VAPOTHERM INC - Quarter Report: 2021 June (Form 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 June 30, 2021

☐ 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 July 29, 2021, there were 26,006,883 outstanding common shares of Vapotherm, Inc.

Vapotherm, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2021

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 – June 30, 2021and December 31, 2020	5
	Condensed Consolidated Statements of Comprehensive Loss – Three and Six Months ended June 30, 2021 and 2020	6
	Condensed Consolidated Statements of Stockholders’ Equity – Three and Six Months ended June 30, 2021 and 2020	7
	Condensed Consolidated Statements of Cash Flows – Six Months ended June 30, 2021 and 2020	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4	Controls and Procedures	36

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	37
Item 1A	Risk Factors	37
Item 6	Exhibits	38
Exhibit Index		38
Signatures		39

__________________

We use “Vapotherm,” “Vapotherm Access,” “High Velocity Therapy,” “HVT,” “Precision Flow,” “Hi-VNI,” “OAM,” “HGE,” “Solus Medical,” 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 filed with the Securities and Exchange Commission (“SEC”) on February 24, 2021 and in our Quarterly Reports of Form 10-Q, including this Quarterly Report for the quarter ended June 30, 2021.

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 Precision Flow systems, future results of operations, financial position, capital requirements and our needs for additional financing;

•

commercial success and market acceptance of our Precision Flow 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;

•

competitive companies and technologies in our industry and our ability to compete successfully;

•

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 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;

•

our ability to expand, manage and maintain our direct sales and marketing organizations in the United States, Germany and United Kingdom, and to market and sell our Precision Flow systems globally and to expand our limited release and eventually to market and sell our Oxygen Assist Module throughout the United Kingdom, Europe, and the Middle East;

•

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, Precision Flow systems, Oxygen Assist Module, and Vapotherm Access applications and offerings or avoid claims of infringement;

•

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 filed with the SEC on February 24, 2021 and in our other filings with the SEC. 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)

	June 30, 2021			December 31, 2020
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	81,488		$	113,683
Accounts receivable, net		8,498			23,488
Inventories		29,355			19,873
Prepaid expenses and other current assets		5,117			5,041
Total current assets		124,458			162,085
Property and equipment, net		21,617			20,573
Operating lease right-of-use assets		7,401			8,260
Restricted cash		253			1,853
Goodwill		14,012			16,226
Intangible assets, net		5,042			5,694
Other long-term assets		1,172			967
Total assets	$	173,955		$	215,658
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	5,088		$	4,967
Contract liabilities		1,361			2,977
Accrued expenses and other current liabilities		19,284			34,033
Revolving loan facility, current portion		1,170			-
Total current liabilities		26,903			41,977
Long-term loans payable, net		39,689			39,653
Revolving loan facility, net of current portion		1,726			4,888
Deferred income tax liabilities		8			6
Other long-term liabilities		12,403			15,229
Total liabilities		80,729			101,753
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2021 and December 31, 2020		-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of June 30, 2021 and December 31, 2020, 25,956,505 and 25,722,984 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		26			26
Additional paid-in capital		437,758			430,781
Accumulated other comprehensive income		59			41
Accumulated deficit		(344,617	)		(316,943	)
Total stockholders' equity		93,226			113,905
Total liabilities and stockholders’ equity	$	173,955		$	215,658

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 June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Net revenue	$	20,625		$	35,152		$	52,933		$	54,267
Cost of revenue		11,218			17,544			26,358			27,442
Gross profit		9,407			17,608			26,575			26,825
Operating expenses
Research and development		4,577			3,895			9,487			7,257
Sales and marketing		12,804			14,858			26,704			28,175
General and administrative		8,627			5,627			16,686			10,878
Total operating expenses		26,008			24,380			52,877			46,310
Loss from operations		(16,601	)		(6,772	)		(26,302	)		(19,485	)
Other (expense) income
Foreign currency loss		(60	)		(25	)		(130	)		(1	)
Interest income		24			60			53			185
Interest expense		(648	)		(1,295	)		(1,313	)		(2,590	)
Other		18			-			18			15
Net loss	$	(17,267	)	$	(8,032	)	$	(27,674	)	$	(21,876	)
Other comprehensive income (loss):
Foreign currency translation adjustments		7			(4	)		18			(75	)
Total other comprehensive income (loss)	$	7		$	(4	)	$	18		$	(75	)
Total comprehensive loss	$	(17,260	)	$	(8,036	)	$	(27,656	)	$	(21,951	)
Net loss per share - basic and diluted	$	(0.67	)	$	(0.35	)	$	(1.07	)	$	(0.99	)
Weighted-average number of shares used in calculating net loss per share, basic and diluted		25,887,313			23,090,613			25,841,944			21,986,774

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		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 adjustments		-		-		-		11		-			11
Net loss		-		-		-		-		(10,407	)		(10,407	)
Balance at March 31, 2021		25,834,208	$	26	$	434,274	$	52	$	(327,350	)	$	107,002

Issuance of common stock upon exercise of options		14,577		-		156		-		-			156
Issuance of common stock with restricted stock units and awards		51,617		-		44		-		-			44
Issuance of common stock under the Employee Stock Purchase Plan		55,558		-		851		-		-			851
Issuance of common stock for services		545		-		13		-		-			13
Stock-based compensation expense		-		-		2,420		-		-			2,420
Foreign currency translation adjustments		-		-		-		7		-			7
Net loss		-		-		-		-		(17,267	)		(17,267	)
Balance at June 30, 2021		25,956,505	$	26	$	437,758	$	59	$	(344,617	)	$	93,226

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, 2019		20,851,531	$	21	$	319,115	$	44		$	(265,441	)	$	53,739
Issuance of common stock upon exercise of options		24,687		-		40		-			-			40
Issuance of common stock with restricted stock units and awards		34,265		-		58		-			-			58
Issuance of common stock for services		6,666		-		77		-			-			77
Stock-based compensation expense		-		-		1,370		-			-			1,370
Foreign currency translation adjustment		-		-		-		(71	)		-			(71	)
Net loss		-		-		-		-			(13,844	)		(13,844	)
Balance at March 31, 2020		20,917,149	$	21	$	320,660	$	(27	)	$	(279,285	)	$	41,369

Issuance of common stock in connection with public offering, net		3,852,500		4		93,823		-			-			93,827
Issuance of common stock in connection with at-the-market offering, net		511,648		1		9,783		-			-			9,784
Issuance of common stock under Employee Stock Purchase Plan		36,389		-		359		-			-			359
Issuance of common stock upon exercise of options		99,206		-		227		-			-			227
Issuance of common stock upon exercise of warrants		41,066		-		-		-			-			-
Issuance of common stock with restricted stock units and awards		31,114		-		53		-			-			53
Issuance of common stock for services		3,986		-		72		-			-			72
Stock-based compensation expense		-		-		1,305		-			-			1,305
Foreign currency translation adjustment		-		-		-		(4	)		-			(4	)
Net loss		-		-		-		-			(8,032	)		(8,032	)
Balance at June 30, 2020		25,493,058	$	26	$	426,282	$	(31	)	$	(287,317	)	$	138,960

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

VAPOTHERM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Six Months Ended June 30,
	2021			2020
Cash flows from operating activities
Net loss	$	(27,674	)	$	(21,876	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense		5,118			2,824
Depreciation and amortization		2,863			2,148
Provision for bad debts		(202	)		282
Provision for inventory valuation		(183	)		(327	)
Non-cash lease expense		861			518
Change in fair value of contingent consideration		763			-
Loss on disposal of property and equipment		40			3
Amortization of discount on debt		64			127
Deferred income taxes		7			-
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		15,195			(8,542	)
Inventories		(9,286	)		(9,204	)
Prepaid expenses and other assets		(281	)		(547	)
Accounts payable		(308	)		3,380
Contract liabilities		(1,664	)		868
Accrued expenses and other current liabilities		(14,856	)		6,189
Operating lease liabilities, current and long-term		(859	)		(518	)
Net cash used in operating activities		(30,402	)		(24,675	)
Cash flows from investing activities
Purchases of property and equipment		(3,156	)		(3,839	)
Net cash used in investing activities		(3,156	)		(3,839	)
Cash flows from financing activities
Proceeds from short-term line of credit		-			995
Payments on short-term line of credit		(1,993	)		-
Proceeds from exercise of stock options		917			267
Proceeds from issuance of common stock in connection with public offering		-			94,156
Proceeds from issuance of common stock in connection with at-the-market offering		-			9,926
Proceeds from issuance of common stock under Employee Stock Purchase Plan		851			359
Common stock offering costs		-			(471	)
Net cash provided by (used in) financing activities		(225	)		105,232
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(12	)		(28	)
Net increase (decrease) in cash, cash equivalents and restricted cash		(33,795	)		76,690
Cash, cash equivalents and restricted cash
Beginning of period		115,536			73,507
End of period	$	81,741		$	150,197
Supplemental disclosures of cash flow information
Interest paid during the period	$	1,249		$	2,422
Property and equipment purchases in accounts payable and accrued expenses	$	442		$	341
Issuance of common stock upon vesting of restricted stock units	$	91		$	111

