UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _______ to _______
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
(Address of principal executive offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
|
☒ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
|
Emerging growth company |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of April 28, 2022, there were
Vapotherm, Inc.
Form 10-Q
For the Quarterly Period Ended March 31, 2022
TABLE OF CONTENTS
__________________
We use “Vapotherm,” “Vapotherm Access,” “High Velocity Therapy,” “HVT,” “Precision Flow,” “Hi-VNI,” “OAM,” “HGE,” “Vapotherm UK,” and other marks as trademarks in the United States and/or in other countries. This Quarterly Report on Form 10-Q contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.
Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe that the information from these third-party publications, research, surveys and studies included in this Quarterly Report on Form 10-Q is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. This data involves a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission (“SEC”) on February 24, 2022 and in our subsequent Quarterly Reports of Form 10-Q, including this Quarterly Report for the quarterly period ended March 31, 2022.
Unless the context requires otherwise, references to “Vapotherm,” the “Company,” “we,” “us,” and “our,” refer to Vapotherm, Inc. and our consolidated subsidiaries.
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words and the use of future dates. Forward-looking statements include, but are not limited to, statements concerning:
3
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on February 24, 2022 and in our other subsequent filings with the SEC, including this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VAPOTHERM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
|
(unaudited) |
|
|
|
|
||
Assets |
|
|
|
|
|
|
||
Current assets |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Inventories |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
Restricted cash |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Deferred income tax assets |
|
|
|
|
|
|
||
Other long-term assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
||
Current liabilities |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Contract liabilities |
|
|
|
|
|
|
||
Accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Revolving loan facility |
|
|
- |
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
||
Long-term loans payable, net |
|
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
(Note 10) |
|
|
|
|
|
|
||
Stockholders' equity |
|
|
|
|
|
|
||
Preferred stock ($ |
|
|
|
|
|
- |
|
|
Common stock ($ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Accumulated other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total stockholders' equity |
|
|
|
|
|
|
||
Total liabilities and stockholders’ equity |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Vapotherm, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share amounts)
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net revenue |
|
$ |
|
|
$ |
|
||
Cost of revenue |
|
|
|
|
|
|
||
Gross profit |
|
|
|
|
|
|
||
Operating expenses |
|
|
|
|
|
|
||
Research and development |
|
|
|
|
|
|
||
Sales and marketing |
|
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
|
||
Total operating expenses |
|
|
|
|
|
|
||
Loss from operations |
|
|
( |
) |
|
|
( |
) |
Other (expense) income |
|
|
|
|
|
|
||
Interest expense |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
||
Foreign currency loss |
|
|
( |
) |
|
|
( |
) |
Loss on extinguishment of debt |
|
|
( |
) |
|
|
- |
|
Net loss before income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
Provision for income taxes |
|
|
|
|
|
- |
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
||
Foreign currency translation adjustments |
|
|
( |
) |
|
|
|
|
Total other comprehensive (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Total comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss per share - basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted-average number of shares used in calculating net |
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
VAPOTHERM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share amounts)
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
|
|
|
|
|
|||||||||
|
|
Common Stock |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income (Loss) |
|
|
Deficit |
|
|
Equity |
|
||||||
Balance at December 31, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Issuance of common stock upon exercise of options |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Issuance of common stock with restricted stock units and |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Issuance of common stock for services |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Foreign currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
||
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance at December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Issuance of common stock upon exercise of options |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Issuance of common stock with restricted stock units |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Issuance of common stock for services |
|
|
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|||
Issuance of common stock to satisfy contingent |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||||
Issuance of common stock warrants |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
||
Foreign currency translation adjustments |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
