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

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

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.

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 October ~~29, 2020,~~27, 2021, there were ~~25,661,162~~26,072,567 outstanding common shares of Vapotherm, Inc.

2We 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 September 30, 2021.

Unless the context requires otherwise, references to “Vapotherm,” the “Company,” “we,” “us,” and “our,” refer to Vapotherm, Inc. and our consolidated subsidiaries.

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.~~words and the use of future dates. Forward-looking statements include, but are not limited to, statements concerning:

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 ~~Securities and Exchange Commission (the “SEC”) on March 4, 2020, our Quarterly Report on Form 10-Q filed with the~~ SEC on ~~May 5, 2020, our Quarterly Report on Form 10-Q filed with the SEC on August 4, 2020, this Quarterly Report on Form 10-Q,~~February 24, 2021 and in our other filings with the ~~SEC.~~SEC, including this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

We use “Vapotherm,” “Precision Flow,” “High Velocity Therapy,” “HVT,” “Hi-VNI,” “OAM,” 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 SEC on March 4, 2020, our Quarterly Report on Form 10-Q filed with the SEC on May 5, 2020, our Quarterly Report on Form 10-Q filed with the SEC on August 4, 2020, and this Quarterly Report on Form 10-Q. These and other factors could cause our future performance to differ materially from our assumptions and estimates.

Unless the context requires otherwise, references to “Vapotherm,” the “Company,” “we,” “us,” and “our,” refer to Vapotherm, Inc. and its consolidated subsidiary unless stated or the context otherwise requires.

	September 30, 2020			December 31, 2019			September 30, 2021			December 31, 2020
	(unaudited)						(unaudited)
Assets
Current assets
Cash and cash equivalents	$	139,015		$	71,655		$	70,335		$	113,683
Accounts receivable, net		10,875			8,243			20,812			23,488
Inventories		25,029			9,137			24,730			19,873
Prepaid expenses and other current assets		4,895			4,066			5,924			5,041
Total current assets		179,814			93,101			121,801			162,085
Property and equipment, net		17,992			15,086			21,727			20,573
Operating lease right-of-use assets								6,956			8,260
Restricted cash		1,853			1,852			253			1,853
Goodwill		571			588			13,996			16,226
Intangible assets, net		258			353			4,877			5,694
Deferred income tax assets		66			66
Other long-term assets		1,063			844			1,201			967
Total assets	$	201,617		$	111,890		$	170,811		$	215,658
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	6,252		$	3,375		$	4,143		$	4,967
Contract liabilities		279			137			2,190			2,977
Accrued expenses and other current liabilities		19,134			9,187			28,830			34,033
Short-term line of credit		4,495			3,491
Total current liabilities		30,160			16,190			35,163			41,977
Long-term loans payable, net		42,000			41,787			39,707			39,653
Revolving loan facility								1,726			4,888
Deferred income tax liabilities								8			6
Other long-term liabilities		881			174			11,978			15,229
Total liabilities		73,041			58,151			88,582			101,753
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019		-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of September 30, 2020 and December 31, 2019, 25,625,605 and 20,851,531 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		26			21
Preferred stock ($0.001 par value) 25,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020								-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of September 30, 2021 and December 31, 2020, 26,043,578 and 25,722,984 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively								26			26
Additional paid-in capital		428,306			319,115			440,367			430,781
Accumulated other comprehensive income		3			44			19			41
Accumulated deficit		(299,759	)		(265,441	)		(358,183	)		(316,943	)
Total stockholders' equity		128,576			53,739			82,229			113,905
Total liabilities and stockholders’ equity	$	201,617		$	111,890		$	170,811		$	215,658

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019			2021			2020			2021			2020
Net revenue	$	30,559		$	10,809		$	84,826		$	35,094		$	38,115		$	30,559		$	91,048		$	84,826
Cost of revenue		15,049			5,999			42,491			19,646			19,291			15,049			45,649			42,491
Gross profit		15,510			4,810			42,335			15,448			18,824			15,510			45,399			42,335
Operating expenses
Research and development		4,745			3,280			12,002			9,720			3,979			4,745			13,466			12,002
Sales and marketing		15,932			9,193			44,107			27,786			20,465			15,932			47,169			44,107
General and administrative		6,047			3,978			16,925			13,389			7,262			6,047			23,948			16,925
Total operating expenses		26,724			16,451			73,034			50,895			31,706			26,724			84,583			73,034
Loss from operations		(11,214	)		(11,641	)		(30,699	)		(35,447	)		(12,882	)		(11,214	)		(39,184	)		(30,699	)
Other (expense) income
Foreign currency gain (loss)		38			(28	)		37			(37	)		(58	)		38			(188	)		37
Interest income		42			242			227			658			21			42			74			227
Interest expense		(1,308	)		(1,338	)		(3,898	)		(3,783	)		(647	)		(1,308	)		(1,960	)		(3,898	)
Other		-			-			15			-			-			-			18			15
Net loss	$	(12,442	)	$	(12,765	)	$	(34,318	)	$	(38,609	)	$	(13,566	)	$	(12,442	)	$	(41,240	)	$	(34,318	)
Other comprehensive income (loss), net of tax:
Other comprehensive income (loss):
Foreign currency translation adjustments		34			(72	)		(41	)		(70	)		(40	)		34			(22	)		(41	)
Total other comprehensive income (loss)	$	34		$	(72	)	$	(41	)	$	(70	)	$	(40	)	$	34		$	(22	)	$	(41	)
Total comprehensive loss	$	(12,408	)	$	(12,837	)	$	(34,359	)	$	(38,679	)	$	(13,606	)	$	(12,408	)	$	(41,262	)	$	(34,359	)

Net loss per share attributable to common stockholders - basic and diluted	$	(0.49	)	$	(0.65	)	$	(1.48	)	$	(2.16	)
Net loss per share - basic and diluted													$	(0.52	)	$	(0.49	)	$	(1.59	)	$	(1.48	)
Weighted-average number of shares used in calculating net loss per share, basic and diluted		25,578,328			19,531,153			23,192,703			17,854,730			25,987,648			25,578,328			25,891,045			23,192,703

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

					Additional		Accumulated Other													Additional		Accumulated Other
	Common Stock				Paid-in		Comprehensive			Accumulated			Stockholders'			Common Stock				Paid-in		Comprehensive			Accumulated			Stockholders'
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity			Shares		Amount		Capital		Income			Deficit			Equity
Balance at December 31, 2019		20,851,531	$	21	$	319,115	$	44		$	(265,441	)	$	53,739
Balance at December 31, 2020																	25,722,984	$	26	$	430,781	$	41		$	(316,943	)	$	113,905
Issuance of common stock upon exercise of options		24,687		-		40		-			-			40			77,892		-		761		-			-			761
Issuance of restricted stock		40,931		-		58		-			-			58
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		-		-		1,447		-			-			1,447			-		-		2,575		-			-			2,575
Foreign currency translation adjustments		-		-		-		(71	)		-			(71	)		-		-		-		11			-			11
Net loss		-		-		-		-			(13,844	)		(13,844	)		-		-		-		-			(10,407	)		(10,407	)
Balance at March 31, 2020		20,917,149	$	21	$	320,660	$	(27	)	$	(279,285	)	$	41,369
Balance at March 31, 2021																	25,834,208	$	26	$	434,274	$	52		$	(327,350	)	$	107,002

