Vapotherm, Inc.

Good afternoon, ladies and gentlemen, and welcome to the VapoTherm first quarter 2022 financial results conference call. As a reminder, this call is being webcast live and recorded. It's now my pleasure to introduce your host, Mr. Mark Klausner of Westwick. Sir, please go ahead.

Good afternoon, and thank you for joining us for the VapoTherm first quarter 2022 financial results conference call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army, and Senior Vice President and Chief Financial Officer, John Landry. As a reminder, this call is being webcast live and recorded, and we will be referencing a slide presentation in conjunction with our remarks. Because there is a short delay between the live telephone audio and the presentation being shown on the webcast, for the best experience, please either use the webcast for both the audio and video content, or if you dialed in by phone, download the slides from our website and advance them yourselves. To access this webcast, please visit the event section in the IR section of our website, vapotherm.com, and a replay of the event will be available following the call. Before we begin, I would like to remind everyone that our remarks today contain forward-looking statements. All statements made on this call, including during the question and answer session, other than statements of historical fact, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, anticipate, assume, could, intend, target, transform, return, drive, project, contemplate, believe, estimate, predict, potential, strategy, continue, or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words or the use of future dates. Forward-looking statements on this call include, but are not limited to, statements concerning financial guidance, return to historical disposable turn rates, gross margin improvements, future revenue growth, reduction of cash operating expenses to pre-COVID levels, progress towards profitability, release of new products, and the ability of such products to command premium pricing, the timing and success of the planned relocation of manufacturing operations, penetration of new care areas, receipt of regulatory approvals for new indications for our products, and the future behavior of COVID-19, flu, RSV, and other respiratory illnesses. These statements are based on the current plans and 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, 2021, which was filed with the Securities and Exchange Commission, or SEC, On February 24, 2022, our quarterly report filed on Form 10-Q for the quarter ended March 31, 2022, 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. With that, it's my pleasure to turn the call over to VapoTherms President and Chief Executive Officer, Joe Army.