VAPOTHERM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
||
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Provision for bad debts |
|
|
|
|
|
( |
) |
|
Provision for inventory valuation |
|
|
|
|
|
( |
) |
|
Non-cash lease expense |
|
|
|
|
|
|
||
Change in fair value of contingent consideration |
|
|
( |
) |
|
|
|
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
||
Amortization of discount on debt |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
|
||
Loss on extinguishment of debt |
|
|
|
|
|
- |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
||
Inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
|
|
|
|
||
Contract liabilities |
|
|
( |
) |
|
|
( |
) |
Accrued expenses and other current liabilities |
|
|
( |
) |
|
|
( |
) |
Operating lease liabilities, current and long-term |
|
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from investing activities |
|
|
|
|
|
|
||
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities |
|
|
|
|
|
|
||
Proceeds from loans, net of discount |
|
|
|
|
|
- |
|
|
Repayment of loans |
|
|
( |
) |
|
|
- |
|
Payments of debt extinguishment costs |
|
|
( |
) |
|
|
- |
|
Payment of debt issuance costs |
|
|
( |
) |
|
|
- |
|
Repayments on revolving loan facility |
|
|
( |
) |
|
|
- |
|
Payment of contingent consideration |
|
|
( |
) |
|
|
- |
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
||
Net cash provided by financing activities |
|
|
|
|
|
|
||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
|
|
|
( |
) |
|
Cash, cash equivalents and restricted cash |
|
|
|
|
|
|
||
Beginning of period |
|
|
|
|
|
|
||
End of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
||
Interest paid during the period |
|
$ |
|
|
$ |
|
||
Property and equipment purchases in accounts payable and accrued expenses |
|
$ |
|
|
$ |
|
||
Debt issuance costs in accounts payable and accrued expenses |
|
$ |
|
|
$ |
- |
|
|
Issuance of common stock to satisfy contingent consideration |
|
$ |
|
|
$ |
- |
|
|
Issuance of common stock warrants in conjunction with debt draw down |
|
$ |
|
|
$ |
- |
|
|
Issuance of common stock upon vesting of restricted stock units |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
1. Description of Business
Vapotherm, Inc. (the “Company”) is a global medical technology company primarily focused on the care of patients of all ages suffering from the respiratory distress often associated with complex lung diseases such as chronic obstructive pulmonary disease (“COPD”), congestive heart failure (“CHF”), pneumonia, asthma and COVID-19. The Company’s strategy is to become the world’s preeminent complex lung disease patient management company by combining digital, clinical and device solutions to create a healthcare ecosystem focused on improving the lives of complex lung disease patients while reducing the cost of their care. The Company’s device solutions are focused on High Velocity Nasal Insufflation (“HVNI”, or “High Velocity Therapy”), which delivers non-invasive ventilatory support to patients by providing heated, humidified, oxygenated air at high velocities through a small-bore nasal interface, and on closed loop control systems such as our Oxygen Assist Module, designed to automatically maintain SpO2 levels within a specified range for a defined period of time. The Company’s digital solutions are focused on at home patient monitoring, using proprietary algorithms to predict impending respiratory episodes before they occur and coordinate timely intervention, obviating the need for costly hospital admissions and minimizing patient distress. The Company’s clinical solutions include affiliations with leading pulmonologists and other clinicians, offering both in person and virtual care, as well as its own call center staffed by experienced nurses. While these device, digital and clinical solutions function independently, the Company believes leveraging the three together can create a unique healthcare ecosystem, focused on delivering high quality, efficient respiratory care.
High Velocity Therapy is an advanced form of high flow therapy that is differentiated due to its ability to deliver breathing gases, including oxygen, at a high velocity, for the treatment of spontaneously breathing patients with either Type 1 hypoxic respiratory distress, like that experienced by patients with pneumonia or COVID-19, or Type 2 hypercapnic respiratory distress, like that experienced by patients with COPD. The Company’s Precision Flow systems, which use High Velocity Therapy technology, are clinically validated alternatives to, and address many limitations of, the current standard of care for the treatment of respiratory distress in a hospital setting. The Company’s next generation High Velocity Therapy system, known as HVT 2.0, received 510k clearance from the FDA in 2021 and is currently in limited market release. The HVT 2.0 platform is approved for therapy in multiple settings of care, including the home.
In certain countries outside the United States, the Company currently offers its Oxygen Assist Module, or OAM, which launched in the United Kingdom, select European markets, and Israel in late 2020. The Oxygen Assist Module can be used with most versions of the Company’s Precision Flow system as well as the HVT 2.0. The Oxygen Assist Module helps clinicians maintain a patient’s pulse oxygen saturation, or SpO2, within a target SpO2 range over a greater period of time while requiring significantly fewer manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce the health risks associated with dosing too much, or too little, oxygen, particularly in neonates. In neonates, these risks include visual or developmental impairment or death.
