VAPO - Vapotherm: Struggling For Air

Summary

• Vapotherm has been struggling for years.
• The pandemic which appeared to be a blessing has not benefited the business at all; in fact, the contrary.
• The fundamental picture is too dire to become upbeat, even at these low levels.
• Shares remain unattractive in my book despite the volatile trading action in recent weeks.

In May, I concluded that shares of Vapotherm ( VAPO ) were running out of air, following a big reversion of a pandemic induced boom in the shares. While shares rose on the back of the pandemic, the business has not thrived, in fact operating losses have risen over this period of time. Amidst lower revenues and substantial losses, no quick fixes were in sight as I am afraid that this conclusion still holds today.

A Recap

Vapotherm went public in 2018 on the back of its Hi-VNI product line, designed to help people which suffer from respiratory diseases. A non-invasive ventilator provides heated, humidified and oxygenated air through a nasal interface. On the back of 13,000 products installed at the time, shares traded around the $20 mark upon their debut.

These products are used by patients which suffer from related diseases which include COPD, asthma, pneumonia and even heart failure, with patients of each of these indications benefiting from additional oxygen being supplied. Compared to a traditional oxygen mask, administration in this manner is more efficient, more comfortable and less claustrophobic as well.

The company generated $35 million in sales in 2017 on which an operating loss of a similar amount was reported, and revenues rose in a modest fashion to $42 million in 2018 and $48 million in 2019.

At the outset of the pandemic shares fell to just $8 per share, translating into a mere $140 million operating asset valuation, equal to about 3 times sales. Non-convincing revenue growth and continued losses were the reason for the lackluster share price performance. Revenues jumped to $125 million upon the pandemic (for obvious reasons), but despite these spectacular top-line results operating losses only narrowed from $48 million to just $43 million. Despite the lackluster margin developments, shares still ended the year around $30 per share, driven by the strong top-line sales development, after having peaked at $50 during the summer of the year.

The company feared that the momentum was a thing of the past already as the company saw 2021 sales at just $85 million, with operating expenses set to exceed the expected revenue base, setting the company up for another year of substantial losses. In the end, revenues for 2021 came in at $113 million, down a bit compared to 2020, but much better than guided for. The trouble is that operating losses rose further to $57 million.

For 2022, Vapotherm guided for revenues to come in at $106 million, with again losses seen. Of course the pandemic was on its retreat, but many chronic breathing diseases are still prevalent and actually growing in the Western world, providing a secular demand driver over time.

That was about the good news as first quarter sales for 2022 only came in at $21.6 million, accompanied by a $19.9 million operating loss, and the company cut the full year sales guidance, now projecting revenues in the mid-$80 million, with gross margins seen around 35% and operating expenses seen around $100 million.

Given that bombshell update on the outlook, shares fell to just $3 per share. The resulting equity valuation of $75 million, or a $100 million valuation if we factor in a modest net debt load, indicates that the market has given up on the company as well. In fact, I called it a call option on a potential resurgence of the pandemic. Irony will it, the pandemic has actually been detrimental to the business causing much more disruption to the business than likely otherwise would have been the case. This is due to the company dealing with a demand explosion, incurring many expenses to facilitate the growth, while now being presented with the bill: an expensive cost base as demand cools down, while the demand surge did not result in any profits in the meantime.

Coming Down - And To Live Again

Since spring shares have come under further pressure to the point at which shares traded at just half a dollar in November. Perhaps some speculation or revival of the pandemic resulted in the shares recovering now trading at $2.50 per share again, just below the levels seen in May.

Second quarter results were dismal by all means with revenues only coming in at $13.0 million, a very poor result attributed de-stocking from the pandemic as the company posted huge losses and cut the full year guidance further. Early in November, third quarter results revealed some kind of stability with sales coming in at $13.5 million, yet these quarterly numbers were still accompanied by operating losses to the tune of $20 million, as I kindly exclude impairment charges in this already.

The problem with all of this is that the share count kept increasing to 27 million shares following some dilution, but moreover the company has incurred $71 million in net debt as a result of the heavy losses. The updated guidance for the year, with sales now seen at a midpoint of $65 million, reveals that fourth quarter sales are seen around $17 million. While this marks a sequential pickup in sales, it remains a dismal situation by all means.

Since the borrowers waived some covenants to fund the business in 2023, shares rallied from half a dollar in November to $2 and change here, which looks a like a huge move as the underlying news flow remains bad.

The third quarter results revealed some reasons to be upbeat as the company provided a peek into 2023. For the upcoming year cash expenses are set to fall from an expected $84 million in 2022 to $61 million. Of course, this still needs to be delivered upon. That said, losses are seen as the initial 2023 guidance calls for sales at a midpoint of $78 million and gross profits which are likely not able to cover the expense base.

Given all of this the situation remains very dire with no quick fixes in sight, making it very easy for me to continue to stay away from the stock.

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