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 upon exercise of options		99,206		-		227		-			-			227			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		36,389		-		359		-			-			359			55,558		-		851		-			-			851
Issuance of common stock upon exercise of warrants		41,066		-		-		-			-			-
Issuance of restricted stock		35,100		-		53		-			-			53
Issuance of common stock for services																	545		-		13		-			-			13
Stock-based compensation expense		-		-		1,377		-			-			1,377			-		-		2,420		-			-			2,420
Foreign currency translation adjustments		-		-		-		(4	)		-			(4	)		-		-		-		7			-			7
Net loss		-		-		-		-			(8,032	)		(8,032	)		-		-		-		-			(17,267	)		(17,267	)
Balance at June 30, 2020		25,493,058	$	26	$	426,282	$	(31	)	$	(287,317	)	$	138,960
Balance at June 30, 2021																	25,956,505	$	26	$	437,758	$	59		$	(344,617	)	$	93,226

Issuance of common stock upon exercise of options		80,020		-		217		-			-			217			61,594		-		488		-			-			488
Issuance of common stock upon exercise of warrants		16,208		-		-		-			-			-
Issuance of restricted stock		36,319		-		51		-			-			51
Issuance of common stock with restricted stock units and awards																	24,934		-		42		-			-			42
Issuance of common stock for services																	545		-		13		-			-			13
Stock-based compensation expense		-		-		1,756		-			-			1,756			-		-		2,066		-			-			2,066
Foreign currency translation adjustments		-		-		-		34			-			34			-		-		-		(40	)		-			(40	)
Net loss		-		-		-		-			(12,442	)		(12,442	)		-		-		-		-			(13,566	)		(13,566	)
Balance at September 30, 2020		25,625,605	$	26	$	428,306	$	3		$	(299,759	)	$	128,576

Balance at September 30, 2021																	26,043,578	$	26	$	440,367	$	19		$	(358,183	)	$	82,229

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

					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

Issuance of common stock upon exercise of options		80,020	-			217	-				-			217
Issuance of common stock upon exercise of warrants		16,208	-		-		-				-			-
Issuance of restricted stock		30,481	-			51	-				-			51
Issuance of common stock for services		5,838		-		208		-			-			208
Stock-based compensation expense	-		-			1,548	-				-			1,548
Foreign currency translation adjustments	-		-		-			34			-			34
Net loss	-		-		-		-				(12,442	)		(12,442	)
Balance at September 30, 2020		25,625,605	$	26	$	428,306	$	3		$	(299,759	)	$	128,576

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

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY, continued~~CASH FLOWS

Additional

Accumulated
Other

Common Stock

Paid-in

Comprehensive

Accumulated

Stockholders'

Shares

Amount

Capital

Income (Loss)

Deficit

Equity

Balance at December 31, 2018

16,782,837

$
17

$
265,926

$
-

$
(214,382
)

$
51,561

Issuance of common stock warrants

-

-

293

-

-

293

Issuance of common stock upon exercise of options

268

-

-

-

-

-

Issuance of restricted stock

116,580

-

194

-

-

194

Stock-based compensation expense

-

-

1,935

-

-

1,935

Net loss

-

-

-

-

(12,964
)

(12,964
)
Balance at March 31, 2019

16,899,685

$
17

$
268,348

$
-

$
(227,346
)

$
41,019

Issuance of common stock upon exercise of warrants

12,164

-

-

-

-

-

Issuance of common stock upon exercise of options

122,497

-

193

-

-

193

Issuance of common stock upon repayment of non-recourse loan

79,854

-

144

-

-

144

Issuance of restricted stock

52,168

-

82

-

-

82

Stock-based compensation expense

-

-

789

-

-

789

Foreign currency translation adjustments

-

-

-

2

-

2

Net loss

-

-

-

-

(12,880
)

(12,880
)
Balance at June 30, 2019

17,166,368

$
17

$
269,556

$
2

$
(240,226
)

$
29,349

Issuance of common stock in connection with public offering, net

3,570,750

4

48,304

-

-

48,308

Issuance of common stock upon exercise of options

22,848

-

37

-

-

37

Issuance of restricted stock

41,647

-

64

-

-

64

Stock-based compensation expense

-

-

217

-

-

217

Foreign currency translation adjustments

-

-

-

(72
)

-

(72
)
Net loss

-

-

-

-

(12,765
)

(12,765
)
Balance at September 30, 2019

20,801,613

$
21

$
318,178

$
(70
)

$
(252,991
)

$
65,138


	Nine Months Ended September 30,
	2021			2020
Cash flows from operating activities
Net loss	$	(41,240	)	$	(34,318	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense		7,197			4,580
Depreciation and amortization		4,181			3,371
Provision for bad debts		(110	)		251
Provision for inventory valuation		(285	)		(428	)
Non-cash lease expense		1,304			797
Change in fair value of contingent consideration		(457	)		-
Loss on disposal of property and equipment		126			13
Amortization of discount on debt		55			190
Deferred income taxes		12			-
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		2,776			(2,916	)
Inventories		(4,576	)		(15,468	)
Prepaid expenses and other assets		(1,102	)		(1,039	)
Accounts payable		(854	)		2,803
Contract liabilities		(658	)		332
Accrued expenses and other current liabilities		(4,286	)		10,520
Operating lease liabilities, current and long-term		(1,305	)		(797	)
Net cash used in operating activities		(39,222	)		(32,109	)
Cash flows from investing activities
Purchases of property and equipment		(4,814	)		(5,944	)
Net cash used in investing activities		(4,814	)		(5,944	)
Cash flows from financing activities
Proceeds from short-term line of credit		-			995
Payments on short-term line of credit		(3,163	)		-
Proceeds from exercise of stock options		1,405			485
Proceeds from issuance of common stock in connection with public offering		-			94,155
Proceeds from issuance of common stock in connection with at-the-market offering		-			9,927
Proceeds from issuance of common stock under Employee Stock Purchase Plan		851			360
Common stock offering costs		-			(471	)
Net cash provided by (used in) financing activities		(907	)		105,451
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(5	)		(37	)
Net increase (decrease) in cash, cash equivalents and restricted cash		(44,948	)		67,361
Cash, cash equivalents and restricted cash
Beginning of period		115,536			73,507
End of period	$	70,588		$	140,868
Supplemental disclosures of cash flow information
Interest paid during the period	$	1,862		$	3,670
Property and equipment purchases in accounts payable and accrued expenses	$	133		$	139
Issuance of common stock upon vesting of restricted stock units	$	133		$	162

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

Nine Months Ended September 30,

2020

2019

Cash flows from operating activities

Net loss

$
(34,318
)

$
(38,609
)
Adjustments to reconcile net loss to net cash used in operating activities

Stock-based compensation expense

4,580

2,941

Depreciation and amortization

3,371

2,219

Provision for bad debts

251

77

Provision for inventory valuation

(428
)