The Company sells its Precision Flow systems to hospitals through a direct sales organization in the United States, the United Kingdom and Germany and through distributors in other select countries outside of those countries. The Oxygen Assist Module is sold through a direct sales organization in the United Kingdom and Germany and through distributors in Europe and the Middle East. The Company is in the process of seeking FDA approval to market the Oxygen Assist Module in the United States. In addition, the Company employs field-based clinical educators who focus on medical education and training in the effective use of its products and help facilitate increased adoption and utilization. The Company focuses on physicians, respiratory therapists and nurses who work in acute hospital settings, including emergency departments and adult, pediatric and neonatal intensive care units. The Company’s relationship with these clinicians is particularly important, as it enables the Company’s products to follow patients through the care continuum.
On November 2, 2021, HGE Health Care Solutions, LLC ("HGE") affiliated with a leading pulmonology practice in Tulsa, Oklahoma known as Pulmonary Care Innovations, PLLC d/b/a RespirCare (“RespirCare”). RespirCare provides in-person and virtual care to COPD and other respiratory distress patients in Oklahoma (and potentially other states with licensure reciprocity). This affiliation was structured as an acquisition of RespirCare’s management company, PCI Management Group LLC (“PCI”) and PCI’s arrangements with RespirCare and its physician shareholder. The Company consolidates PCI and RespirCare for accounting and tax purposes. See Note 3 “Business Combinations” to these condensed consolidated financial statements for details of this transaction.
9
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2021 Form 10-K and are updated, as necessary, in this report. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.
Principles of Consolidation
These condensed consolidated financial statements include the financial statements of Vapotherm UK Ltd ("Vapotherm UK," formerly Solus Medical Ltd.), a wholly owned subsidiary of the Company based in the United Kingdom, Vapotherm Deutschland GmbH, a wholly owned subsidiary of the Company located in Germany, HGE, a wholly owned subsidiary of the Company located in the United States, PCI, a wholly owned subsidiary of HGE which was acquired on November 2, 2021 located in the United States, and RespirCare, an affiliate of PCI located in the United States. All intercompany accounts and transactions have been eliminated upon consolidation.
Segment Information
Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company globally manages the business within
The majority of the Company’s long-term assets are located in the United States. Long-term assets located outside the United States totaled $
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates relied upon in preparing these condensed consolidated financial statements include calculation of stock-based compensation, valuation of warrants, fair values of acquired assets and liabilities, including goodwill and intangibles assets, realizability of inventories, allowance for bad debts, accrued expenses, including the fair value of contingent consideration, the valuation allowances against deferred income tax assets, and assessments of impairment with respect to long-lived and intangible assets. Actual results may differ from these estimates.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of March 31, 2022, and the condensed consolidated statements of comprehensive loss, stockholders’ equity and of cash flows for the three months ended March 31, 2022 and 2021 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2022 and the results of its operations and its cash flows for the three months ended March 31, 2022 and 2021. The financial data and other information disclosed in these notes related to the three months ended March 31, 2022 and 2021 are also unaudited. The results of operations for the three months
10
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
ended March 31, 2022 and 2021 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.
Reclassification
Certain amounts in 2021 have been reclassified to conform to the presentation in 2022. None of the reclassifications had any impact to the Company’s results of operations.
Financial Instruments and Concentrations of Credit Risk
As of March 31, 2022, the Company’s financial instruments were comprised of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt, the carrying amounts of which approximated fair value due to their short-term nature or market interest rates. All of the Company’s cash and cash equivalents are maintained at creditworthy financial institutions. At March 31, 2022, deposits exceed the amount of any insurance provided.
The Company extends credit to customers in the normal course of business but typically does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of its customers. An allowance for potentially uncollectible accounts is provided based on history, economic conditions, and composition of the accounts receivable aging. In some cases, the Company makes allowances for specific customers based on these and other factors. Provisions for the allowance for doubtful accounts are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive loss.
Supplier Risk
The Company obtains some of the components and subassemblies included in its Precision Flow systems and its Oxygen Assist Module from single source suppliers. The partial or complete loss of one or more of these suppliers could cause significant production delays, an inability to meet customer demand and a substantial loss in revenue.
Foreign Currency and Foreign Operations
The functional currency of the Company is the currency of the primary economic environment in which the entity operates, which is the U.S. dollar. For the Company’s non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of its foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
Realized foreign currency gains or losses arising from transactions denominated in foreign currencies are recorded in other (expense) income in the condensed consolidated statements of comprehensive loss. Unrealized foreign currency gains or losses arising from transactions denominated in foreign currencies are recorded in accumulated other comprehensive income (loss).
