Vapotherm, Inc.
Q1 2019 Earnings Call Transcript

Published: 13 May 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Vapotherm First Quarter 2019 Financial Results Conference Call. As a reminder, this call is being webcast live and recorded. It is now my pleasure to introduce to your host, Mr. Mark Klausner of Westwicke. Please go ahead, sir.

[Mark Klausner:]

Good afternoon and thank you for joining us for the Vapotherm first quarter 2019 financial results conference call. Joining us on today's call are Vapotherm's Chief Executive Officer, Joe Army and its 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. [Operator Instructions] Before we begin, I would like to remind everyone that our 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 identified in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 22, 2019. 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 Chief Executive Officer, Joe Army.

[Joe Army:]

Good afternoon and thank you for joining us today. I'll begin by discussing our first-quarter 2019 results, and then I'm going to hand the call over to our CFO, John Landry, to provide a financial review, after which I will discuss 2019 strategic priorities before taking questions. Big picture, several things worked pretty well this quarter and a couple areas didn't work the way we expected them to. What worked in the quarter was the emergency department focus, U.S. disposable turn rates, the gross margin improvement play and expansion of our clinical data and new product development efforts. What didn't work was some disruption in [indiscernible] turnover in the US field which led to lower than expected US capital equipment sales. So let's dive into what didn't work and discuss some of the disruption in the US sales force. We put a lot of stress on the sales force with the changes that we made in the fourth quarter. Recall that we expanded a number of US sales territories by 25% in the fourth quarter. We also shifted the scope and focus of our clinical educators to the larger higher volume accounts and combined the leadership of both the sales and clinical educators under a single region leader. This involved a fair amount of territory changes. Anytime you split territories to expand it can take a little time to settle everybody down. While we're optimistic about the benefits of these changes longer-term, the impact on our results this quarter as we saw lower-than-expected capital equipment sales in the US. We are evolving the profile of the sales reps we're hiring. Historically we hired young B2B sales reps looking to get into medical sales and then would see a percentage of them leave after several years of experience for OR focused medical device jobs with big companies. With the improved economics of the higher valued PF Plus, in the fourth quarter sales force expansion we began hiring seasoned medical device reps from larger OR focused medical device companies that had a lot of experience selling high clinical valued technologies to physicians. These folks are a whole different kettle of fish. It has been really interesting to see them progress through sales training and in the field with only three months under their belts. We like the new profile, we see them ramping as expected. Our focus now is on helping the remaining tenured reps that came from B2B settle down in the midst of all these changes and continue developing as medical technology sales professionals. We expect to sort this out in the next several quarters before we begin the next sales force expansion in fourth quarter later this year. Every year we get better at this, which is good because we'll be doing this for the foreseeable future. Shifting gears to what did work

[John Landry:]

Thank you very much, Joe. Revenue for the first quarter 2019 was $12.3 million, which represented a 14.5% increase over revenue of $10.7 million in the first quarter of 2018. Total US revenue was $10 million representing an increase of 16.6% over the first quarter of 2018 while total international revenue was $2.3 million representing an increase of 6.3% over the first quarter of 2018. Capital revenue, which includes revenue from both product sales and lease revenue, was $2.7 million for the first quarter of 2019 and represented an 8.5% increase over the prior year. U.S. and international capital revenues were $2.2 million and $500,000 respectively for the first quarter of 2019. Disposable revenue was $9 million in the first quarter of 2019, which represented a 19.2% increase over the first quarter of 2018 and was primarily driven by an increase in our worldwide installed base of Precision Flow units. During the first quarter of 2019 we sold roughly 89,000 disposables worldwide. Disposable revenue was $7.5 million and $1.5 million in the US and international markets respectively in the first quarter 2019. Worldwide service revenue was $602,000 in the first quarter 2019, and of this amount $329,000 was generated in the US and $273,000 in our international markets. Gross profit for the first quarter of 2019 was $5.2 million, an increase of $934,000 over gross profit of $4.2 million in the first quarter of 2018. Gross margin was 42.1% first quarter of 2019 compared to 39.5% in the first 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 cost in comparison to the first quarter 2018. Additionally, we achieved operating efficiency by holding operating overhead constant while increasing throughput of our manufacturing facility to support continued sales growth. Research and development expense was $3.3 million for the first quarter 2019, an increase of $1.1 million over the prior year. The increase in research and development expenses was due to new product development cost and an increase in research and development headcount and employee-related expenses including stock-based compensation. Sales and marketing expense was $9.2 million for the first quarter of 2019, an increase of $1.1 million over the prior year. The increase in sales and marketing expenses was primarily due to investments in marketing initiatives, clinical studies and increased compensation, travel and employee-related expenses including stock-based compensation in our sales and marketing organizations. General and administrative expense was $4.9 million for the first quarter of 2019, an increase of $2.5 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 first quarter of 2019 was $13 million or $0.76 per share compared to a net loss of $8.9 million or $11.33 per share in the first quarter of 2018. Adjusted EBITDA for the first quarter of 2018 was a negative $9.6 million compared to a negative $7.8 million in the first quarter of 2018. Adjusted EBITDA adjusted for foreign currency gains or losses, net interest expense, changes in the fair value of warrant liabilities, depreciation and amortization expense and stock-based compensation. Adjusted EBITDA loss increased by $1.8 million in the first quarter of 2019 as compared to the first quarter of 2018 due to higher operating expenses which were partially offset by an increase in gross profit. As of March 31, 2019 cash and cash equivalents were $56.7 million compared to $58.2 million as of the end of December 2018 and $15.1 million as of the end of March 2018. During the quarter we pulled down the final tranche of term debt available to us under our current term debt facility in the amount of $10.5 million. Now turning 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 41.5% to 42%, an increase from our prior guidance of 41% to 41.5%. For the full year 2019 we now expect operating expenses to be in the range of $68 million to $70 million, an increase of $4 million related to stock-based compensation expense for equity awards granted during the first quarter of 2019. For the second quarter of 2019 we expect revenue to be between $11.8 million and $12 million, which represents growth of 12% to 14% over the second quarter of 2018 respectively. This concludes my remarks. I will now turn it back over to you, Joe.

