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Vapotherm, Inc. (NYSE:VAPO)
Q2 2019 Earnings Call
July 29, 2019, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon, ladies and gentlemen, and welcome to the Vapotherm Second Quarter 2019 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 Westwicke. Please go ahead, sir.

Mark Klausner -- Investor Relations, Westwicke

Good afternoon and thank you for joining us for the Vapotherm Second Quarter 2019 Financial Results Conference Call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army, and its 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 everybody that remarks and responses to your questions today may contain forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 risks identified in the risk factors section of our annual report filed on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 22, 2019, and in any subsequent filings with the Securities and Exchange Commission. 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 acceptable 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 Vapotherm's President and Chief Executive officer, Joe Army.

Joe Army -- President and Chief Executive Officer

Good afternoon and thank you for joining us today. I'll begin the call by discussing our second quarter 2019 results. Then I'll hand the call over to John Landry, our CFO, and he's going to provide additional financial details on our second quarter results. After which, I'll update you on our key areas of focus for the balance of 2019 and then we'll open it up for questions.

At the midpoint of 2019, I'm feeling pretty good with how we're executing on most fronts. Big picture -- the new reps are coming up to speed. We opened up 36 gold and silver emergency department accounts this quarter. The U.S. disposable turn rate ticked up again. We grew our disposals 29%. Gross margins were above 45% and our cash burn decreased by over $1 million.

On the other hand, our legacy tenured rep performance in the U.S. produced lower than expected U.S. capital equipment sales. As we discussed on the last call, we threw an awful lot of change at the U.S. field team last fall. Just to remind you, expansion, realignment of the clinical team, a news sales lead model, and a new sales rep profile. For the most part, these changes are working as or better than we expected.

Today, roughly 60% of our 52 U.S. sales territories are staffed with reps that have the new profile. Of the remaining 40% legacy tenured reps, half of them have been developing and maturing nicely and getting the job done. We're proud of them for the way they worked through the transition and the success they're experiencing. However, some of the legacy tenured reps have had trouble adjusting to the changes we made and they didn't build the pipelines as we expected.

This quarter, we saw a decent chunk of the legacy folks deliver to plan or close to it but the majority of them didn't. We moved some of the low performers out at the end of 2Q and are backfilling with seasoned medical device sales professionals and we're really focused on getting the whole sales force performing to plan.

Shifting gears to what worked, first, that new sales rep profile is working. Most of these folks are coming up the curve and growing their install base to drive disposable growth. Secondly, the emergency department focus in the U.S. is working. Hi-VNI technology is now being used in 267 gold and silver EDs around the country.

An ED is a really cool place to deploy Hi-VNI technology because it's effective on all respiratory distress patients that are spontaneously breathing. It's efficient for clinicians to set up and use and patients tolerate it better than bypass. The ED is all about workflow and Hi-VNI technology helps our customers treat all of their spontaneously breathing respiratory distress patients with a single tool and the patients find that tool comfortable and effective.

The third element that really worked was our disposable turn rates in the U.S. One of the things that I really like about our business is how sticky the disposable revenue is. It makes it much easier to forecast our growth when over 70% of our total revenue is disposables. It was interesting to see our 2Q turn rates come in above our historical averages. Last year, our U.S. 2Q turn rate was $1.72 million and this quarter it was $1.9 million.

We're continuing to dig into this and one variable that might be affecting it could be our continued focus on driving increased use and penetration in the emergency department. It's early days but we are seeing higher turn rates from those hospitals that use us in the ED and have one of our Vapotherm transfer units, or VTUs.

Despite the positive performance this quarter, we are going to continue to forecast with our historical turn rates until we get the U.S. field team hitting on all cylinders and we gain more confidence that this deviation from historical mean is real, it's sustainable, and it's tied to something within our control.

The fourth aspect of the business that really worked during the quarter was our three-pronged game plan to improve gross margins: selling higher clinical value products, reducing those direct product costs, and driving more volume through the factory's fixed cost base. In 2Q, once again, all three of our elements were working.