Thanks, Mark. Good afternoon, and thank you for joining us today. The COVID pandemic had a profound impact on our business, both good and bad. As we're moving to the endemic phase of this virus, we wanted to take this opportunity to provide a deep dive into the performance of our business during the pandemic and in the years leading up to it and share our vision of Vacotherm's future, which we remain very bullish about. In light of this, we'll not be providing the traditional review of our first quarter performance. There is a lot of detail around our financial and operating performance for the quarter in our press release issued earlier today, as well as in the 10-K, which will be filed shortly. So we encourage you to review those documents for specifics. We have a unique business, capable of doing things no one else in our industry can do. Over the coming slides, we'll walk you through a brief history of our business and how it's been transformed by COVID since March 2020 and update you on our plans for the coming years. My goal is that coming out of today's call, you will be clear on the four fundamental aspects of our plan. Number one, transform this business into a consistent, predictable 20% revenue grower. Number two, drive gross margins above 60% and set ourselves up for expansion to 70%. Number three, return our cash operating expenses to pre-COVID levels. And number four, drive this business to profitability. As I said before, COVID has a profound impact on our business, both good and bad. On the positive side, it accelerated the growth of our install base to levels we did not expect to see until 2025, elevated global awareness of our brand and its remarkable efficacy, and we believe enabled us to take significant share in the respiratory space. On the negative side, in order to meet every customer need during this global pandemic, it required us to take actions and incur costs that hurt our gross margins, temporarily increased our cost structure, made the business more volatile and difficult to predict, and created revenue comps which cloud our fundamental growth profile. 2022 will be a transitional year as we come out of the pandemic and shift our focus to a more stable, sustainable operating model. In 2023, you'll see us firing on all cylinders, delivering growth, driving towards profitability. So let's start with a review of where we were at the end of 2019. In the years leading up to the onset of COVID, we were making good progress building our position in the respiratory care landscape. From 2016 to 2019, we increased the number of disposables sold by over 80%, from 145,000 per year to over 260,000 per year. During these three years, our market share in the respiratory care space nearly doubled, accounting for approximately 6% of the U.S. market. We were pleased with the progress we made and even more excited about the roughly 94% of the market still in front of us. So what drove this performance over the period? As you know, we run a razor-blade business made up of capital units and single-use disposables, so a critical element of our success is the growth of our capital unit install base, which in turn drives recurring disposables revenue. What you see in this chart is the annual growth of our U.S. install base from 2015 to today. Prior to 2020, we drove a steady increase in that install base from 2015 when we first launched our direct sales force in the U.S., To the end of 2019, we saw our install base grow at a 17% compound annual growth rate. And then COVID hit. Beginning in the second quarter of 2020, the world experienced an explosion in demand for respiratory care equipment, and we were there to support our customers. COVID radically changed the trajectory of our U.S. install base growth, which nearly doubled from the end of 2019 to the end of 2021, for a 40% compound annual growth rate over this period. Beyond growth in the number of units, we also saw a big shift in the composition of our customer base, particularly in the U.S. The pandemic shined a spotlight on Vaporform and our technology, allowing us to rapidly expand our share of the biggest hospitals in the U.S., hospitals we generally refer to as gold accounts, the top 1,000 U.S. hospitals measured by respiratory discharges. As we dramatically grew our U.S. install base during COVID-19, We also won a large number of these gold accounts because of our superior technology, our outstanding field team, and our ability to deliver product when others couldn't. As you can see in this chart, the turn rate or the number of disposables used per month by each unit of capital equipment was very predictable on a quarterly basis and followed a clear seasonal pattern. With Q1 typically having the highest turn rates because of flu and RSV, lower turn rates in the second and third quarters when the weather got warmer and the kids got out of school and increasing turn rates as we moved into the fourth quarter when flu and RSV came back. From 2015 to the end of 2019, you could see that we could sell our watch by these turn rates with the average turn rate being approximately 1.9 per month. As we moved into 2021, historical patterns around respiratory distress changed dramatically. Seasonal trends reversing and the volatility in turn rates increasing. In the first quarter of 2020, U.S. disposable ordering patterns became highly correlated with COVID hospitalizations, making the volumes of disposables sold significantly more volatile and unpredictable, with big increases in demand with no warnings. Until the Omicron surge in late 2021 and early 2022, hospitalizations associated with each of the prior surges followed a bell-shaped distribution, normalizing at pre-surge levels following a spike. However, Omicron was different. Following the spike in January, hospitalizations began to decline in February and then fell off a cliff in March, and Omicron patients were less sick than previous surges. When we gave guidance in February, we were expecting to see a tail of hospitalizations similar to what we had seen with the initial spikes in 2020, with the holiday wave in the winter of 21, and most recently with Delta. The expected tail did not materialize, and that, combined with a much lighter-than-expected flu and RSV season due to Omicron masking in late December, caused the respiratory census in hospitals to decrease a lot. Now, as we move into what appears to be an endemic phase of COVID, where it becomes a more normalized part of the respiratory landscape, we expect to see a return to less volatile turn rates and a traditional seasonal pattern of flu, RSV, and respiratory illness in general, provided masking is no longer widespread. As noted before, one of the benefits of COVID was the big ramp of our installed base and the increase in new accounts, including significant growth in gold accounts, the top 1,000 U.S. hospitals as measured by respiratory discharge. However, one