Vapotherm, Inc.
Q4 2021 Earnings Call Transcript

Published: 26 Feb 2022

[Operator:]

Good afternoon, ladies and gentlemen and welcome to the Vapotherm Fourth Quarter 2021 Financial Results Conference Call. As a reminder, this call is being webcast live and recorded. It is now my pleasure to introduce you 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 fourth quarter 2021 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. 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 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, 2021, which was filed with the Securities and Exchange Commission, or SEC, on February 24, 2022, 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 Vapotherm’s President and Chief Executive Officer, Joe Army.

[Joe Army:]

Good afternoon and thank you for joining us today. I will begin by discussing our fourth quarter and full year 2021 results and share our perspective on the impact of COVID-19 on our business. I will also review the substantial progress we made in 2021 against the objectives we set at the beginning of the year. I will then hand the call over to our CFO, John Landry, to provide the financial details. Lastly, I will update you on our key areas of focus for 2022 before taking questions. The fourth quarter of 2021 was another strong quarter for Vapotherm. We booked $22.2 million in revenue, bringing full year 2021 revenue to $113.3 million. These results reflect 2-year compounded annual growth rates of 31% and 53%, respectively. Our worldwide installed base now stands at 35,200 units or more than double the installed base at the end of 2019. Over the past 2 years, we also doubled the number of our Emergency Department Gold and Silver accounts and exited 2021 with 528 Gold and Silver ED accounts which are the top 2,000 ED hospitals in the U.S. as measured by respiratory discharges. Without question, these strong results reflect the impacts of COVID-19 on our business and importantly, the positive impact our technology has had on the lives of COVID patients around the world, but it’s undeniable COVID-19 has made our business difficult to predict. As an example recall that in 2021 we have raised our revenue guidance multiple times with full year revenue ultimately, exceeding the midpoint of our original estimate by $28 million. This unpredictability is likely to continue for as long as the virus remains unpredictable. We know this makes it challenging for investors trying to value the business and disguises the significant amount of progress in the business over the past year. However, it is important to note that COVID-19 dramatically increased the awareness of our technology. It has validated the unique efficacy of our product and highlighted our organization’s patient and customer focus. We now have a robust global installed base exceeding 35,000 units, which is a 23% increase over 2020. To put this rapid expansion of our installed base in context, these units alone will generate approximately $85 million in recurring revenue, assuming a return to historical levels of utilization. This would represent a 27% increase in recurring revenue over 2021, even if there were no further increases in our installed base and zero increases in average selling price. This also does not take into account the significantly higher utilization rates we see in our ED Gold and Silver accounts. Our technology is recognized and respected in an ever-increasing number of hospitals and clinics around the world. And if, as many predict, COVID-19 becomes a chronic seasonal illness like the flu, our total addressable market has grown. We think all these factors leave us exceptionally well positioned to execute on our fundamental strategy to become the complex lung disease patient management company. Our strategy combines digital, clinical and device solutions to create a health care ecosystem focused on improving the lives of complex lung disease sufferers while reducing the cost of their care. We’ve been making steady progress towards our goal. Going into 2021, we outlined four objectives to set us on a path towards becoming the complex lung disease patient management company. Number one, ensuring our installed base is productive; number two, growing our installed base; number three, launching HVT 2.0; and number four, building a digital presence. We made significant progress against these objectives in 2021. Regarding the productivity of our installed base, we saw an 18% year-over-year increase in disposables revenue versus 2020. Regarding growth of our installed base, we ended 2021 with a global installed base of 35,200 units, representing a year-over-year increase of 23% from 2020. Regarding the launch of HVT 2.0, we successfully obtained FDA 510(k) clearance for this next-generation product, which does not require a source of wall air and will be central to our ability to treat patients anywhere in the hospital as well as in the home and during emergency transport. We launched a limited market release of this product in a small number of facilities earlier this year and have been receiving positive feedback. Regarding expansion of our digital presence, we launched Vapotherm Access 365 