The final aspect of our business that worked during the quarter was our preparation for a limited market release of our oxygen management module for the precision flow system. We called it oxygen is a deadly, dangerous, life-sustaining drug with a narrow therapeutic window. Delivering too much oxygen to a baby can result in blindness while not delivering enough oxygen to a baby can result in developmental disabilities or even death.

The product is coming along nicely, although we are spending more money than planned on this development. We submitted the tech file for European CE marketing on July 2nd, and have been working closely with European thought leaders in building the training and education materials, as well as thinking through pricing and business model options. We also displayed the technology at a European neonate conference and the reception was positive. In the U.S., we had a productive meeting with the FDA and expect to begin a clinical trial in the U.S. late this year.

To wrap up, halfway through the year, we're feeling cautiously optimistic about the remainder of 2019 and we like the work we're doing to set up more success in 2020. Once again, we managed to work our way through some growing pains in the U.S. field team while still delivering on our commitments. Despite the softer U.S. capital sales in the quarter, the install base is right where it needs to be. The ED focus is working. Disposables grew 29% and the U.S. disposable turn rates bumped up. Gross margins were over 45% and the O2 dosing module development efforts are on track. And we knocked our cash burn down by over $1 million.

Now, I will turn it over to John Landry, our CFO, and he's going to provide a financial review. John?

John Landry -- Vice President and Chief Financial Officer

Thank you very much, Joe. Revenue for the second quarter of 2019 was $12 million, representing an increase of 13.5% over revenue of $10.6 million in the second quarter of 2018. Total U.S. revenue was $8.7 million, representing an increase of 11% over the second quarter of 2018, while total international revenue was $3.3 million, which represented an increase of 21% over the second quarter of 2018.

Capital revenue, including revenue from billed product sales and lease revenue, was $2.9 million for the second quarter of 2019, representing a 20.5% decrease over the prior year. U.S. and international capital revenue were $1.9 million and $1 million, respectively, for the second quarter of 2019.

Disposable revenue was $8.5 million in the second quarter of 2019, representing a 28.9% increase over the second quarter of 2018, and was primarily driven by an increase in our worldwide install base of precision flow units and higher utilization rates. During the second quarter of 2019, we sold roughly 88,000 disposables worldwide. Disposable revenue was $6.5 million and $2 million in the U.S. and international markets, respectively, in the second quarter of 2019.

Worldwide service revenue was $527,000 in the second quarter of 2019, and of this amount, $281,000 was generated in the U.S. and $246,000 in our international markets.

Gross profit for the second quarter of 2019 was $5.5 million, an increase of $1.4 million over the gross profit of $4.1 million in the second quarter of 2018. Gross margin was 45.5% in the second quarter of 2019, compared to 38.8% in the second quarter of 2018. The increase in gross margin was driven by a favorable sales mix of disposables, as well as a decrease in disposable component costs in comparison to the second quarter of 2018. Additionally, we improved operating efficiency by holding operating overhead constant while increasing throughput in our manufacturing facility to support continued sales growth.

Research and development expense was $3.2 million for the second quarter of 2019, an increase of $1.1 million over the prior year. The increase in research and development expense was due to new product development costs and an increase in research and development headcount and employee-related expenses, including stock-based compensation.

Sales and marketing expense was $9.4 million for the second quarter of 2019, an increase of $900,000 over the prior year. The increase in sales and marketing expenses was primarily due to increased compensation, travel, and employee-related expenses, including stock-based compensation, in our sales and marketing organizations.

General and administrative expense was $4.5 million for the second quarter of 2019, an increase of $1.9 million over the prior year. The increase was primarily due to increased headcount, employee-related expenses, including stock-based compensation, legal, advisory, and consulting fees, and public company-related costs.

Net loss for the second quarter of 2019 was $12.9 million, or $0.76 per share, compared to $11.2 million, or $13.39 per share in the second quarter of 2018.

