Vapotherm, Inc. (NYSE:VAPO) Q3 2023 Earnings Call Transcript November 8, 2023
Vapotherm, Inc. misses on earnings expectations. Reported EPS is $-2.38 EPS, expectations were $-2.2.
Operator: Good afternoon, and welcome to Vapotherm's Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to turn today's conference over to Dorota Mckay, Vapotherm's Vice President and Chief Accounting Officer. Dorota, you may begin.
Dorota Mckay: Good afternoon, and thank you for joining us for the Vapotherm third 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 at 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 Factors 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.
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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.
Joe Army: Thank you all for joining us. On today's call, I will review the progress we made during the third quarter, and John will review our financial results. I will then provide my thoughts on the fourth quarter before we open the call for Q&A. Revenue, excluding revenue from the Vapotherm Access call center business, which we commercially exited in the fourth quarter of '22, grew 18% in the third quarter as compared to the third quarter of '22. Now that the underlying market has returned to more normal year-over-year comparability, the progress we're making on the top line is clear to see with growth in the high teens this quarter. We continue to execute well against our path to profitability initiatives and saw another sequential quarter, our sixth quarter in a row, of reduced non-GAAP cash operating expenses, lower inventory balances and reduced cash burn.
The significant progress we've made in these key metrics, when combined with the additional actions we took in the third quarter of this year to further reduce our non-GAAP cash operating expenses, gives us confidence that we will become adjusted EBITDA positive in the fourth quarter of 2023. This, along with further expected reductions in our 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 on our business plans without raising additional capital. Revenue in the third quarter was $15.2 million. Worldwide capital equipment revenue growth of 25% versus the third quarter of 2022 was driven by HVT 2.0 sales in the U.S. and Precision Flow sales in Brazil in support of a tender that was awarded to our distributor.
In the U.S., customers continue to upgrade their installed base of Precision Flow units to HVT 2.0 units, given its ease of use and built-in air source, which allows it to be used throughout the hospital. We're also excited to announce that we recently received regulatory clearance of HVT 2.0 in Brazil, which will allow us to bring the HVT 2.0 to our second largest market. Worldwide disposables revenue increased by 18% compared to the third quarter of 2022. We expect to increase worldwide disposables revenue by growing our HVT 2.0 installed base and our ongoing efforts to increase awareness of the effectiveness of our technology in treating acute hypercapnic respiratory failure in COPD patients as well as other long seasonal conditions requiring respiratory support.
The HYPERACT study, which I will discuss in a moment, was specifically designed to show the effectiveness of our technology in hypercapnic patients. Turning to our gross margin improvement initiatives. Our gross margin was 40% as compared to gross margin of 14% in the third quarter of 2022, which included inventory write-offs and reserves as we transitioned from the Precision Flow to HVT 2.0. Gross margin in the third quarter decreased by 300 basis points from the second quarter of 2023 as we scaled our Mexico operation to run 24/7 for the first time in advance of the upcoming RSV and flu seasons. Doing so, we incurred higher scrap rates and lower first pass yields as we work through the new higher learning curve of the additional shifts and incurred higher freight costs.
Overall, the transition to our Mexico operation has been incredibly smooth as evidenced by our consistent sequential improvement in gross margin for several quarters. We had a setback this quarter, but we believe that these onetime costs are behind us, our performance is back on track, and we expect to see significant gross margin improvement return in the fourth quarter of this year. Earlier in the quarter, we took steps to further reduce operating cash expenses, which reduced cash operating expenses in the third quarter to $12.3 million from $14.2 million in the second quarter of this year and from $19.5 million in the third quarter of 2022. We expect that our annual cash OpEx run rate going into 2024 will be $48 million to $50 million. At that level of spend, we expect to be cash flow positive sometime in the middle of 2024 and believe that our current cash balance is sufficient to get us through that point.
