Vapotherm, Inc.

Good afternoon, and thank you for joining us for the Vapotherm Third Quarter 2021 Financial Results Conference Call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army, and its Senior Vice President and Chief Financial Officer, John Landry. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit the events link in the IR section of our website, vapotherm.com. Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements. These statements are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the risk factor section of our annual report filed on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission, or SEC, on February 24, 2021. Our quarterly reports on Form 10-Q for the quarters ended March 31, 2021, June 30, 2021, and September 30, 2021, which were filed with the SEC on May 5, 2021, August 9, 2021, and November 3, 2021, respectively, and in any subsequent filings with the SEC. Such risk factors may be updated from time to time in our filings with the SEC, which are publicly available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise, unless required by law. This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the investor relations portion of our website. With that, it's my pleasure to turn the call over to VapoTherms President and Chief Executive Officer, Joe Army.

Good afternoon, and thank you for joining us today. I will begin by discussing our third quarter 2021 results. Then I'll hand the call over to our CFO, John Landry, to provide 3Q financial details. Lastly, I will update you on our key areas of focus for the remainder of the year before taking questions. Demand for our technology surged in the third quarter, resulting in one of the strongest quarters in the company's history in what is typically our seasonally slowest quarter. Total revenue was the second highest on record, disposable revenue was the highest on record, and our U.S. disposables term rate was the highest it has been in over five years. Importantly, our total worldwide revenue and total disposables revenue both exceeded our performance in the third quarter of 2020. This performance is significant for several reasons. First, it further validates the safety and efficacy of our proprietary high-velocity therapy in treating respiratory distress patients who could benefit from our noninvasive ventilatory support as an alternative to intubation. With thousands of hospitals across the world using our technology on a daily basis and our rapid expansion during the pandemic, The value of our high-velocity therapy delivers to patients and hospitals is clear. This is proven by the significant disposables revenue growth during the quarter, a trend that we have seen throughout 2021. Year-to-date, total disposables revenue has grown 33% over 2020 and has more than doubled over the first three quarters of 2019. second our technology appears to have reached critical mass we received a ton of clinical exposure since the start of the pandemic resulting in greater awareness of our technology around the world our global install base now sits at nearly 35 000 more than double the size it was 24 months ago and we are in over 500 of the top 2 000 largest emergency departments in the us our creativity Agility and focus on customers has paid dividends. Our ability to deliver product during this extremely difficult period has continued to grow our reputation in the marketplace. A number of the new ED gold and silver accounts we won during the quarter were highly competitive situations. The fact that we delivered when others could not has been an important element of our success and one of the reasons we believe we are taking market share. Third, as the COVID-19 virus continues to mutate, Many believe it has become a permanent part of the respiratory landscape, much like flu and RSV. While no one can predict what this virus will do, if it continues as a chronic annual problem, our global TAM will expand significantly, in which case our large and growing install base leaves us well positioned to capitalize on this trend. I'm very proud of our team and our ability to deliver product and support to our customers. To make sure we can continue to do this with the much larger install base, We significantly expanded our disposables production capacity in the third quarter by establishing additional manufacturing capability in Mexico. Not only were we able to increase capacity by 75%, but we're able to do so in a way that will drive gross margin improvement over the long term. We also took steps to address the labor shortages affecting the entire country, which threatened our ability to meet customer demand for disposables. We found creative ways through that challenge, which included recruiting in other geographic areas and flying in and housing teams from across the country to staff our production lines in New Hampshire. This enabled us to staff second and third shifts, which proved crucial to our success in delivering for our customers. While the ebbs and flows of COVID-19 will continue to cause some near-term quarter-to-quarter volatility in our results, over the long term, we are confident in our ability to successfully manage the business no matter the environment. In the midst of a COVID-19 surge, we will run the same play we did this quarter and focus on delivering flawlessly for our customers while rapidly expanding our install base and winning new gold and silver accounts. As the COVID-19 surge subsides, we will shift our focus back on our 1H1D, or one hospital, one day strategy, in which we train and educate customers across all parts of the hospital on our technology's unique ability to treat both hypoxic and hypercapnic patients. We consider this a win-win strategy. focusing on satisfying high demand during surges when access to customers is limited, and focusing on executing our 1H1D strategy when access to customers returns to normal levels. Given the significant expansion in our install base over the last six quarters, we estimate it could take four to six quarters to complete our 1H1D training across our entire customer base, assuming no intervening COVID-19 surges. Once completed, we believe our install base will be fully productive and our disposable utilization rates will match or exceed historical levels regardless of what happened with COVID-19. In summary, we believe the combination of our superior technology, white glove field support, proven track record of always delivering for our customers, growing suite of digital solutions, commitment to high-quality clinical education in alignment with our customers' mission of the best clinical outcome at the lowest overall cost will allow us to continue to drive long-term growth and establish Vapotherm as the complex lung disease patient management company. I will now turn it over to John to review the financial results of the quarter. I will then close by telling you our key areas of focus for the fourth quarter, which will set us up for a successful 2022.