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 development and commercialization of its proprietary High Velocity Therapy products that are used to treat patients of all ages suffering from respiratory distress. The Company’s High Velocity Therapy delivers non-invasive ventilatory support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. The Company’s Precision Flow systems, which use High Velocity Therapy, 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 offers four versions of its Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision Flow Heliox. In certain countries outside of the United States, the Company offers the Oxygen Assist Module, which was launched in the United Kingdom, select European markets, and Israel in late 2020 and is now available in 18 countries. The Oxygen Assist Module, in addition to disposables, includes subscription-based revenue which increases the revenue per installed unit. The Company generates revenue from sales of its Precision Flow systems and related disposable products utilized with its Precision Flow systems. The Company also generates revenue from sales of its Precision Flow system’s companion products, which include the Vapotherm Transfer Unit 2.0, the Q50 compressor and various adapters. The Company offers different options to its hospital customers for acquiring Precision Flow capital units, ranging from the purchase of the Precision Flow capital units with payment in full at the time of purchase, to financed purchases of the Precision Flow capital units, to bundled discounts 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.

The Company sells Precision Flow systems to hospitals through a direct sales force in the United States, the United Kingdom, and Germany and through distributors in select other countries outside of these three countries. In addition, the Company utilizes clinical educators who are typically experienced users of high velocity therapy and who focus on medical education efforts to facilitate adoption and increase utilization. The Company is focused on physicians, respiratory therapists and nurses who work in acute hospital settings, including the emergency department (“ED”) and adult, pediatric and neonatal intensive care units (the “ICUs”). The Company’s relationship with these clinicians is particularly important, as it enables its products to follow patients through the care continuum.

In March 2020, the World Health Organization declared a global pandemic related to the novel coronavirus (“COVID-19”). The Company’s high velocity therapy is a first-line therapy for treating respiratory distress, which is experienced by many COVID-19 patients. The Company’s hospital customers around the world are using the Company’s technology to support the respiratory distress experienced by many COVID-19 patients so that they can triage their sickest patients using a limited number of ventilators. As a result, the Company experienced a significant increase in worldwide demand for its products from both new and existing accounts in 2020 and during the first quarter of 2021, as compared to prior year periods. The full extent to which the COVID-19 pandemic will continue to impact the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and variants of the virus and the actions taken to treat or contain COVID-19 or to otherwise limit its impact, including the availability and effectiveness of vaccines, among other factors.

On November 13, 2020, the Company acquired HGE Health Care Solutions LLC (“HGE”). The Company undertook the acquisition to expand its capabilities by providing a remote monitoring platform designed to empower respiratory patients with chronic obstructive pulmonary disease (“COPD”), as well as payors and providers, to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life. HGE was rebranded to Vapotherm Access (“Vapotherm Access”) during the second quarter of 2021. See Note 3 “Business Combination” 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, 2020 (the “2020 Form 10-K”). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2020 Form 10-K and 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 Solus Medical Ltd. (“Solus”), a wholly owned subsidiary of the Company based in the United Kingdom, HGE, a wholly owned subsidiary of the Company located in the United States, and Vapotherm Deutschland GmbH, a wholly owned subsidiary of the Company located in Germany. 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, Solus and Vapotherm Access. Segment information is consistent with how management 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 $1.9 million and $1.7 million as of June 30, 2021 and December 31, 2020, 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 and estimated incurred but not reported insurance obligations, and the valuation allowances against deferred income tax assets. Actual results may differ from these estimates.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2021, and the condensed consolidated statements of comprehensive loss, stockholders’ equity and of cash flows for the three and six months ended June 30, 2021 and 2020 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 June 30, 2021 and the results of its operations and its cash flows for the three and six months ended June 30, 2021 and 2020. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2021 and 2020 are also unaudited. The results of operations for the three and six

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

months ended June 30, 2021 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Reclassification

Certain amounts in 2020 have been reclassified to conform to the presentation in 2021. None of the reclassifications had any impact to the Company’s results of operations.

Financial Instruments and Concentrations of Credit Risk

As of June 30, 2021, 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 June 30, 2021, deposits exceeded the amount of any federal depository 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.

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 June 30, 2021, $1.0 million of its $81.7 million of cash, cash equivalents and restricted cash balance was located outside 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:

	June 30, 2021		December 31, 2020
Cash and cash equivalents	$	81,488	$	113,683
Restricted cash		253		1,853
Total cash, cash equivalents, and restricted cash	$	81,741	$	115,536

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

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 prospectively beginning on January 1, 2021. The Company changed to the units-of-production method to better reflect the pattern of economic consumption of the tooling. The prospective change to the units-of-production depreciation method had an immaterial impact on the Company’s results of operations for the three and six months ended June 30, 2021. 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 and six months ended June 30, 2021

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 liabilities in the condensed consolidated balance sheets. A roll-forward of the Company’s warranty liability from December 31, 2020 to June 30, 2021 is as follows:

Balance at December 31, 2020	$	561
Provisions for warranty obligations		14
Settlements		(207	)
Balance at June 30, 2021	$	368

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 adapters. 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, the sale of extended service contracts and preventative maintenance plans, which are purchased by a small portion of the Company’s customer base, and revenue related to Vapotherm Access’s “software as a service” platform. In addition, the Company sells small quantities of component parts in the United States, United Kingdom, and Germany and to third-party international service centers who provide service on Precision Flow capital units outside of these three countries. 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 service revenue.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

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.

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 and six months ended June 30, 2021 or 2020.

The Company’s contracts with its customers generally 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 automatic transfer of title at or shortly after the end of the lease term or contains a bargain purchase options. 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 $1.2 million and $2.7 million at June 30, 2021 and December 31, 2020, 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 obligation.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

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 June 30, 2021 and 2020 were $0.2 and $0.8 million, respectively, and for the six months ended June 30, 2021 and 2020 were $0.7 million and $1.1 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 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.

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 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 shares, 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 is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. 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. Expected volatility is calculated based on historical volatility of a group of publicly traded companies that the Company considers a peer group. 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 its 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 and forfeiture rates are estimated in a manner similar to option grants described above and expected volatility is based on the Company’s historical volatility.

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.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

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.

The Company’s major tax jurisdictions are the states of New Hampshire and Pennsylvania, and the United States, United Kingdom, and Germany. There is no provision or benefit for income taxes for the three or six months ended June 30, 2021 or 2020 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, 2020 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 may have on its financial position, results of operations, cash flows, or disclosures.

3. Business Combination

On November 13, 2020, the Company completed the acquisition of all outstanding membership interests of HGE, whose principal assets included intangible assets related to customer relationships, developed technology, trademarks and trade names. The Company undertook the acquisition to expand its capabilities by providing a remote monitoring platform which is designed to empower respiratory patients with COPD and providers to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life.

The purchase price, net of cash acquired, of $19.3 million was funded with an initial cash payment of $8.4 million and $10.9 million of contingent consideration. The contingent consideration is payable in cash or common stock, at the sole discretion of the Company, and will be remitted in future milestone payments, one following calendar year 2021, one following calendar year 2022, and one following calendar year 2023. The final three payments will be adjusted up or down based on the revenue performance of certain Vapotherm Access service offerings during those three years. The acquisition has been accounted for as an acquisition of a business.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

The Company is in the process of finalizing its valuation of the assets acquired and liabilities assumed. During the three months ended March 31, 2021, the Company recorded an adjustment to correct immaterial errors related to the acquisition which reduced the purchase price by $2.3 million and decreased goodwill, intangible assets and other liabilities by $2.2 million, $0.3 million and $0.3 million, respectively. The following table summarizes the corrected preliminary purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities assumed as of November 13, 2020:

Cash	$	2
Accounts receivable		518
Inventory		3
Prepaids and other current assets		238
Property and equipment		225
Operating lease right-of-use assets		2,329
Goodwill		13,398
Intangible assets		5,180
Other long-term assets		45
Total assets acquired		21,938
Accounts payable		(32	)
Accrued expenses and other liabilities		(620	)
Contract liabilities		(31	)
Other long-term liabilities		(1,951	)
Total liabilities assumed		(2,634	)
Total purchase price	$	19,304

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed may be subject to change as additional information is received. The Company expects to finalize the purchase price allocation as soon as practicable, but not later than one year from the acquisition date.

