Q3 2023 Vapotherm Inc Earnings Call
Good afternoon, and walk us through third.
Third quarter 2023 financial results Conference call. All participants are in listen only mode and this call is being recorded after the Speakers' remarks, there will be a question and answer session. It is now my pleasure to turn today's conference over to the Rona Mckay faithful service, Vice President and Chief Accounting Officer.
Corona you may begin.
Good afternoon, and thank you for joining us for Sun paper third quarter 2023 financial results Conference call.
Joining us on today's call are 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.
Access the webcast. Please visit the events link in the IR section of our website at Stapleton 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.
<unk> 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.
Aren't 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 baseball terms, President and Chief Executive Officer, Joe Army.
Thank you all for joining us.
Today's call I will review the progress we made during the third.
Quarter.
John will review our financial results.
They didn't provide my thoughts on the fourth quarter before we open the call for Q&A.
Revenue, excluding revenue from the deeper connections call center business, which we commercially exited in the fourth quarter of 'twenty two.
Grew 18% in the third quarter as compared to the third quarter of 'twenty two.
Now that the underlying market has returned to more normal year over year comparability.
The progress, we're making on the top line growth.
This quarter.
We continued to execute well against our path to profitability initiatives.
Another sequential quarter, our sixth quarter in a world of reduced non-GAAP cash operating expenses.
Inventory balances and reduced cash burn.
The significant progress we've made in these key metrics when combined with the additional actions we took.
Third quarter of this year to further reduce our non-GAAP cash operating expenses.
Companies that we will become adjusted EBITDA positive.
Fourth quarter of 2023.
Thus along with further expected reductions inventory levels should allow us to then turn cash flow positive in mid 2024.
Which means that we should have enough cash in our balance sheet to execute our business plans without raising additional capital.
Revenue in the fourth quarter was $15 2 million.
Capital equipment revenue growth, 45%.
The third quarter of 2022 was driven by <unk> sales in the U S.
Precision for sales in Brazil in support of the tender that was awarded to our distributor.
In the U S customers continue to upgrade their installed base of precision flow units to HCP to Paul Davis.
Given the ease of use and built in your choice, which allows it to be used to shore up the hospital.
We're also excited to announce that we recently received regulatory clearance of <unk> in Brazil, which will allow us to bring the HCP chip go ahead to our second largest market.
Worldwide disposables revenue increased by 18% compared to the first quarter of 'twenty to 'twenty two.
We expect to increase worldwide disposables revenue by growing our <unk> installed base.
Efforts to increase awareness of the effectiveness of our technology in treating acute type of Catholic respiratory failure and COPD patients.
As well as other non seasonal conditions requiring respiratory support.
The Hyperx study, which well discuss in a moment was specifically designed to show the effectiveness of our technology in hypothetically patients.
Turning to our gross margin improvement initiatives.
June was 40 per se.
This compared to gross margin of 14% in the third quarter 2022.
Which included inventory write offs and reserves to be transitioned from the precision flow to <unk>.
Gross margin in the third quarter decreased by 200 basis points from the second quarter of 2020.
As we scale, our Mexico operation to run 24, seven for the first time in advance of the upcoming RSV acute issues.
Doing so will include higher scrap rates lower first price yields as we walk through the new hire meaningful.
The additional shifts.
Higher freight costs.
Overall, the transition to our Mexico operation has been incredibly smooth as evidenced by our consistent so.
The improvement in gross margin for several quarters.
I'll step back this quarter, but we believe that these one time costs are behind us.
It's back on track and we expect to see.
<unk> gross margin improvement return in the fourth quarter of this year.
Early in the quarter, we took steps to further reduce operating cash expenses, which reduced cash operating expenses in the third quarter.
The $12 3 million from $14 2 million and the SEC.
Quarter of this year.
$19 5 million in the third quarter.
2022.
We expect that our overall cash opex run rate going into 'twenty 'twenty four will be fought.
$48 million $50 million.
At that level of spend we expect to be cash flow positive sometime in the middle of 2024.
Believe that our current cash balance is sufficient to get us to that point.
We continued to reduce our inventory levels and converted another $1 5 billion of excess inventory into cash in the quarter.
We remain on track to normalize our inventory levels by the end of 'twenty 'twenty four.
Following up excess inventory, we purposefully built for purchase during the pandemic.
Ensure we could fulfill every customer need Gerry corporate charges.
Last but not least we ended the quarter with $14 4 million of unrestricted cash our cash burn was $3.6 million this quarter.
We have consistently reduced our cash burn every quarter for the past six quarters.
