, our cash operating expenses in the second half of the year and expect that our annual cash OpEx run rate going into 2024 will be $48 million to $50 million, which is lower than our cash OpEx in 2018, the year we went public. As part of these initiatives, I’ve personally taken a 25% cut in my salary and annual bonus potential.

During the quarter, we continued to make further progress on converting excess inventory into cash and remain on track to normalizing our inventory levels by the end of 2024 by selling off excess inventory built or purchased during the pandemic to ensure we could fulfill every customer need during COVID surges. Our clinical research group is working to expand the clinical evidence supporting and differentiating our products. We recently saw some exciting data on our Oxygen Assist Module or OAM published in the British Medical Journal. This was an independent randomized controlled trial where our technology was recently used in the U.K. to treat 60 preterm infants in the NICU. Babies treated with the OAM had optimal oxygen levels 81% of the time compared to only 55% of the time using manual control.

This difference is both statistically and clinically significant. Remember, oxygen is both a life-saving and a dangerous drug, especially for premature babies. If you give those babies too much oxygen, they can go blind. If you don’t give them enough oxygen, they can have developmental problems or worse. The OAM has been shown in multiple studies to keep babies in the safe range. These results are extremely compelling and we look forward to continuing to develop such strong data to support the use of our technology on patients worldwide. In the U.S., we are currently enrolling a study we call MODERATION Neo to further develop data to support the clinical efficacy of OAM. We expect to have additional sites open as part of the trial during the third quarter of this year.

The data from this trial will be used to support an FDA regulatory submission for OAM. During the quarter, we also completed enrollment in our HYPERACT study, which was designed to compare the ability of our technology to treat acute hypercapnic respiratory failure in the emergency department compared to BiPAP. This trial is focused only on moderate to severe COPD patients with CO2 levels above 60 and pH below 7.35. These hypercapnic patients are very ill and are a tough patient population to treat, particularly with BiPAP, the current standard of care. The targeted end point of the trial is non-inferiority to BiPAP and the data is currently being analyzed, and we expect the independent investigators will submit the publication in 3Q. We look forward to this publication and are excited to share the results of this important study with the medical community.

There was another interesting study that completed enrollment during the quarter. In this study, which was conducted at Auburn University’s exercise physiology center, healthy athletes from a Division 1 athletic center underwent an exercise test, measuring their maximum power output. Immediately after exercise sessions, they recovered using our technology in various settings. Blood lactate levels and other measurements were taken to see if our gear supports improved recovery. These results are being analyzed and prepared for publication. Recovery support is important not only for high-performance athletes, but also for patients needing physical or pulmonary rehabilitation. This has the potential to open new markets in physical and pulmonary rehab as well as high-performance athletics.

Recall that in our previously published ambulation pilot study, medical rehabilitation patients who used our equipment recovered 30% faster. Before turning the call over to John, I wanted to provide an update on the progress, we’ve made on our product for the home market. In the U.S. alone, there are 2.2 million late-stage COPD patients and about 500,000 of these patients are on a home ventilator system. We expect that we will be able to treat these patients and those who are intolerant of the BiPAP mask, which according to clinical data is roughly one-third of all patients who wear BiPAP mask. Our solution brings together HVT technology and volume ventilation, including volume assured ventilation with pressure support with Vapotherm Access 365 symptom tracking all in a cloud-connected platform.

The solution enables engagement between the patients and their caregivers to optimize therapy delivery for late-stage COPD patients across the care continuum. All of these capabilities are managed through an easy-to-use full touchscreen interface that supports maximum patient comfort and optimal respiratory conditions. We expect the home product to launch in 2024 and to begin generating revenue in the back half of 2024. Importantly, this solution provides both capital and recurring disposable revenue streams, which are uncorrelated with the typical respiratory seasonality, we see with flu and RSV. Investment between now and the launch of this product is included in our updated cash OpEx guidance. I will now turn the call over to John, who will review the financial results for the quarter.

John Landry: Thanks, Joe. Worldwide revenue in the second quarter of 2023 was $16 million. U.S. revenue was $11.8 million, and international revenue was $4.2 million. Capital revenue grew 42% and HVT 2.0 capital sales represented 71% of our U.S. unit sales. Gross margin was 42.8% in the quarter, which is up from 35% in Q1, as we ramped up production in our Mexico facility, and have begun to more fully realize the benefits of that move. GAAP operating expenses were $17 million in the second quarter, down from $42.2 million in the second quarter of 2022, which included impairment charges of $18.7 million. Non-GAAP cash operating expenses were $14.2 million in the second quarter, down from $16.4 million in the first quarter of 2023.