The fair value of the intangible asset associated with customer relationships was estimated using a discounted cash flow method with the application of the multi-period excess earnings method. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable to only the subject intangible assets after deducting contributory asset charges. An income and expense forecast was built based upon specific intangible asset revenue and expense estimates. The fair value of the intangible asset associated with developed technology, trademarks and trade names was valued using the relief from royalty method. Under this method, an intangible asset’s fair value is equal to the present value of the estimated after-tax royalty savings generated over the life of the assets. Royalty rates were selected based on market review of third-party licensing arrangements. The fair value of the contingent consideration was valued based on a Monte-Carlo simulation of Vapotherm Access’s estimated future revenue discounted to its present value.

The rate used to discount the estimated future net cash flows to their present values for each intangible asset was based upon a weighted average cost of capital calculation. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the assets acquired from HGE.

The amortization period for each of the intangible assets is 10 years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such assets. Goodwill associated with the acquisition was primarily attributable to the expansion opportunity of the remote monitoring platform for respiratory patients and providers. The goodwill is deductible for tax purposes.

The Company has included the financial results of Vapotherm Access in the condensed consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were approximately $0.2 million and were recorded in general and administrative expense as incurred during 2020.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

The following table summarizes changes to the contingent consideration payable, a recurring Level 3 measurement, for the six months ended June 30, 2021:

Balance at December 31, 2020	$	13,187
Change in value of contingent consideration based on correction of purchase price calculation		(2,258	)
Change in fair value of contingent consideration		763
Balance at June 30, 2021	$	11,692

The change in fair value of contingent consideration totaled $0.6 million and $0.8 million for the three and six months ended June 30, 2021, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of comprehensive loss.

Pro Forma Financial Information

The following unaudited pro forma information for the three and six months ended June 30, 2020 presents consolidated information as if the HGE acquisition occurred on January 1, 2020, which was the first day of the Company’s fiscal year 2020:

	Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
Net revenue	$	35,623		$	54,998
Net loss	$	(9,113	)	$	(23,330	)
Net loss per share, basic	$	(0.39	)	$	(1.06	)

4. Fair Value Measurements

In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company generally defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

•

Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

•

Level 3 – unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date.

As of June 30, 2021, the Company had two items, cash equivalents and contingent consideration, measured at fair value on a recurring basis. The Company’s cash equivalents primarily consist of money market deposits which total approximately $60.6 million at June 30, 2021 and are valued based on Level 1 of the fair value hierarchy. The Company’s contingent consideration which totals $11.7 million at June 30, 2021 relates to the 2020 acquisition of HGE and is valued based on Level 3 of the fair value hierarchy as describe in Note 3 “Business Combination.” There were no transfers in and out of Level 1, 2 or 3.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

5. Accounts Receivable

Accounts receivable consists of the following:

	June 30, 2021			December 31, 2020
United States	$	5,665		$	18,893
International		2,936			4,967
Total accounts receivable		8,601			23,860
Less: Allowance for doubtful accounts		(103	)		(372	)
Accounts receivable, net of allowance for doubtful accounts	$	8,498		$	23,488

One customer accounted for 25% and 15% of net revenue for the three and six months ended June 30, 2021, respectively. No individual customer accounted for 10% or more of net revenue for the three or six months ended June 30, 2020. No individual customers accounted for 10% or more of total accounts receivable at June 30, 2021 or December 31, 2020.

6. Inventories

Inventories consist of the following:

	June 30, 2021		December 31, 2020
Component parts	$	16,518	$	10,367
Finished goods		12,837		9,506
Total inventories	$	29,355	$	19,873

7. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill and intangible assets during 2021 are as follows:

	Goodwill			Intangible Assets
Balance at December 31, 2020	$	16,226		$	5,694
Change in value based on correction of purchase price calculation and allocation		(2,222	)		(340	)
Amortization	-				(315	)
Foreign currency exchange rate changes		8			3
Balance at June 30, 2021	$	14,012		$	5,042

The following table presents a summary of acquired intangible assets:

	As of June 30, 2021
	Weighted Average Amortization Period in Years		Gross Carrying Amount		Accumulated Amortization
Customer relationships		10.00	$	2,420	$	(151	)
Developed technology		10.00		2,400		(150	)
Customer agreements		3.83		456		(270	)
Trade name / marks		10.00		360		(23	)
Total identifiable intangible assets		9.50	$	5,636	$	(594	)

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

The Company recognized $0.1 million and less than $0.1 million of amortization expense within sales and marketing expenses related to the intangible assets during the three months ended June 30, 2021 and 2020, respectively, and recognized $0.2 million and $0.1 million of amortization expense within sales and marketing expense related to intangible assets during the six months ended June 30, 2021 and 2020, respectively. The Company also recognized $0.1 million of amortization expense within general and administrative expenses related to intangible assets during each of the three and six months ended June 30, 2021, with no such amounts being recorded within general and administrative expenses during the three or six months ended June 30, 2020.

8. Debt

Current Credit Facilities

On October 21, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) which provides for a revolving loan facility of $12.0 million (the “Revolving Facility”) and a term loan facility of $40.0 million (the “Term Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the Facilities were used to repay the Company’s former revolving loan facility and term loan facility, described in more detail below.

The Revolving Facility will mature on October 21, 2022 and may be renewed on an annual basis thereafter by mutual agreement of the Company and CIBC. The Revolving Facility bears interest at a floating rate per annum equal to the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and is subject to a floor of 3.25%. At June 30, 2021, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $2.9 million at June 30, 2021 and there were letters of credit of $1.2 million outstanding at June 30, 2021. Availability under the Revolving Facility is determined based on eligible receivables reduced by letters of credit outstanding. At June 30, 2021, there were no additional borrowings available under the Revolving Facility.

The Term Facility will mature on October 21, 2025. Advances under the Term Facility bear interest at a floating rate equal to the WSJ Prime Rate plus 2.5% and is subject to a floor of 3.25%. At June 30, 2021, the interest rate was 5.75%. The outstanding balance was $40.0 million at June 30, 2021. The Loan Agreement provides for interest-only payments on the Term Facility for the first 36 months through October 21, 2023. Thereafter, amortization payments on the Term Facility will be payable monthly in 24 equal installments. The Term Facility may not be prepaid prior to October 21, 2021 without prepaying all of the interest that otherwise would have been payable on the Term Facility during the period commencing on October 21, 2020 and ending on October 21, 2021, plus a prepayment charge of 2.0%. Thereafter, the Term Facility may be prepaid in full, subject to a prepayment charge of (i) 2.0%, if such prepayment occurs after October 21, 2021 but on or prior to October 21, 2022, and (ii) 1.0%, if such prepayment occurs after October 21, 2022 but on or prior to October 21, 2023. The Term Facility and Revolving Facility are secured by a lien on substantially all of the Company’s assets, including intellectual property.

The Loan Agreement contains customary covenants and representations, including, without limitation, a minimum revenue covenant equal to 80% of each year’s annual operating plan (tested on a trailing twelve month basis at the end of each fiscal quarter) and other financial covenants, reporting obligations, and limitations on dispositions, changes in business or ownership, mergers or acquisitions, indebtedness, encumbrances, distributions and investments, transactions with affiliates and capital expenditures.