and Vapotherm Access Post Care in 2021. I will elaborate further on each of these initiatives. Ensuring the productivity of our installed base is the principal purpose of our 1H1D program, which you’ve heard me talk about before. Over the past year, when COVID-19 was surging, we focused on delivering flawlessly for our customers, furthering the growth of our installed base. But as COVID-19 pressure subsided, we shifted focus to our 1H1D or One Hospital One Day strategy in which we train and educate customers across all parts of the hospital on our technology’s unique ability to treat both hypoxic patients who can’t get enough oxygen and hypercapnic patients, such as COPD patients, who cannot clear enough carbon dioxide with the goal of increasing utilization across all types of respiratory illnesses. While much remains to be done to increase awareness of how well our equipment treats hypercapnic or COPD patients, we are pleased with the progress we made with our 1H1D program in 2021 despite the headwind of the pandemic, which often left hospitals with little bandwidth to focus on much else. For example, when we focused on 1H1D in our top 100 accounts during the second quarter, we saw disposable utilization rates rise in these facilities. When all our customers are trained, we believe our installed base will become highly productive and disposable utilization rates will continue to rise matching or exceeding historical levels regardless of the course of COVID-19, which in turn will resolve the unpredictability of our revenue growth. And with HVT 2.0, we will have a more robust and flexible platform to accomplish this. As I noted, HVT 2.0 was cleared for sale in Europe and the U.S. in 2021. Our limited market release is a bit behind schedule due to the Delta and Omicron surges experienced in the second half of 2021, but is now well underway. Initial feedback on the HVT 2.0 has been quite positive. HVT 2.0 is a key element of our plan to expand our digital footprint. And due to its own internal air source has the ability to help patients in areas of the hospital that don’t have piped-in air and in the future in transport and the home. In addition to HVT 2.0, we made significant progress expanding our digital footprint, building on our acquisition of HGE Medical in late 2020 and putting additional pieces in place for a complete health care ecosystem focused on complex lung disease patients. We rebranded all of this as Vapotherm Access and midyear launched Vapotherm Access Post Care to hospitals, a program dedicated to reducing 30-day readmissions of recently discharged COPD patients. We also launched Vapotherm Access 365 to hospitals and providers, extending the 30 days of post care to full year patient monitoring. Initial customer feedback has been positive. Although as with many hospital-facing initiatives in 2021, we were slowed by the Delta and Omicron surges in the second half of 2021. Given the initial positive feedback we’ve received, we recently established a small direct sales force focused exclusively on Vapotherm Access Post Care and Vapotherm Access 365 and are excited about expanding our funnel as Omicron subsides. I am very proud of our team and our ability to deliver product and support to our customers during another challenging year. Unlike many medical technology companies, we’ve been able to resolve supply chain issues and labor challenges and meet our customers’ needs throughout this pandemic. From a team perspective, while we did experience employee turnover during the great resignation, I’m excited about the talent we recently brought into the organization. We strengthened the leadership team and Board, added an experienced Chief Technology Officer to the team and expanded our digital and software expertise. From a customer perspective, our ability to consistently deliver product has grown our reputation in the marketplace resulting in new ED Gold and Silver account wins in highly competitive situations. To ensure we meet our customers’ needs as we continue to grow and COVID-19 becomes a permanent part of the landscape, we significantly expanded our disposables production capacity by adding manufacturing capability in Mexico. Our partners in Mexico will assemble our established high-volume products while our Exeter-based team will focus on our higher technology, new product offerings. I am pleased to report that we added this capacity without materially increasing our fixed cost base, which will help set us up for long-term gross margin improvement. Last but not least, we opened a distribution center in Texas to reduce the delivery times and costs for our customers on the West Coast in the U.S. In summary, we believe our proven track record of always delivering for our customers, our expanded installed base, increased awareness of our technology, new products and digital solutions are all going to allow us to continue to drive long-term growth and establish Vapotherm as the complex lung disease patient management company. I will now turn it over to John to review the financial results of the quarter. I will then close by telling you our key areas of focus, which will set us up for a successful 2022.