Adjusted EBITDA for the second quarter of 2019 was a negative $10.2 million compared to a negative $8.5 million in the second quarter of 2018. Adjusted EBITDA adjusts for foreign currency gains or losses, loss on extinguishment of debt, net interest expense, changes in the fair value of warrant liabilities, depreciation and amortization expense, and stock-based compensation. The $1.7 million increase in adjusted EBITDA loss in the second quarter of 2019 was primarily due to higher operating expenses, which were partially offset by higher gross profit.

As of June 30, 2019, cash and cash equivalents of $46.1 million compared to $56.7 million as of the end of March 2019 and $58.2 million as of the end of December 2018. Excluding the impact of our Stolis acquisition and our debt activity, our cash burn decreased by over $1 million from the first quarter of 2019 to the second quarter of 2019.

Now, as I turn to guidance, for the full year 2019, we continue to expect revenue to be between $49 million and $51 million, which represents a year-over-year increase of 16% to 20%. For the full year 2019, we now expect gross margin to be in the range of 42.5% to 43.5%, an increase from our prior guidance of 41.5% to 42%. For the full year 2019, we continue to expect operating expenses to be in the range of $68 million to $70 million.

For the third quarter of 2019, we expect revenue to be between $11 million and $11.4 million, representing growth of 17% to 21% over the third quarter of 2018, respectively. Please note that from a seasonal perspective, the third quarter is typically our slowest quarter from a revenue perspective given holiday schedules and the fact that kids are not in school and not as sick.

This concludes my remarks. I'll now turn it back over to you, Joe. Thanks.

Joe Army -- President and Chief Executive Officer

Thanks, Johnny. Before opening up the line for questions, I'd like to review how we intend to focus our efforts over the balance of the year. First, with regard to the U.S. sales force, we're focused on getting our underperforming reps back on track and preparing to expand our sales channel again in the fourth quarter.

While we are proud of the way our sales force has worked through all the changes, our focus for the second half of the year is to get underperforming legacy tenured reps back into the habit of delivering a plan or backfilling with seasoned medical device reps by the end of the year. Some of that work has already begun. In the fourth quarter, we expect to expand the number of sales territories and we anticipate starting 2020 with 57 territories, up from the current 52.

Secondly, we're focused on the launch of new projects. We have begun preparing for a limited market release of our new ProSoft line of next-generation Hi-VNI technology patient interfaces. These cannulas are designed to improve patient comfort and user friendliness through increased material softness, color coding, and new packaging. We decided to push back the limited market release of our integrated aerosol drug delivery Hi-VNI disposable to late third quarter to coincide when the kids return to school which typically marks the beginning of RSV season where this product would be more used.

I've also spoken a bit about our precision flow oxygen management module for the PF unit. Third quarter, we'll be focused on refining the offering for both our international distributors and newly direct UK markets, as we expect to have secured international regulatory clearance by the end of the year. The only caveat to this timeline relates to the transition of the European regulatory model from an MDD to MDR, which we're concerned may lead to disruption in the approval process.

After we receive CE mark, we expect to test several business models and we're interested to see if this technology pulls through PF units in the new accounts. We'll also be defining the patient populations for this technology. As I mentioned earlier, we're planning to start a U.S. clinical trial late this year.

Third, we're focused on expanding our large and compelling clinical data set. The ambulation study is in the publication process and we hope to have more clarity later this year on the publication date. We have begun moving forward with the ED boarding study we discussed last quarter. This study looks at the effect of our Hi-VNI technology on emergency room boarding. ED boarding is when the ICU is full and there's no beds for the patients, so they're forced to wait on gurneys in the hallway of the ED until a bed is available. As you can imagine, this creates a lot of workflow issues, cost issues, patient satisfaction issues for the hospital and the ED team.

Anecdotally, our customers believe that Hi-VNI technology can help move patients through the ED faster and we're looking at the best to measure the effect on ED boarding when the hospital deploys Hi-VNI in the ED.

We also expect to see several papers published later this year or early next on the effectiveness of Hi-VNI technology on severely hypercapnic patients, the types of patients that in the past could only be treated with an IPPV.