The events of default under the Loan Agreement include, without limitation, and subject to customary grace periods, (1) the Company’s failure to make any payments of principal or interest under the Loan Agreement or other loan documents, (2) the Company’s breach or default in the performance of any covenant under the Loan Agreement, (3) the occurrence of a material adverse effect or an event that is reasonably likely to result in a material adverse effect, (4) the existence of an attachment or levy on a material portion of funds of the Company or its subsidiaries, (5) the Company’s insolvency or bankruptcy, or (6) the occurrence of certain material defaults with respect to any other of the Company’s indebtedness in excess of $500,000. If an event of default occurs, CIBC is entitled to take enforcement action, including acceleration of amounts due under the Loan Agreement. The Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. CIBC has indemnification rights and the right to assign the Facilities, subject to customary restrictions.

As of June 30, 2021, the Company was in compliance with all covenants under the Loan Agreement.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

The annual principal maturities of the Company’s term loans as of June 30, 2021 are as follows:

2021		-
2022		-
2023		3,200
2024		19,200
2025		17,600
Less: Unamortized deferred financing costs		(311	)
Long-term loans payable	$	39,689

Prior Credit Facilities

On October 21, 2020, the Company used $40 million of the Term Facility, approximately $4.9 million of the Revolving Facility, and approximately $6.3 million of cash on hand to pay off all obligations owing under, and to terminate, both its prior Credit Agreement and Guaranty, as amended (the “Amended Credit Agreement and Guaranty”), with Perceptive Credit Holdings II, LP (“Perceptive”) and its Business Financing Agreement, as amended (the “Amended Revolver Agreement”) with Western Alliance Bank. As a result of the termination of the Amended Credit Agreement and Guaranty and the Amended Revolver Agreement, the Company recorded a loss on extinguishment of debt of $4.2 million, which included the prepayment penalty, exit fees, write-off of the remaining unamortized deferred financing costs, and legal fees, during the fourth quarter of 2020.

9. Commitments and Contingencies

Lease Commitments

In May 2016, the Company entered into a lease agreement for office and storage space at 100 Domain Drive, Exeter New Hampshire and has entered into several amendments since then to lease additional space. In total, the Company occupies approximately 95,320 square feet of space at this facility and the lease, as most recently amended, is scheduled to expire on January 28, 2025. The Company has the option to renew the lease for two additional five-year terms by providing written notice twelve months prior to end of the initial or first lease extension term. The Company is not reasonably certain that it will renew the lease beyond January 2025.

In October 2019, the Company entered into an assignation and variation agreement for a lease of 453 square meters of office and warehouse space at 2 Dryden Loan, Bilston Glen Industrial Estate, Loanhead in the United Kingdom. The lease term expires on February 15, 2022 and will automatically renew for an additional five-year period unless the Company terminates the lease by providing written notice to the landlord one month prior to the end of the current lease term. The Company is not reasonably certain that it will renew the lease beyond February 2022.

In November 2020, in connection with the acquisition of HGE, the Company assumed a real estate lease for 22,524 square feet of office space at 1301 Virginia Drive, Fort Washington, Pennsylvania. The lease term expires on July 31, 2025. The Company has the option to renew the lease for one additional five-year term by providing written notice six months prior to end of the current lease term. The Company is not reasonably certain that it will renew the lease beyond July 2025.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

The Company adopted ASC 842 effective January 1, 2020. As a result, the June 30, 2020 condensed consolidated financial statements have been updated, as applicable, to reflect the adoption of this standard. There was no effect of the change on the Company’s 2020 results of operations as a result of the adoption. The following table presents operating lease cost and information related to operating right-of-use assets and operating lease liabilities for the periods indicated:

	Six Months Ended June 30,
	2021			2020
Lease cost:
Operating lease cost	$	832		$	807
Variable lease cost		250			181
Total	$	1,082		$	988
Operating cash flow impacts:
Cash paid for amounts included in measurement of lease liabilities	$	1,170		$	807
Weighted average remaining lease term - operating leases (in years)		3.7			4.6
Weighted average discount rate - operating leases		8.0	%		9.1	%

As of June 30, 2021, future maturities of lease liabilities under the Company’s noncancelable operating leases are as follows:

	Total Due
2021 (remaining 6 months)		1,182
2022		2,343
2023		2,380
2024		2,417
2025		515
Total payments		8,837
Less interest		(1,476	)
Total present value of lease payments	$	7,361

Legal

From time to time, the Company may become involved in various legal proceedings, including those that may arise in the ordinary course of business. The Company believes there is no litigation pending that could have, individually, or in the aggregate, a material adverse effect on the results of its operations or financial condition.

10. Warrants

There was no warrant activity during the three or six months ended June 30, 2021. The Company had outstanding warrants to purchase 33,948 shares of its common stock at a price of $14.00 per share at both June 30, 2021 and December 31, 2020.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

11. Revenue

Disaggregated Revenue

The following table shows the Company’s net revenue disaggregated into categories the Company considers meaningful:

	Three Months Ended June 30,						Six Months Ended June 30,
	2021						2021
	US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital Equipment	$	1,714	$	3,310	$	5,024	$	7,946	$	8,242	$	16,188
Disposable		7,327		5,467		12,794		19,788		10,162		29,950
Subtotal Product Revenue		9,041		8,777		17,818		27,734		18,404		46,138
Lease Revenue
Capital Equipment		653		44		697		2,230		77		2,307
Other		343		108		451		887		244		1,131
Service and Other Revenue		1,293		366		1,659		2,548		809		3,357
Total Net Revenue	$	11,330	$	9,295	$	20,625	$	33,399	$	19,534	$	52,933

	Three Months Ended June 30,						Six Months Ended June 30,
	2020						2020
	US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital Equipment	$	14,079	$	5,226	$	19,305	$	17,380	$	6,923	$	24,303
Disposable		9,441		3,722		13,163		19,135		6,458		25,593
Subtotal Product Revenue		23,520		8,948		32,468		36,515		13,381		49,896
Lease Revenue
Capital Equipment		1,620		14		1,634		2,247		31		2,278
Other		435		76		511		752		151		903
Service and Other Revenue		107		432		539		509		681		1,190
Total Net Revenue	$	25,682	$	9,470	$	35,152	$	40,023	$	14,244	$	54,267

United States and International net revenue is based on the customer location to which the product is shipped. Except for Brazil, which represented 25% and 15% of net revenue for the three and six months ended June 30, 2021, respectively, no other individual foreign country represents more than 10% of the Company’s total net revenue.

Contract Balances from Contracts with Customers

Contract liabilities consist of deferred revenue and other contract liabilities associated with rebates and fees payable to GPOs, IDNs and distributor partners. The following table presents changes in contract liabilities during the six months ended June 30, 2021:

	Deferred Revenue			Other Contract Liabilities
Balance at December 31, 2020	$	2,518		$	459
Additions		2,876			120
Subtractions		(4,153	)		(459	)
Balance at June 30, 2021	$	1,241		$	120

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

12. Stock-Based Compensation

Stock-based compensation expense was allocated based on the employees’ and non-employees’ functions as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Cost of revenue	$	180	$	74	$	356	$	145
Research and development		273		199		614		400
Sales and marketing		900		480		1,821		920
General and administrative		1,080		624		2,327		1,359
Total	$	2,433	$	1,377	$	5,118	$	2,824

Stock Options

The Company granted options to purchase 368,140 shares of common stock at exercise prices ranging from $19.57 to $35.51 per share, with a weighted average exercise price of $26.90 per share, during the six months ended June 30, 2021. The Company granted options to purchase 938,910 shares of common stock at exercise prices ranging from $10.60 to $39.01 per share, with a weighted average exercise price of $12.47 per share, during the six months ended June 30, 2020. The weighted average fair value of stock options granted during the six months ended June 30, 2021 and 2020 was $19.61 and $9.16 per share, respectively.

The weighted average assumptions used in the Black-Scholes options pricing model are as follows:

	Six Months Ended June 30,
	2021			2020
Expected dividend yield		0.0	%		0.0	%
Risk free interest rate		1.0	%		1.7	%
Expected stock price volatility		86.0	%		87.6	%
Expected term (years)		6.1			6.1

Restricted Stock Units and Restricted Stock Awards

The Company has granted both restricted stock units and restricted stock awards.

A summary of restricted stock unit activity for the six months ended June 30, 2021 is as follows:

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2020		228,489		$	25.60
Granted		200,238			26.63
Vested		(27,201	)		29.40
Canceled		(6,625	)		23.49
Unvested at June 30, 2021		394,901		$	25.90

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

A summary of restricted stock award activity for the six months ended June 30, 2021 is as follows:

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2020		103,650		$	1.68
Granted/purchased		-			-
Vested		(54,115	)		1.68
Canceled		-			-
Unvested at June 30, 2021		49,535		$	1.68

Employee Stock Purchase Plan

The ESPP provides for successive discrete offering periods of approximately six months or as determined by the plan administrator. Offering periods begin on each November 15^th and May 15^th or the first trading day thereafter.