[John Landry:]

Thank you, Joe. As mentioned, revenue in 4Q 2021 was $22.2 million compared to revenue of $40.9 million in 4Q 2020 and $13 million in 4Q 2019, a 2-year compounded annual growth rate of 31%. Please note, we experienced a significant COVID-19 surge late in 4Q 2020, which drove revenue to an all-time high and resulted in a difficult year-over-year revenue comp. To provide you with context as to how we’ve done compared to pre-COVID levels from a revenue perspective, I am going to provide commentary comparing 4Q ‘21 against 4Q 2019, along with our 2-year compounded annual growth rates, which is how we eliminate the near-term volatility in our quarterly results. Disposable revenue was $15 million in 4Q 2021, representing a $5.3 million increase over disposable revenue of $9.7 million in 4Q 2019, a 2-year compounded annual growth rate of 25%. Our monthly U.S. disposable utilization rate in 4Q 2021 was 1.56, which is lower than our historical disposable utilization rate for the fourth quarter of the year, given the significant expansion of our installed base. Despite lower utilization rates overall in 2021, we grew our disposable revenue by 18% over 2020 levels. This gives us confidence that we’ll be able to drive long-term recurring revenue growth in our business, especially once we complete our 1H1D strategy in all accounts. As Joe pointed out, we saw at or above historical churn rates in 2Q 2021 in those accounts where 1H1D was deployed. As we have seen in prior quarters, our disposal utilization rates in Gold and Silver ED accounts are above our overall disposable utilization rates. Long term, we expect recurring revenue to account for over 70% of our revenue which is important to us, given its predictability and higher gross margin profile. Capital revenue was $5.4 million in 4Q 2021 as compared to $2.9 million in 4Q 2019. In 4Q 2021, we sold 613 PF units worldwide versus 604 in 4Q 2019. Our worldwide installed base grew by 682 units in 4Q 2021. As of the end of 4Q 2021, our worldwide installed base consisted of approximately 35,200 units, reflecting 23% year-over-year growth. We like the long-term recurring revenue stream that this worldwide installed base will provide once we have a chance to complete our 1H1D strategy with existing accounts, which we won’t expect to be complete until mid-2023. Assuming a return to historical utilization levels, we would expect annual recurring revenue of approximately $85 million or 27% more than in 2021 without factoring in additional growth in the installed base, higher utilization rates or increased average selling prices. Worldwide service revenue was $1.9 million in 4Q 2021 compared to $400,000 in 4Q 2019. The increase in worldwide service revenue was due to Vapotherm Access-related revenue and higher service revenue on an increased worldwide installed base of Precision Flow units. Gross profit in 4Q 2021 was $7.8 million, a decrease of $12.9 million over gross profit of $20.7 million in 4Q 2020. Gross margin was 35% in 4Q 2021 compared to 50.6% in 4Q 2020. Gross margin was negatively impacted by costs related to the setup of disposable lines in our contract manufacturers’ facility in Mexico, higher labor rates for temporary resources, including travel-related costs and expedited freight cost. These temporary production costs allowed us to meet all customer demand while setting us up to better handle future fluctuations in customer demand and to achieve our long-term gross margin objective. Operating expenses were $25.8 million in 4Q 2021, a decrease of $7.3 million from $33 million in 4Q 2020. The decrease in operating expenses was primarily due to lower sales and marketing expenses due to lower sales commissions. Net loss in 4Q 2021 was $18.6 million or $0.71 per share compared to a loss of $17.2 million or $0.67 per share in 4Q 2020. Adjusted EBITDA loss for 4Q 2021 was negative $13.5 million compared to negative $9.1 million in 4Q 2020. The year-over-year increase in adjusted EBITDA loss was primarily due to lower revenue and gross margin due to temporary production costs we incurred this quarter, partially offset by lower operating expenses. As of December 31, 2021, cash and cash equivalents were $57.1 million compared to $70.3 million as of September 30, 2021 and $113.7 million as of December 31, 2020. In February, we refinanced our existing term debt and line of credit and replaced it with a new $125 million 5-year term debt facility with $100 