Our final area of focus is the continued effort to improve our gross margin. While we like what we see for the remainder of the year and we intend to keep running the same three-pronged play to drive gross margin that we've used to date, including launching new products that have more clinical value, reducing product costs, and scaling production volumes -- rinse and repeat, rinse and repeat, rinse and repeat. We're already beginning to shift our focus for setting the table for 2020's gross margin improvement plan and we build leverage in that P&L and we drive down our cash burn.

A big part of what we do in changing clinical practice from the 20-year gold standard bypass is to open the clinician's mind to the possibility of providing ventilatory support to spontaneously breathing patients without a mask. The more you, as investors, understand what we do and how we make the clinicians and patients feel, the clearer you will understand the opportunities and challenges in front of us as we change clinical practice.

Now, I want to share a patient story with you from the last quarter. As a reminder to you, every day I start my day by looking in our CRM system and I read our latest posts from our field team as they share their experiences from around the world. It's a great way to start my day. But I'm going to share one that came from one of our teammates from the upper Midwest. I modified it a little bit and I'll walk you through it.

Week 2 of the Upper Midwest -- and hospital name deleted, of course -- validation. Currently, five patients have found success using our Hi-VNI technologies. One of the patients was transferred to the hospital in respiratory distress with pneumonia. The treatment plan at the last facility was to stay intubated and receive a trach but the family wanted a second opinion. Last night, this patient extubated himself. The staff initially tried to place the patient on by-pap but he wouldn't keep it on and they were talking about reintubating. The patient was really struggling to breathe.

The RT suggested trying Vapotherm's Hi-VNI technology. They started that patient out at our max settings and I saw the patient quickly calm down and he was starting to breathe. His stats maintained above 92%. Today, I saw the staff wean the oxygen down to 55% while keeping him on the max flow for the support. Yesterday, I saw them extubate another patient across the hall to Hi-VNI technology. This morning, he was on mid-range settings and I just heard this afternoon he was already weaned off Hi-VNI to a simple wall oxygen cannula and he was moved out of the ICU. The medical director is so ecstatic and the RTs are loving it. I have to go. They are extubating another patient to Hi-VNI technology as I type.

In summary, we had another decent quarter with some headwinds we managed to work our way through. We remain cautiously optimistic about the rest of the year. Thank you for trusting us with your capital. It means an awful lot to us. Now, I'd like to open it up for your questions.

Questions and Answers:


At this time, in order to ask a question, press "*1" on your telephone keypad. And your first question comes from the line of Margaret Kaczor from William Blair. Your line is open.

Margaret Kaczor -- William Blair -- Analyst

Hey. Good afternoon, guys. Thanks for taking the question.

Joe Army -- President and Chief Executive Officer

Hey, Margaret. How are you doing?

Margaret Kaczor -- William Blair -- Analyst

I'm doing well. So, first question from me is just a little bit of follow up on the sales force commentary that you guys had. So, maybe you can remind the folks on the call of the changes that were made last fall, outside of just the expansion component of it, and did it really take a few quarters to see the impact from the change in structure because of the length of the sales cycle or some other reason? And then I'll have a follow-up in terms of kind of the pipeline of new placements going forward.

Joe Army -- President and Chief Executive Officer

You bet. So, just to remind you, last year we changed the rep profile. Historically, we had used B2B sales reps that were looking to break into medical technology. And in the fourth quarter, we were then in a position, because of the improving economics of the precision flow system, we were now in a position to actually go out and hire seasoned, senior, experienced medical device sales professionals. So, the intention was to expand the sales force by 25% and really do it with those folks.

In addition, we restructured our clinical manager team and we moved those resources around a bit and deployed some of those positions back into sales positions. We also changed -- and so, of course, when you grow a sales force by 25%, you also touch the geography a fair amount. Everybody's territory lines were changing.

And then we went to a single region leader model. Historically, the clinical people had reported to one manager and the sales people reported to another. And what we found was a single leader model seemed to make the most sense.