Combination of revenue growth.
Gross margin improvement and reduced cash operating expenses.
We are not cash flow positive yet, but we've made incredible progress in getting to adjusted EBITDA is the first step, which we expect to see this upcoming quarter.
Through continued execution, we then expect to become cash flow positive in mid 'twenty one.
On the clinical front I'd like to update you on three important clinical trials.
The Hyperx clinical trial has been accepted.
Initial presentation at the society for critical care Medicine Congress in January of 2024.
The hyper trial was designed to compare the ability of our <unk> technology.
To treat acute type of Catholic respiratory failure.
The emergency Department.
Where to buy level positive airway pressure.
Bypass.
I pop as a form of noninvasive ventilation delivered by a form bidding face mask.
Which is the current standard of care for hyperkinetic patients.
It should help the cat is a life threatening condition in which patients unable to effectively remove excess carbon dioxide out of the body.
While bi-level pressured systems of the current standard of care many patients cannot tolerate the discomfort applications associated with the mask required for those systems.
I didn't like delivery.
Masks and replace providing greater patient comfort and protecting the patient to go with the ability to speak.
The primary endpoint of the trial was non inferiority of HB ni with traditional measurements.
She had laboratory values music use patient comfort there were no adverse events.
We're excited to share the results of this important study within medical.
Second we have stopped our moderation neocart trial, which was designed to support the safety of the oxygen assist module on the precision platform in Iraq.
Ultimate goal is approval of the auction assist module on the <unk> platform.
So I'm just trying to work to date, we believe the quickest path to this goal is to stop the trial started trial with the oxygen assist module arguably treaty to create a platform once our development work is complete.
We are pleased to note there were no adverse events.
Published the results to date as a pilot study.
Our international business continues to successfully sell the oxygen assist module for precision flow.
Expected to be a major contributor to growth in our international business.
Lastly, the results of a UK based investigator initiated clinical trial will be presented at the European Respiratory Society International Congress.
<unk> showed that use of our technology is more effective standard oxygen therapy.
For the treatment of acute asthma in children.
50 children were enrolled in the study 22 were treated with standard oxygen therapy of 28 were treated with our technology.
86% of the children treated with standard oxygen therapy, requiring escalation of therapy.
Almost 61% of the children treated with our technology further escalation.
In addition children treated without technology net hospital discharge criteria in the <unk>.
Medium power 29 hours compared to a median time of 37 hours for those treated with standard oxygen.
In conclusion I'm pleased with the progress we've made on our path to profitability initiatives.
The midpoint of our 2023 revenue guidance range, we expect to deliver revenue growth excluding revenue from <unk>.
<unk> cost of the business.
20% in the last three quarters of this year versus the same three quarters of 2022.
And almost 50% reduction in cash operating expenses from 2021 to 'twenty to 'twenty three.
Our differentiated technology large installed base and recently launched <unk> product give us the opportunity to drive significant revenue growth.
The last three quarters of this year will be the first three quarters without the impact of Covid skewing the results and demonstrate the strong growth potential in our underlying business without incremental investments.
Also the combination of expected revenue growth.
Gross margin improvement in <unk>.
Decreased cash opex positions us to become adjusted EBITDA positive in the fourth quarter of 'twenty three.
And then cash flow positive in mid 2024.
I will now turn the call over to John who will review the financial result for the quarter.
Thanks, Joe worldwide revenue in the third quarter of 2023 was $15 $2 million U S revenue was $11 2 million and international revenue was $4 million.
Worldwide capital and worldwide disposables revenue grew 25% and 18% respectively as compared to the third quarter of 2022.
HPT to point out capital sales represented 73% of our U S unit sales in the third quarter of 2023.
Gross margin was 39, 6% in the third quarter, which is down from 42, 8% in the second quarter of 2023 due to inefficiencies in our Mexico facility as we significantly ramp production in anticipation of RSV and flu season in the northern hemisphere.
Gross margin in the third quarter of 39, 6% increase from 13, 8% in the third quarter of 2022.
This increase is largely due to the absence of inventory reserves and write offs. We made in connection with the transition from precision flow to HPT two pointed out in the third quarter of 2022 year over year revenue growth and a lower cost of operations in Mexico.
GAAP operating expenses were $16 $3 million in the third quarter down from $24 8 million in the third quarter of 2022.
non-GAAP cash operating expenses were $12 $3 million in the third quarter down from $14 2 million in the second quarter of 2023.
non-GAAP cash operating expenses decreased from $19 5 million in the third quarter of 2022, a year over year reduction of $7 2 million or 37%.