The ESPP permits eligible employees to elect to purchase shares of common stock through fixed whole percentage contributions from eligible compensation during each offering period, not to exceed 10% of the eligible compensation a participant receives during an offering period and not to accrue at a rate which exceeds $25,000 of the fair value of the stock (determined on the grant date(s)) for each calendar year. A participant may purchase the lower of (a) a number of shares of common stock determined by dividing such participant’s accumulated payroll deductions on the exercise date by the option price, (b) 5,000 shares, or (c) such other lesser maximum number of shares as shall have been established by the plan administrator.

Amounts deducted and accumulated by the participant will be used to purchase shares of common stock at the end of each offering period. The purchase price of the shares will be 85% of the lower of the fair value of common stock on the first trading day of each offering period or on the purchase date. Participants may end their participation during an offering period up to ten days in advance of the exercise date and will be paid their accumulated contributions that have not been used to purchase shares of common stock. Participation ends automatically upon termination of employment.

The fair value of the purchase right for the ESPP option is estimated on the date of grant using the Black-Scholes pricing model with the following assumptions during 2021:

Expected dividend yield	0.0%
Risk free interest rate	0.2%
Expected stock price volatility	55.0%
Expected term (years)		0.5

13. Net Loss Per Share

The Company excluded the following potential common shares, based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

	As of June 30,
	2021		2020
Options to purchase common stock		1,975,099		1,826,614
Unvested restricted stock units and awards		444,436		206,795
Employee stock purchase plan shares		47,130		19,473
Warrants to purchase common stock		33,948		101,979
		2,500,613		2,154,861

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements for the fiscal quarter ended June 30, 2021, included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section of our 2020 Form 10-K filed with the SEC on February 24, 2021 and in our Quarterly Reports on Form 10-Q, including this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.

Vapotherm is a global medical technology company primarily focused on the development and commercialization of our proprietary High Velocity Therapy products that are used to treat patients of all ages suffering from respiratory distress. Our High Velocity Therapy products deliver non-invasive ventilatory support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. Our 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. As of June 30, 2021, more than 3.0 million patients have been treated with our Precision Flow systems, and we have a global installed base of over 32,000 capital units.

The efficacy of our products is supported by a significant body of clinical evidence across multiple patient populations suffering from respiratory distress. We have developed the only high velocity nasal insufflation device clinically validated as an alternative to non-invasive positive pressure ventilation (“NiPPV”) while addressing many of its limitations, evidenced in part by our sponsored 204 patient, multisite randomized controlled trial in the Emergency Department which was published in the July 2018 issue of Annals of Emergency Medicine. In April 2020 Heart and Lung, the Journal of Cardiopulmonary and Acute Care, published a subgroup analysis from this ED study that showed High Velocity Therapy may provide ventilatory support similar to NiPPV in patients presenting with acute hypercapnic respiratory failure. In February 2021, Critical Care Explorations published a multi-center, prospective observational case study that showed High Velocity Therapy was an effective tool for reducing the respiratory rate in COPD patients with acute hypercapnic respiratory failure. In its 2021 edition of the America Associate of Respiratory Care (“AARC”) Uniform Reporting Manual, which has been re-named the Safe & Effective Staffing Guide for Respiratory Therapy Departments, AARC has now given our High Velocity Therapy technology the same productivity value as Bi-Level Positive Airway Pressure (“BiPAP”).

Our business was significantly transformed during 2020 due to increased demand for our High Velocity Therapy technology for treatment of COVID-19 patients, as evidenced by year over year revenue growth of 161.4% from 2019 to 2020. The COVID-19 pandemic contributed to this transformation in at least two primary ways. First, it resulted in increased awareness of high flow therapy, including recognition by the CDC, WHO, NIH, Society for Critical Care Medicine, American College of Emergency Physicians, and the Chinese, German, Italian, and Australian thoracic societies of high flow therapy as an appropriate first line therapy for those suffering from low oxygen levels. Second, many respiratory distress patients who require ventilatory support are initially treated in a hospital’s ED with the goal of stabilizing these patients with a non-invasive ventilation therapy so their underlying condition can be treated. Our existing focus on hospital emergency departments as an effective entry point for our products resulted in our systems being in the right place at the right time when the COVID-19 pandemic hit. This exposed a significant number of new physicians to the efficacy of our High Velocity Therapy technology, especially as they were able to see patients moved out of the emergency room and into lower acuity settings in the hospital after receiving our High Velocity Therapy. We expect that increased awareness among physicians of the efficacy of our High Velocity Therapy to treat patients in respiratory distress, whether they are hypoxic or hypercapnic, will result in expanded use of our products in a variety of settings.

We currently offer four versions of our Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision Flow Heliox. In certain countries outside of the United States we currently offer our Oxygen Assist Module, which was fully launched in the United Kingdom, select European markets, and Israel in late 2020 and is now available in 18 countries. Our Oxygen Assist Module, in addition to disposables, includes subscription-based revenue which increases the revenue per installed unit. The Oxygen Assist Module can be used with all versions of our Precision Flow systems except for the Precision Flow Heliox. The Oxygen Assist Module is designed to help clinicians maintain a patient’s pulse oxygen saturation (“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. In neonates, these risks include visual or developmental impairment or death.

In February 2021, we upgraded the software on approximately 45 Oxygen Assist Module units outside of the United States from software version 2.2.0 to software version 2.5.0. Subsequently, a bug in software version 2.5.0 was discovered by one of our

employees. Although there have been no reports of patient injury associated with this bug and we believe risk of patient injury is unlikely, out of an abundance of caution, we immediately notified our users and undertook a field action to remove software version 2.5.0 from all upgraded units and downgrade these units to software version 2.2.0 until the issue is resolved. All software downgrades have been completed.

The Oxygen Assist Module was granted Breakthrough Device Designation by the FDA on April 2, 2020 for the following indication: Oxygen Assist Module is an optional module used only with the Vapotherm Precision Flow and is indicated for on-demand titration of oxygen into warm humidified breathing gases delivered to spontaneously breathing patients based on continuous non-invasive monitoring of pulse oxygen saturation. Oxygen Assist Module is intended to treat pediatric patients (neonates and infants ≥1000g) in monitored clinical environments (e.g., the NICU). We are continuing to work with FDA through the Breakthrough Device program to make our Oxygen Assist Module available in the United States, with the first step being an investigational device exemption for pediatric evaluation of the Oxygen Assist Module in the United States. Our IDE clinical study was approved on April 29, 2021. We expect to begin enrollment in this clinical study in the second half of 2021.

We are also in the process of seeking FDA clearance for our High Velocity Therapy 2.0 (“HVT 2.0”) as the next generation of our Precision Flow system. Subject to receipt of FDA clearance, the HVT 2.0 is targeted for a limited release market in the United States in the second half of 2021 and for a full market release in early 2022. The HVT 2.0 represents the next generation of High Velocity Therapy. The system retains the core competencies of the current Precision Flow platform and, with an internal blower, is designed to eliminate the need for wall air. With a variable oxygen connection (tank, wall or concentrator) the HVT 2.0 system is designed to support patients wherever they need respiratory support, including outside of the hospital in a home or future use in a field transport setting. A large intuitive display with touchscreen operation, on screen troubleshooting guidance, and a fully assembled disposable are designed to minimize clinician time spent on operating the equipment so they can focus on their patient. Despite the HVT 2.0 system not yet having received 510(k) clearance from the FDA, on February 12, 2021, the FDA notified us that, under FDA Emergency Use Authorization (“EUA”) issued on March 24, 2020, the HVT 2.0 was authorized for emergency use in healthcare settings to treat patients during the COVID-19 pandemic, subject to the conditions set forth in the EUA. We recently received a positive assessment from our Notified Body for the HVT 2.0, allowing us to affix the CE mark and sell HVT 2.0 in the European Union. As a result, we expect to initiate a limited market release in certain European countries in the second half of 2021 before moving to a full market release in early 2022.

