Vapotherm, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Second Quarter 2022 Financial Results Conference Call. As a reminder, this call is being webcast live and recorded. It is now my pleasure to introduce your host, Mr. Mark Klausner of Westwick. Please go ahead, sir.

Good afternoon, and thank you for joining us for the Vapotherm Second Quarter 2022 Financial Results Conference Call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Armie, 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, DaveLathurm.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, 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 was filed on May 4, 2022. Our quarterly report filed on Form 10-Q for the quarter ended June 30, 2022, which was 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. 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 Bapotherm's President and Chief Executive Officer, Joe Army.

Thanks, Mark. Good afternoon, and thank you for joining us today. 2Q 2022 revenue was $13 million as worldwide respiratory census remained low and customers worked through disposables inventory purchased during the first quarter 2022 Omicron 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 or that precision flow units installed during COVID are quote-unquote dead boxes. We remain cautiously optimistic about the remainder of the year as we expect the trend towards a more normalized respiratory census to continue in the second half of 2022 and expect modest RSV and flu levels later this year in the US. We launched our new HVT 2.0 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 2Q 2022 on our path to profitability plan and provide you with the latest on our debt covenant matter. As a refresher, there are four fundamental aspects of our plan. Number one, transform our business into a consistent, predictable 20% revenue grower beginning in 2023. Number two, drive gross margins to 60% by the fourth quarter of 2023. and set us up for expansion to 70% plus. Number three, return our cash operating expenses to pre-COVID levels, or $17 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 $50 million of cash plus $20 million of excess inventory that will be burned down by mid-2023. Now let me provide a little more color regarding each of these points. Top-line growth in the near term will largely be driven by executing on our one hospital, one day, or 1H1D strategy and the full launch of HVT 2.0. Through 1H1D, 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 patients, or hypercatinic, like COPD patients who retain excess carbon dioxide. In 2Q2022, 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 1H1D strategy in person in our gold accounts. In addition, we trained over 11,000 clinicians via digital training programs. We continue to believe that executing on the 1H1D play will allow us to return our disposable utilization rates to the historical level over time as we go deeper and wider in our gold accounts. Despite the lower overall 2Q 2022 disposable utilization rate based on census, awareness 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 we're used in, the higher the disposables revenue per installed unit. We launched the next generation HVT 2.0 platform in early 3Q 2022, and our sales pipeline is growing. Early feedback from our sales team and customers has been positive. With its internal blower, HVT 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. This is important as accounts using our high-velocity therapy in the general care floor areas have higher than average disposable utilization rates. Over time, we expect HVT 2.0 to replace older Precision Flow units, which is the same trend we saw when we launched the Precision Flow Plus in early 2018. In the first year post-Precision Flow Plus launch, we replaced roughly 5% of the legacy Precision Flow installed base and expect similar results with HVT 2.0 in the pre-COVID installed base. as hospital capital budgets begin to normalize. We expect to primarily sell HVT 2.0 units as opposed to placing units and anticipate a material uptick in both capital and disposable ASPs for the HVT 2.0 platform due to increased clinical and economic utility for the customer. Our second key focus is improving gross margin to 60% by 4Q 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 hire 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 are on track. 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 4Q 2022 and will negatively impact gross margin in that quarter. Our third key priority is to normalize our cash operating expenses to pre-COVID levels of $17 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-plan sales compensation. We brought most of the R&D work back in-house, and are winding down 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 vapor term 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 HVP 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 have put us on the path to become adjusted EBITDA positive in 4Q23. 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-month period ending July 31st. and reportable in August to our lender. We entered into an agreement with our lender to extend the first six-month measurement period by one month to 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.