[Joe Army:]

Thanks, John. Before opening the line for questions I'd like to review how we intend to execute on our 2019 strategic priorities over the balance of the year. As a reminder, our priorities are

[Operator:]

[Operator instructions] Jason Mills, Canaccord Genuity.

[David Ruskin:]

Hey, this is David Ruskin on for Jason. Can you hear me all right?

[Joe Army:]

You bet.

[David Ruskin:]

So I want to start first on the US sales force, specifically looking at capital revenue. Can you talk a little bit more, provide a little color around what you're doing within that -- the sales force territories to remediate what happened in the first quarter? And really how we should think about the Q2 guidance going forward given the guidance is similar to what was in the first quarter and the Company still did beat that guidance?

[Joe Army:]

Well, I think I want to start with the -- we beat it, but we beat it by $300,000 or so, right? So that's good, but that's not anything to write home to mother about in my book. And so that's why Johnny is reiterating what the guidance should be for the year. We're not changing our revenue at this time. And when you think about any kind of dislocation and disruption that we caused in that field through that expansion and the realignment of duties and the realignment of leadership, that's going to take another one or two quarters to really work its way out through the system before we start that next expansion in the fourth quarter. So, I think our advice to you is stick with our top-line guidance of 49 to 51. You bump that gross margin up, I think that's fine, but let's get another quarter or two under our belt with this sales force expansion and really the redevelopment of the rep profile that we're using. John, do you have anything to add to that?

[John Landry:]

No, I would agree with that, Joe. I think we did beat by $300,000 in quarter and reiterating our guidance for the full year. I think that's prudent given where we're at right now. So, that's what we are going to stick with here for 2019.

[David Ruskin:]

Okay thanks. And then maybe going more into the top-line growth for the year, because you qualify at least how you've been seeing new accounts versus going deeper into existing accounts and how you expect that to trend for the remainder of the year.

[Joe Army:]

I think the big question there is the balance still between new accounts and existing customers what we've seen historically, and I think the answer is yes. John?

[John Landry:]

I would agree with you Joe. When you look at our book of business, roughly two-thirds of our capital equipment sales come from existing customers and one-third comes from new customers. And that's been pretty consistent rate or split over the past several quarters and we expect that to continue throughout 2019.

[Operator:]

[Operator instructions] Margaret Kaczor, William Blair.

[Unidentified Analyst:]

This is Anna on for Margaret. Thanks for taking my question. Congrats on quarter. Given the launch of new products, publication of new data and further expansion into the emergency room, but then with some of the sales force disruption in mind, can you help us better understand some of the puts and takes of guidance, including anticipated productivity improvements as well as any benefit from the soft launch of the IntellO2 later this year?

[Joe Army:]

Let me maybe start with IntellO2 and then John can work through some of the other ones. I wouldn't put anything in your models for IntellO2 for 2019. I would put not a nickel in there because I know I don't have any in mind. And it has to do with this is going to happen very late in the year and in a handful of OUS countries. And we think that we are going to learn an awful lot about this. It's going to really help us figure out the best way to -- the best offering to provide our customers the solutions they need for managing exposure of oxygen to their patients or dosing of oxygen to their patients. But I've got to tell you, I wouldn't put anything in that model. I don't think that's a great idea.