of the uncertainties coming out of COVID is whether hospitals that adopted our technology during the pandemic to address huge spikes in hospitalizations would continue to use our systems post-pandemic. Based on what we've seen over the last two years and through the end of the first quarter, we believe the customers we won during COVID and especially the gold accounts have performed on par with comparable pre-COVID customers. That is important because if all golden cows perform the same during COVID, it gives us confidence they will continue to perform similarly as COVID subsides and respiratory census patterns begin to normalize. Those of you who follow Vapotherm are aware of our one hospital, one day, or one H, one D strategy, which is meant to 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 COVID patients, or hypercapnic, like COPD patients. When we're in 1H1B conversations with hospitals, we're focused on educating them on a couple of key factors. First, the benefits of our technology are both hypoxic patients and hypercapnic patients. Second, how our technology can be used in the four key care areas that we serve today, the emergency department, or ED, the adult intensive care unit, or AICU, the neonatal intensive care unit, or NICU, and the pediatric intensive care unit, or PICU. We believe this play works well. Historically, around two-thirds of our capital equipment sales came from existing customers as they expand their use into new care areas and treat new patient symptoms, like hypercapnia in COPD patients. Looking at the chart in the center of the slide, you can see the more care areas we treat, the bigger the accounts revenue. This data is exciting. It shows us there is a large opportunity within our U.S. Gold customers to go deeper and wider to drive revenue growth without needing to add more customers. Within our gold accounts, 71% are only using our technology in one or two care areas, leaving huge room to expand and get all units turning at or above historical levels. It's also important to note the more care areas they use us in, the higher the turn rates are. Beyond the four care areas highlighted here, we will be expanding into additional care areas within the hospital, where ideally patient census would be less correlated to the typical seasonal respiratory census. Expansion into one of these care areas will drive recurring revenue growth while potentially reducing the seasonality in that core respiratory business. I hope you can see from the detailed data we just reviewed why I'm confident in our ability to return to historical turn rates. Just doing a simple math, assuming our plan works, the 35,000 units in the global install base yield 800,000 disposables per year, or $90 million in recurring revenue. It's important to note how sensitive our disposables revenue is to even small changes in turn rates. For example, for each 0.1 increase in the monthly turn rate, we generate $5 million in incremental disposables revenues. Now I want to share with you why I believe it's possible for us to possibly exceed our historical turn rates. What you're looking at on this slide is the historical U.S. quarterly disposables turn rate for different groups of customers. First, hospitals that use our technology in the emergency department, which is the blue line on the graph, have higher turn rates than hospitals that do not, which is the gray line. We've seen this consistently over a number of years, and it will continue to be a focus as part of our 1H1D strategy and our new account strategy. Winning and expanding into ED accounts is an important part of our plan as over 50% of all hospital admissions come through the ED. Second, during the summer of 2020, we noted a small group of accounts that had significantly higher turn rates in 2019 pre-COVID than all the other accounts. We engaged an artificial intelligence consulting firm to analyze these accounts to understand the customer journey that led to such high turn rates. There was significant and multiple signal in the data sets that identified the specific customer journey. From this, 1H1D was refined and optimized to help customers along the same path. For obvious competitive reasons, we're not going to lay out the entire journey, But use on hypercapnia and on general care floors were two very important elements, which is exactly what 1H1D and our HVT 2.0 launch are all aimed at. One area of our history that I don't think is fully appreciated is our proven ability to drive higher ASPs through product innovation. On both capital and disposables in both the U.S. and internationally, We've seen substantial increases in ASPs over the past six years as we have shown the value we bring to customers and patients alike. Like best-in-class med tech companies, we have consistently increased average selling prices by delivering more critical and economic value in our new products. As we look ahead, we expect to drive higher capital in disposable ASPs as we introduce new, higher-value products and services like the upcoming HVT 2.0 launch. Our product development roadmap is designed to create a digitally-enabled care ecosystem to deliver breakthrough patient outcomes at a lower total cost throughout the care continuum. The next generation HPT 2.0 launch will be critical and exciting for us later this year. With its internal blower, HPT 2.0 enables us to access the 50% of all U.S. hospital beds on general care floors that don't have medical air in the room. As we observed in our high-turner project, using our high-velocity therapy technology in the general care floor areas was associated with higher turn rates. With our large install base, strong field teams around the world, well-understood clinical efficacy, pipeline of new products, and demonstrated ability to deliver to our customers and patients no matter what, we've created a strong foundation that's seen tremendous growth over the past two years. But growth is just one piece of the puzzle. We need to fuel that growth with capital we have while driving to profitability as quickly as possible. That is exactly what we plan to do. Before I turn the call over to John and have him walk you through how we intend to do this, I want to address the revenue covenant in our new debt facility. The covenant is based on hitting a trailing six-month revenue milestone beginning in July and reported at the end of August. In light of lower-than-expected revenue in March, we could face a challenge hitting the first revenue milestone. However, we could still achieve our revenue milestone if respiratory distress hospitalizations return to normal levels. We're in full compliance today and are routinely communicating progress with our lender. We've also worked successfully with this lender in my last company during the 2008 financial crisis, and I'm confident we'll do so again. With that, I'd like to turn the call over to John.