Non-GAAP cash operating expenses have decreased sequentially every quarter since we launched our path to profitability initiative early in 2022, and we’re down from $21.7 million in the second quarter of 2022, a year-over-year reduction of $7.5 million. Adjusted EBITDA was a loss of $6.4 million in the second quarter of 2023, down from an adjusted EBITDA loss of $9.2 million in the first quarter of 2023 and $20.2 million in the second quarter of 2022. We ended the quarter with $25.1 million of inventory, a reduction of $3.4 million during the quarter. We continue to make progress in reducing inventory from the peak of $38.4 million in the second quarter of 2022. We remain on track to hit our target of reducing inventory levels by another $10 million to $12 million by the end of 2024.

We ended the quarter with $18 million of cash, net cash burn in the quarter was approximately $7.8 million or approximately $3.2 million less than in the first quarter. We expect that cash burn in the second half of 2023 will be in the range of $3 million to $8 million with a significant decrease driven by increased revenue and gross margin in combination with further reductions in cash operating expenses and continuing inventory reductions. This will leave us with a cash balance at year-end in the range of $10 million to $15 million, which we continue to believe will support our ongoing operations as we achieve cash flow breakeven in mid-2024. Turning to guidance. As Joe noted, while we expect capital revenue to remain strong for the balance of the year, we are anticipating lower U.S. disposables growth than we anticipated at the beginning of the year.

As a result, we now expect annual revenue of $70 million to $73 million, down from the previous range of $77 million to $79 million. Our updated revenue guidance represents an annual growth rate of 9% to 14%, excluding revenue from Vapotherm Access, which we exited commercially in Q4, 2022. Excluding Vapotherm Access, revenue growth in the second half of 2023 will be 19% at the midpoint of our updated revenue expectations, demonstrating our ability to drive growth despite the reductions we have made in cash OpEx. We believe this growth rate in the second half of 2023 is achievable for two reasons. First, the first half of 2022 was a difficult comp due to Omicron-related purchasing, especially in Q1, 2022. Second, we saw a 32% growth in U.S. disposables in June 2023 versus June 2022, the first non-COVID impact of year-over-year comparison.

Given the strength we have seen with HVT 2.0 capital sales, we now anticipate that 65% to 75% of our revenue will come from disposables revenue and that the remainder will come from capital and service revenue. We now expect gross margin for the full year 2023 to be in the range of 43% to 45%, down from previous guidance of 48% to 50%. This decrease from prior guidance is due to lower expected revenue, especially U.S. disposables revenue. Given the additional actions we’ve taken to reduce cash OpEx early in Q3, we now expect that GAAP operating expenses will be between $70 million to $72 million, down from previous guidance of $76 million to $78 million and that non-GAAP cash operating expenses will now be between $55 million to $57 million for the full year, down from $60 million to $62 million.

We expect to exit the year with an annual cash OpEx run rate of $48 million to $50 million. Before I turn the call back over to Joe, I’d like to remind investors that a reverse share split of between, 1:3 to 1:8 was approved by shareholders at our June Annual Meeting and provided the Board with the authority to determine whether and when to implement the split and the appropriate split level. Given that our share price remains below the $1 required for continued New York Stock Exchange listing, our Board approved today a 1-for-8 reverse stock split, which we expect will become effective on August 18. Back to you, Joe.

Joe Army: Thanks, John. As we look to the back half of the year, our focus continues to be on driving towards profitability through revenue growth, gross margin improvement, and driving cash operating expenses below pre-COVID levels, while investing prudently in future growth drivers, such as the home market and the MODERATION Neo clinical trial. I’d like to thank our team for their ongoing efforts as we drive towards profitability. We made some significant changes in the past year. I’m very proud of our execution and our path to profitability initiatives. As always, we appreciate your support of Vapotherm and look forward to updating you on our next quarterly call. I will now open the call up for questions.

Q&A Session

Operator: Thanks gentlemen. [Operator Instructions] Okay. Looks like our first call is from Bill Plovanic with Canaccord. Bill, go ahead.

Jon Young: Hi. Joe and John, it’s Jon Young on for Bill tonight. Thanks for taking our questions. First, can we just start on the cash burn guidance for the second half of this year of $3 million to $8 million? How are you getting there? And what drives really the high versus low end of that $3 million to $8 million range? Thank you.

John Landry: Hi Jon. This is John. I can take that question, and thanks for joining tonight. So from a cash burn perspective, as you’ve seen in our earnings call, we’re basically going to be reducing our cash OpEx burn over the balance of the quarter and going to continue to reduce our cash OpEx, such that we’re exiting the fourth quarter with a run rate of approximately $12.5 million, which is between $48 million to $50 million for next year. As we knock down the cash burn with increased revenue in the back half of the year, improved gross margins and reduced cash OpEx and the balance of the year. We’re going to knock that cash burn down from what we just saw around $7.8 million in the second quarter to amount less than that here in the balance of the year.