We continue to reduce our inventory levels and converted another $1.5 million of excess inventory into cash in the quarter. We remain on track to normalize our inventory levels by the end of 2024 by selling off excess inventory we purposely built for purchase during the pandemic to ensure we could fulfill every customer need during COVID surges. 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 through a 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, and 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-2024. On the clinical front, I'd like to update you on three important clinical trials. First, the HYPERACT clinical trial has been accepted for initial presentation at the Society for Critical Care Medicine Congress in January 2024. The HYPERACT trial was designed to compare the ability of our High VNI technology to treat acute hypercapnic respiratory failure in the emergency department compared to bi-level positive airway pressure or BiPAP. BiPAP is a form of noninvasive ventilation delivered by a formfitting face mask, which is the current standard of care for hypercapnic patients. Acute hypercapnia is a life-threatening condition in which a patient is unable to effectively remove excess carbon dioxide out of the body.
While bi-level pressure systems are the current standard of care, many patients cannot tolerate the discomfort and complications associated with the mask required for those systems. High VNI is delivered via a mask-free interface, providing greater patient comfort and protecting the patient's ability to speak [indiscernible]. The primary endpoint of the trial was non-inferiority of HVNI with additional measurements of associated laboratory values, ease of use and patient comfort. There were no adverse events, and we're excited to share the results of this important study with the medical community. Second, we have stopped our MODERATION Neo clinical trial, which was designed to support the safety of the Oxygen Assist Module on the Precision Flow platform in the U.S. Our ultimate goal is approval of the Oxygen Assist Module on the HVT 2.0 platform.
Based on our work to date, we believe the quickest path to this goal is to stop the current trial and start a trial with the Oxygen Assist Module on the HVT 2.0 platform once our development work is [indiscernible]. We are pleased to note there were no adverse events, and we'll publish the results to date at a pilot study. Our international business continues to successfully sell the Oxygen Assist Module for Precision Flow, and we expect it to be a major contributor of growth in our international business. Lastly, the results of a U.K.-based investigator-initiated clinical trial were recently presented at the European Respiratory Society International Congress. This study showed that use of our technology is more effective than standard oxygen therapy for the treatment of acute asthma in children.
50 children were enrolled in this study, 22 were treated with standard oxygen therapy and 28 were treated with our technology. 86% of the children treated with standard oxygen therapy required escalation of therapy, while only 61% of the children treated with our technology needed further escalation. In addition, children treated with our technology met hospital discharge criteria in a median time of 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. At the midpoint of our 2023 revenue guidance range, we expect to deliver revenue growth, excluding revenue in the Vapotherm Access call center business, of 20% in the last three quarters of this year versus the same three quarters of 2022, despite an almost 50% reduction in cash operating expenses from 2021 to 2023.
Our differentiated technology, large installed base and recently launched HVT 2.0 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, continued gross margin improvement and decreased cash OpEx positions us to become adjusted EBITDA positive in the fourth quarter of '23 and then cash flow positive in mid-2024. I will now turn the call over to John, who will review the financial results for the quarter.
John Landry: 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. HVT 2.0 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% increased 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 HVT 2.0 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 $300,000 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 2022. We continue to make progress in reducing inventory from the peak of $38.4 million in the second quarter of 2022.
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, I'm pleased to report that we met our 2023 onetime minimum net revenue covenant requirement of $25 million for the 6-month period ended September 30, 2023. 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 to $71 million, which represents an annual growth rate of 8% to 11%, excluding revenue from the Vapotherm Access call center business, which we exited commercially in the fourth quarter of 2022. Excluding Vapotherm 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 Vapotherm 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.
For full year 2023, we continue to expect that 65% to 75% of our revenue will come from disposables revenue and that the remainder will come from capital and 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.
Joe Army: Thanks, John. As we look to close out the year strong, our focus will continue to be [indiscernible] towards profitability through revenue growth, gross margin improvement and driving cash operating expense below pre-IPO levels while investing prudently in future growth drivers, such as the home market and clinical studies. By delivering fourth quarter results, including positive adjusted EBITDA, we should be well positioned to execute on our 2024 plans and achieve financial self-sustainability. We made a lot of structural changes over the past six quarters. I'm very proud of 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 cusp of adjusted EBITDA profitability while still driving top line growth. As always, we appreciate your support of Vapotherm and look forward to updating you on our next quarterly call. I will now open up the call for questions.