Thanks, Joe. As Joe mentioned, our plan is to take this business from where we are today and drive it to adjusted EBITDA profitability. Part of that formula includes driving predictable 20% revenue growth. The other part of that focuses on how we manage our cost structure in a post COVID world. Starting with cost of goods sold. As you may recall, the business had negative gross margins when Joe and I joined in 2012. we put a three-pronged plan in place to improve gross margins every year. One, increase ASPs through the introduction of new products that offer higher clinical and economic value. Two, reduce direct material and labor costs. And three, drive increased volumes through our fixed overhead base. Through disciplined execution of this play, we drove gross margin to 50% in 2020. Just as we saw volatility on the top line during COVID, we experienced similar impacts on our gross margins. With COVID causing huge spikes in demand for capital and disposables as hospitals fought to navigate through a pandemic and care for record numbers of patients, we made the strategic decision to do whatever it took to deliver for our customers for two reasons. One, it was the right thing to do, and two, we knew this was going to be a once-in-a-lifetime opportunity to win large numbers of big new customers who would end up being super valuable for years to come. In order to meet all customer needs, we took a number of nontraditional actions that worked, but resulted in roughly 10 percentage points of temporary gross margin erosion, primarily caused by two factors. First, we saw unprecedented material and labor costs. For example, we expedited parts into our facility at big markups, designed a new roll stand with a local partner when facing backwater, went from a one-shift operation to a 24-7 shop using temporary resources, used R&D personnel to support supply chain and keep the production lines running, and when direct labor couldn't be found in New Hampshire, brought people in from Oklahoma. To meet demand during the Delta and Omicron surges, we even sent people from various parts of the company, such as marketing, to build product in the cleanroom. The customer goodwill we have seen from our ability to meet every customer need is inspiring. Second, in third quarter 2021, we moved a portion of our disposables manufacturing to a contract manufacturing partner in Mexico, which would lower our manufacturing costs in the long term and add a lot of capacity with no incremental fixed costs to meet the huge demand in the event of additional surges. However, in the short term, Gross margins were hurt by this move, which required significant one-time startup costs, which are running through cost of goods sold in 2022. These factors are short-term and one-time. Importantly, we believe that the goodwill we earned with all our new and existing customers by delivering throughout the pandemic when others could not will pay off long-term and was worth the temporary impact to gross margins. As we exit the pandemic, our gross margin improvement plan is running well. Once we burn through the higher cost inventory, we will see the benefits of lower cost disposables and capital, leading to an expected 60% gross margin by late 2023, early 2024, with a clear pathway to 70%. To help accomplish this, we are moving all our remaining manufacturing from New Hampshire to Mexico by the end of 2022. Although we intend to continue the disposables contract manufacturing partnership we established in 2021, our plan for the remainder of our products is to establish our own manufacturing plant, likely in the Tijuana area, and to staff and operate the plant ourselves. We have announced the move to affected employees in New Hampshire. While this move will incur significant startup costs, The lower cost associated with our Mexico plan will be a key part of our plan to increase gross margins to 60% by late 2023, early 2024, and mitigate the risk of higher U.S. inflation and a tight labor market in New Hampshire for the foreseeable future. Beyond cost of goods sold, we are making high-growth investments while returning overall cash spend closer to pre-COVID levels on our path to profitability. As you can see from the graph, prior to 2020, we had a predictable and disciplined approach to cash OpEx to drive growth. COVID required us to temporarily increase cash OpEx to support our customers and our employees. We encouraged significant over-planned compensation for both our field and corporate-based personnel due to over-planned revenue. We reduced over-planned worldwide commission expense as a percentage of revenue as we leveraged over-planned commission rates in 2021. Corporate bonus plans, including executive leadership, have always been capped. These one-time costs are expected to normalize in 2022 and beyond. From the outset of COVID, our R&D teams were redeployed to support the supply chain and keep the production lines running. To ensure we hit our new product development timelines despite the R&D team focused on meeting every customer need, we outsourced a lot of this development to outside firms. While more expensive than doing the work in-house, we felt it was critical to have important new products ready to launch once COVID moved beyond the pandemic phase. We expect these new products will drive growth and share expansion for years to come. As you can see on the graph, OpEx flattened in 2021 and will decrease as we exit 2022 due to the return of an app plan compensation structure and bringing R&D back in-house. Going forward, we are planning for a less volatile environment in which we can execute on our OPEX initiatives to return our cost structure to normal, including a return of at-plan compensation, right-sizing our facilities footprint post-move to Mexico, and bringing R&D back in-house. Bringing this all together, we have a pathway to profitability driven by the execution of our long-term financial and operating strategy, As Joe mentioned, we view 2022 as a transition year with the positive impacts in revenue growth and cost structure resizing expected to be seen in 2023 and beyond. For 2022, we now expect revenue in the range of $81 million to $86 million. We expect gross margins in the range of 34% to 36% with a material step-up expected in 2023 and beyond as we move past the one-time cost in our inventory. We expect to reduce our inventory balance by more than 50% by the end of 2023 as we return to historical inventory turns of approximately four times per year. This reduction in inventory will return over $20 million of cash back to the balance sheet. We expect total GAAP operating expenses, including depreciation, amortization, and stock-based compensation expense of $99 to $102 million in 2022 with a material step-down expected in 2023. We currently expect cash operating expenses, excluding depreciation, amortization, and stock-based compensation expense, in the range of $86 to $88 million in 2022, with a material step-down expected in 2023. Now, I'm going to hand it back to our CEO, Joe Armie, to wrap up before we take questions.