Thank you, Joe. As mentioned, Revenue in 3Q 2021 was $38.1 million compared to revenue of $30.6 million in 3Q 2020 and $10.8 million in 3Q 2019, a two-year compounded annual growth rate of 88%. U.S. revenue was $33 million in 3Q 2021 as compared to $25.5 million in 3Q 2020. International revenue was $5.2 million in 3Q 2021 as compared to $5 million in 3Q 2020. Disposables revenue was $21.7 million in 3Q 2021, representing an increase of $80.6 million over disposable revenue of $13 million in 3Q 2020. In 3Q 2021, U.S. disposable revenue was $19 million as compared to $10.4 million in 3Q 2020, while international disposable revenue was $2.6 million in both 3Q 2021 and 3Q 2020. In 3Q 2021, we sold roughly 200,000 disposables worldwide versus 129,000 in 3Q 2020. Capital revenue was 15.1 million in 3Q 2021 as compared to 16.9 million in 3Q 2020. In 3Q 2021, we sold roughly 2,400 PF units worldwide versus roughly 2,700 in 3Q 2020. UF capital revenue was 12.9 million in 3Q 2021 as compared to 14.8 million in 3Q 2020. International capital revenue was 2.2 million in 3Q 2021 as compared to 2.1 million in 3Q 2020. We believe the significant year-over-year increase in disposable revenue compared with a small year-over-year decrease in capital revenue serves to illustrate the significance of our growing install base in ED gold and silver accounts. Worldwide service revenue was $1.3 million in 3Q 2021 compared to $617,000 in 3Q 2020. The increase in worldwide service revenue was due to vapor farm access-related revenue and an increased worldwide install base of precision flow units. Our worldwide installed base grew by approximately 2,500 units in 3Q 2021. As of the end of 3Q 2021, our worldwide installed base consists of approximately 34,500 units, reflecting 39% year-over-year growth. Our monthly U.S. disposable utilization rate in 3Q 2021 was 2.56, which was a record new high despite the fact that the third quarter is typically our slowest quarter from a disposable utilization perspective. For context, our monthly average disposable utilization rate was 1.65 in the third quarters of 2017 through 2019. Gross profit in 3Q 2021 was $18.8 million, an increase of $3.3 million over gross profit of $15.5 million in 3Q 2020. Gross margin was 49.4% in 3Q 2021 compared to 50.8% in 3Q 2020. Gross margin was negatively impacted by one-time charges related to the transfer of certain activities to our contract manufacturer in Mexico, partially offset by increased labor and overhead absorption due to higher disposable volumes and a greater percentage of total revenue coming from the U.S. Operating expenses were $31.7 million in 3Q 2021, an increase of $5 million over $26.7 million in 3Q 2020. The increase in operating expenses was primarily due to an increase in sales commissions on higher revenue levels. Net loss in 3Q 2021 was $13.6 million, or 52 cents per share, compared to a loss of $12.4 million, or 49 cents per share, in 3Q 2020. Adjusted EBITDA loss for 3Q 2021 was negative $10.7 million compared to negative $8.2 million in 3Q 2020. The increase in adjusted EBITDA loss was primarily due to an increase in year-over-year expenses and slightly lower gross margins. As of September 30, 2021, cash and cash equivalents were $70.3 million compared to $81.5 million as of June 30, 2021, and $113.7 million as of December 31, 2020. In 3Q 2021, we used cash of $11.2 million, of which $1.2 million was used for paying down our line of credit. Based on the strong results we saw in the last three weeks of the third quarter, we now expect full-year revenue to be at least $106 million, which represents an increase of 120% over 2019 and a two-year compounded annual growth rate of 48%. This new revenue guidance reflects an update from previously issued full-year revenue guidance of at least $102 million. We expect U.S. revenue in 4Q 2021 to approximate 2Q 2021 levels based on the following assumptions. First, we do not anticipate any significant COVID-19 surges in 4Q. Second, we expect a light flu season in the U.S. based on what the southern hemisphere experienced in 2Q and 3Q, and we expect RSV levels to be consistent with what we saw in 3Q. Third, we believe many of our U.S. customers ordered more product than what they needed in 3Q and will burn this inventory down in 4Q, which is consistent with our experience in previous COVID-19 surges. We expect international revenue to grow about 25% over 4Q 2019. It continues to be difficult to predict the timing, duration, and impact of COVID-19 on hospitalization, and to the extent the impact of COVID-19 deviates from those expectations, our full-year revenue forecast would be impacted. We now expect full-year gross margin to be between 47% to 49%, an increase from previous guidance of 46% to 48%. While we expect our gross margin to decrease year over year, we see this as a temporary issue due to reduced revenue and overhead absorption in 2021 versus 2020. In addition, the new production capacity in Mexico will help us execute on our gross margin improvement plan, and we remain comfortable in our belief that we'll be able to increase gross margin long-term to 65%. We now expect full-year operating expenses of at least $106 million, an increase from previously issued operating expense guidance of at least $102 million. The increase in operating expense guidance is due primarily to increased sales commissions on higher expected full-year revenue. With that, I'd now like to turn it back over to you, Joe.