Q2 2022 Vapotherm Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the vapor <unk> second quarter 2022 financial results Conference call.
A reminder, this call is being webcast live and recorded.
It is now my pleasure to introduce your host Mr. Mark Klausner of Westlake. Please go ahead Sir.
Good afternoon, and thank you for joining us for the <unk> second quarter 2022 financial results conference call joining us on today's call are <unk>, 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 <unk> Dot 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, 2021, which was filed with the Securities and Exchange Commission or SEC on February 24th 2022.
Our quarterly report filed on Form 10-Q for the quarter ended March 31, 2022, which was filed on May 4th 2022.
Our quarterly report filed on Form 10-Q for the quarter ended June 32022, which will be filed today 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 accepted accounting principles or GAAP.
We generally refer to these as non-GAAP financial measures.
Conciliations 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.
It's my pleasure to turn the call over to <unk>, President and Chief Executive Officer, Joe Army.
Thanks, Marc good afternoon, and thank you for joining us today.
<unk> 2022 revenue was $13 million as worldwide respiratory census remained low.
Customers worked through disposals inventory purchased during the first quarter 2022 on the current surge.
We believe we are beginning to see some of these factors subside as revenue increased sequentially in May and June .
Based on our channel checks, we do not believe we are losing competitively in the marketplace, where that precision flow units installed during COVID-19.
Quote unquote dead boxes.
We remain cautiously optimistic about the remainder of the year as we expect the trend towards a more normalized respiratory sensus to continue in the second half of 2022.
And expect modest RSV and flu levels later this year in the U S.
We launched our new <unk> platform in July and given early market feedback expect this new product to drive growth in the second half of 2022 versus our first half 2022.
On today's call I will update you on the milestones we achieved in <unk> 2022 on our path to profitability plan and provide you with the latest on our debt covenant matter.
As a refresher for fundamental aspects of our plan number one transform our business into a consistent predictable 20% revenue grower beginning in 2023.
Number two grow.
Margins to 60% by the fourth quarter of 2023.
Set us up for expansion, 70% plus.
Number three return our cash operating expenses to pre COVID-19 levels or $17 million to $18 million per quarter in 2023.
And number four drive the business to profitability with the capital that we currently have on our balance sheet, which includes the $15 million of cash plus $20 million of excess inventory that will burn down by mid 2023.
Now, let me provide a little more color regarding each of these points.
Topline growth in the near term will largely be driven by executing on our one hospital, one day or one <unk> strategy and the full launch of <unk> two point out.
Through <unk>, we educate our customers on the full capabilities of our technology to help patients through all four care areas of their hospital that we serve today.
Regardless of whether the patients are hypoxic like oxygen deprived COVID-19 patients.
We're hyper Catholic like COPD patients, who retain excess carbon dioxide.
In <unk> 2022, Covid hospitalizations, and respiratory census were low which gave our sales force full access to their customers.
As a result, we were able to focus on the execution of our one <unk> strategy in person in our gold accounts.
In addition, we trained over 11000 clinicians via digital training programs.
We continue to believe that executing on the <unk> play will allow us to return our disposable utilization rates to the historical level.
Despite the lower overall <unk> 2022, disposable utilization rate based on census.
Wariness and interest in our technology continues to grow.
We added another four gold accounts since our May earnings call.
And only 30% of our near 500 gold accounts are using our technology in three or more care areas, which represents a significant growth driver for us.
It is important to note that the more care areas were used in the higher the disposables revenue per installed units.
We launched the next generation <unk> platform in early <unk> 2022.
Our sales pipeline is growing.
Early feedback from our sales team and customers has been positive.
With its internal blower <unk> enables us to access to 50% of all U S Hospital beds on general care floors that don't have medical air in the room.
This is important as accounts using our high velocity therapy in the general care four areas have higher than average disposable utilization rates.
Over time, we expect <unk> to point out to replace older precision flow units, which is the same trend we saw when we launched the precision core plus.
Early 2018.
In the first year post precision 12, plus launch we replaced roughly 5% of the legacy precision flow installed base.
And expect similar results with HPT to Plano in the pre Covid installed base as hospital capital budgets begin to normalize.
We expect to primarily sell HPT to Porto units as opposed to placing units.
Anticipating a material uptick in both capital and disposable asp's for the <unk> two point of platform.
Due to increased clinical and economic utility for the customer.
Our second key focus is improving gross margin to 60% by <unk> 2023.
With a pathway to 70%.
Which is an important part of our profitability plan.
We made good progress on this as we signed an agreement with a third party company to source and higher operational personnel for us in Mexico.
