Q4 2022 Vapotherm Inc Earnings Call

Good afternoon, and welcome to stay both arms fourth quarter 2022 financial results conference call.

All participants are in a listen only mode and this call is being recorded.

After the Speakers' remarks, there will be a question and answer session.

You would like to ask a question at this time simply press star followed by the one on your telephone keypad.

It is now my pleasure to turn today's conference over to Mark Klausner with ICR Westwick, Sir you may begin.

Good afternoon, and thank you for joining us for the <unk> third and fourth quarter 2022 financial results Conference call.

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 App.

Youll report filed on Form 10-K for the year ended December 31, 2022, 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 <unk>, President and Chief.

<unk> Officer, Joe Army.

Thanks, Mark and thank you all for joining us on today's call I will review the steps we took in 2022 to set us up for success in 2023 and beyond.

And John will review, our fourth quarter financial performance and discuss our 2023 guidance.

I will then tell you the actions, we will take to achieve our guidance and drive predictable profitable growth in the future.

As a result of Covid during 2020 and 2021.

We doubled our worldwide installed base and doubled the number of our gold accounts, which are the top 1000 U S hospitals in terms of respiratory discharged.

After two years of Covid volatility it was difficult to predict what 2022 would look like.

As COVID-19 transitioned from a lower respiratory disease to an upper respiratory disease COVID-19 related hospitalizations decreased dramatically.

At the same time, we saw reduced revenue our expenditures to meet all customer needs had left us with lower gross margins.

An unsustainable operating cost structure in a capital constrained balance sheet.

Throughout 'twenty two we address these issues and devoting considerable effort to de risking the business and setting us up for success in 2023.

One of our key focus areas throughout the year has been to return to predictable disposable revenue growth.

As it represents the majority of our revenue and carries the highest gross margin.

We've done this by focusing on our goal of accounts.

And these accounts, we've been expanding into additional care areas and delivering high quality medical education and training.

As a result of these efforts we've seen U S disposable turn rates, which represent disposables sold per month per box steadily recover.

In the fourth quarter, we had 70% of our pre Covid three year historical average due in part to fluor, arriving earlier than usual.

Our fourth quarter U S disposable turn rate of 70% was up from 42% in the second quarter.

60% in the third quarter.

We're also executing on the launch of the HPT to point out. This next generation platform that represents a major upgrade over our precision pulp plus.

First it incorporates a built in blower, which allows it to be used in areas of the hospital. They don't have wall air and second it makes it easier to transport patients between care areas.

It is also easier to use and therefore requires less training time.

There's been a lot of interest in this product since launch and we are beginning to see a number of customers replace their existing fleets with these newer devices.

During the quarter, we continued our efforts to improve gross margins I am pleased to.

To report that our new vapor mix facility is certified.

All of our production lines have been moved to validated importantly, all of our cost assumptions are intact, and we are building product and putting it into inventory.

We will begin to see the impact of these lower cost products as we work through the high cost inventory that we built during COVID-19 to meet all customer needs.

Another key area of focus in 2022 was our balance sheet.

Our balance sheet is now in good shape, and we have improved our financial flexibility. We've recently completed a $23 million equity raise an expected $17 million of inventory presently on the balance sheet, we will convert to cash by the end of 2024.

We also restructured the SLR debt facility to reset our 2023 financial covenants reduced our minimum cash covenant and add the ability at our election to pick a portion of our 2023 interest expense.

Saving cash expenditures of potentially up to $9 million.

Between the additional cash from our recent equity raise the conversion of inventory to cash the ability to pick our interest payments.

Our reductions in operating expenses and the gross margin improvements, we expect from our relocation of manufacturing to Mexico.

We believe we have the necessary capital to get us to adjusted EBITDA positive by the end of this year.

During 2022, we also focused heavily on reducing cash operating expenses to pre COVID-19 levels or $63 million in 2019.

Cash operating expenses decreased by approximately $17 2 million in 2022 versus 2021 with the stage set to deliver pre COVID-19 level of cash operating expenses in 2023 of $60 million to $62 million.

During the year, we right sized our worldwide commercial organization stopped commercial investments in <unk> access in respiratory care.

Brought R&D back in house, and one a grant from the Singapore government to offset a portion of our new R&D efforts and our newly established R&D Center.

I will now turn the call over to John who will review the financial results from this quarter.