We recorded an adjusted EBITDA loss of $6 1 million in the third quarter of 2023, which is $300000 less than our adjusted EBITDA loss of $6 4 million in the second quarter of 2023 and significant improvement over our adjusted EBITDA loss of $17 7 million in the third quarter of 2000.
'twenty two.
We continue to make progress in reducing inventory from the peak of $38 4 million in the second quarter of 2022, we.
We ended the quarter with $23 $1 million of inventory a reduction of almost $15 million over the last five quarters.
We remain on track to further reduce our inventory levels by another $10 million over the next five quarters, resulting in inventory of roughly $13 million.
By the end of 2024.
We ended the quarter with $14 4 million of unrestricted cash a decrease of $3 6 million in the quarter versus a decrease in cash of $7 7 million in the second quarter of 2023.
Lastly, Im pleased to report that we met our 2023 onetime minimum net revenue covenant requirement of $25 million for the six month period ended September 32023.
We recorded net revenue of $31 $2 million for this measurement period.
Our next minimum net revenue Covenant test will begin in 2024 with the minimum net revenue level set at a discount to the company's 2024 annual operating plan.
We also remain in compliance with our minimum unrestricted cash and cash equivalents covenant of $5 million.
I'll now turn to guidance.
We now expect annual revenue of 69 million $71 million, which represents an annual growth rate of 8% to 11% excluding revenue from the <unk> access call Center business, which we exited commercially in the fourth quarter of 2022.
Excluding <unk> access revenue growth in the fourth quarter will be 13% at the midpoint of our updated revenue expectations.
This is a deceleration from the third quarter, primarily due to a tough comp in the fourth quarter of last year due to an unusually early flu season.
Our revenue guidance at the midpoint of the range and excluding <unk> access reflects net revenue growth of 20% over the last three quarters of last year, which we believe accurately reflects the underlying trajectory of the business.
Full year 2023, we continue to expect that 65% to 75% of our revenue will come from disposables revenue and then the remainder will come from capital in service revenue.
We now expect gross margin for the full year 2023 to be in the range of 41% to 43%.
We now expect that GAAP operating expenses will be between 68 million to $70 million, a decrease of $2 million from previous guidance.
We now expect that non-GAAP cash operating expenses will be between 54 million to $56 million, a decrease of $1 million from previous guidance.
We expect to exit the year with an annual non-GAAP cash operating expense run rate of 48 million to $50 million.
We believe that the additional reduction in non-GAAP cash operating expenses taken in the third quarter and our continued focus on reducing our inventory balance will offset the reduction in our revenue and gross margin expectations for 2023. Therefore, we continue to expect to end 2023 with unrestricted cash of between $10 million.
And $15 million.
With that I'll now turn it back over to you Joe.
Thanks, Chad.
We look to close out the year strong.
Focus will continue to be driving towards profitability through revenue growth.
Gross margin improvement and driving cash operating expense below pre IPO levels, while investing prudently and future growth drivers such as the whole market.
Clinical studies.
By delivering fourth quarter results, including positive adjusted EBITDA.
We should be well positioned to execute on our 2020 forecast and achieve financial self sustainability.
We made a lot of structural changes over the past six quarters or so.
Our execution on our path to profitability initiatives.
I'd like to thank our team for their ongoing efforts as we are now on the cost of adjusted EBITDA profitability, while still driving top line growth.
And always we appreciate your support of April.
Forward to updating you on our next quarterly call.
I will now open up the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear three Tom prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star.
Followed by the two CRE.
If you are using a speakerphone. Please lift the handset before pressing any keys. Your first question comes from Margaret Kalvar with William Blair. Please go ahead.
Hey, everyone. This is Nick <unk> on for Margaret Tonight. Thanks for taking our questions just to start on cash obviously, good to see cash burn continued to improve this quarter.
So I guess should we expect a similar level. The next few quarters as you work towards that cash flow positive next year.
I know you mentioned the cash Opex run rate in 2024, but are there any additional water levers you could pull to maybe even improve upon that further.
On the call. This is John Thanks for your question Tonight, Yes, where we're pleased with the reduction in our cash burn this past quarter I think as we look forward here to the fourth quarter is kind of a two step process in call. It first step is really to get to adjusted EBIT positive, which we're targeting here in the fourth quarter and then the next step is cash.
Low breakeven mid.
The year 2024, and really a couple of steps that two step processes in place I think.
The major driver of that we have as you pointed out as cash Opex reductions we've taken all the actions.