Historically, we have generated revenue primarily from sales of the disposable products utilized with our proprietary Precision Flow systems and our Oxygen Assist Module, and to a lesser extent, from the sale or lease of the capital units themselves. However, due to demand for our High Velocity Therapy technology during the COVID-19 pandemic, we generated revenue primarily from sales of our Precision Flow systems in 2020, which although putting pressure on our margins also resulted in a 72.8% increase in our installed base, which we expect will drive future recurring disposable revenue. The extent to which the COVID-19 pandemic will impact our business during the remainder of 2021 and beyond will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and variants of the virus, and the actions taken to treat or contain COVID-19 or to otherwise limit its impact, the availability and effectiveness of vaccines, among other factors. For example, as vaccinations increase and COVID-19 hospitalizations decrease in the U.S., we would expect to see overall demand for our High Velocity Therapy products decrease from the higher than historical levels we experienced during the height of the COVID-19 pandemic. As the COVID-19 pandemic winds down, we expect to sell fewer capital units as a percentage of our revenues, especially in the United States, and expect our revenue mix between capital and disposable sales to begin to normalize back to historical levels. Also, worldwide precautionary measures taken to reduce the spread of COVID-19 infections have impacted, and may continue to impact, the incidence of flu and flu-related illnesses, which have negatively impacted and could continue to negatively impact our future revenue.

We sell our Precision Flow systems to hospitals through a direct sales organization in the United States, the United Kingdom and Germany and we sell our Precision Flow systems through distributors in other select European countries outside of these three countries. Our 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. We expanded the commercial launch of our Oxygen Assist Module throughout the United Kingdom, Europe, and the Middle East in the first quarter of 2021. In addition, we employ field-based clinical educators who focus on medical education and training in the effective use of our products and help facilitate increased adoption and utilization, most recently through our 1H1D (One Hospital One Day) strategy. We focus on physicians, respiratory therapists and nurses who work in acute hospital settings, including the ED and adult, pediatric and neonatal ICUs. Our relationship with these clinicians is particularly important, as it enables our products to follow patients through the care continuum. As of June 30, 2021, we have sold our Precision Flow systems to over 1,800 hospitals across the United States, where they have been primarily deployed in the ICU setting.

Since inception, we have financed our operations primarily through sales of our equity securities, sales of our Precision Flow systems and their associated disposables, and amounts borrowed under our credit facilities. We have devoted the majority of our resources to research and development activities related to our Precision Flow systems, Oxygen Assist Module and HVT 2.0,

including regulatory initiatives, and sales and marketing activities. We have invested heavily in our sales and marketing function by increasing the number of sales representatives and clinical educators to facilitate adoption and increase utilization of our High Velocity Therapy products and expanded our digital marketing initiatives and medical education programs, including our Vapotherm Academy which was instrumental during the pandemic and used to train more than 30,000 caregivers during 2020 and the first half of 2021.

On November 13, 2020, we acquired HGE Health Care Solutions LLC (“HGE”). We undertook the acquisition to expand our capabilities by providing a remote monitoring platform designed to empower respiratory patients with chronic obstructive pulmonary disease (“COPD”), as well as payors and providers, to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life. HGE was rebranded to Vapotherm Access during the second quarter of 2021. Our initial product launch, Vapotherm Access – Post Care is intended to manage COPD patients after discharge and seek to lower 30-day readmission rates. We believe this is important since a hospital typically incurs a penalty on its entire book of Center for Medicare & Medicaid Services business if its 30-day readmission rate is above the U.S. national average. We expect to learn from this new product as we continue to make significant investments in our Vapotherm Access offerings beyond Post Care.

We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives, expanding the number of clinical educators internationally along with our international marketing programs and expanding worldwide direct to clinician digital marketing efforts to help facilitate further adoption among existing hospital accounts as well as broaden awareness of our products to new hospitals. We also expect to continue to make investments in research and development, regulatory affairs and clinical studies to develop future generations of our High Velocity Therapy products, support regulatory submissions and demonstrate the clinical efficacy of our new products. In addition, as we seek to maintain our current increased production capacity, we expect to continue to make investments in our production capabilities related to future generations of High Velocity Therapy products. Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require additional funding, which may include future equity and debt financings.

Results of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	(in thousands)
Net revenue	$	20,625		$	35,152		$	52,933		$	54,267
Cost of revenue		11,218			17,544			26,358			27,442
Gross profit		9,407			17,608			26,575			26,825
Operating expenses
Research and development		4,577			3,895			9,487			7,257
Sales and marketing		12,804			14,858			26,704			28,175
General and administrative		8,627			5,627			16,686			10,878
Total operating expenses		26,008			24,380			52,877			46,310
Loss from operations		(16,601	)		(6,772	)		(26,302	)		(19,485	)
Other expense, net		(666	)		(1,260	)		(1,372	)		(2,391	)
Net loss	$	(17,267	)	$	(8,032	)	$	(27,674	)	$	(21,876	)

Revenue

	Three Months Ended June 30,
	2021					2020					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
Product Revenue:
Capital Equipment	$	5,024		24.4	%	$	19,305		54.9	%	$	(14,281	)		-74.0	%
Disposables		12,794		62.0	%		13,163		37.5	%		(369	)		-2.8	%
Subtotal Product Revenue		17,818		86.4	%		32,468		92.4	%		(14,650	)		-45.1	%
Lease Revenue
Capital Equipment	$	697		3.4	%	$	1,634		4.6	%	$	(937	)		-57.3	%
Other		451		2.2	%		511		1.5	%		(60	)		-11.7	%
Service and Other Revenue		1,659		8.0	%		539		1.5	%		1,120			207.8	%
Total Net Revenue	$	20,625		100.0	%	$	35,152		100.0	%	$	(14,527	)		-41.3	%

Net revenue decreased $14.5 million, or 41.3%, to $20.6 million for the second quarter of 2021 compared to $35.2 million for the second quarter of 2020. The decrease in net revenue was primarily attributable to a $14.3 million and $0.9 million decrease in capital equipment and capital equipment lease revenue, respectively. Capital equipment revenue decreased 74.0% in the second quarter of 2021 primarily due to decreased sales of our Precision Flow units as a result of decreased demand related to the slowdown of the COVID-19 pandemic primarily in the United States, partially offset by increased average selling prices in the United States. Disposable revenue decreased 2.8% in the second quarter of 2021 primarily driven by lower volume in the United States due to the slowdown of the COVID-19 pandemic and lower respiratory census in the United States as measured by respiratory discharges as compared to historical levels, partially offset by higher demand in our International markets due to continued COVID-19 pandemic demand along with higher average selling prices in the United States. Lease revenue also decreased primarily due to the slowdown of the COVID-19 pandemic in the United States. The increase in service and other revenue in the second quarter of 2021 is primarily the result of Vapotherm Access revenue as a result of the HGE acquisition in the fourth quarter of 2020.

Net revenue information by geography is summarized as follows:

	Three Months Ended June 30,
	2021					2020					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
United States	$	11,330		54.9	%	$	25,682		73.1	%	$	(14,352	)		-55.9	%
International		9,295		45.1	%		9,470		26.9	%		(175	)		-1.8	%
Total Net Revenue	$	20,625		100.0	%	$	35,152		100.0	%	$	(14,527	)		-41.3	%

Net revenue generated in the United States decreased $14.4 million, or 55.9%, to $11.3 million for the second quarter of 2021, compared to $25.7 million for the second quarter of 2020. Net revenue generated in our International markets decreased $0.2 million, or 1.8%, to $9.3 million for the second quarter of 2021, compared to $9.5 million for the second quarter of 2020. Both the United States and International net revenue declines were primarily driven by a decrease in the number of Precision Flow units sold period over period due to the slowdown in the COVID-19 pandemic, particularly in the United States, during the current year period. The decrease in net revenue in the United States was also impacted by a decrease in disposable sales due to the slowdown in the COVID-19 pandemic, partially offset by increased capital equipment and disposable average selling prices. The International net revenue decline was partially offset by an increase in disposable sales for the second quarter of 2021 compared to the second quarter of 2020.