I will tell you that I'm tickled pink with the way that the new reps are coming up the curve. What I'm not happy about is that, while we're only supposed to have 25% of them, 60% of our field organization today is that new profile, largely because we incurred a lot of unplanned turnover of tenured reps that just could not wrap their heads around shrinking sales territories. We all learned a long time ago from John Brown at Striker that there's three truths. Right? Every year, you're going to get a smaller territory. Every year, your quota is going to go up. And every year, you're going to go make more money than you did the year before.

Well, that's not the case in the copier industry. And so for young people who are really trying to figure this out, it was a difficult transition for them. And a lot of them did not make it, which we then just doubled down on our bet and continued to hire more seasoned senior medical device professionals. And I've got to tell you, looking back, I'm awfully glad we did. I really like that sales channel that we're building today. I think the one leader model has really proven itself out. We're seeing the new reps, the 60% that we hired back in fourth quarter, come up the curve just as we expected to see them. And we expect to see them continue to make that progression.

Roughly half of the remaining tenured reps, I'm so proud of them. It's unbelievable. They are doing a super job. They're on the leader boards. They're all tracking to President's Club. They're doing a good job. But about half of them are not and we're going to continue to take a hard look at them. We're going to continue to go coach them and lead them in the field. But if they're not able to go get their pipelines built and really be able to track to that level of productivity, we now know that the seasoned senior profile works, so that's where our next move would be.

Margaret Kaczor -- William Blair -- Analyst

Got it. Yeah. That's helpful. And so you've still got the lower performing reps. You'll maybe focus on retraining them. Push comes to shove, you'll figure out a new model that clearly is working. But maybe talk a little bit about the pipeline for new placements and how that's looking at this point. Because part of it for us is you've got the existing accounts that you sell into, you've got the new accounts that you're selling into. With some of the higher disposable utilization rates, it seems like that pipeline should remain strong for continuing placements but maybe walk us through that.

Joe Army -- President and Chief Executive Officer

Let me start by answering the last part first. That install base, which is what we look at -- we look at total revenue, install base, and gross margin. Right? Those are the three things that are driving us crazy. We're focused right on them. That install base is right where it needs to be in the U.S. and international. So, we're set up very well for the second half of the year. We really like the turn rates increasing but we're going to just sit tight for the time being, Margaret, because we still want to work through any remaining uncertainty with that U.S. sales force. We want to create a buffer in there. Right?

The pipelines continue to improve. They keep growing and we like the way they're doing it, particularly when you start to think about 60% of that sales force started in the fourth quarter. Their pipelines are maturing very nicely. And a good bunch of our tenured people, their pipelines are healthy and strong. So, I like what I'm seeing there. I'm just going to remain a little bit more cautious on the capital equipment on the U.S. side than the disposables. That's working the way we want it to.

Margaret Kaczor -- William Blair -- Analyst

Okay. Good. And then if I can sneak one more in. In terms of kind of the disposable utilization rate being better, can you walk us through those higher turn rates you referenced? The ED focus and the guarantee program. But are you seeing continued interest across the board or is it really focused on kind of some of those new dynamics you've got? Thanks.

Joe Army -- President and Chief Executive Officer

No, it's the same, Margaret. It's the same thing we've been doing. It's driving into gold and silver EDs, the largest EDs in the country. There's roughly 2,000 of them. And driving the message of mask-free NIV for the spontaneously breathing patient. And we now know in every one of these EDs we go, we found the magic bullet. Right? We know that every single one of them have mask-intolerant patients and our sales force is getting more and more experience at teaching them this.

It's interesting. I was in the field earlier this quarter visiting a bunch of EDs throughout a couple different parts of the country. And what I found interesting was even though those turn rates are up -- and, look, it's not up crazy. Right? It's 1.72 to 1.9. But for us, that model is pretty sensitive, as you know. The turn rate. So, we're very cautious about that. I'm still finding, even when hospitals in the early stages of their adoption, they're still only using it for hypoxic patients and not yet hypercapnic patients. When I go into hospitals that have been using it for 9-12 months, that's when I really see them using it on the full gamut and getting the full value out of it.