We believe we need to take.
To allow us to get to that point and the second real main lever that we hadn't Cali is around our inventory reduction.
Probably can tell we have about $23 million of inventory at the end of the fourth quarter.
Basically we want to drive that back to four turns per year in terms of inventory levels, which will free up about $10 million of incremental cash by the end of 2024. So over the next five quarters, we plan to unlock about $10 million of cash from our balance sheet and return it back to our cash books.
By the end of the year. So that's our that's our plan from a cash perspective.
Great. Thanks, very helpful. And then kind of just tied to HPT ones into one here as a follow up.
I think you mentioned last quarter HP.
T two point out accounting for roughly 70% of the U S capital sales. So was it similar this quarter.
And I guess, how should we think about the timing of entering the market in Brazil. After the regulatory approval you mentioned.
MS. Mccullough you I'll take this one as well from an HPT to point out perspective, we did see a little bit of a bump up in terms of the concentration of HPT to point out capital sales as a percentage of the total unit sales in that low 70% about 73% this past quarter.
We expect to see HPT pointed out will continue to be a larger percentage of the overall.
<unk> unit sales.
Longer term.
In terms of our international HPT to point, our approval from Brazil perspective, we're looking to.
Close that as quickly as possible, Brazil is a very important market to our second largest.
In the world for Us so getting that.
Product into Brazil, and being in position to help treat those patients as well.
We're looking to do here as quickly as possible.
Great. Thanks, again for taking my questions.
Welcome.
Your next question comes from Marysville with BTG.
Hi, Joe Hi, John Thanks for taking the questions. This evening I wanted to ask a two parter on capital and disposables.
HPT to Plano it sounds like there's continues to be strong demand for it.
And it's certainly a big growth driver year over year, but I noticed it did step down a decent amount sequentially is this just seasonality has there been any change in sort of demand or or capital.
Capex environment.
That sort of thing and then on disposables looks like you've had a nice recovery up to about 60% of pre COVID-19 churn rates very nice to see.
Wanted to understand if that sort of meaningfully changes your outlook on the disposable turn rates going forward.
Okay.
Henry I can I can take those questions. So I'll start first with capital. So from a Capex perspective, we saw hospital capex spending tighten up a bit here in the third quarter.
We saw a lot of deals that we had with the U S government pushed into the fourth quarter, which is unusual since September 30th typical fiscal year end for the government. So.
Unusual pattern there, we're not losing deals are just taking longer to get done.
<unk> tore HPT to point out continues to be strong.
On a customer perspective, and we're now just starting to see some inbound request for quotations for the HPT to point out.
Given that the AC 611 high flow nasal cannula solution for the <unk> hundred 60 will be coming off the markets and so so that's from a from a capital perspective on the disposables perspective, we did see a recovery in the <unk>.
Turn rate is against the prior Covid three year average so we did bump up.
Approaching 60% here in the third quarter.
As we look forward to the fourth quarter.
And that would be really on driving the usage and hypercalcemia and ni PPP patients and existing accounts.
Our goal is to get back to our historical CPC turn rates.
Over time.
We do that over the next three years, we can grow our business.
15% plus per year, just like getting back to it was churn rates in our gold account. So as we look at the mix of disposables, we expect that there'll be.
65% to 70% this year, just given the HPT to put out capital.
<unk> had this year, but longer term, we expect them to be about 75% contribution of our total revenue.
Perfect very helpful very encouraging Jon and then maybe my follow up heard mention of the impact to gross margins from <unk>.
Building inventory ahead of the RSV flu season, what are your expectations for the winter season. This year and those illnesses just curious to kind of level set post COVID-19 now that it does feel like we're truly in a post COVID-19 era. Thanks for taking the questions.
Yes, sure Thanks, Barry so where.
Just.
We're just starting to see the impact of the RSV and flu season here in the U S.
Which is <unk>.
Prior to Covid typically happened around this time in the fourth quarter. So.
Our guidance is really based on the expectation that we will see a mild to moderate flu season in the fourth quarter.
With about 25% of the overall 2023 2020 for flu season, taking place in the fourth quarter this year and the balance taking place in the first quarter of 2024.
What we experienced prior to the pandemic and you expect to.
Return back to that type of traditional pattern here going forward. So.
That's we're looking at some.
A modeling perspective, how we developed our guidance here for the balance of the year.
Understood. Thank you.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
There are no further questions at this time. Please proceed.
Okay.
Thank you for joining us on today's call.
Look forward to updating you again next quarter.
A nice evening.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.
Perfect.
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Yes.
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