	Six Months Ended June 30,
	2021					2020					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
Product Revenue:
Capital	$	16,188		30.6	%	$	24,303		44.8	%	$	(8,115	)		-33.4	%
Disposables		29,950		56.6	%		25,593		47.1	%		4,357			17.0	%
Subtotal Product Revenue		46,138		87.2	%		49,896		91.9	%		(3,758	)		-7.5	%
Lease Revenue
Capital Equipment		2,307		4.4	%		2,278		4.2	%		29			1.3	%
Other		1,131		2.1	%		903		1.7	%		228			25.2	%
Service and Other Revenue		3,357		6.3	%		1,190		2.2	%		2,167			182.1	%
Total Net Revenue	$	52,933		100.0	%	$	54,267		100.0	%	$	(1,334	)		-2.5	%

Net revenue decreased $1.3 million, or 2.5%, to $52.9 million for the first six months of 2021 compared to $54.3 million for the first six months of 2020. The decrease in net revenue was primarily attributable to an $8.1 million decrease in capital equipment revenue, partially offset by a $4.4 million increase in disposable revenue. Capital equipment revenue decreased 33.4% in the first six months of 2021 primarily due to decreased sales of our Precision Flow units as a result of decreased demand related to the slowdown of the COVID-19 pandemic in the United States. Disposable revenue increased 17.0% in the first six months of 2021 primarily driven by an increase in the worldwide installed base of Precision Flow units, higher International volume due to the COVID-19 pandemic and higher average selling prices in the United States. The increase in service and other revenue in the first six months of 2021 is primarily the result of Vapotherm Access revenue as a result of the HGE acquisition in the fourth quarter of 2020.

	Six Months Ended June 30,
	2021					2020					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
United States	$	33,399		63.1	%	$	40,023		73.8	%	$	(6,624	)		-16.6	%
International		19,534		36.9	%		14,244		26.2	%		5,290			37.1	%
Total Net Revenue	$	52,933		100.0	%	$	54,267		100.0	%	$	(1,334	)		-2.5	%

Net revenue generated in the United States decreased $6.6 million, or 16.6%, to $33.4 million for the first six months of 2021, compared to $40.0 million for the first six months of 2020. The decrease in net revenue in the United States primarily resulted due to a decrease in volume of sales of capital equipment and disposables related to the slowdown of the COVID-19 pandemic in the United States, partially offset by increased average selling prices. Net revenue generated in our International markets increased $5.3 million, or 37.1%, to $19.5 million for the first six months of 2021, compared to $14.2 million for the first six months of 2020. International net revenue growth was primarily driven by an increase in the number of disposables sold period over period due to continued COVID-19 pandemic demand and higher installed bases. International net revenue growth was also driven by increased volume of sales of capital equipment due to continued COVID-19 pandemic demand, which growth was partially offset by decreased average selling prices for the first six months of 2021 compared to the first six months of 2020.

Cost of Revenue and Gross Profit

Cost of revenue decreased $6.3 million, or 36.1%, to $11.2 million in the second quarter of 2021 compared to $17.5 million in the second quarter of 2020. Cost of revenue decreased $1.1 million, or 4.0%, to $26.4 million in the first six months of 2021 compared to

$27.4 million in the first six months of 2020. These decreases were primarily due to lower materials and labor costs due to a decrease in sales volumes of our Precision Flow units and disposables related to the slowdown in the COVID-19 pandemic in the United States.

Gross profit decreased to 45.6% in the second quarter of 2021 compared to 50.1% in the second quarter of 2020. Gross profit was negatively impacted primarily by lower labor and overhead absorption due to lower sales volumes in the second quarter of 2021 compared to the second quarter of 2020. Second quarter 2021 gross profit was also negatively impacted by geography mix with lower gross profit margins realized on distributor sales, partially offset by reduced supplier freight and expediting fees. Gross profit increased to 50.2% in the first six months of 2021 compared to 49.4% in the first six months of 2020 due primarily to reduced supplier freight and expediting fees, partially offset by lower labor and overhead absorption.

Research and Development Expenses

Research and development expenses increased $0.7 million, or 17.5%, to $4.6 million in the second quarter of 2021 compared to $3.9 million in the second quarter of 2020. As a percentage of revenue, research and development expenses increased to 22.2% in the second quarter of 2021 compared to 11.1% in the second quarter of 2020.

Research and development expenses increased $2.2 million, or 30.7%, to $9.5 million in the first six months of 2021 compared to $7.3 million in the first six months of 2020. As a percentage of revenue, research and development expenses increased to 17.9% in the first six months of 2021 compared to 13.4% in the first six months of 2020.

The increase in research and development expenses for both comparison periods was primarily due to increased product development costs associated with the development of our future generation High Velocity systems and increased employee-related expenses and stock-based compensation. Additionally, the increase in research and development expenses during the first six months of 2021 was due to increased patent-related costs.

Sales and Marketing Expenses

Sales and marketing expenses decreased $2.1 million, or 13.8%, to $12.8 million in the second quarter of 2021 compared to $14.9 million in the second quarter of 2020. As a percentage of revenue, sales and marketing expenses increased to 62.1% in the second quarter of 2021 compared to 42.3% in the second quarter of 2020.

Sales and marketing expenses decreased $1.5 million, or 5.2%, to $26.7 million in the first six months of 2021 compared to $28.2 million in the first six months of 2020. As a percentage of revenue, sales and marketing expenses decreased to 50.4% in the first six months of 2021 compared to 51.9% in the first six months of 2020.

The decrease in sales and marketing expenses for both comparison periods was primarily due to decreased sales commission expenses, partially offset by increased employee-related expenses, stock-based compensation and an increase in travel expenses as such activities were limited in the prior periods due to the COVID-19 pandemic.

General and Administrative Expenses

General and administrative expenses increased $3.0 million, or 53.3%, to $8.6 million in the second quarter of 2021 compared to $5.6 million in the second quarter of 2020. As a percentage of revenue, general and administrative expenses increased to 41.8% in the second quarter of 2021 compared to 16.0% in the second quarter of 2020.

General and administrative expenses increased $5.8 million, or 53.4%, to $16.7 million in the first six months of 2021 compared to $10.9 million in the first six months of 2020. As a percentage of revenue, general and administrative expenses increased to 31.5% in the first six months of 2021 compared to 20.0% in the first six months of 2020.

The increase in general and administrative expenses for both comparison periods was primarily due to increases in employee-related expenses, stock-based compensation, audit and compliance related costs, changes in the value of contingent consideration, and increased insurance, legal, rent and software maintenance costs, partially offset by a reduction in reserves for uncollectible accounts receivable.

Other Expense, Net

Other expense, net decreased $0.6 million, or 47.1%, to $0.7 million in the second quarter of 2021 compared to $1.3 million in the second quarter of 2020. Other expense, net decreased $1.0 million, or 42.6%, to $1.4 million in the first six months of 2021

compared to $2.4 million in the first six months of 2020. The decrease in other expense, net in both the second quarter and first six months of 2021 was primarily due to a decrease in interest expense due to lower average interest rates on outstanding borrowings in 2021 compared to the same periods in 2020.

Liquidity and Capital Resources

As of June 30, 2021, we had cash, cash equivalents and restricted cash of $81.7 million and an accumulated deficit of $344.6 million. Our primary sources of capital to date have been from sales of our equity securities, sales of our Precision Flow systems and their associated disposables and amounts borrowed under credit facilities. Since inception, we have raised a total of $371.9 million in net proceeds from sales of our equity securities.

We believe that our existing cash resources and availability under our revolving facility described below will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. If these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or enter new debt financing arrangements. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all or may be available only in amounts or on terms unacceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products and services.

Cash Flows

The following table presents a summary of our cash flows for the periods indicated:

	Six Months Ended June 30,
	2021			2020
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(30,402	)	$	(24,675	)
Investing activities		(3,156	)		(3,839	)
Financing activities		(225	)		105,232
Effect of exchange rate on cash, cash equivalents and restricted cash		(12	)		(28	)
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(33,795	)	$	76,690

Operating Activities

The net cash used in operating activities was $30.4 million in the first six months of 2021 and consisted primarily of a net loss of $27.7 million and an increase in net operating assets of $12.0 million partially offset by $9.3 million in non-cash charges.

The net cash used in operating activities was $24.7 million in the first six months of 2020 and consisted primarily of a net loss of $21.9 million and an increase in net operating assets of $8.4 million, partially offset by $5.6 million in non-cash charges. Non-cash charges for both periods consisted primarily of stock-based compensation expense and depreciation and amortization expense.

Investing Activities

Net cash used in investing activities for the first six months of 2021 and 2020 consisted of purchases of property and equipment of $3.2 million and $3.8 million, respectively.