Thanks, Joe.

Worldwide <unk> revenue in the fourth quarter was $18 $7 million.

Revenue came in ahead of our expectations as the flu season started earlier than normal which increased disposables revenue.

U S revenue was $15 $5 million and international revenue was $3 1 billion.

The growth in U S revenue was driven by an increase in turn rates back to 70% of the pre COVID-19 three year historical average for the fourth quarter.

International revenue was driven by two of our direct markets, the UK and Germany.

Gross margin was 27, 5% in the quarter ahead of our guidance of 16% to 18% as some of the Mexico costs moved into the first quarter and we benefited from a higher mix of U S disposable revenue.

Excluding the onetime costs related to the Mexico move and inventory reserves gross margin would have been 37%.

non-GAAP operating expenses, excluding impairment and loss on disposal of property and equipment were $21 million in the fourth quarter down from $22 3 million in the third quarter.

non-GAAP cash operating expenses were $18 million in the fourth quarter at the high end of our guidance range due to higher commission expense related to higher revenue.

Cash operating expenses have decreased sequentially every quarter and we have completed most of the actions necessary to return to pre COVID-19 levels.

We ended the quarter with $15 $7 million of cash down from $28 9 million at the end of the third quarter.

Net cash burn in the quarter after adjusting for $1 2 million of ATM proceeds was approximately $13 million, which is approximately 50% less than the average from the previous three quarters.

As Joe mentioned, we raised $23 million through a private placement, which closed a few weeks ago.

Taking into account the private placement our pro forma cash as of year end 2022 would have been $36 5 million, assuming net proceeds of $28 million.

We continue to believe we will convert approximately $17 million of our remaining inventory balance into cash by the end of 2024, and we're making progress on this initiative.

Inventory at the end of the quarter was $33 million down from a peak of $38 4 million in the second quarter of 2022 and.

In addition, as part of our debt Amendment, we added a pick or a payment in kind feature to our debt facility for calendar year 2023.

With the recent amendment, we signed this pick feature allows us to elect to add up to $9 million in annual interest payments to the debt balance and reduce our cash burn in 2023.

We believe that these actions in conjunction with improving gross margins and reduced cash operating expenses.

I'd us with the capital necessary to fund the business to cash flow positive.

Turning to guidance for.

For the full year 2023, we continue to expect revenue of $77 million to $79 million a growth rate of 15% to 18%.

We estimate that 75% of this revenue will be U S revenue and the remainder international.

We anticipate that 75% of revenue will come from disposable revenue and the remainder will come from capital in service.

Our expectations assume that the U S disposable turn rate will average 66% of the pre COVID-19 level for the full year.

During the year at high 15th or 16th and ending the year in the low seventies.

We expect that the first quarter of 2023 will be the last quarter of difficult year over year comparisons for us as the first quarter of 2022 represented the last quarter in which there were significant COVID-19 related hospitalizations that increased customer demand.

We expect gross margin for the full year 2023 to be in the range of 48% to 50% unchanged from our prior guidance.

We expect gross margin to be in the low to mid 40% in the first half of the year and low <unk> in the second half of the year.

We expect that GAAP operating expenses will be $76 million to $78 million and that non-GAAP cash operating expenses will be $60 million to $62 million for the full year.

As a reminder, the first quarter is typically the highest quarter for operating expenses due to the timing of various programs like our national sales meeting.

We expect to exit the year with non-GAAP quarterly cash operating expenses of approximately $15 million.

With that I would like to turn the call back over to Joe.

Thanks, John 2023 is all about driving predictable revenue growth.

Our gross margin improvement plan.

And maintaining operating expenses at pre Covid levels.

And investing prudently in future growth drivers.

Based on these actions we believe we can end 2023 and adjusted EBITDA positive.

There are some key actions, we will take to drive revenue growth 2023 and beyond.

First we will continue our focus on gold accounts as we drive churn rates to pre COVID-19 averages.

Our sales team will focus on expanding into new care areas within each goal to Carol.

We're also going to continue to drive medical education with a specific focus on hypercalcemia.

Hypercalcemia is not sensitive to flu RSV and COVID-19 admissions, so increasing our utilization in this area will reduce the impact of seasonality on our business and increase overall turn rates.

We're also going to execute on the <unk> opportunity, particularly the replacement cycle in our 500 gold accounts.