(602
)
Loss on disposal of property and equipment

13

112

Amortization of discount on debt

190

171

Changes in operating assets and liabilities, net of acquisition:

Accounts receivable

(2,916
)

616

Inventories

(15,468
)

3,984

Prepaid expenses and other assets

(1,039
)

528

Accounts payable

2,803

(743
)
Contract liabilities

142

(31
)
Accrued expenses and other current liabilities

10,710

807

Net cash used in operating activities

(32,109
)

(28,530
)
Cash flows from investing activities

Purchases of property and equipment

(5,944
)

(3,132
)
Acquisition of business, net of cash acquired

-

(1,560
)
Net cash used in investing activities

(5,944
)

(4,692
)
Cash flows from financing activities

Proceeds from issuance of common stock in connection with public offering, net

94,155

48,669

Proceeds from issuance of common stock in connection with at-the-market offering, net

9,927

-

Common stock offering costs

(471
)

(361
)
Proceeds from issuance of common stock under the Employee Stock Purchase Plan

360

-

Short-term line of credit

995

(260
)
Proceeds from exercise of stock options and purchase of restricted stock

485

374

Proceeds on loans

-

10,500

Debt issuance costs

-

(322
)
Net cash provided by financing activities

105,451

58,600

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(37
)

(26
)
Net increase in cash, cash equivalents and restricted cash

67,361

25,352

Cash, cash equivalents and restricted cash

Beginning of period

73,507

60,022

End of period

$
140,868

$
85,374

Supplemental disclosures of cash flow information

Interest paid during the period

$
3,670

$
3,563

Property and equipment purchases in accounts payable and accrued expenses

$
139

$
222

Issuance of warrants in conjunction with debt draw down

-

$
293

Issuance of common stock upon vesting of restricted stock

$
162

$
340

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

Vapotherm, Inc. (the “Company”) ~~was founded in 1993 and reincorporated under the laws of the State of Delaware in 2013. Since inception, the Company has~~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 Precision Flow 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 4 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 21 countries. The Company generates subscription-based revenue from its Oxygen Assist Module and related disposables products utilized with the Oxygen Assist Module. 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 ~~adaptors.~~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, ~~and in~~ the United Kingdom, and Germany and through distributors in select other countries outside of ~~the United States and United Kingdom.~~these 3 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 Journal of the American Medical Association published data from mainland China in April 2020 suggesting that 19% of all COVID-19 patients experience respiratory distress and require some amount of respiratory support. 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 ~~has seen~~experienced a significant increase in worldwide demand for its products from both new and existing accounts in 2020 and during the first ~~nine months~~and third quarters of ~~2020.~~

~~Since inception,~~2021, as compared to prior year periods. The full extent to which the ~~Company has financed~~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 operations primarily through public offerings of its common stock, private placements of its convertible preferred stock, sales of its Precision Flow systems and amounts borrowed under its credit facilities. The Company has devotedimpact, including the majority of its resources to research and development activities related to its Precision Flow systems, including regulatory initiatives and sales and marketing activities. The Company has invested heavily in its sales and marketing function by increasing the number of sales representatives and clinical educators to facilitateavailability, adoption ~~and increase utilization of its high velocity therapy products and expanded its digital marketing initiatives and medical education programs.~~

The Company is subject to risks common to companies in the medical device industry, including, but not limited to, risks relating to the successful development and commercialization of its Precision Flow products, fluctuations in operating results and financial risks, protection of proprietary knowledge and patent risks, dependence on key personnel and collaborative partners, competition, technological and manufacturing risks, customer acceptance and demand, compliance with the Food and Drug Administration and other governmental regulations, management of growth and effectiveness of ~~marketing by the Company and by third parties.~~vaccines, among other factors.

On November 16, 2018, the Company completed an initial public offering of 4,600,000 shares of common stock, which included the full exercise by the underwriters of their option to purchase 600,000 shares of common stock, at a price of $14.00 per share, which raised net proceeds of $57.4 million after deducting the underwriting discount of $4.5 million and offering expenses of $2.5 million.

~~On February 28, 2019,~~13, 2020, the Company acquired ~~Solus Medical Ltd.~~HGE Health Care Solutions LLC (“~~Solus”~~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”), ~~its United Kingdom based distributor.~~ 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 ~~Combinations”~~Combination” to these condensed consolidated financial statements for details of this transaction.

In August 2019, the Company completed a public offering of 3,570,750 shares of common stock, which included the full exercise by the underwriters of their option to purchase 465,750 shares of common stock, at a price of $14.50 per share, which raised net proceeds of $48.3 million after deducting the underwriting discount of $3.1 million and offering expenses of $0.4 million.

On December 20, 2019, the Company entered into an Open Market Sales Agreement (the “ATM Agreement”) with Jefferies LLC (“Jefferies”), under which the Company may offer and sell its common stock having aggregate sales proceeds of up to $50.0 million from time to time through Jefferies as its sales agents. During April 2020, the Company sold 511,648 shares of common stock pursuant to the ATM Agreement for gross proceeds of $10.2 million, or $9.8 million net of commissions and offering expenses.

In May 2020, the Company completed a public offering of 3,852,500 shares of common stock, which included the full exercise by the underwriters of their option to purchase 502,500 shares of common stock, at a price of $26.00 per share, which raised net proceeds of $93.8 million after deducting the underwriting discount of $6.0 million and offering expenses of $0.3 million.

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, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our ~~2019~~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.

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, ~~which was acquired~~HGE, a wholly owned subsidiary of the Company located in the ~~first quarter~~United States, and Vapotherm Deutschland GmbH, a wholly owned subsidiary of ~~2019.~~the Company located in Germany. All intercompany accounts and transactions have been eliminated upon consolidation.

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 1 reporting segment, Vapotherm, Inc. and 23 reporting units, Vapotherm, Solus and ~~Solus.~~Vapotherm Access. Segment information is consistent with how ~~management~~the chief operating decision maker reviews the business, makes investing and resource allocation decisions and assesses operating performance.

The majority of the Company’s long-term assets are located in the United States. Long-term assets located outside the United States totaled ~~$0.1~~$2.1 million and $1.7 million as of ~~each of~~ September 30, ~~2020~~2021 and December 31, ~~2019.~~2020, respectively.

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, the valuation allowances against deferred income tax assets, and assessments of impairment with respect to long-lived and intangible assets. Actual results may differ from these estimates.

The accompanying condensed consolidated balance sheet as of September 30, ~~2020,~~2021, and the condensed consolidated statements of comprehensive loss, stockholders’ equity and of cash flows for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~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 September 30, ~~2020~~2021 and the results of its operations and its cash flows for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 are also unaudited. The

results of operations for the three and nine months ended September 30, ~~2020~~2021 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Certain amounts in ~~2019~~2020 have been reclassified to conform to the presentation in ~~2020.~~2021. None of the reclassifications had any impact to the Company’s results of operations.

As of September 30, ~~2020,~~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 ~~and~~or market interest rates. All of the Company’s cash and cash equivalents are maintained at creditworthy financial institutions. At September 30, ~~2020,~~2021, deposits ~~exceed~~exceeded the amount of any federal ~~depositary~~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 ~~the Company’s~~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.