[John Landry:]

Yes, I would agree with that, Joe. So, when you think about our IntellO2 product, we are going to be looking at a limited market release here by the end of the year. And our initial focus is in the EU. So, Joe is correct, we do not have any revenue in our model for IntellO2 in 2019. And when you look at the other couple products, Anna, we have a couple ones, our Prosoft around our cannula which we talked about as well as our Airgen adapter which we've previously disclosed. Those are coming online in the second half of the year. We expect to launch those late in 2019. So, from a revenue and margin impact perspective, it's an immaterial amount for 2019. So our guidance excludes those. But as we start thinking about 2020 those will become more impactful to our continuing growth and expansion in 2020 and beyond.

[Unidentified Analyst:]

Okay, that's helpful, thank you. And then in regard to some of the clinical data that has already come out this year and that you continue to work on across your portfolio of products, what steps are you taking -- what specific steps are you taking in regards to the digital marketing campaign and educating the emergency department physicians and nurses on the technology in order to help them incorporate it into their practices?

[Joe Army:]

So, that's a really good question. Digital marketing continues to be an important lead generation development tool for us and it's still one that I scratch my head. I still can't believe the clinicians find ideas or new technologies off of Facebook to go and apply, but welcome to the 21st Century. We are running a series of plays with respect to digital marketing ads as well as webinars as well as CME events, or CMU events -- CEU events, excuse me. So it's really a combination of all three and in any given month they are being changed up. So for example, we know that we've got -- there will be a concentrated effort, for example, around ambulation of patients in both ICU and other parts of the hospital later this year that would coincide with publications of those papers. I would tell you that your best bet, honest to God, go follow us on Facebook and go see for yourself what we're doing. And I think it will give you a perspective that maybe not everybody has. Or if you're like me, you don't have a Facebook account and then you've got to go get your kids to do it.

[Operator:]

Sean Lavin, BTIG.

[Marie Thibault:]

Hi Joe; hi, John. It is Marie Thibault on for Sean tonight. Thanks for taking the questions. I wanted to ask very quickly about the ED guarantee program. I know that you were adding more customers this quarter. I'd love to hear what the early feedback is on that program and I guess any kind of qualitative details you can give us around that program.

[Joe Army:]

I'll tell you, the early feedback from my field organization, I wish they were on the call because they would tell you that they really like the ED guarantee program because it really just stops the customer in their tracks and they go you guys are really willing to stand behind the technology doing what you say it does on the label. And we are like yes. So that begins a whole different set of conversations inside the customer. What I wish my sales reps would do is to keep driving that and bring it all the way to fruition instead of focusing -- now, I want them focused on getting the order, absolutely. But I would like them to sign more of those ED guarantees. Because while we're making progress adding them, there is a -- I've got to get to a critical mass before we can start using this for a registry and we are not there yet. And I'm just impatient; I'd like to get there sooner. But I'll tell you, I think it's a very useful -- I don't think, I know it's a very useful tool to that field organization. And we are looking at other ways to do this as well in other parts of the hospital where we've got a large data set and we know what the outcomes are going to be relative to current standard of care. So, sales force loves it, I just wish that they would use it and continue that conversation and not just close the deal but close the deal and get them to sign this, too.

[Marie Thibault:]

Sounds good. I'm sure we would like to see that registry too, so that sounds great. And it sounds like your team has a lot coming later in 2019. I know one of the things you mentioned was the softer cannula, some of the upgrades in the disposables. Should we think about higher ASPs alongside that, or how should I think about disposable ASPs going forward here?

[Joe Army:]

The way I'd think about this is we are running a three prong play to improve gross margin. And one of those prongs is to develop products that have higher clinical value to our customers that have just -- inherently you're going to get a better patient outcome, you are going to take work out of it, you are going to improve the overall clinical experience for that customer. That's one of the ways that we are going to command higher economics is because we are delivering greater value to those customers. So, the intention behind all of our new products is to deliver more clinical value and, by extension, improve our ASPs. But I wouldn't look this year for any kind of significant impact or really any impact on our disposables, but that's -- I'm over my pay grade now. John will need to address that.

[John Landry:]

Yes, I would agree. I think we believe that the improved clinical utility and economic value that brings to the customers will improve our ASPs as we've done in the past through say our Precision Flow Plus which we launched several years ago. But that said, we're still in the process of vetting that out with our customers here in 2019 and we'll have more line of sight and visibility to that for 2020, Marie.

[Joe Army:]

Don't touch your back half of -- leave your back half 2019 numbers alone [Multiple Speakers].

[Marie Thibault:]

Thanks for taking the questions and congrats on the strong quarter.

[Operator:]

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

[Joe Army:]

I want to thank you all for your interest in Vapotherm. We really appreciate it and we look forward to updating you on our progress again next quarter.

[Operator:]

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