VAPOTHERM INC [VAPO] Filings

10-Q 1 vapo-20220331.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-38740

Vapotherm, Inc.

(Exact name of registrant as specified in its charter)


Delaware	46-2259298
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Domain Drive
Exeter, N.H. (Address of principal executive offices)	03833 (Zip Code)

(603) 658-0011

(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
Common Stock, $0.001 par value per share	VAPO	New York Stock Exchange

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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	☐	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 26,563,525 outstanding common shares of Vapotherm, Inc.

Vapotherm, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2022

TABLE OF CONTENTS


		Page No.
Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements (interim periods unaudited)	5
	Condensed Consolidated Balance Sheets – March 31, 2022 and December 31, 2021	5
	Condensed Consolidated Statements of Comprehensive Loss – Three Months ended March 31, 2022 and 2021	6
	Condensed Consolidated Statements of Stockholders’ Equity – Three Months ended March 31, 2022 and 2021	7
	Condensed Consolidated Statements of Cash Flows – Three Months ended March 31, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4	Controls and Procedures	35

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	36
Item 1A	Risk Factors	36
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 5	Other Information	36
Item 6	Exhibits	38
Exhibit Index		38
Signatures		39

__________________

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.

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:

•

estimates regarding the annual total addressable market for our High Velocity Therapy systems and other products and services, future results of operations, financial position, capital requirements and our needs for additional financing;

•

commercial success and market acceptance of our High Velocity Therapy systems, our Oxygen Assist Module, our Vapotherm Access (formerly known as HGE Digital Health) applications and offerings, and any future products we may seek to commercialize;

•

the commercial and clinical success of our strategy to create a respiratory care "ecosystem," including our affiliation with RespirCare and other potential participants, and our ability to execute this strategy;

•

our ability to enhance our High Velocity Therapy technology, our Oxygen Assist Module, and our Vapotherm Access applications and offerings to expand our indications and to develop and commercialize additional products and services;

•

our business model and strategic plans for our products, technologies and business, including our implementation thereof;

•

the impact of the current COVID-19 pandemic and labor and hospital staffing shortages on our business and operating results;

•

our ability to accurately forecast customer demand for our products, adjust our production capacity if necessary and manage our inventory, particularly in light of the ongoing COVID-19 pandemic and current global supply chain disruptions;

•

our ability to expand, manage and maintain our direct sales and marketing organizations in the United States, Germany, the United Kingdom and any other jurisdictions in which we elect to pursue a direct sales model, and to market and sell our High Velocity Therapy systems globally and to market and sell our Oxygen Assist Module in the United States and throughout the world;

•

our plan to successfully transition all manufacturing operations from New Hampshire to Mexico and the
anticipated favorable effect thereof on our gross margins and costs and risks in connection therewith;

•

our ability to hire and retain our senior management and other highly qualified personnel;

•

our ability to obtain additional financing in the future;

•

our ability to commercialize or obtain regulatory approvals for our products, or the effect of delays in commercializing or obtaining regulatory approvals;

•

U.S. Food and Drug Administration or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including healthcare reform measures in the United States and international markets;

•

the timing or likelihood of regulatory filings and approvals;

•

our ability to establish, maintain, and use our intellectual property to protect our High Velocity Therapy technology, Oxygen Assist Module, and Vapotherm Access applications and offerings, and to prevent infringement of our intellectual property and avoid third party infringement claims;

•

the volatility of the trading price of our common stock; and

•

our expectations about market trends and their anticipated effect on our business and operating results.

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.

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	$	72,907		$	57,071
Accounts receivable, net		9,912			10,909
Inventories		38,048			36,562
Prepaid expenses and other current assets		4,909			5,205
Total current assets		125,776			109,747
Property and equipment, net		25,336			22,157
Operating lease right-of-use assets		7,770			7,045
Restricted cash		1,109			253
Goodwill		15,283			15,300
Intangible assets, net		4,245			4,398
Deferred income tax assets		8			78
Other long-term assets		1,027			1,107
Total assets	$	180,554		$	160,085
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	6,608		$	5,923
Contract liabilities		1,424			2,081
Accrued expenses and other current liabilities		15,375			28,559
Revolving loan facility		-			6,608
Total current liabilities		23,407			43,171
Long-term loans payable, net		96,491			39,726
Other long-term liabilities		6,727			10,521
Total liabilities		126,625			93,418
Commitments and contingencies (Note 10)
Stockholders' equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021		-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of March 31, 2022 and December 31, 2021, 26,559,819 and 26,126,253 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		27			26
Additional paid-in capital		453,612			443,358
Accumulated other comprehensive (loss) income		(29	)		26
Accumulated deficit		(399,681	)		(376,743	)
Total stockholders' equity		53,929			66,667
Total liabilities and stockholders’ equity	$	180,554		$	160,085

The accompanying notes are an integral part of these condensed consolidated financial statements.