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 ~~our~~the Company’s non-U.S. ~~subsidiary~~subsidiaries that ~~transacts~~transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange ~~as of~~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).

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 September 30, ~~2020, $0.4~~2021, $1.1 million of ~~our $140.9~~its $70.6 million of cash, cash equivalents and restricted cash balance was located outside the United States.

~~(In thousands, except share~~ As of December 31, 2020, $0.4 million of its $115.5 million of cash, cash equivalents and ~~per share amounts)~~restricted cash balance was located outside of the United States.

The following table presents the components of total cash, cash equivalents, and restricted cash as set forth in the Company’s condensed consolidated statements of cash flows:

	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
Cash and cash equivalents	$	139,015	$	71,655	$	70,335	$	113,683
Restricted cash		1,853		1,852		253		1,853
Total cash, cash equivalents, and restricted cash	$	140,868	$	73,507	$	70,588	$	115,536

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 nine months ended September 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 nine months ended September 30, 2021

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, ~~2019~~2020 to September 30, ~~2020~~2021 is as follows:

Balance at December 31, 2019	$	225
Balance at December 31, 2020				$	561
Provisions for warranty obligations		659			288
Settlements		(166	)		(344	)
Balance at September 30, 2020	$	718
Balance at September 30, 2021				$	505

Effective January 1, 2020, the Company was self-insured for certain obligations related to health insurance. The Company also purchases stop-loss insurance to protect itself from material losses. Judgments and estimates are used in determining the potential value associated with reported claims and for events that have occurred but have not been reported. The Company’s estimates consider expected claim experience and other factors. Receivables for insurance recoveries are recorded as assets, on an undiscounted basis. The Company’s liabilities are based on estimates, and, while the Company believes that its accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in claims experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

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 ~~Hi-VNI, Precision Flow Plus, Precision Flow Classic,~~systems, the Vapotherm Transfer Unit 2.0 and Q50 compressor. The Company’s main disposable products are single-use disposables and nasal interfaces, or cannulas, and ~~adaptors.~~adapters. Lease revenue consists of two components which include capital equipment that the Company leases ~~out~~ to its customers and, in certain situations, an allocation from disposable revenue to other lease revenue upon the sale of disposable products in bundled arrangements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. Service revenue consists of fees associated with routine service of capital units, ~~and~~ the sale of extended service contracts and preventative maintenance plans, which are purchased by a small portion of the Company’s customer ~~base.~~base, and revenue related to Vapotherm Access’s 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 ~~the United States and United Kingdom.~~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.

Under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards ~~Codification~~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 ~~entity~~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.

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 the practical expedient in paragraph ASC 606-10-32-18, 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. NaN of the Company’s contracts contained a significant financing component during the nine months ended September 30, 2020 or 2019.

The Company’s contracts with its customers have a duration of less than one year. Therefore, the Company has elected to apply a practical expedient and recognizes the incremental costs of obtaining contracts as an expense. These costs are included in sales and marketing expense in the accompanying condensed consolidated statements of comprehensive loss.

The Company also enters into agreements to lease its capital equipment. For such sales, the Company accounts for revenue under ASC 840, Leases, and assesses and classifies these transactions as sales-type or operating leases based on whether the lease transfers ownership of the equipment to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term. Equipment included in arrangements including transfer of title are accounted for as sales-type leases and the Company recognizes the total value of the lease payments due over the lease term to revenue at the inception of the lease. The Company records the current value of future lease payments under prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets; these amounts totaled $1.7 and $0.9 million at September 30, 2020 and December 31, 2019, respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the capital lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis as it becomes receivable monthly over the term of the lease.

The Company also enters into agreements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. In these bundled arrangements, revenue recognized for the sale of the disposables is allocated between disposable revenue and other lease revenue based on the estimated relative stand-alone selling prices of the individual performance obligations.

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 September 30, 2020 and 2019 was $0.6 and $0.2 million, respectively. Shipping and handling costs for the nine months ended September 30, 2020 and 2019 totaled $1.7 and $0.7 million, respectively.

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.

The Company recognizes revenue on product sales and service of its capital equipment and product sales of disposables to its end users in the United States and United Kingdom and to its distribution partners in other international markets. In each instance, 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. NaN of the Company’s contracts contained a significant financing component during the three and nine months ended September 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.

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 September 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.

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 September 30, 2021 and 2020 were $0.8 and $0.6 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $1.5 million and $1.7 million, respectively.

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~~stock, restricted stock units and stock options, to be recognized as expense in the condensed consolidated statements of comprehensive loss based on their grant date fair values.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units is measured at the market value of the related shares of the Company’s common stock on the grant date. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. 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. NaN 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.

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the condensed consolidated financial statements or in the Company’s tax returns. Deferred taxes are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is

established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the condensed consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more ~~likely than not~~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 ~~United States,~~states of New Hampshire and Pennsylvania, and the United ~~Kingdom.~~States, United Kingdom, and Germany. There is 0 provision or benefit for income taxes for the three or nine months ended September 30, ~~2020~~2021 or ~~2019~~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 ~~September 30, 2020 or~~ December 31, ~~2019~~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.

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (the “JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. The Company expects it will no longer qualify as an EGC as of December 31, 2020 and, at that time, will begin to adopt certain accounting pronouncements at dates applicable to public companies.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard clarifies the definitions of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. In July 2018, the FASB issued ASU No. 2018-11 Leases (Topic 842) (“ASU 2018-11”) which provided another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date. In June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842), which defers the effective date for ASU 2016-02 to annual periods beginning after December 15, 2021 and interim periods beginning after December 15, 2022 for private companies or EGCs following private company adoption dates. The standard was effective for public companies for periods beginning after December 31, 2018. The new standard originally required a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of the initial application. The Company expects to adopt the new standard in the fourth quarter of 2020 with an effective date of January 1, 2020. The Company is in the process of adopting the new standard, including evaluating the changes that will be required under this standard to its future financial reporting and disclosures, and the Company has designed and implemented related processes and controls to address these changes. The Company expects the most significant effects of adoption to relate to (1) the recognition of new right-of-use assets and lease liabilities on the balance sheet for the Company’s facilities and certain other operating leases; and (2) the need to provide new disclosures about the Company’s leasing activities related to the amount, timing and uncertainty of cash flows arising from leases.

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, ~~EGCs~~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.~~disclosures.

On ~~February 28, 2019,~~November 13, 2020, the Company completed the acquisition of all outstanding ~~equity securities~~membership interests of ~~Solus,~~HGE, whose principal assets included intangible assets related to ~~supplier agreements.~~customer relationships, developed technology, trademarks and trade names. The Company undertook the acquisition to ~~accelerate~~expand its ~~penetration in the United Kingdom market.~~ 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 ~~$2.0~~$19.3 million was funded with an initial cash payment of ~~approximately $1.6~~$8.4 million and ~~a settlement~~$10.9 million of ~~a $0.4 million receivable from a preexisting relationship. Additionally,~~contingent consideration. The contingent consideration is payable in cash or common stock, at the sole discretion of the Company, ~~recognized $1.0 million~~and will be remitted in ~~contingent consideration as compensation expense during 2019~~future milestone payments, one following calendar year 2021, one following calendar year 2022, and ~~expects to recognize contingent consideration~~one following calendar year 2023. The final three payments will be adjusted up or down based on the revenue performance of ~~$1.2 million as compensation expense in 2020. The acquisition has been accounted for as an acquisition of a business.~~

certain Vapotherm Access service offerings during those three years. The acquisition has been accounted for as an acquisition of a business.