We've also identified a facility and signed a lease.
Assumptions related to our labor and overhead cost structure on truck.
And we expect to be producing product at our cost of goods sold target by year end 2022 early 2023.
Direct costs associated with the move to Mexico will be charged as a period expense in <unk> 2022.
Will negatively impact gross margin in that quarter.
Our third key priority is to normalize our cash operating expenses to pre COVID-19 levels of $17 million to $18 million per quarter in 2023.
While our published results don't yet reflect it we took meaningful steps in the quarter.
We began the process of normalizing at planned sales compensation.
Brought most of the R&D work back in house and are winding down the arrangements with third party R&D design firms.
As part of this effort, we are establishing a technology center in Singapore, which will be a wholly owned <unk> subsidiary.
And we're working with the Singapore Economic development Board.
To finalize grant funding.
Having an R&D operation in Singapore will allow us to have R&D resources working on projects around the clock.
This will be helpful. As we develop our HPT home and digital offerings.
We've identified other areas that we will normalize as we further adjust our quarterly operating expense levels without impacting our future growth drivers.
These three actions will put us on a path to become adjusted EBITDA positive in <unk> 2003.
We have more work to do but I remain convinced that we can achieve this goal with the capital on our balance sheet today.
Before I turn the call over to John I want to address the revenue covenant in our debt facility.
The covenant was based on hitting a trailing six month revenue milestone in the first six months period, ending July 31, and.
And reportable in August to a lender.
We entered into an agreement with our lender to extend the first six month measurement period by one month.
For the six month period, ending August 31.
We're in discussions with our lender regarding our revenue covenant and anticipate having this fully addressed before the first reporting period.
With that I'd like to turn the call over to John .
Thank you Joe.
Total revenue in <unk> 2022 was $13 million with April revenue being the low point and growing sequentially in may and again in June .
<unk> revenue was $7 $9 million in <unk> 2022, due to lower respiratory sensus and the bleed off of customer inventory purchased during the <unk> 2022 on the Con Serge.
Our monthly U S. Disposable turn rate was <unk> 77, and <unk> 2022.
Viewing gold accounts that were added during COVID-19 eight.
80% of them had disposable turn rates that were equivalent to pre COVID-19 gold accounts, which continues to suggest to us that we don't have that at boxes and new gold accounts that we added during COVID-19.
Capital revenue was $2 $6 million in <unk> 2022, and our worldwide installed base grew by 403 units and <unk> 2022.
At the end of the second quarter, our worldwide installed base consisted of approximately 36100 units, reflecting 13% year over year growth.
Worldwide service revenue was $2 $5 million in <unk> 2022.
Gross profit in <unk> 2022 was $2 4 million, resulting in a gross margin of 18, 2%.
Most margin was negatively impacted by lower revenue and production levels inventory reserves and are continuing to run out of higher cost inventory built in the second half of 2021 to meet Covid demand.
While the onetime setup cost of our Mexico operations, which we expect to incur in the fourth quarter of 2022 will negatively impact our gross margin in the short term they will set us up to better handle future fluctuations in customer demand and to achieve our long term gross margin objective of 60% by <unk> 2023.
Operating expenses included $18 7 million of noncash impairment charges as we wrote down the net carrying value of goodwill and intangible assets recorded as part of our hte and respiratory care acquisition, which form the basis of our <unk> access reporting unit, while we.
We'll continue to invest in hte and respiratory care, we completed an interim goodwill impairment assessment as a result of our year to date stock price decline and wrote down our goodwill to its estimated fair value, which decreased as a result of reduced revenue expectations.
We also wrote off intangible assets related to customer relationships and developed technology as part of an overall impairment assessment.
These noncash impairment charges do not impact our revenue guidance.
Operating expenses also include $1 8 million of severance related expenses due to senior level personnel of retirements and transitions.
Total operating expenses in <unk> 2022 were $42 2 million.
Cash operating expenses, excluding impairment charges, depreciation and amortization stock based compensation expense change in the value of contingent consideration and the impact of severance accruals were $21 $7 million in <unk> 2022 versus $24 3 million in <unk> 2022.
Net loss in <unk>, 2022 was $42 7 million or.
Or $1 61 per share compared to a net loss of $17 $3 million or <unk> 67 per share in <unk> 2021.
Adjusted EBITDA loss for <unk>, 2022, with negative $22 million compared to negative $12 $3 million.
<unk> 2021.
Year over year increase in adjusted EBITDA loss was primarily due to lower revenue and gross margin.
As of June 32022.
Cash and cash equivalents were $49 9 million compared to $72 9 million as of March 31 2022.
