Vapotherm, Inc.

Thank you for standing by. My name is Greg and I will be your conference operator today. At this time, I would like to welcome everyone to the VapoTherm Incorporated second quarter 2023 financial results call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. Thank you so much. I would now like to turn the call over to Mark Klausner. Mark, please go ahead, sir.

Good afternoon, and thank you for joining us for the VapoTherm's second quarter 2023 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. 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, tapotherm.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, 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 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 Vapotherm's President and Chief Executive Officer, Joe Army.

Thanks, Mark, and thank you all for joining us. On today's call, I'll review the progress we made during the second quarter. And then John will review our financial performance before I provide my thoughts on the balance of 2023 and turn to Q&A. During the second quarter, our revenue grew significantly, highlighted by strong continuing demand for HVT 2.0. We also continued to execute well against our pathway to profitability initiatives. Gross margins improved significantly. Cash operating expenses continued to decline. and our inventory balance continued to decrease. The combination of these factors provides us confidence that our cash burn will continue to decrease significantly in the back half of the year, and that we have adequate capital to run the business to profitability. Revenue in the second quarter was $16 million, an increase of 34% compared to the second quarter of last year, excluding revenue from vapor therm access, which we exited in the fourth quarter of 2022. Growth was driven by strong HVT 2.0 adoption, largely due to existing customers who upgraded their installed base of precision flows to HVT 2.0 and new customer acquisition. Customers are clearly seeing the value of HVT 2.0. It's intuitive, easy to use, and since it has its own air source, can be used throughout the hospital. As a result, our HVT 2.0 pipeline is strong especially given existing customer demand to upgrade their precision flow fleets. Our disposables revenue increased by 38% compared to 2Q 2022, but came in below our expectations, as U.S. DPC turn rates did not recover as quickly as expected. Despite the positive trends we saw in Q2, we're lowering our annual revenue guidance as a result of the slower pace of recovery of the U.S. DPC turn rate. We expect to see U.S. DPC turn rates improve with increased utilization of our growing HVT 2.0 install base and our ongoing efforts to increase awareness regarding the effectiveness of our technology in treating acute hypercapnic respiratory failure in COPD patients, as well as other non-seasonal conditions requiring respiratory support. Turning to our gross margin improvement initiatives, our gross margin improved by nearly 800 basis points sequentially compared to Q1, as our Mexico facility is fully operational, and nearly all higher-costed disposables inventory built in our New Hampshire facility was burned off in Q1. We are executing on these initiatives and seeing the positive impact on our gross margin. As a result of our ongoing focus to reduce our non-GAAP cash operating expenses to pre-COVID levels, we reduced cash operating expenses by another $2.2 million from Q1 and $7.5 million from the second quarter of 2022. This is the fifth quarter in a row of sequential reductions in cash operating expenses since we launched our Path to Profitability efforts in 2022. We have taken further actions to reduce our cash operating expenses in the second half of the year and expect that our annual CashOpex run rate going into 2024 will be $48 to $50 million, which is lower than our CashOpex in 2018, the year we went public. As part of these initiatives, I've personally taken a 25% cut in my salary and annual bonus potential. During the quarter, we continue to make further progress on converting excess inventory into cash and remain on track to normalize our inventory levels by the end of 2024 by selling off excess inventory built or purchased during the pandemic to ensure we could fulfill every customer need during COVID surges. Our clinical research group is working to expand the clinical evidence supporting and differentiating our products. We recently saw some exciting data on our oxygen assist module, or OM, published in the British Medical Journal. This was an independent randomized control trial where our technology was recently used in the UK to treat 60 preterm infants in the NICU. Babies treated with the OM had optimal oxygen levels 81% of the time compared to only 55% of the time using manual control. This difference is both statistically and clinically significant. Remember, oxygen is both a life-saving and a dangerous drug, especially for premature babies. If you give those babies too much oxygen, they can go blind. If you don't give them enough oxygen, they can have developmental problems or worse. The ORM has been shown in multiple studies to keep babies in the safe range. These results are extremely compelling. And we look forward to continuing to develop such strong data to support the use of our technology on patients worldwide. In the U.S., we are currently enrolling a study we call Moderation Neo to further develop data to support the clinical efficacy of ALM. We expect to have additional sites open as part of the trial during the third quarter of this year. The data from this trial will be used to support an FDA regulatory submission for ALM. During the quarter, we also completed enrollment in our HYPERACT study, which was designed to compare the ability of our technology to treat acute hypercapnic respiratory failure in the emergency department compared to BiPAP. This trial is focused only on moderate to severe COPD patients with CO2 levels above 60 and pH below 7.35. These hypercapnic patients are very ill and are a tough patient population to treat, particularly with BiPAP, the current standard of care. The targeted endpoint of the trial is non-inferiority to BiPAP, and the data is currently being analyzed, and we expect the independent investigators will submit for publication in 3Q. We look forward to this publication and are excited to share the results of this important study with the medical community. There was another interesting study that completed enrollment during the quarter In this study, which was conducted at Auburn University's Exercise Physiology Center, healthy athletes from a Division I athletic center underwent an exercise test, measuring their maximal power output. Immediately after exercise sessions, they recovered using our technology in various settings. Blood lactate levels and other measurements were taken to see if our gear supports improved recovery. These results are being analyzed and prepared for publication. Recovery support is important not only for high-performance athletes, but also for patients needing physical or pulmonary rehabilitation. This has the potential to open new markets in physical and pulmonary rehab, as well as high-performance athletics. Recall that in our previously published Ambulation Pilot Study, medical rehabilitation patients who used our equipment recovered 30% faster. Before turning the call over to John, I wanted to provide an update on the progress we've made on our product for the home market. In the U.S. alone, there are 2.2 million late-stage COPD patients, and about 500,000 of these patients are on a home ventilator system. We expect that we will be able to treat these patients and those who are intolerant of a BiPAP mask, which according to clinical data, is roughly one-third of all patients who wear a BiPAP mask. Our solution brings together HVT technology and volume ventilation, including volume-assured ventilation with pressure support, with Vapotherm Access 365 symptom tracking, all in a cloud-connected platform. The solution enables engagement between the patients and their caregivers to optimize therapy delivery for late-stage COPD patients across the care continuum. All of these capabilities are managed through an easy-to-use full touchscreen interface that supports maximum patient comfort and optimal respiratory conditions. We expect the home product to launch in 2024 and to begin generating revenue in the back half of 2024. Importantly, this solution provides both capital and recurring disposable revenue streams, which are uncorrelated with the typical respiratory seasonality we see with flu and RSV. Investment between now and the launch of this product is included in our updated cash OPEX guidance. I will now turn the call over to John, who will review the financial results for the quarter.