million drawn at closing and $25 million available in 2023 upon the achievement of a revenue milestone. The new term debt facility is interest only for 4 years, which may be extended to a fifth year upon the achievement of a revenue milestone. Upon closing, our cash balance increased by $50.2 million. We believe this additional cash along with $25 million of additional debt capacity will allow us to fully fund the business to cash flow positive. On a pro forma basis, cash and cash equivalents as of December 31, 2021 would have been $107.3 million, including the $50.2 million of net cash received in February as part of our new debt facility. Now I’d like to turn to our 2022 financial outlook. As stated last quarter, we believe that COVID-19 and its mutations have become a chronic recurring problem, which will continue to result in COVID-19-related hospitalizations each year and significantly expand our total addressable market. Based on our expectation that some level of COVID-19-related hospitalizations will continue worldwide, we expect net revenue of between $104 million and $108 million in 2022. We believe we are now near the tail end of the current surge in the U.S. and has played out as expected. While hospitalizations were higher than in previous surges, the level of respiratory distress and demand for our product wasn’t as great as in prior surges. We anticipated this would be the case, which is why we built in an expectation that the impact of future surges would be approximately 50% of the previous surges. While it’s difficult to predict the impact of another variant on hospitalizations and demand for our product, our estimate assumes one additional COVID-19 related surge in the U.S. this year in the fourth quarter similar in scope to the surge we are currently experiencing. The impact of COVID-19 on hospitalizations worldwide continues to be very dynamic. Should our expectations regarding COVID-19 hospitalization not materialize as planned, our future financial results could be materially different than expected. We expect full year gross margin to be between 47% to 50%. In the back half of 2021, we incurred higher temporary labor costs, expedited freight costs and made investments in additional disposables production capacity to ensure we could meet every customer need during the pandemic. Given the fact that COVID is less predictable than other seasonal respiratory diseases have been, the expansion of disposables contract manufacturing in Mexico will allow us to ramp production up or down as needed with little to no incremental overhead. These costs are behind us, but we expect them to impact gross margin for the first half of 2022. After that, we expect our three-point gross margin improvement plan will improve gross margins. New products such as HVT 2.0 will allow us to increase average selling prices and decrease direct material labor cost at scale. Lastly, we expect to drive more volume through our fixed overhead base, thereby lowering overhead rates per unit. I want to be clear that the impact of gross margin that we saw in Q4 2021 and will impact us in the first half of 2022 is a temporary impact resulting from the extraordinary measures we were willing to take to ensure all customer needs were met despite the labor and supply chain issues that many industries dealt with in the second half of 2021. We believe these costs will be repaid many times over with the customer loyalty they generated. Also now that our new contract manufacturing lines are operational, we are much better positioned to deal with fluctuating demand without having to go to these lengths. With all three elements of our gross margin improvement plan at work, we remain comfortable in our view that we will be able to increase gross margin long-term to 65% within the timeframe that we discussed during our Investor Day this past summer. We expect full year operating expenses of between $110 million and $112 million, which represents a slight increase over 2021 operating expenses of $110 million. The increase in our operating expenses over the past 2 years has been driven by commission expenses and ensuring we can meet customer demand. As we look forward, these expenses will be replaced by investments focused on driving revenue growth, launching new products and expanding our Vapotherm Access platform. We expect adjusted EBITDA loss for 2022 to be between $39 million and $41 million. I would now like to turn it back over to Joe.