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid temporary investments purchased with original maturities of
11
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
United States. As of December 31, 2021, $
The following table presents the components of total cash, cash equivalents, and restricted cash as set forth in the Company’s condensed consolidated statements of cash flows:
|
|
March 31, |
|
|
December 31, |
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Total cash, cash equivalents, and restricted cash |
|
$ |
|
|
$ |
|
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recognized over the estimated useful lives of the related assets on a straight-line basis, except for tooling for which depreciation is recognized utilizing the units-of-production method. Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the remaining lease term or the estimated useful lives of the improvements and is included in depreciation expense. Demonstration equipment represents internally manufactured capital equipment that is used on-site at trade shows and at customer locations to demonstrate the Precision Flow system. Depreciation expense on demonstration equipment is recorded in sales and marketing expense in the condensed consolidated statements of comprehensive loss. Placement and evaluation systems represent capital equipment placed at customer locations under placement or evaluation agreements for which depreciation expense is included in cost of revenue in the accompanying condensed consolidated statements of comprehensive loss. Effective April 1, 2021, the Company changed the estimated useful life for certain of its demonstration, placement and evaluation units from
When impairment indicators are present, the Company evaluates the recoverability of its long-lived assets. If the assessment indicates an impairment, the affected assets are written down to fair value. There were
Intangible Assets
Intangible assets are related to customer relationships, developed technology, and customer agreements and are amortized on a straight-line basis over their useful lives. Amortization is recorded within sales and marketing expenses in the consolidated statements of comprehensive loss for customer-related intangible assets while amortization of other intangible assets is included within general and administrative expenses in the consolidated statements of comprehensive loss. Intangible assets are evaluated for impairment whenever events or circumstances indicate an asset may be impaired. There were
Goodwill
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting in a business combination. Goodwill is not amortized but reviewed for impairment. Goodwill is reviewed annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.
The Company compares the fair value of its reporting units to their carrying values. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of the reporting unit, the Company would record an impairment loss equal to the difference. There was
12
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
Product Warranty
The Company provides its customers with a standard
Balance at December 31, 2021 |
|
$ |
|
|
Provisions for warranty obligations |
|
|
|
|
Settlements |
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
|
Revenue Recognition
The Company’s revenue is primarily derived from the sale of products, leases and services. Product revenue consists of capital equipment and single-use disposables that are shipped and billed to customers both domestically and internationally. The Company’s main capital equipment products are the Precision Flow systems, the Vapotherm Transfer Unit 2.0 and Q50 compressor. The Company’s main disposable products are single-use disposables and nasal interfaces, or cannulas, and adaptors. Lease revenue consists of two components which include capital equipment that the Company leases to its customers and, in certain situations, an allocation from disposable revenue to other lease revenue upon the sale of disposable products in bundled arrangements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. Service revenue consists of fees associated with routine service of capital units and the sale of extended service contracts and preventative maintenance plans, which are purchased by a small portion of the Company’s customer base. In addition, the Company sells small quantities of component parts in the United States, United Kingdom, and to third-party international service centers who provide service on Precision Flow capital units outside of the United States and United Kingdom. Service revenue also includes fees from remote patient monitoring services sold through Vapotherm Access. Freight revenue is based upon actual freight costs plus a percentage markup of such costs associated with the shipment of products domestically, and to a lesser extent, internationally, and is included in service revenue. Rebates and fees consist of contractually obligated administrative fees and percentage-of-sales rebates paid to Group Purchasing Organizations (“GPOs”), Integrated Delivery Networks (“IDNs”) and distributor partners and accounted for as a reduction of revenue.
Under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codifications (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and assesses whether each promised good or service is distinct and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value-added, and other taxes collected on behalf of third parties are excluded from revenue. The Company’s standard payment terms are generally
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative stand-alone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the stand-alone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Revenue is generally recognized when the customer obtains control of the Company’s product, which generally occurs at a point in time upon shipment based on the contractual shipping terms of a contract.
13
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
Product and service revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value amount method to which the Company expects to be entitled. As such, revenue on sales is recorded net of prompt pay discounts and payments made to GPOs, IDNs and distributors. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determination of whether to include estimated amounts in the transaction price is based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company believes that the estimates it has established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in different estimates.