The decrease in cash in second quarter of 2022 was primarily due to a net loss.
Yeah.
For 2022, we expect revenue in the range of 76 million to $81 million.
This guidance reflects a continuing trend toward more normal respiratory sensus and modest RSV in late <unk> as kids go back to school and a modest flu season, which typically begins in the fourth quarter in the U S. We.
We are not factoring in any significant impact from COVID-19 or.
Our guidance assumes U S disposable utilization rates of approximately 60% to 70% of pre COVID-19 levels at seasonally adjusted for third quarter and fourth quarter.
We now expect gross margins for the full year of 2022 in the range of 30% to 32% with a material step up expected in 2023.
This margin factors in the inventory reserves, we recorded in the second quarter of 2022.
The remaining burn off of higher cost of inventory built in the second half of 2021 and the anticipated direct costs from the move of current operations in Mexico.
We anticipate most of the move related costs will be recorded as period expenses in <unk> 2022.
We expect to increase our gross margin into the low fifteens and 2023 and exit the year with a 60% gross margin.
Labor cost of $6 per hour in Mexico are tracking to our expectations as we recruit production staff.
This compares to approximately $28 per hour here in the U S.
We continue to expect to reduce our inventory balance by more than 50% by mid 2023, as we've returned to historical inventory turns at four turns per year, which we were operating at pre COVID-19.
Importantly, this reduction in inventory will return over $20 million of cash to the balance sheet from current levels.
We now expect total GAAP operating expenses, excluding impairment charges of $97 million to $100 million in 2022, a decrease from previous guidance of $99 million to $102 million.
We now expect cash operating expenses, excluding impairment charges depreciation and amortization stock based compensation expense change in the value of contingent consideration and the impact of severance accruals in the range of $84 million to $86 million in 2022, a decrease from previous guidance of $86 million.
The $88 million.
We are pleased with the progress we made in the second quarter on our path to profitability plan regarding expense normalization without impacting future growth drivers, we expect to exit <unk> 2022, with a quarterly cash opex run rate of 17% to $18 million per quarter and have identified other areas that we will not.
Lies to pre COVID-19 levels as we further adjust our operating expense levels without sacrificing future growth.
We expect to end 2022.
With $15 million of cash plus another $15 million of excess inventory, which we expect to convert into cash by mid 2023, as we returned our inventory turn rates to a pre COVID-19 level or four turns per year.
This will allow us to fund our business through 2023 and get us to adjusted EBIT positive in <unk> 2023.
Now I'm going to hand, it back to our CEO , Joe Army to wrap up before we take questions.
Thanks, John .
In closing, we're going to go back to work and execute on our plan to drive 20% revenue growth improved gross margins to 60%.
Normalize our cost structure to pre COVID-19 levels or sub $18 million per quarter in 2023.
Execution of this plan will drive us to self sustainability with the capital we have today and get us to adjusted EBITDA positive in <unk> 2023.
This is truly a unique business made up of best in class people has done amazing things together, especially meeting every customer need during COVID-19.
Thank every one of them for their dedication and commitment to our customers patients and each other.
Thank you for trusting us with your capital now I'd like to open it up for questions.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again, we'll pause for just a moment to compile the Q&A roster.
Yeah.
Our first question comes from Margaret teaser from William Blair. Please go ahead. Your line is open.
Hey, guys good afternoon.
Yes, maybe just to start Alex let's start with kind of SaaS.
Around that you can getting as a percentage of the accounts or of the installed base, maybe that didn't order disposables and should we assume that it's roughly 40% that's not our goal to counter the gold accounts also not ordering because of the inventory issues you had referenced.
Hi, Margaret this is John thanks for joining today.
Internally in terms of our installed base of ordering accounts, we did some analysis on the accounts that we acquired the gold account specifically that we acquired during Covid.
And we found that approximately 80% of those.
We're ordering disposables at.
That essentially the same as the pre Covid gold account that we had so.
As a smaller percentage of those accounts about 20% of those accounts that werent ordering but in that 20%. The installed base of those accounts was relatively small and immaterial. So we think largely.
Most of the accounts are ordering in the majority of those gold accounts that we had both pre COVID-19 as well as during Covid were ordering disposables during that period of time.
Okay.
If we think about this being an inventory issue.
What.
David do you guys have on sell in versus sell through.
Of the disposables.
Yes, it's good question Margaret we don't.
We can't tell to your point exactly wanted disposable abuse, we don't have an ability to track it when it's actually used within the precision flow units.
So a lot of it is done.
Physical inspection by our reps so as we looked at it.