The field team has done an excellent job launching the HPT two pointed out.

I am excited to see what they will accomplish in 2023.

I'd also note that the HPT two pointed out and its related disposables have higher asps than our.

Our legacy legacy products, given the higher clinical utility they provide by ease of use and reduce training requirements.

These higher Asps will help drive revenue growth.

On the gross margin front most of the significant structural changes have been made are relocation to Mexico is complete and now we're going to return to executing our gross margin improvement plan, including ASP uplift direct material and labor cost reductions and greater overhead cost absorption.

From an operating expense standpoint, we believe we've taken the steps necessary to return non-GAAP cash operating expenses to pre COVID-19 levels now.

Now we will create operating leverage while we continue to invest prudently in new products and technology and clinical support for future growth.

We accomplished a lot in 2022, which has set us up to execute in 2023 and.

And be well positioned to be adjusted EBITDA positive by year end.

I'd like to thank our team for all their hard work in executing on our path to profitability initiatives, which we launched in early 2022 in response to a rapidly changing environment.

We're excited about the opportunities in front of US. We appreciate your support of <unk> and look forward to updating you on our next quarterly call.

I will now open the call for questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press star one on your telephone keypad.

Your first question comes from the line of Bill <unk> with Canaccord Genuity. Your line is open.

Hi, Zagury day on for <unk>. My first question is you mentioned.

Inventory converting it to cash by the end of this year is there a specific cadence for that that you can mention how will it be sort of even throughout the year or heavier in certain quarters.

Okay.

Hey, Jack this is John that can take that from a cadence perspective, we would expect it to be fairly consistent over the course of the year, so roughly equivalent reductions on a quarterly basis.

And the point there is accurate we have that cash burn reduction will happen over the next couple of years of that approximately 60% of that will take place.

Okay.

Great. Thank you for that my second question is what interest rate expense should we model for 2023 and beyond will that be impacted by the Pik that you can do on your deal or anything like that.

Sure Zach Zachary I can take that as well from a modeling perspective.

Plan on <unk>.

14% interest rate.

For 'twenty.

2023, a lot of it will depend on what the fed rates change over the course of the year. It is variable debt. So.

That plan on a 14 ish.

Per cent range for 2023.

Great. Thank you very much.

Youre welcome.

Your next question comes from the line of Marie <unk> with BTG.

Hey, Good afternoon, John Jon This is Sam Libra for Murray and thanks for taking the questions here maybe.

Maybe I can start on the revenue guidance and I appreciate the commentary on the outlook on mix and <unk>.

The U S versus international but maybe in terms of cadence.

Should we think about the year progressing in terms of utilization picking back up to pre COVID-19 levels and also taking into account seasonality for the business.

Hi, Stan it's John I can take this question here in terms of seasonality as we think about the business.

Quarterly cadence perspective, we think generally it will probably revert back to the sort of 2017 to 19 pre Covid years' experience.

In that particular timeframe, our quarterly cadence is sort of in the.

25 ish percent contribution in Q1.

Kind of in the 'twenty three 'twenty two range for Qs, two and three and then wrapping up the year with the high Twenty's to round out the full year to get back to 100%. So as we look at 2023, that's how we that's how we're thinking about it from a cadence perspective as well.

Okay really helpful.

And then maybe I can ask my follow up here on <unk>.

<unk> two point now you mentioned the opportunity to replace.

The existing fleet and the 500 gold accounts I guess is there also an opportunity to expand.

Did that customer installed base as they also treatments and new care areas as well.

Hey, Sam This is Joe I think I can take that one if you want.

There is absolutely an opportunity to expand into new care areas, we've already been seeing that with hospitals.

Replace their fleet from the expanded their fleet. So we're pretty excited about <unk> launch there are.

Our capital equipment headwinds out there I'm sure you've heard in other calls but.

We see that really not playing out as much on the smaller orders I think on the larger orders to hold.

We'll system conversions are taking a little bit more time as we work our way through it.

So the room for expansion, we've been seeing it.

Understood. Thanks for taking the questions.

Okay.

There are no further questions at this time I will now turn the call back over to Mr. Joe Army for closing remarks.

Thank you for joining us on today's call and we look forward to updating you again next quarter have a nice evening.

This concludes today's call you may now disconnect.

Please wait the conference will begin shortly.

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