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 purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities assumed as of ~~February 28, 2019:~~November 13, 2020:

Cash	$	466		$	2
Accounts receivable		411			518
Inventory		492			3
Prepaids and other assets		3
Prepaids and other current assets					238
Property and equipment		1			225
Operating lease right-of-use assets					2,329
Goodwill		592			13,398
Intangible assets		455			5,180
Other long-term assets					45
Total assets acquired		2,420			21,938
Accounts payable and accrued expenses		(241	)
Accounts payable					(32	)
Accrued expenses and other liabilities					(620	)
Contract liabilities		(75	)		(31	)
Deferred taxes		(78	)
Other long-term liabilities					(1,951	)
Total liabilities assumed		(394	)		(2,634	)
Total purchase price	$	2,026		$	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.

~~In determining~~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 ~~Company considered, among other factors, the opportunity provided by a customer agreement with the National Health Service.~~ acquisition date.

The fair value of the intangible ~~assets~~asset associated with ~~this agreement were~~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 ~~expenses~~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 ~~Solus.~~HGE.

The ~~total weighted average~~ amortization period for each of the intangible assets is ~~approximately 3.83~~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 ~~market~~ expansion opportunity inof the ~~United Kingdom.~~remote monitoring platform for respiratory patients and providers. The goodwill ~~attributable to the United Kingdom jurisdiction~~ is ~~not~~ deductible for tax purposes.

The Company has included the financial results of ~~Solus~~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 ~~2019.~~the fourth quarter of 2020.

~~Notes~~The following table summarizes changes to ~~Unaudited Condensed Consolidated Financial Statements~~

~~(In thousands, except share and per share amounts)~~the contingent consideration payable, a recurring Level 3 measurement, for the nine months ended September 30, 2021:

The change in fair value of contingent consideration was a reduction of $1.2 million and $0.5 million for the three and nine months ended September 30, 2021, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of comprehensive loss.

The following unaudited pro forma information for the three and nine months ended September 30, ~~2019~~2020 presents consolidated information as if the ~~Solus~~HGE acquisition occurred on January 1, ~~2019,~~2020, which was the first day of the Company’s fiscal year ~~2019:~~2020:

	Three Months Ended September 30,			Nine Months Ended September 30,
	2019			2019			Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
Net revenue	$	10,809		$	35,331		$	31,136		$	86,134
Net loss	$	(12,765	)	$	(38,553	)	$	(13,404	)	$	(36,734	)
Net loss per share, basic	$	(0.65	)	$	(2.16	)	$	(0.52	)	$	(1.58	)

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 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 September 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 ~~totaled~~total approximately ~~$123.2~~$49.5 million at September 30, ~~2020~~2021 and are valued based on Level 1 of the fair value hierarchy. ~~As described in Note 8 “Debt”, during 2019,~~The Company’s contingent consideration which totals $10.5 million at September 30, 2021 relates to the ~~Company granted warrants to purchase 19,789 shares~~2020 acquisition of ~~common stock in connection with an amendment to its financing arrangement. These equity-classified warrants were~~HGE and is valued ~~using the Black-Scholes pricing model, which falls within~~based on Level 3 of the fair value ~~hierarchy.~~hierarchy as describe in Note 3 “Business Combination.” There were 0 transfers in and out of Level 1, 2 or 3.

Accounts receivable consists of the ~~Black-Scholes pricing model were as follows at the date of grant:~~following:

NaN individual customer accounted for 10% or more of net revenue for the three or nine months ended September 30, 2021 or September 30, 2020. NaN individual customers accounted for 10% or more of total accounts receivable at September 30, 2021 or December 31, 2020.

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

~~Accounts receivable by customer location consists~~The Company recognized $0.1 million and less than $0.1 million of amortization expense within sales and marketing expenses related to the ~~following:~~

~~NaN individual customer accounted for 10% or more~~intangible assets during the three months ended September 30, 2021 and 2020, respectively, and recognized $0.3 million and $0.1 million of ~~revenue for~~amortization expense within sales and marketing expense related to intangible assets during the nine months ended September 30, 2021 and 2020, respectively. The Company also recognized $0.1 million and $0.2 million of amortization expense within general and administrative expenses related to intangible assets during the three and nine months ended September 30, 2021, respectively, with 0 such amounts being recorded within general and administrative expenses during the three or nine months ended September 30, 2020 ~~or 2019. NaN individual customers accounted~~.

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 ~~10% or~~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 ~~total accounts receivable~~the Company and CIBC. The Revolving Facility bears interest at ~~either~~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 September 30, ~~2020 or December 31, 2019.~~2021, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $1.7 million at September 30, 2021 and there were letters of credit of $1.2 million outstanding at September 30, 2021. Availability under the Revolving Facility is determined based on eligible receivables reduced by letters of credit outstanding. At September 30, 2021, there was $9.1 million ofadditional borrowings available under the Revolving Facility.

~~Inventories consist~~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 September 30, 2021, the interest rate was 5.75%. The outstanding balance was $40.0 million at September 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 ~~following:~~

~~7. Goodwill~~interest that otherwise would have been payable on the Term Facility during the period commencing on October 21, 2020 and ~~Intangible Assets~~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 ~~carrying amount~~Loan Agreement include, without limitation, and subject to customary grace periods, (1) the Company’s failure to make any payments of ~~goodwill~~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 ~~intangible assets during 2020 are as follows:~~confidentiality. CIBC has indemnification rights and the right to assign the Facilities, subject to customary restrictions.

~~The following table presents a summary~~As of ~~previously acquired intangible assets:~~

September 30, 2021, the Company was in compliance with all covenants under the Loan Agreement.

~~8. Debt~~The annual principal maturities of the Company’s term loans as of September 30, 2021 are as follows:

On November 16, 2016, the Company entered a Business Financing Agreement (the “Revolver Agreement”) with Western Alliance Bank, an Arizona corporation, which replaced its then-existing revolving line of credit. The Revolver Agreement made available $7.0 million of revolving credit upon the closing date. Availability under the Revolver Agreement is calculated based upon 80% of the eligible receivables (net of pre-paid deposits, pre-billed invoices, other offsets, and contras related to each specific account debtor). The original maturity date under the Revolver Agreement was September 30, 2018. The Company refinanced the Revolver Agreement in April 2018 (the “Amended Revolver Agreement”), increasing the line of credit to $7.5 million and extending the maturity date to September 30, 2020. The principal is due upon maturity. ~~On March 22, 2019, the Company entered into an amendment to the Amended~~ ~~Revolver Agreement~~ (as amended, the “First Amended Revolver Agreement”), which increased the allowable permitted indebtedness under the First Amended Revolver Agreement in connection with the Company’s credit card program from $0.3 million to $0.5 million. On July 7,October 21, 2020, the Company entered into a second amendment to the Amended Revolver Agreement (as amended, the “Second Amended Revolver Agreement”), which, under certain circumstances, reduced the amount of funds required to be held on deposit with Western Alliance Bank. On September 29, 2020, the Company entered into a third amendment to the Amended Revolver Agreement (as amended, the “Third Amended Revolver Agreement”), which extended the maturity date to February 28, 2023. Under the Third Amended Revolver Agreement, interest is required to be paid monthly on the outstanding balance at the Wall Street Journal Prime Rate in effect from time to time, subject to a floor of 3.25%.