[Joe Army:]

Thanks, John. In 2022 and beyond, we are going to be focused on recurring revenue growth, gross margin expansion and driving to cash flow positive. Driving sustainable recurring revenue growth consists of three elements. First, we will ensure our significantly expanded installed base is productive by running our 1H1D program in non-COVID-19 surge periods. These efforts will be focused on training and educating customers or hypercapnic patients that clinicians haven’t historically placed on our technology, but make up one-third to one-half of all respiratory distressed patients. Given our 1H1D experience in the second quarter of 2021, which was focused on our top 100 accounts, we expect we will be able to return to historical disposable utilization levels per installed capital unit within four to six quarters. Second, we will introduce new products such as the HVT 2.0 platform and Oxygen Assist Module or OAM, which will result in higher clinical and economic value for our customers, which we expect will translate into higher recurring revenue per installed capital unit. The HVT 2.0 platform will be launched in a hospital setting first and focused on areas of the hospital that don’t have piped-in air, which we estimate to be 50% of all hospital beds in the United States. We will complete a limited worldwide marketing release in the first half of 2022 to test the marketing messaging, training materials and business model before rolling out more fully in 3Q. While the HVT 2.0 is cleared for home, we will further develop the HVT 2.0 platform to allow us to better serve patients in the home and in transport or EMS and to improve long-term gross margins via a lower cost design. The HVT 2.0 home version is currently under development with the goal of first patient use in the first half of 2023. Our own installed base continues to grow in select international markets, and we are enrolling patients in our OAM IDE study in the U.S., which will support our regulatory efforts and submission to FDA. Lastly, we will expand our digital business, now branded Vapotherm Access. We believe our initial product, Vapotherm Access Post Care, will allow hospitals to lower their 30-day COPD readmission rates by remotely monitoring patients daily for the first 30 days post discharge. This monitoring will allow for early clinical intervention in the event the patient’s health deviates from their unique baseline, which we believe is key towards keeping these patients from returning to the hospital. We will continue to execute on our three-pronged gross margin improvement plan. We believe the launch of the HVT 2.0 platform, OAM and the digital expansion will allow us to increase our average selling prices by offering more clinical and economic utility for our customers. The HVT 2.0 platform will provide for lower direct material and labor costs due to volume-based cost reductions, which we have negotiated with our suppliers. In addition, we will continue to drive cost out of the HVT 2.0 platform through continuous improvement efforts and new product offerings for home and transport. Lastly, we expect to drive overhead efficiencies as we’ve been able to scale capacity over the past couple of years with little to no incremental fixed overhead costs. As we drive more volume through our facilities, we expect overhead rates per unit to come down over time. Lastly, we will drive to cash flow positive through gross margin improvement and operating leverage in our P&L. To bridge us until we are cash flow positive, we recently refinanced our debt facility and added $50.2 million of cash onto our balance sheet. This additional cash, along with another $25 million of debt capacity will provide us with the runway needed to get to cash flow positive. In conclusion, I am excited about the progress we made in 2021 and how we’re positioned for 2022. Our technology and the value we deliver to our customers has been proven time and again over the course of the pandemic, resulting in a materially expanded installed base which will provide us with opportunities for significant recurring revenue growth for years to come. In speaking with our largest investors over the past few months, they have shared the following points with us. They would like to see transparency around our near-term revenue expectations given the unpredictability of COVID-19, non-dilutive financing of our growth, my pay tied to performance, clear and consistent progress towards profitability and the long-term value of the installed base. To that end, in early January, we provided 2022 revenue guidance detailing our operating assumptions to address the near-term prospects. We refinanced our term debt, which we believe will provide us with the capital we need to get us to cash flow positive. My 2022 equity award is now entirely performance-based and tied to targeted 2024 revenue of $147 million or a 2-year compound annual growth rate of 18%. Given the progress we’ve made as a business and the opportunities in front of us, it’s my personal belief that our long-term prospects are very strong. I’m extremely proud of what our organization has done through this pandemic and would like to thank each of our employees for their focus on meeting every customer need while setting us well on the path to becoming the complex lung disease patient management company. Thank you for trusting us with your capital. Now I’d like to open it up for questions.

[Operator:]

Our first question will come from Margaret Kaczor with William Blair. Please go ahead.

[Unidentified Analyst:]

Hi, everyone. This is Brandon on for Margaret. Thanks for taking the question. I wanted to focus first on the ‘22 guidance. I appreciate the color that you guys are giving. I know it’s hard to kind of model these ebbs and flows with COVID. I wanted to understand, though, what are you assuming kind of in the core flu business? I mean, you have this COVID wave sounds like in Q4 and the winter time frame maybe. So are you assuming flu comes back as well? Or is COVID kind of overtaking the flu? So what are you assuming in there? And then does it just get totally replaced? And does it drive, in this COVID wave that you’re assuming, are you assuming more of a pull-through of systems or disposables or both?

[John Landry:]

Hi, Brandon, this is John, I’ll take that question. So in terms of the assumptions we have layered into this guidance for 2022, this current surge is largely due to the Omicron surge, Brandon. We’ve seen little to no flu here in the first quarter. If you look at the CDC tracker for flu cases when the first quarter of the year started out, tail end of 4Q starting ramp up and then ramped down pretty quickly. So if you look at it, it’s really largely Omicron-related surge here in the first quarter. As we’re expecting over the – as I mentioned, in the fourth quarter would probably be our next surge time as temperatures get colder, holiday season is upon us. We’re largely factoring in another related surge. Probably somewhat limited in the way of flu as we look at it from a fourth quarter perspective because it typically starts usually at the tail end of the year and is really more of a Q1 impact. So we will update you more on that as we think about 2023 guidance. In terms of the sort of mix of capital and disposables, I think what we typically see in surges is that as surges start to recede, we will start to see the capital contribution slowdown first and then we will see the disposables next. So I think as hospitalization start to decrease here as what we’re seeing in the different CDC trackers, we’re starting to see the capital start to recede as well and demand start to recede as well here as we’re near the tail end of this most recent surge.