So, this ED play is working. I like this. I think this is a good thing and we're gonna just pound this thing like you can't believe.

Margaret Kaczor -- William Blair -- Analyst

Thanks, guys.


And your next question comes from the line of Jason Mills from Canaccord Genuity. Your line is open.

Cecilia Furlong -- Canaccord Genuity -- Analyst

Hi, Joe and John. This is actually Cecilia on for Jason. And I just wanted to ask about your Q3 guidance and kind of what this implies for sequential ramp in Q4 and just your thoughts around the sales force disruption, maybe that ameliorating a little bit in Q4, and what you see from capital versus the disposable sales mix in those two quarters.

John Landry -- Vice President and Chief Financial Officer

Sure. Good afternoon, Cecilia. It's John. I'll take this one here. So, in terms of our guidance for the third quarter, given the sales force disruption we spoke about and some of the legacy rep turnover that we had earlier in the year, coupled with the fact that the third quarter is our seasonally slowest quarter, we feel that the range of $11 million to $11.4 million is our best estimate right now for the third quarter revenue. If you recall, for the first half of the year, we were tracking about $400,000 ahead of guidance, which gives us confidence we'll be able to deliver on the full year number.

With regard to the fourth quarter, I would expect the revenue as modeled to increase in the fourth quarter of the year. Recall that the fourth quarter is our largest capital quarter of the year. Typically, it's tied to the hospital budget cycle, which culminates in the December timeframe. With that, we also have a number of the sales reps that have been hired recently in the fourth quarter of 2018 coming fully up to speed and tenured by the fourth quarter of '19, as well as the fact that we see the pipelines that they're building, as well as the tenured rep pipelines, we feel comfortable that we'll be able to deliver on that guidance of $49 million to $51 million for the full year.

Cecilia Furlong -- Canaccord Genuity -- Analyst

Okay. Great. Thank you. And then I guess just turning back to focus on the ED. I was just curious. In those new accounts that you're opening, what type of organic growth into other departments are you seeing so far and kind of what have those trends been?

Joe Army -- President and Chief Executive Officer

So, it's really hard to tell you the answer to that question because we don't know where the boxes are kept outside of the ED. So, the reason we know it is they're actually storing precision flow units in the ED and using them there. The resp precision flow units, they will literally go into an equipment corral and they'll sit up on the second floor or something until somebody needs them. So, we don't know where in the hospital they move to, whether it's in the PACU, general care floor beds, ICU, or whatnot. What we look at is the overall disposable dollars, the disposable units, the number of patients being treated, we look at those turn rates and then we see the hospitals buy additional precision flow units. And generally we're seeing that one to two quarters after they've adopted in the ED. That pattern has continued.

The second pattern that has continued is that roughly two-thirds of our capital equipment in any given quarter is coming from existing customers that are expanding their fleet. That pattern has continued. So, I don't have any more clarity than that. And we know that when we go in and open up the ED, it spreads throughout the hospital.

Cecilia Furlong -- Canaccord Genuity -- Analyst

Okay. Great. Thank you very much for taking the questions.

Joe Army -- President and Chief Executive Officer

You're welcome. Thank you.

John Landry -- Vice President and Chief Financial Officer

You're welcome. Thank you.


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

Joe Army -- President and Chief Executive Officer

Well, I just wanted to say thank you again. We appreciate all of your time and support and we're very excited about what the second half of the year will bring and look forward to talking to you in October.


This concludes today's conference call. You may now disconnect.

Duration: 31 minutes

Call participants:

Mark Klausner -- Investor Relations, Westwicke

Joe Army -- President and Chief Executive Officer

John Landry -- Vice President and Chief Financial Officer

Margaret Kaczor -- William Blair -- Analyst

Cecilia Furlong -- Canaccord Genuity -- Analyst

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