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	$	21,622		$	32,308
Cost of revenue		13,730			15,140
Gross profit		7,892			17,168
Operating expenses
Research and development		5,549			4,910
Sales and marketing		13,322			13,900
General and administrative		8,954			8,059
Total operating expenses		27,825			26,869
Loss from operations		(19,933	)		(9,701	)
Other (expense) income
Interest expense		(1,747	)		(665	)
Interest income		17			29
Foreign currency loss		(69	)		(70	)
Loss on extinguishment of debt		(1,114	)		-
Net loss before income taxes	$	(22,846	)	$	(10,407	)
Provision for income taxes		92			-
Net loss	$	(22,938	)	$	(10,407	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(55	)		11
Total other comprehensive (loss) income	$	(55	)	$	11
Total comprehensive loss	$	(22,993	)	$	(10,396	)
Net loss per share - basic and diluted	$	(0.87	)	$	(0.40	)
Weighted-average number of shares used in calculating net loss per share, basic and diluted		26,321,087			25,796,065

The accompanying notes are an integral part of these condensed consolidated financial statements.

VAPOTHERM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share amounts)


					Additional		Accumulated Other
	Common Stock				Paid-in		Comprehensive			Accumulated			Stockholders'
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity
Balance at December 31, 2020		25,722,984	$	26	$	430,781	$	41		$	(316,943	)	$	113,905
Issuance of common stock upon exercise of options		77,892		-		761		-			-			761
Issuance of common stock with restricted stock units and awards		29,699		-		47		-			-			47
Issuance of common stock for services		3,633		-		110		-			-			110
Stock-based compensation expense		-		-		2,575		-			-			2,575
Foreign currency translation adjustment		-		-		-		11			-			11
Net loss		-		-		-		-			(10,407	)		(10,407	)
Balance at March 31, 2021		25,834,208	$	26	$	434,274	$	52		$	(327,350	)	$	107,002

Balance at December 31, 2021		26,126,253	$	26	$	443,358	$	26		$	(376,743	)	$	66,667
Issuance of common stock upon exercise of options		1,227		-		12		-			-			12
Issuance of common stock with restricted stock units and awards		60,488		-		10		-			-			10
Issuance of common stock for services		3,683		-		76		-			-			76
Issuance of common stock to satisfy contingent consideration		368,168		1		5,629		-			-			5,630
Issuance of common stock warrants		-		-		1,157		-			-			1,157
Stock-based compensation expense		-		-		3,370		-			-			3,370
Foreign currency translation adjustments		-		-		-		(55	)		-			(55	)
Net loss		-		-		-		-			(22,938	)		(22,938	)
Balance at March 31, 2022		26,559,819	$	27	$	453,612	$	(29	)	$	(399,681	)	$	53,929

The accompanying notes are an integral part of these condensed consolidated financial statements.

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	$	(22,938	)	$	(10,407	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense		3,446			2,685
Depreciation and amortization		1,391			1,574
Provision for bad debts		177			(156	)
Provision for inventory valuation		150			(12	)
Non-cash lease expense		519			422
Change in fair value of contingent consideration		(188	)		202
Loss on disposal of property and equipment		151			23
Amortization of discount on debt		139			32
Deferred income taxes		83			3
Loss on extinguishment of debt		1,114			-
Changes in operating assets and liabilities:
Accounts receivable		805			9,987
Inventories		(1,650	)		(7,042	)
Prepaid expenses and other assets		(927	)		(1,651	)
Accounts payable		84			870
Contract liabilities		(652	)		(1,730	)
Accrued expenses and other current liabilities		(11,882	)		(14,338	)
Operating lease liabilities, current and long-term		(293	)		(424	)
Net cash used in operating activities		(30,471	)		(19,962	)
Cash flows from investing activities
Purchases of property and equipment		(3,008	)		(2,256	)
Net cash used in investing activities		(3,008	)		(2,256	)
Cash flows from financing activities
Proceeds from loans, net of discount		99,094			-
Repayment of loans		(40,000	)		-
Payments of debt extinguishment costs		(817	)		-
Payment of debt issuance costs		(1,365	)		-
Repayments on revolving loan facility		(6,608	)		-
Payment of contingent consideration		(135	)		-
Proceeds from exercise of stock options		12			761
Net cash provided by financing activities		50,181			761
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(10	)		2
Net increase (decrease) in cash, cash equivalents and restricted cash		16,692			(21,455	)
Cash, cash equivalents and restricted cash
Beginning of period		57,324			115,536
End of period	$	74,016		$	94,081
Supplemental disclosures of cash flow information
Interest paid during the period	$	983		$	639
Property and equipment purchases in accounts payable and accrued expenses	$	1,581		$	263
Debt issuance costs in accounts payable and accrued expenses	$	202		$	-
Issuance of common stock to satisfy contingent consideration	$	5,630		$	-
Issuance of common stock warrants in conjunction with debt draw down	$	1,157		$	-
Issuance of common stock upon vesting of restricted stock units	$	10		$	47

The accompanying notes are an integral part of these condensed consolidated financial statements.