~~At September 30, 2020 the interest rate was 3.25%. The outstanding balance under the Third Amended Revolver Agreement was $4.5~~used $40 million at September 30, 2020 and there was $0.8 million remaining availability based on eligible receivables. At December 31, 2019, the interest rate was 6.50%. The outstanding balance under the Third Amended ~~Revolver Agreement~~ was $3.5 million at December 31, 2019 and the remaining availability based on eligible receivables was $0.8 million. The Third Amended Revolver Agreement requires the Company to comply with a minimum liquidity covenant at all times. As of September 30, 2020, the Company was in compliance with all covenants.

~~The Third Amended Revolver Agreement is secured by substantially all~~ of the ~~Company’s assets, excluding intellectual property.~~

~~As discussed in Note 15 “Subsequent Events,”~~Term Facility, approximately $4.9 million of the ~~Company fully repaid~~Revolving Facility, and ~~terminated the Third Amended Revolver Agreement~~approximately $6.3 million of cash on ~~October 21, 2020.~~

~~On April 6, 2018, the Company entered into a~~hand to pay off all obligations owing under, and to terminate, both its prior Credit Agreement and Guaranty, as amended (the ~~“Credit~~“Amended Credit Agreement and Guaranty”), with Perceptive Credit Holdings II, LP (“Perceptive”)~~. Pursuant to the Credit~~ and its Business Financing Agreement, ~~and Guaranty,~~as amended (the “Amended Revolver Agreement”) with Western Alliance Bank. As a total of $42.5 million was available in 3 tranches. The first tranche was drawn down in the amount of $20.0 million on the closing date, April 6, 2018, and was used to repay a former loan agreement in full.In connection with this draw down, the Company granted Perceptive warrants to purchase 37,693 shares of Series D preferred stock which were converted into warrants to purchase shares of common stock at the timeresult of the ~~initial public offering. The warrants had an exercise price~~termination of ~~$15.92 per share, were fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and would have expired in April 2028.~~

On July 20, 2018, pursuant to the Credit Agreement and Guaranty, the Company drew down the second tranche of $10.0 million. In connection with this draw down, the Company granted Perceptive warrants to purchase 18,846 shares of Series D preferred stock which were converted into warrants to purchase shares of common stock at the time of the initial public offering. The warrants had an exercise price of $15.92 per share, were fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and would have expired in July 2028.

~~On September 27, 2018, the Company entered into the first amendment to the Credit Agreement and Guaranty (as amended, the “Amended Credit Agreement and Guaranty”) with Perceptive. Pursuant to~~ the Amended Credit Agreement and Guaranty and the Amended Revolver Agreement, the Company ~~was permitted to draw~~recorded a loss on extinguishment of debt of $4.2 million, which included the final $12.5 million of availability at any time through March 31, 2019 and the minimum 2018 revenue requirement of $43.2 million that was required to draw down the final tranche was eliminated. Concurrently with the closing of the Amendment, the Company drew down $2.0 millionprepayment penalty, exit fees, write-off of the remaining ~~$12.5 million available.~~ unamortized deferred financing costs, and legal fees, during the fourth quarter of 2020.

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 2 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 ~~this draw down,~~the acquisition of HGE, the Company ~~granted~~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 ~~Perceptive warrants~~renew the lease for 1 additional five-year term by providing written notice six months prior to ~~purchase 3,769 shares~~end of ~~its Series D preferred stock which were converted into warrants to~~the current lease term. The Company is not reasonably certain that it will renew the lease beyond July 2025.

The Company adopted ASC 842 effective January 1, 2020. As a result, the time of the initial public offering. The warrants had an exercise price of $15.92 per share, were fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and would have expired in September 2028.

On March 22, 2019, the Company drew the remaining $10.5 million of availability under the Amended Credit Agreement and Guaranty. In connection with this draw down, the Company granted Perceptive warrants to purchase 19,789 shares of common stock. The warrants had an exercise price of $15.92 per share, were fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and would have expired in March 2029.

On March 22, 2019, the Company entered into a second amendment to the Amended Credit Agreement and Guaranty increasing the allowable permitted indebtedness in connection with the Company’s credit card program from $0.3 million to $0.5 million.

~~On June 10, 2020, Perceptive exercised all of its outstanding warrants. See Note 10 “Warrants” for further details.~~

On June 16, 2020, the Company entered into a third amendment to the Amended Credit Agreement and Guaranty (the “2020 Amended Credit Agreement and Guaranty”), which amended the prepayment premium by clarifying the methodology for calculating Perceptive’s annualized internal rate of return under the term loan.

Pursuant to the 2020 Amended Credit Agreement and Guaranty, the outstanding principal amount accrues interest at an annual rate equal to 9.06% plus the greater of (a) one-month LIBOR and (b) 1.75% per year. At September 30, 2020 condensed consolidated financial statements have been updated, as applicable, to reflect the ~~interest rate~~adoption of this standard. There was ~~10.81%. The outstanding balance, including accretion~~no effect of the ~~additional final payment due upon maturity and described below, was $42.6 million at September 30,~~change on the Company’s 2020 ~~and there was 0 remaining availability. The 2020 Amended Credit Agreement and Guaranty is secured by substantially all~~results of operations as a result of the ~~Company’s assets, including intellectual property.~~adoption. The following table presents operating lease cost and information related to operating lease liabilities for the periods indicated:

On the maturity date, in addition to the payment of principal and accrued interest, the Company will be required to make a payment of 0.5% of the total amount borrowed under the 2020 Amended Credit Agreement and Guaranty unless the Company has already made such a payment in connection with an acceleration or prepayment of borrowings under the agreement. In the event the Company prepays all or part of the amounts borrowed under the 2020 Amended Credit and Guaranty prior to the maturity date, the Company will be subject to additional prepayment fees which decrease as the time to maturity decreases. The 2020 Amended Credit Agreement and Guaranty requires the Company to comply with a minimum liquidity covenant at all times and a minimum revenue covenant measured at the end of each fiscal quarter.

~~The annual principal~~2021, future maturities of lease liabilities under the Company’s ~~term loans as of September 30, 2020~~noncancelable operating leases are as follows:

~~As discussed in Note 15 “Subsequent Events,” the Company fully repaid and terminated the 2020 Amended Credit Agreement and Guaranty on October 21, 2020.~~

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.