[Unidentified Analyst:]

Got it. And then maybe shifting to HVT, I know you guys are still early in that limited market release, but it sounds like you’re at least in a couple of accounts and maybe getting some early experience. I was just hoping you could give us a little bit more color. What are kind of the benefits that you guys are seeing in the account? Are things going as you would have expected? Have there been any surprises, either positive or negative? And that would impact your excitement around that product?

[Joe Army:]

Brandon, it’s Joe. I’ll take that one. So as you know, we got 510(k) clearance on that in the third quarter. And as we mentioned, we started with a limited market release. We’re pleased with the results that we’re seeing thus far. I think the ability to move patients throughout the hospital without having to use a compressor or anything of that nature, it just reduces the complexity of using the technology. I think it was – the response has been pretty positive. I was surprised at the number of comments that we’re getting around how easy it is to learn how to set it up and use it. And part of that may be there is an awful lot of new people in all those hospitals. There is been a big lot of turnover in hospitals in the respiratory and nursing teams. So that was something that I had not expected to see. And I think we will see how that plays out when we move this into full market release in the back half of the year.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question will come from Bill Plovanic with Canaccord. Please go ahead.

[Bill Plovanic:]

Okay, thanks. Good evening. Thanks for taking my question. A couple here. First, just as we roll into the first quarter, I was wondering if you could give us some directionality on the top line. And then how should we think about gross margins? I mean, obviously, a bunch of – it sounds like a bunch of one-time charges in the fourth quarter. You didn’t call out exactly how much was the setup versus ongoing. So just trying to get a feel for what kind of the first quarter could look like and how quickly top line and gross margins come back. And then I’ll have a follow-up.

[John Landry:]

Sure, Bill, this is John. I’ll take that question. In terms of our expectations for the year, we’re thinking the first and fourth quarter will be the quarters where we’re impacted by the surge. So as we factored it in, we’re thinking it’s roughly 50% of the volume that we’ve seen in previous surges. That seems to be largely playing out based on our experience to date. So again, I think revenue split will probably be more first and fourth quarter this year. In terms of the gross margin implications, to your point, the large chunk of that delta from some of the numbers we experienced earlier in the year and in comparison to prior years were largely due to those temporary costs associated with getting the disposables lines spun up in Mexico as well as ensuring we have the temporary labor in-house to make sure we can meet all customer needs. So a big chunk of that delta is due to those temporary costs, some of which went through our P&L in the fourth quarter in 2021 and then the balance will work their way through in the first half of 2022. So as we think about the margin profile for the year, first half of the year would be probably lower weighted, back half of the year will be a higher contribution from a margin perspective. So we ramp up in the second half of the year. And we will be back on our pathway to improving our margins to the 3-point gross margin improvement plan with the running to date.

[Bill Plovanic:]

Okay. I’m sorry, maybe I missed it. But is Q1 revenue going to be higher or lower than the fourth quarter, given we’re in the middle of a surge? I mean it’s so difficult with your business to kind of get trending. That’s why I’m asking the question is. I don’t know if they bought all the systems and maybe it’s just going to be disposables or all they are doing is burning off disposables that were purchased with systems. I’m just trying to get some color.

[John Landry:]

Yes, we expect the fourth quarter, Bill, to be larger than the first quarter, fourth quarter to be larger than the first. And the reason for that is we typically have year-end buying that goes into – factors into the equation from a seasonality perspective. So both capital and disposables are generally larger from a fourth quarter perspective, which would be our expectation here as well.

[Bill Plovanic:]

Okay, that’s helpful. Thank you so much. And then just the last question I have is on the OAM trial, you mentioned that you’re continuing to enroll. When do you expect to have enrollment – the IDE trial enrollment completed on that? And then when does that position you for submission and approval?