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.

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 one reporting segment, Vapotherm, Inc. and three reporting units, Vapotherm, Vapotherm UK and Vapotherm Access. Segment information is consistent with how the chief operating decision maker reviews the business, makes investing and resource allocation decisions and assesses operating performance.

The majority of the Company’s long-term assets are located in the United States. Long-term assets located outside the United States totaled $3.8 million and $2.4 million as of March 31, 2022 and December 31, 2021, respectively.

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

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 90 days or less to be cash equivalents. The Company holds restricted cash related to certificates of deposits and collateral in relation to lease agreements. As of March 31, 2022, $1.1 million of its $74.0 million of cash, cash equivalents and restricted cash balance was located outside the

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

United States. As of December 31, 2021, $1.1 million of its $57.3 million of cash, cash equivalents and restricted cash balance was located outside of the United States.

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, 2022		December 31, 2021
Cash and cash equivalents	$	72,907	$	57,071
Restricted cash		1,109		253
Total cash, cash equivalents, and restricted cash	$	74,016	$	57,324

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 five years to seven years. This prospective change had an immaterial impact on the Company’s results of operations for the three months ended March 31, 2021.

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 no impairments of property and equipment during the three months ended March 31, 2022 or 2021.

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 no impairments of intangible assets during the three months ended March 31, 2022 or 2021.

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 no impairment of goodwill during the three months ended March 31, 2022 and 2021.

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 one-year warranty on its capital equipment sales. Warranty costs are accrued based on actual historical trends and estimated at the time of sale. The warranty liability is included within accrued expenses and other current liabilities in the condensed consolidated balance sheets. A roll-forward of the Company’s warranty liability from December 31, 2021 to March 31, 2022 is as follows:


Balance at December 31, 2021	$	330
Provisions for warranty obligations		116
Settlements		(110	)
Balance at March 31, 2022	$	336

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 30 days from the date of sale.

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.

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.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying a practical expedient under ASC 606, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component during the three months ended March 31, 2022 and 2021.

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 $0.4 million and $0.7 million at March 31, 2022 and December 31, 2021, respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the sales-type or direct financing lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis over the term of the lease.

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 $0.4 million and $0.5 million, respectively.

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.

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 three years. For performance-based awards, the related compensation cost is amortized over the performance period on an accelerated attribution basis. Compensation cost associated with performance awards is based on fair value on the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved. Cumulative adjustments are recorded each quarter to reflect estimated outcomes of the performance-related conditions until the results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the expected life (weighted average period of time that the options granted are expected to be outstanding), the volatility of the Company’s common stock and an assumed risk-free interest rate. For the year ended December 31, 2021, expected volatility was calculated based on historical volatility of a group of publicly traded companies that the Company considers a peer group. Effective January 1, 2022, expected volatility is based on the historical volatility of the Company's common stock. The expected life is estimated using the simplified method for “plain vanilla” options. The risk-free interest rate is based on U.S. Treasury rates with a remaining term that approximates the expected life assumed at the date of grant. No dividend yield is assumed as the Company does not pay, and does not expect to pay, dividends on its common stock. The Company estimates forfeitures based on historical experience with pre-vested forfeitures. To the extent actual forfeitures differ from the estimate, the difference is recorded to compensation expense in the period of the forfeiture.

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.

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 $0.1 million and related to deferred tax liabilities for differences in the book and tax basis of indefinite-lived assets, partially offset by a benefit for net deferred income tax assets deemed more likely than not to be realized by our foreign subsidiaries. There was no provision or benefit for income taxes for the three months ended March 31, 2021 because the Company has historically incurred operating losses and maintains a full valuation allowance against its United States net deferred tax assets.

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 November 2, 2021, 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. The principal assets acquired included goodwill and property and equipment. The Company undertook the acquisition in order to increase the number of patients for Vapotherm Access remote patient monitoring service.

The purchase price, net of cash acquired, of $1.7 million was funded with cash payments of approximately $1.3 million and the settlement of $0.4 million of preexisting transactions. The acquisition has been accounted for as an acquisition of a business. The following table summarizes the preliminary purchase price allocation that includes the fair value of the separately identifiable assets acquired and liabilities assumed as of November 2, 2021:

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

VAPOTHERM INC [VAPO] Filings
10-Q	[2022-05-04]
10-K	[2022-02-24]
10-Q	[2021-11-03]
10-Q	[2021-08-09]
10-Q	[2021-05-05]
10-K	[2021-02-24]
10-Q	[2020-11-04]
10-Q	[2020-08-04]
10-Q	[2020-05-05]
10-K	[2020-03-04]
10-Q	[2019-11-05]
S-1	[2019-07-30]
10-Q	[2019-07-29]
10-Q	[2019-05-10]
10-K	[2019-03-22]
S-1	[2018-10-19]