The Company has non-cancellable purchase commitments for inventories, capital equipment and services which total $5.9 million at September 30, 2021, all of which are expected to be paid within one year.

There was 0 warrant activity during the three or nine months ended September 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 September 30, 2021 and December 31, 2020.

On June 10, 2020, a warrant to purchase 80,097 shares of common stock was exercised on a net exercise basis. Upon exercise, the exercise price of $15.92 per share was satisfied through the Company’s withholding of 39,031 of the warrant shares and issuing 41,066 shares of common stock.

On July 10, 2020, a warrant to purchase 20,889 shares of common stock held was exercised on a net exercise basis. Upon exercise, the exercise price of $14.00 per share was satisfied through the Company’s withholding of 6,902 of the warrant shares and issuing 13,986 shares of common stock to the holder.

On August 7, 2020, a warrant to purchase 4,285 shares of common stock held was exercised on a net exercise basis. Upon exercise, the exercise price of $14.00 per share was satisfied through the Company’s withholding of 2,064 of the warrant shares and issuing 2,222 shares of common stock to the holder.

On October 1, 2020, a warrant to purchase 42,857 shares of common stock held was exercised on a net exercise basis. Upon exercise, the exercise price of $14.00 per share was satisfied through the Company’s withholding of 20,689 of the warrant shares and issuing 22,168 shares of common stock to the holder.

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2020						2020						2021						2021
	US		International		Total		US		International		Total		US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital Equipment	$	13,198	$	2,047	$	15,245	$	30,578	$	8,970	$	39,548	$	11,291	$	2,040	$	13,331	$	19,237	$	10,282	$	29,519
Disposable		10,426		2,618		13,044		29,561		9,076		38,637		19,043		2,631		21,674		38,831		12,793		51,624
Subtotal Product Revenue		23,624		4,665		28,289		60,139		18,046		78,185		30,334		4,671		35,005		58,068		23,075		81,143
Lease Revenue
Capital Equipment		1,117		12		1,129		3,364		43		3,407		1,195		99		1,294		3,425		176		3,601
Other		442		82		524		1,194		233		1,427		399		89		488		1,286		333		1,619
Service and Other Revenue		343		274		617		852		955		1,807		1,022		306		1,328		3,570		1,115		4,685
Net Revenue	$	25,526	$	5,033	$	30,559	$	65,549	$	19,277	$	84,826
Total Net Revenue													$	32,950	$	5,165	$	38,115	$	66,349	$	24,699	$	91,048

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019						2019						2020						2020
	US		International		Total		US		International		Total		US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital Equipment	$	1,408	$	647	$	2,055	$	4,517	$	2,198	$	6,715	$	13,198	$	2,047	$	15,245	$	30,578	$	8,970	$	39,548
Disposable		5,962		1,865		7,827		20,023		5,353		25,376		10,426		2,618		13,044		29,561		9,076		38,637
Subtotal Product Revenue		7,370		2,512		9,882		24,540		7,551		32,091		23,624		4,665		28,289		60,139		18,046		78,185
Lease Revenue		463		-		463		1,410		-		1,410
Capital Equipment														1,117		12		1,129		3,364		43		3,407
Other														442		82		524		1,194		233		1,427
Service and Other Revenue		202		262		464		812		781		1,593		343		274		617		852		955		1,807
Net Revenue	$	8,035	$	2,774	$	10,809	$	26,762	$	8,332	$	35,094
Total Net Revenue													$	25,526	$	5,033	$	30,559	$	65,549	$	19,277	$	84,826

United States and International net revenue is based on the customer location to which the product is shipped. No individual foreign country represents more than 10% of the Company’s total ~~revenue.~~net revenue for the three or nine months ended September 30, 2021 or September 30, 2020.

Contract liabilities consist of deferred revenue and other contract liabilities associated with rebates and fees payable to GPOs, IDNs and distributor partners. ~~Deferred revenues are included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.~~ The following table presents changes in contract liabilities during the nine months ended September 30, ~~2020:~~2021:

	Contract Liabilities			Deferred Revenue			Deferred Revenue			Other Contract Liabilities
Balance at December 31, 2019	$	137		$	344
Balance at December 31, 2020							$	2,518		$	459
Additions		279			912			4,668			396
Subtractions		(137	)		(735	)		(5,392	)		(459	)
Balance at September 30, 2020	$	279		$	521
Balance at September 30, 2021							$	1,794		$	396

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

	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019			2020		2019		2021		2020		2021		2020
Cost of goods sold	$	86	$	9		$	231	$	147
Cost of revenue										$	181	$	86	$	537	$	231
Research and development		204		11			604		266		274		204		888		604
Sales and marketing		592		(102	)		1,512		657		613		592		2,434		1,512
General and administrative		874		299			2,233		1,871		1,011		874		3,338		2,233
Total	$	1,756	$	217		$	4,580	$	2,941	$	2,079	$	1,756	$	7,197	$	4,580

The Company granted options to purchase 406,640 shares of common stock at exercise prices ranging from $19.57 to $35.51 per share, with a weighted average exercise price of $26.81 per share, during the nine months ended September 30, 2021. The Company granted options to purchase 964,568 shares of common stock at exercise prices ranging from $10.60 to $52.94 per share, with a weighted average exercise price of $13.07 per share, during the nine months ended September 30, 2020. The Company granted options to purchase 871,346 shares of common stock at exercise prices ranging from $13.35 to $19.40 per share, with a weighted average exercise price of $17.36 per share, during the nine months ended September 30, 2019. The weighted average fair value of stock options granted during the nine months ended September 30, 2021 and 2020 was $19.46 and ~~2019 was~~ $9.60 per share, respectively.

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

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

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

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

A summary of restricted stock award activity for the nine months ended September 30, ~~2020~~2021 is as follows:

In connection with our initial public offering in November 2018, the Company’s board of directors adopted the ESPP and a total of 166,500 shares of common stock were initially reserved for issuance under the ESPP. The number of shares of common stock available for issuance under the ESPP is increased on the first day of each calendar year beginning January 1, 2019 and each year thereafter until 2028 by the lessor of (i) 1% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, and (ii) the number of shares of common stock determined by the Company’s board of directors up to such an initial maximum of 1,741,300 shares of common stock. The number of shares of common stock reserved under the plan at September 30, 2020 totals 512,048.

The ESPP provides for successive discrete offering periods of approximately six months or as determined by the plan administrator. ~~The~~Offering periods begin on each November 15^th and May 15^th or the first offering period began on January 2, 2020. As of September 30, 2020, 36,389 shares of common stock were purchased by employees under the ESPP at a price of $9.88 per share, resulting in cash proceeds of $0.4 million.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 ~~2020:~~2021:

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 ~~attributable to common stockholders~~ for the periods indicated because including them would have had an anti-dilutive effect:

	As of September 30,				As of September 30,
	2020		2019		2021		2020
Options to purchase common stock		1,770,880		1,407,448		1,906,111		1,770,880
Unvested restricted stock		224,240		267,566
Unvested restricted stock units and awards						442,796		224,240
Employee stock purchase plan shares						35,739		23,628
Warrants to purchase common stock		76,805		182,076		33,948		76,805
Employee stock purchase plan shares		23,628	-
		2,095,553		1,857,090		2,418,594		2,095,553

~~See Note 8 “Debt” for a discussion of the Company’s 2020 Amended Credit Agreement and Guaranty and related transactions with Perceptive, a holder of more than 5% of the Company’s common stock.~~

On October 21, 2020 (the “Closing Date”), the Company entered into a loan and security agreement with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) (the “Loan Agreement”). The Loan Agreement 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 existing revolving loan facility and term loan facility and for general corporate and working capital purposes.