The second quarter as our reps are able to get back into the accounts, we're able to see the inventory levels.
Youre early in the quarter, we were able to see them get burned off over the balance of the second quarter.
We're able to also take a look at the ordering patterns that we saw.
Again.
Starting to see those accounts reorder again through our what we call our disposable purchasing pattern sheet.
Then also.
We then saw sequential increases from April to May and then again into June so so.
The majority of that stocking we believe occurred during the omicron surge as customers were anticipating a severe serge.
On the con that didn't quite materialize in the acuity of the respiratory illness with these patients wasn't quite as severe so it took a period of time for them to burn off their inventory levels.
We're seeing now through the second quarter.
Okay, and so as you.
If you could talk about what you saw in July are you seeing any trends.
Suggested continues to improve at this point and really what I'm trying to get to is as we kind of focus on the 20% growth in 2023, what does that imply for the turn rates and kind of the confidence that you have.
Can reach back out on those numbers.
Thanks.
Sure Yeah, absolutely. So July is our typically our slowest season of the year. So it's tough to discern a pattern.
From.
What we've seen so far.
In the third quarter.
As we think about going forward in terms of that growth rates. We expect this year by you know for the remainder of the year, we expect our turn rates in the U S anyway to get back to roughly 60 to $60 to 70% of their pre COVID-19 historical levels.
And then as we go through and get through our 100 <unk> activities. This year and then go touch those accounts again next year, we expect to get to get to the end of 2023 and exit with near historical turn levels and then return to that level in 2024, as we work through popular account so.
Our growth rate for 'twenty two.
23 of that 20% will be really comprised of a return to.
Nonetheless, near normalization of the turn rates and our HPT to point out launch, which were which we just completed here in the third.
Third quarter.
Okay. Thanks, guys.
Our next question comes from Bill <unk> from Canaccord. Please go ahead. Your line is open.
Okay, great. Thanks for taking my questions.
So it's Margaret asked I'm going to ask it a little different way.
You look at the top end and the bottom end of guidance kind of.
How much of that is gold silver and kind of the other accounts coming back you see 60% to 70%, but is that only gold coming back and then kind of the non gold not and then.
As you as we think about that productivity as you come up to speed and then how do you think about how long.
I wanted to make sure I heard this right. You said you thought you would get to one <unk> by year end 'twenty two to all accounts is that did I hear that correctly.
It's really all of these questions here is getting at is kind of what sort of visibility to date, what's going to drive the numbers you were talking about it at the high end and the low end and what gives you comfort him. Thank you.
Sure. So so in terms of the comfort around guidance Bill in terms of the breakout of the gold silver and bronze and we don't break out the percentages of revenue very specifically around those but we're very concentrated in the gold, which as you might.
Surmised.
Create a without and Thats really the main driver of.
The business as we go deeper into those accounts.
100, <unk>, which to your point was to be completed by the end of 2022.
We expect to see those turn rates recover in those accounts, which drives the large percentage of the book of business and we have visibility into those accounts as we continue to execute the 100 <unk>.
Strategy.
So again $1 <unk> to answer that question is around wrapping it up by the end of this year getting to all of those accounts in particular, the gold accounts that we have and then driving that deeper and wider.
The care areas that we're in in those gold accounts were only in about 30%.
30% of those accounts, we do have I ran all four care areas. So to the extent that we do the 180 <unk> program extend deeper and wider into those accounts, that's helping increase the utilization of disposables and those accounts throughout those throughout those gold account that we have in the U S.
So and then in cast this another way does the low end or the high low or high end of your guidance assume that you're 100% penetrated back up and running on just the gold accounts, where you're making the assumption that some of your other business comes back.
No.
Build it up like that so in terms of the low and the high end of the range, we're thinking 60% of our pre COVID-19 historical level will be the overall turn rate.
<unk> percent at the high end of the guidance range and that's on the overall book of business.
Of course, the big chunk of that is driven by the goal of accounts.
Okay, I'll get back into queue on questions. Thank you.
Our next question comes from Marie Thibault from BTG. Please go ahead. Your line is open.
Hi, Joe Hi, John I wanted to follow up on Margaret's question here about July trends, I know youre aiming to get back to 60% to 70% of historical levels. If you could take your best estimate of where you are right now in July versus historical levels for July .
Yeah.
Yes, I mean, I think we feel good with that 60% to 70%.
Based on the visibility we have still early in the quarter, but based on what we've seen and again in what is a seasonally slow quarter for us the slowest turn rate quarter of the year historically $161 65.
We feel good with where things are at this point.
Okay.