I think the range that we’re providing, I think, really is around the adjusted EBITDA over that period, plus or minus our progress that we continue to make on reducing our inventory levels over the balance of the year. So to the extent we made more progress on knocking down adjusted EBITDA loss further and reducing our cash investment and inventory that will determine basically the ends of those range from a cash burn perspective and ending cash perspective at the end of the year.

Jon Young: Got it. Thanks John. That was helpful. And just as a follow-up here, maybe just touch on the updated revenue guidance for the year too. And I heard your commentary on the disposals versus the capital sales for the rest of the year and your expectations around that. But maybe you could go a little bit deeper on the disposables usage. Is this across all respiratory the challenges you’re seeing here? And maybe you could talk about what’s happening in your Gold accounts specifically? Thank you.

John Landry: Sure. Yes, we continue to focus, John, on our Gold accounts as they drive the majority of the revenue in our book of business. And we see that they continue to do so, and they have higher turn rates. So, we are seeing it across the entire book of business. So, the bulk of the reduction in guidance that we have that we talked about was really around the U.S. disposables with a little bit around the international side due to some HVT 2.0 clearances in certain markets. And a little bit in U.S. capital, about $1 million there, given some of the changes made in the U.S. sales organization. The rate of the recovery in the U.S. turn rates, John, hasn’t been as fast as we expected. So, if you recall at the beginning of the year, we built our guidance around U.S. DPC turn rates that would be in the mid-60s for this year, starting at low 60s at the beginning of the year, ending at the low 70s by the end of the year.

And if you recall in Q4 last year, we had a turn rate those in the 70% recovery rate at the pre-COVID averages. In Q3, it was about a 60% recovery rate to the three-year pre-COVID average in what is typically our slowest quarter of the year. So in hindsight, we used Q3, 2022 as a baseline for the recovery rate for our turn rates for 2023. And they’ve been running in the low 50s at this point so far as a percentage of pre-COVID averages year-to-date. And based on what we’ve seen in June and July, we expect to be in the mid-50s for the full year, which is what we’re using to plan our go-forward cash OpEx levels in the business.

Jon Young: Thank you.

Operator: Thanks to the Canaccord team. [Operator Instructions] And our next caller is Margaret Kaczor with William Blair. Margaret, go ahead.

Macauley Kilbane: Hi everyone. This is Macauley on for Margaret. Thanks for taking our questions. I guess just to start, it was obviously good to hear about the success of HTV 2.0. And I know you mentioned mostly coming from existing customers driving the growth this quarter, but are you seeing those purchases spread throughout hospitals? And is there anything you can tell on demand indications or contracts you’re signing from these that give you confidence beyond this year?

Joe Army: Yes. This is Joe Army. I’ll take that call. So the majority of our HVT 2.0 sales in the first half of the year were to existing customers, although there were some notable net new account wins that we had. So, we’re pretty excited about it. I mean the integrated air system, not requiring medical grade air from the wall is turning out to be a really big deal as is the mobility and the simplicity of this device. So, we continue to be pretty positive about what we’re seeing. I can tell you that our U.S. field team has done an excellent job at building up that pipeline and continuing to move these deals through a capital equipment purchasing cycle, which – you may have seen this for other companies. There’s a little bit tighter environment for capital equipment, perhaps than what we’ve seen in the past.

But nonetheless, our team is getting the job done, and I think it speaks volumes to them as well as to the product itself. So – we do – we like what we see in that pipeline for going forward.

Macauley Kilbane: That’s helpful and great to hear. And then one on just some of the headlines we’ve been seeing around the RSV vaccines. So, the first thing there, I guess, are PICUs and NICUs still a sizable piece of the business today? And what are your assumptions in terms of potential impact from that? Thanks John, for taking the questions.

John Landry: Yes. You’re welcome. Yes, I think in the early stages of that vaccine for RSV at this point. So from a modeling perspective, we haven’t really factored in significant RSV flu season here coming up for the back half of the year of modeling normalized flu and RSV patterns. We expect that based on conversations with industry, and medical community, we expect it will take some time for that RSV vaccine to take root and take effect and kick in and potentially impact the RSV rates longer term. So, we expect that to be more of a longer-term impact than the near-term impact here with the RSV vaccine just recently came out. So it’s something we’ll continue to monitor and keep track of here as we see results of that over the long-term.

Operator: Okay. Last call. [Operator Instructions] Okay. Joe, it doesn’t look like we have further questions at this time, so I will hand it back to you for closing comments.

Joe Army: Thank you for joining us today. We look forward to updating you on our next earnings call. Have a great day.

Operator: And ladies and gentlemen, that concludes today’s call. Thank you so much for joining, and you may now disconnect. Have a great day, everyone.