Financing Activities

Net cash used in financing activities was $0.2 million in the first six months of 2021 and consisted primarily of repayments on our revolving loan facility of $2.0 million, partially offset by proceeds received from the exercise of stock options of $0.9 million and proceeds from common stock issuances in connections with our ESPP.

Net cash provided by financing activities was $105.2 million in the first six months of 2020 and consisted of proceeds from the issuance of common stock in connection with underwritten public and at-the-market offerings of $94.2 million and $9.9 million, respectively, borrowings of $1.0 million under our prior short-term line of credit, and proceeds from common stock issuances in

connection with our ESPP and stock option exercises of $0.4 million and $0.3 million, respectively, partially offset by common stock offering costs of $0.5 million.

Credit Facilities

On October 21, 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) which provides for a revolving loan facility of $12.0 million (the “Revolving Facility”) and a term loan facility of $40.0 million (the “Term Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the Facilities were used to repay our former term loan facility and revolving line of credit, which are described in more detail below. As of June 30, 2021, we had $2.9 million and $40.0 million of outstanding borrowings under our Revolving Facility and Term Facility, respectively.

The Revolving Facility will mature on October 21, 2022 and may be renewed on an annual basis thereafter by mutual agreement of us and CIBC. The Revolving Facility bears interest at a floating rate per annum equal to the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and is subject to a floor of 3.25%. At June 30, 2021, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $2.9 million at June 30, 2021 and there were letters of credit of $1.2 million outstanding at June 30, 2021. Availability under the Revolving Facility is determined based on eligible receivables reduced by letters of credit outstanding. At June 30, 2021, there were no additional borrowings available under the Revolving Facility.

The events of default under the Loan Agreement include, without limitation, and subject to customary grace periods, (1) our failure to make any payments of principal or interest under the Loan Agreement or other loan documents, (2) our breach or default in the performance of any covenant under the Loan Agreement, (3) the occurrence of a material adverse effect or an event that is reasonably likely to result in a material adverse effect, (4) the existence of an attachment or levy on a material portion of our or our subsidiaries’ funds, (5) our insolvency or bankruptcy, or (6) the occurrence of certain material defaults with respect to any other of our indebtedness in excess of $500,000. If an event of default occurs, CIBC is entitled to take enforcement action, including acceleration of amounts due under the Loan Agreement. The Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. CIBC has indemnification rights and the right to assign the Facilities, subject to customary restrictions.

As of June 30, 2021, we were in compliance with all covenants under the Loan Agreement.

On October 21, 2020, we used $40 million of the Term Facility, approximately $4.9 million of the Revolving Facility, and approximately $6.3 million of cash on hand to pay off all obligations owing under, and to terminate, both our prior Credit Agreement and Guaranty, as amended (the “Amended Credit Agreement and Guaranty”), with Perceptive Credit Holdings II, LP (“Perceptive”) and our Business Financing Agreement, as amended (the “Amended Revolver Agreement”) with Western Alliance Bank. As a result of the termination of the Amended Credit Agreement and Guaranty and the Amended Revolver Agreement, we recorded a loss on extinguishment of debt of $4.2 million, which included the prepayment penalty, exit fees, write-off of the remaining unamortized deferred financing costs, and legal fees, during the fourth quarter of 2020.

At-the-Market Agreement

On December 20, 2019, we entered into an Open Market Sales Agreement (the “ATM Agreement”) with Jefferies LLC (“Jefferies”) under which we may offer and sell our common stock having aggregate sales proceeds of up to $50.0 million from time to time through Jefferies as our sales agent. We did not sell any shares of our common stock during the six months ended June 30, 2021. The ATM Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or

such date that the maximum offering amount has been sold in accordance with the terms of the agreement. As of June 30, 2021, there was approximately $39.8 million in remaining capacity under this program.

Contractual Obligations

There have been no material changes to our contractual obligations from those described in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 filed with the SEC on May 5, 2021.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

The preparation of the condensed financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are reasonable for use in the preparation of the condensed financial statements. Actual results could differ from these estimates.

Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties, the most important and pervasive accounting policies used and areas most sensitive to material changes from external factors. The critical accounting policies that we believe affect our more significant judgements and estimates used in the preparation of our condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to interest rate risk arises primarily from variable interest rates applicable to borrowings under our Revolving Facility and our Term Facility and interest rates associated with our invested cash balances. Borrowings under our Revolving Facility bear interest at a floating rate per annum equal to the WSJ Prime Rate plus 1.0% and is subject to a floor of 3.25%. At June 30, 2021, the interest rate was 4.25%. Borrowings under our Term Facility bear interest at a floating rate equal to the WSJ Prime Rate plus 2.5% and is subject to a floor of 3.25%. At June 30, 2021, the interest rate was 5.75%. As of June 30, 2021, borrowings under our Revolving Facility and Term Facility total $2.9 million and $40.0 million, respectively. Based on our outstanding borrowings and the WSJ Prime Rate, a 100 basis point increase in the annual interest rate on our outstanding borrowings would have a $0.4 million impact on our interest expense on an annual basis.

On June 30, 2021, we had cash invested in money market deposits of $60.6 million. We believe that a 10 basis point change in interest rates is reasonably possible in the near term. Certain of our cash and cash equivalents balances exceed FDIC insured limits. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. Based on our current level of cash investments, an increase or decrease of 10 basis points in interest rates would have a $0.1 million impact to our interest income on an annual basis.

Foreign Currency Risk

For our 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 as of the balance sheet date. Our principal exchange rate risk is between the U.S. dollar and the British pound sterling, and to a lesser extent, the euro. Adjustments resulting from the translation of the financial statements of their 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. Income and expense items are translated at the average foreign currency exchange rates for the period. As a result, our financial condition and operating results are affected by fluctuations in the value of the U.S. dollar as compared to the British pound sterling and to a lesser extent, the euro. Revenues denominated in currencies other than the U.S. dollar represented approximately 7.7% and 4.9% of consolidated net revenues for the six months ended June 30, 2021 and 2020, respectively. Total assets denominated in the British pound sterling and euros represented approximately 1% of our total assets at both June 30, 2021 and December 31, 2020, respectively. Given the immateriality of net revenues and assets denominated in currencies other than the U.S. dollar, a 10% fluctuation in exchange rates would have an immaterial impact to our consolidated net revenues and consolidated total assets. We do not use foreign exchange contracts or derivatives to hedge any foreign currency exposures.

Inflation Risk

Inflationary factors, such as increases in our cost of revenue and selling and operating expenses, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain and increase our gross margin and sales and marketing and operating expenses as a percentage of our revenue if the selling prices of our products do not increase as much as or more than these increased costs.

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b)

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company may become involved in various legal proceedings, including those that may arise in the ordinary course of business. The Company believes there is currently no litigation pending that could have, individually, or in the aggregate, a material adverse effect on the results of its operations or financial condition.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our 2020 Form 10-K which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on February 24, 2021.

ITEM 5. OTHER INFORMATION

On August 6, 2021, Joel Dube, age 54, was appointed Chief Accounting Officer of the Company effective immediately. Prior to his appointment, Mr. Dube served as Controller of the Company since December 2019. Prior to joining Vapotherm, Mr. Dube served as Vice President, Finance and Business Planning at Lyndra Therapeutics, a biotechnology company, since April 2019. Prior to this, Mr. Dube was the VP of Finance, PAO of Exa Corporation, a software company, from September 2016 to March 2019. Prior to that, Mr. Dube was the VP, Corporate Controller at Juniper Pharmaceuticals, Inc., a pharmaceutical company, from September 2015 to September 2016. Mr. Dube earned his Bachelor of Science degree in Business Administration from the University of Lowell, a postgraduate certification in Accountancy from Bentley College and is a Certified Public Accountant in New Hampshire.

Mr. Dube has no family relationships with any of the Company’s directors or executive officers, and there have been no related party transactions between the Company and Mr. Dube that are reportable under Item 404(a) of SEC Regulation S-K.

ITEM 6. EXHIBITS

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.

EXHIBIT INDEX

Exhibit Number		Description


31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200

32.1		Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VAPOTHERM, INC.

August 9, 2021	By:	/s/ Joseph Army
		Joseph Army
		President and Chief Executive Officer

August 9, 2021	By:	/s/ John Landry
		John Landry
		Senior Vice President and Chief Financial Officer