Thanks, John. In closing, let me recap our plan for the remainder of 2022 and 2023. First, we'll drive 20% revenue growth by getting disposable turn rates back to historical levels by expanding usage in the four care areas in our gold accounts using 1H1D, educating all accounts on use with hypercaptic patients, developing new care areas, and launching important new products like HVT 2.0, especially into the general care floors. Second, we will improve gross margins to 60% by late 2023, early 2024 by spinning up a world-class factory in stable, low-cost Mexico, executing on our three-pronged plan and burning off the expensive inventory caused by massive one-time costs incurred during COVID to meet every customer need. Third, we will normalize our cost structure to pre-COVID levels while investing aggressively in future growth drivers, especially HVT home and the digital opportunities. This three-point plan, executed by the very best team in the medical technology space, will drive us to profitability. This is truly a unique business made up of best-in-class people that has done amazing things together, especially in meeting every customer need during the pandemic. I want to thank each and every one of them for their dedication and commitment to our customers, patients, and each other. Now on to profitability. I'd like to open up for questions now.

Thank you, speakers. Participants, we will now begin the question and answer session. To ask a question over the phone, you may press the star key followed by the number one. To withdraw your request, you may press the pound key. Again, that's star one to ask a question. or to pound key to withdraw your request. Speakers, your first question is from the line of Margaret Catcher of William Blair. Your line is now open.

Hi, everyone. This is Brandon. I'm for Margaret. Thanks for taking the question, and thanks for the extensive overview of slide deck here. This is extremely helpful as you guys are kind of evolving and hopefully stabilizing a little bit post-COVID now. First question I just wanted to focus on, there's a lot of really encouraging information here on the gold account. I'm just kind of curious, how do you keep going deeper into these accounts? Joe, you had highlighted that there's a lot of accounts that are only being used in one or two care areas. What's the strategy here to kind of get them into the third and fourth care area to kind of get them to that higher ring of disposable terms?

Brandon, thanks very much for the question. It's a good one. So 1H1D is the play that we use for driving into the new care areas that we operate in. So literally we use a combination of speakers bureaus, a lot of different education opportunities, but it's really having our field team in those accounts executing on 1H1D and educating in new core areas that, in fact, expands those cores. And that's, quite frankly, what we're really measuring, where we're really focused. I'm really a lot less interested right now in opening net new gold accounts, and I'm very focused on continuing to run 1H1D to expand those golds because I think, as you can see, the amount of money to be made by simply expanding from one carrier to two or from two carriers to three is quite substantial.

Got it.

Brandon, if I could interrupt for just one second. One other thing I think would be important to note in there is the turn rates. You know, when you go from one care area, your turn rate's about, what is it, 1.8? You go to two care areas and it goes up. You go to three care areas, it goes up even more. So the more care areas you go into, the higher the overall turn rate is on that account. We think that's a very interesting and promising phenomenon.

Yeah, absolutely. And, um, and as you kind of get through COVID now, hopefully you can get a little more on the offensive there. Uh, that makes sense. And then just, um, you know, obviously there's been a lot of volatility as we've seen in the slides and obviously through the operating metrics in terms of capital and disposables, um, any color you can kind of give us on, on your longterm guidance, assuming internally, you guys have some different kinds of models to get the 20% growth over the next couple of years. How should we be thinking about capital? Does it kind of normalize to some kind of a pre-COVID level? Are you assuming more disposable turn rates in that long-term guidance in line with pre-COVID or elevated? So anything around those would be helpful as well. Thank you.