We consider the guidance on the.
The back half of this year it certainly looks like.
The outlook hasn't changed much for the back half of the year. It looks like you moved the guidance down really for what we consider a miss here.
In terms of think about the cadence of the back half should we be thinking about Q4 being really the bulk of that or do you think.
You know our Q3 really could be a substantial step up from Q2.
Yeah, I think when I think about the split between three and four against Q3 seasonally lowest so.
We think probably roughly 40 ish percent of that revenue is probably in the third quarter and the 6% to 60% in the fourth so that definitely be more heavily weighted to the fourth quarter.
In connection with the guide for the back half of the year I think.
You mentioned the delta in consensus to the guidance.
Guidance range here, a couple of things went into that we factored in what we saw in the second quarter with regard to <unk>.
Revenue, which was a little bit less than our expectation due to the lower respiratory census in destocking.
We have a little bit of conservatism built in there if we believe for the back half of the year as some of the.
Respiratory sensus starts to kick back in especially in the third quarter as RSV kicks in for US for kids as they go back to school fourth quarter in new starts to kick in in the U S and.
We're excited about the initial market receptivity to our HPT to point out so.
We have factored that into our guidance for the back half of the year.
Thank you for that John one last one if I could sneak in on the HPT to point out launch.
What are you hearing from your hospital customers in terms of.
No.
The number of units they have a number of units that they feel they need to have in sort of their appetite for capital equipment at this point and thanks again for taking all the questions.
Sure sure Marie.
I guess in terms of HPT to point I was fortunate enough to do a field ride towards the end of the quarter and was able to go into several accounts, where we demonstrated and trained on the HPT to point out product.
Customer receptivity was very positive, especially around the ability to transport patients.
Throughout the hospital to get to areas of their hospital that didn't have piped in there because they really like that they like the.
Ease of use the simplicity of setup and breakdown of the equipment. So that was very positive.
These facilities have a fairly large installed base of precision flows, but really where we're looking at the HPT to point out as an option to be able to take that unit and be able to move their patients from their eds to either their general care floors or areas of the hospital ICU that didn't have piped in there. So so.
So despite having installed units and pretty pretty decent sized fleets of installed units were interested in acquiring.
Two flavors, one additional units to build out their fleet further and there was some.
Some desire to replace replace some of their older presented four plus units that they might have had for a while.
Thank you for that.
Youre welcome.
Our next question comes from Joseph Downing from Piper Sandler. Please go ahead. Your line is open.
Hey, guys. This is Joe on for Jason Bednar today.
One from us on the environment.
Our hospitals approaching lower priced capital compared to areas of higher priced capital today from your perspective.
Is there any way to tease out capital spending on newer technologies versus equipment going into <unk>.
Thanks.
Okay.
Sure.
Good question so.
Connected with different.
Spittle systems as they're thinking about capital.
Your point generally lower cost of capital items tend to.
We received less scrutiny than the higher ticket items.
That said if the hospitals acquiring multiple units it does tend to trip over some sort of capex approval limit. So does typically go through value analysis Committee type of review if there is a requirement for multiple units.
Again, I think we've seen a situation where respiratory gear has largely during the pandemic than at the top of the order in terms of prioritization from Capex I think what we've seen is respiratory is not at the top of the list right now I think it's more capex.
<unk> earmarked for more profit generating procedures for the hospital. So I think we've moved down the list some but we're not near the bottom of the list based on some analysis that we've seen in hospital surveys. So we're not quite.
At the bottom of the list, but not at the top either so.
I think combination of smaller capex spend.
Capex spend for our equipment.
Plus the appetite to continue and invest in respiratory technologies.
As a positive for us.
Thanks, and then one more from us on staffing so theres been a lot of obviously on the topic.
Across the health care landscape and we're curious how your hospital customers are approaching utilization of precision flow in response to staffing shortages across countries.
That's also one of the things that we're hearing a little bit about where HPT two pointed out given the much simpler user interface and the fact that the disposable comes all pre assembled so.
So theres going to be an element of having it fundamentally easier product to use that as a very good safety profile. So we're not we're not seeing a lot of issues today with precision flow, but we do see a way to take away some friction.
Challenges for hospitals, given that staffing turnover.
Great. Thanks, guys.
We have no further questions in queue I would like to turn the call back over to the company for closing remarks.
This is Joe Army. Thank you all very much for joining us today and your interest in vapor firm would really appreciate it and we look forward to updating you on our progress again next quarter.
Ladies and gentlemen, this concludes today's conference.
You for your participation you may now disconnect.
Please wait the conference will begin shortly.
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Okay.