[Joe Army:]

Well, I can tell you, Bill, that the trial is ongoing and we’re enrolling patients. And in terms of projecting when we’re going to be done, I think that’s – it’s just not something we’re prepared to comment on. But as soon as we’re done enrollment, we will make sure that we let everybody know. And that will be the big gating factor for us in terms of filing for regulatory clearance.

[Bill Plovanic:]

Okay. And if I could sneak one more in. You’ve talked about building out a sales force on Vapo Access in the Post Care and the 365. How should we think about contribution from that product set in 2022 and 2023? And thanks for taking my questions.

[John Landry:]

Sure, Bill, it’s John. So from a sales force perspective, we have a small half dozen reps that are dedicated to our Vapotherm Access products, whether it’s our Post Care program or our 365 program. So we have them out in the field, they are trained and moving the product forward. From a guidance perspective, we’re not going to break that out separately yet. It’s not a material nature. It’s incorporated into the guidance, being the service and other line items that which is where it will flow through on a quarter-to-quarter basis.

[Bill Plovanic:]

Thank you.

[Operator:]

Our next question will come from Marie Thibault from BTIG.

[Marie Thibault:]

Hi, good evening, Joe and John, thanks for taking the questions. I had a first question here on the pricing of capital units. Just haven’t worked through my model entirely, but just looking at capital revenue and the number of units placed, curious if there were price increases, things that were passed along to customers kind of during this latest surge in 4Q.

[John Landry:]

Hi, Marie, it’s John. I’ll take that question. So in terms of the pricing, it’s largely more of a mix situation where we had a number of the capital units had accessory type of products. So no additional price increases other than what are typically charged to distributors as part of our annual contract renewals, med CPI increases. Largely, it’s more one-time type of mix situation rate than any permanent uplift in the ASPs.

[Marie Thibault:]

Okay, got it. Thank you for that. And then I wanted to – I heard your comment earlier on wins in highly competitive situations within some of the Gold and Silver accounts. Can you tell us a few of the reasons why Precision Flow is winning out over competitors in those cases?

[Joe Army:]

So first and foremost is how the technology is used at the bedside. The Precision Flow is significantly easier to set up and the clinical effect that they get is very predictable and very effective on both Type 1 – they are all dealing with Type 1 patients right now with these COVID-19 folks. The second reason is our field organization. That field organization just did such a remarkable job throughout this pandemic. And actually, before that, we’re delivering a level of service, it’s really a white glove service there in terms of whatever these folks need. And I would tell you, there is a large body of clinical evidence and you can sort of work through that. And then looking at the overall economic value of this over its life cycle versus the commodity products, we win. And I think the last piece has really been the reputation we’ve built for delivering come hell or high water varying to pan out. And I know for a fact there are some very significant wins we got specifically after 2020, where people were unable to get what they needed, and now they are Vapotherm – part of the Vapotherm team, and they got everything they needed in the most recent surges. So I think those are probably the biggest reasons why we’re winning in these really competitive situations, both in U.S. and internationally, it’s both.

[Marie Thibault:]

All those factors together. Okay, that’s helpful, Joe, thank you. If I can sneak one last one in here, kudos on the plan to getting the cash flow positive. Would you mind sharing any kind of revenue run rate we should be thinking about at that level to get to cash flow positive?

[John Landry:]

Yes, Marie, it’s John here. So in terms of the path to profitability as we continue to drive our gross margin improvement, drive our operating expense leverage, primarily in the sales and marketing line items, those would be the main levers or drivers to get us to cash flow positive. I think from a breakeven point, I think it depends on how quickly we want to invest to drive top line growth or not. So I think previously, we communicated in that ZIP code of kind of $125 million plus or so would be sort of that pathway to get there. That’s directionally where we would be, assuming we get the margins kind of in that 60%-ish range as well. So that’s, again, dependent upon how fast we want to go on the OpEx side, making investments to drive top line growth, may change that number up or down a little bit depending upon our strategy going forward.

[Marie Thibault:]

Alright. That’s very helpful. Thank you.

[John Landry:]

You are welcome.

[Operator:]

And 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:]

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

[Operator:]

And this will conclude today’s conference. Thank you for your participation, and you may now disconnect.