Yes. Hi, Brandon. It's John. Thanks for the question today. So when we take a look at our long-term revenue guidance, One of the things we're looking at in terms of capital is, you know, we expect our capital contribution to be more in that, you know, 20% of total revenue range and return our recurring revenue to the 70%, 75% level and service comprising the rest. So as we think about the near term, the goal would be to get our turn rates back up to the historical turn rates over the four to six quarters to go execute on our 1H1B plan, in particular in those bold accounts where we have, you know, the higher turn rates. and especially for core area accounts. And then as well, longer term, as our new product pipeline begins to come to fruition, we expect that to be a contributor to top-line revenue growth as well.

Thank you.

Next question is from the line of Marie Thibault from PTIG. Your line is now open.

Hi, good afternoon, Joe and John. This is Sam from Murray. Thanks for taking the questions. John, you just mentioned, I was going to ask on timing of turn rates maybe normalizing. You just mentioned 46 quarters after COVID ends. Is that still the right way to think about it? And are we at that stage at this point where maybe that clock's starting? It seems like 2023 is really where, you know, these things start to meaningfully improve.

Yes, Sam, this is John. Yeah, that's right. I think that's the right way to think about it. I think now with Omicron largely behind us, it gives our field team an uninterrupted opportunity to go in and run our 1H1D program, in particular in those larger gold accounts, and to go drive deeper into those accounts and expand them from one area to the next. So that's going to be, I think, from a clock perspective, I think that's right. As we continue to grow and expand that, you know, four to six quarters puts us, to your point, in the mid-2023 timeframe. So that's about the right timing. And, you know, at that same time, we also have the opportunity to have our HPT 2.0 come out here in a more full market release. So that will be coming out later this year, which the sales team will be able to use that, along with the 1H1D program, to continue to drive top-line growth.

great really appreciate the color there john and then maybe on the hvt hvt 2.0 um i guess how material revenue contribution could that be maybe starting in in 2023 this is joe uh that's an interesting question i'll tell you that our previous experience with our precision flow plus launch which was the last time we came out with a new capital platform there was significantly less technology upgrade in the precision flow plus We saw a pretty significant increase in the ASP, and we also saw a pretty significant uptake in net new accounts and expansions. But something that we really hadn't expected was we also saw fleet upgrades. So, you know, we sort of look at this one as being interesting in that regard. And, you know, at that time, I was not crazy about fleet upgrades. I wanted people to go open up new accounts and let's expand the installed base. But, you know, an installed base is 35,000 units, and let's remember half of those were pre-COVID. So... I think there's probably some opportunity around that, too.

Great.

Thanks so much. Next question is from the line of Bill Plavanich of Canaccord. Your line is now open.

Thanks. Thank you for taking my questions. I'm not sure if we covered this in some of the broader centers, I mean, you know, the kind of elephant in the room is just the debt outstanding and the covenants and the potential breach of the covenants. And I think you've laid out kind of your path forward here. What do you think is the likelihood that you'll have to breach and or renegotiate those covenants over the next six to 12 months?

Well, I don't think I want to put a probability to it, Bill, only because, you know, the level of uncertainty around are we going to return to somewhat normal rates in the, you know, normal census rates here in the next three months. But I will tell you that, you know, if there is a bump in the road, it's not going to be a big bump, but it's not going to be a long bump. And, you know, we're not jumping up and down about it. We're taking it seriously. We're communicating effectively. But also, you know, this is not something that we view as a catastrophic situation.

Okay, great. I think that's helpful. And then just, you know, I think you laid this out. I just want to be kind of clear on this. You're saying that it's cash flow positive or earnings positive as we get into 2023 and kind of when in 2023. I'm sorry if I missed that.

Yeah, Bill, this is John. So from a profitability perspective, we're looking at adjusted EBITDA profitability, and that would be late in 2023. That will allow us to grow into our top line as well as have all the pieces in place with regard to our gross margin expansion and to have our normalized cost structure in place. So that will take us to the tail end of 2023. Great. Thanks for taking my question.

That concludes our question and answer session for today. I'd now like to turn the call back over to Joe Army for any closing remarks.

Thanks very much. Well, thank you all very much for joining us today. We really appreciate you trusting us with your capital. It means an awful lot to us, and we look forward to updating you on our next call. Have a good day.

This concludes today's conference call. Thank you all for joining. You may now disconnect.