The Company’s contracts with its customers have a duration of less than one year. Therefore, the Company has elected to apply a practical expedient and recognizes the incremental costs of obtaining contracts as an expense. These costs are included in sales and marketing expense in the accompanying condensed consolidated statements of comprehensive loss.
Lease Revenue
The Company also enters into agreements to lease its capital equipment. For such sales, the Company accounts for revenue under ASC 842, Leases (“ASC 842”), and assesses and classifies these transactions as sales-type or operating leases based on whether the lease transfers ownership of the equipment to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term. Equipment included in arrangements including transfer of title are accounted for as sales-type leases and the Company recognizes the present value of the lease payments due over the lease term as revenue at the inception of the lease. The Company records the present value of future lease payments in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets; these amounts totaled $
The Company also enters into agreements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. In these bundled arrangements, revenue recognized for the sale of the disposables is allocated between disposable revenue and other lease revenue based on the estimated relative stand-alone selling prices of the individual performance obligations.
Shipping and Handling Costs
Amounts billed to customers for shipping and handling are included in service revenue. Shipping and handling costs are included in costs of sales. The total costs of shipping and handling for the three months ended March 31, 2022 and 2021 were $
Sales and Value-Added Taxes
When required by local jurisdictions, the Company bills its customers for sales tax and value-added tax calculated on each sales invoice and records a liability for the sales and value-added tax payable, which is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. Sales tax and value-added tax billed to a customer are not included in the Company’s revenue.
14
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
Stock-Based Compensation
The Company maintains an equity incentive plan to provide long-term incentives for employees, consultants, and members of the board of directors. The plan allows for the issuance of non-statutory and incentive stock options, restricted stock, unrestricted stock, stock units, including restricted stock units and performance stock units, and stock appreciation rights to employees, consultants and non-employee directors. The Company recognizes stock-based compensation expense for awards of equity instruments to employees and non-employees based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation (“ASC 718”). ASC 718 requires all equity-based compensation awards, including grants of restricted stock, restricted stock units and stock options, to be recognized as expense in the condensed consolidated statements of comprehensive loss based on their grant date fair values.
The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units is measured at the market value of the related shares of the Company’s common stock on the grant date. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period and is generally
The Company recognizes stock-based expense for shares of its common stock issued pursuant to the Vapotherm, Inc. 2018 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the related offering period. The Company estimates the fair value of shares to be issued under the ESPP based on a combination of options valued using the Black-Scholes option pricing model. The expected life is determined based on the contractual term. Dividend yield, risk-free interest rate, forfeiture rates, and expected volatility are estimated in a manner similar to option grants described above.
Income Tax
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the condensed consolidated financial statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the condensed consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
15
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
The Company’s major tax jurisdictions are the states of New Hampshire and Pennsylvania, and the United States, United Kingdom, and Germany. The provision for income taxes for the three months ended March 31, 2022 totaled $
Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”) due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income and reduce taxes, respectively. The Company has not currently completed an evaluation of ownership changes through December 31, 2021 to assess whether utilization of the Company’s net operating loss and tax credit carryforwards would be subject to an annual limitation under Sections 382 and 383 of the Code. To the extent an ownership change is determined to have occurred under Sections 382 and 383 of the Code, the net operating loss and tax credit carryforwards may be subject to limitation.
Recently Issued Accounting Pronouncements
Credit Losses (Topic 326):
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used and establishes additional disclosures related to credit risks. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivative and Hedging (Topic 815) and Leases (Topic 842), which defers the effective date for ASU 2016-13 to interim and annual periods beginning after December 15, 2022 for private companies, emerging growth companies following private company adoption dates, or public entities meeting the definition of smaller reporting companies as of the date of issuance of this update. Since the Company met the definition of a smaller reporting company as of the date of issuance of this update, the Company is not required to adopt ASU 2016-13 until January 1, 2023. The Company has not yet determined the effects, if any, that the adoption of ASU 2016-13 and subsequent amendments to this standard may have on its financial position, results of operations, cash flows, or disclosures.
3. Business Combination
On
The purchase price, net of cash acquired, of $
16
VAPOTHERM, INC.
Notes to Unaudited Condensed Consolidated Financial Statements