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 Term Facility will mature on October 21, 2025. Advances under the Facilities shall bear interest at a floating rate per annum equal to, (i) in the case of the Revolving Facility, the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and (ii) in the case of the Term Facility, the WSJ Prime Rate plus 2.5%. In each case, the WSJ Prime Rate is subject to a floor of 3.25%. The Loan Agreement provides for interest-only payments on the Term Facility for the first thirty-six months following the Closing Date. Thereafter, amortization payments on the Term Facility will be payable monthly in twenty-four equal installments. The Term Facility may not be prepaid prior to the first anniversary of the Closing Date without prepaying all of the interest that otherwise would have been payable on the Term Facility during the period commencing on the Closing Date and ending on the first anniversary of the Closing Date 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 the first anniversary of the Closing Date but on or prior to the second anniversary of the Closing Date, and (ii) 1.0%, if such prepayment occurs after the second anniversary of the Closing Date but on or prior to the third anniversary of the Closing Date. The Facilities are secured by a lien on substantially all of the assets of the Company, including intellectual property.

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 indebtedness of the Company 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.14. Subsequent Event

On ~~October 21, 2020,~~November 2, 2021, HGE completed an acquisition of all outstanding interests in PCI Management Group LLC for total consideration of $1.2 million in cash. Concurrently, the Company ~~used approximately $40 million~~formed Vapotherm Access Care Management Network LLC, a subsidiary of HGE. The Company undertook these activities to form a value-based enterprise that will enter into value-based contracts with third-party payors for the ~~Term Facility, approximately $4.9 million~~care of ~~the Revolving Facility and approximately $5.7 million of cash on hand to pay off all obligations owing under, and to terminate, both the~~ ~~2020 Amended Credit Agreement and Guaranty~~patients with respiratory disease and the ~~Third Amended Revolver Agreement, which included a prepayment penalty and exit fees~~provision of ~~$3.7 million.~~

Vapotherm Access services. The Company expects to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.

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 September 30, ~~2020,~~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 ~~2019~~2020 Form 10-K filed with the SEC on ~~March 4, 2020,~~February 24, 2021 and in our Quarterly Reports on Form 10-Q, including this Quarterly Report on Form 10-Q ~~filed with~~for the ~~SEC on May 5, 2020, our Quarterly Report on Form 10-Q filed with the SEC on August 4, 2020, and this Quarterly Report on Form 10-Q.~~quarterly period ended September 30, 2021.

Vapotherm ~~Inc.~~ 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 ~~delivers~~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 September 30, ~~2020,~~2021, more than ~~2.5~~3.2 million patients have been treated with our Precision Flow systems, and we have a global installed base of over ~~24,000~~34,000 capital ~~units~~.units.

The efficacy of ~~Vapotherm’s~~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”~~NiPPV”) while addressing many of its limitations, evidenced in part by our sponsored 204 patient, multisite randomized controlled trial in the ~~emergency department (“ED”)~~Emergency Department which was published in the July 2018 issue of Annals of Emergency Medicine. ~~Additionally, in~~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~~NiPPV in patients presenting with acute hypercapnic respiratory failure.

In ~~March 2020, the World Health Organization declared~~February 2021, Critical Care Explorations published a ~~global pandemic related to the novel coronavirus (“COVID-19”). Vapotherm’s~~multi-center, prospective observational case study that showed High Velocity Therapy ~~is a first-line therapy~~was an effective tool for treating respiratory distress, which is experienced by many COVID-19 patients. The Journal of the American Medical Association published data from mainland China in April 2020 suggesting that 19% of all COVID-19 patients experience respiratory distress and require some amount of respiratory support. Our hospital customers around the world are using our technology to treatreducing the respiratory ~~distress experienced by many COVID-19~~rate in COPD patients ~~so that they can triage their sickest patients~~with acute hypercapnic respiratory failure.

Our business was significantly transformed during 2020 due to ~~a limited number of ventilators. As a result, we have seen a significant increase in worldwide~~increased demand for our ~~products~~High Velocity Therapy technology for treatment of COVID-19 patients, as evidenced by year over year revenue growth of 161.4% from ~~both new~~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 Velocity 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 Velocity 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 accounts in the first nine months of 2020. Our operations team, with support from our primarily domestic supply chain, has significantly increased our theoretical maximum production capacity. Looking ahead, our focus is on ~~managing our production levels and supply chain to meet customer demand during this pandemic. The recent increase in demand~~hospital emergency departments as an effective entry point for our products ~~has been accompanied by gross profit headwinds, such as increases~~resulted in ~~air freight costs and expediting fees for components, a higher mix of capital equipment and international revenue, and many related risks to~~ our ~~business. The full extent of~~systems being in the ~~impact of~~right place at the right time when the COVID-19 pandemic ~~will depend on future developments, which are highly uncertain~~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 ~~cannot be predicted, including new information which may emerge concerning~~into lower acuity settings in the ~~severity~~hospital after receiving our High Velocity Therapy. We expect that increased awareness among physicians of ~~COVID-19 and~~ the ~~actions~~efficacy of our High Velocity Therapy to treat patients in respiratory distress, whether they are hypoxic or ~~contain COVID-19 or to otherwise limit its impact, among others.~~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. ~~We also initiated a limited release~~In certain countries outside of the United States we currently offer our Oxygen Assist Module, ~~to certain~~which was fully launched in the United Kingdom, ~~neonatal intensive care unit accounts~~select European markets, and Israel in ~~the first quarter of~~late 2020 and is now available in 21 countries. Our Oxygen Assist Module, in addition to ~~certain adult intensive care unit accounts in Europe and~~disposables, includes subscription-based revenue which increases the Middle East in the second quarter of 2020 for adult hypoxic patients, and we expanded those limited releases to additional United Kingdom neonatal and European and Middle Eastern adult intensive care units during the third quarter.revenue per installed unit. The Oxygen Assist Module ~~is designed to~~can be used with all versions of our Precision Flow systems except for the Precision Flow Heliox. ~~Our~~The Oxygen Assist Module is designed to help clinicians maintain ~~the~~a patient’s pulse oxygen saturation (“SpO2”) within ~~the~~a target SpO2 range over a ~~significantly~~ greater ~~proportion~~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. We intend to further expand the limited release in United Kingdom, European, and Middle Eastern neonatal and adult intensive care units during the fourth quarter and fully launch the Oxygen Assist Module commercially throughout the United Kingdom, and certain European and Middle Eastern countries in the first quarter of 2021, at which time we believe we will begin generating revenue from the product.In neonates, these risks include visual or developmental impairment or death.

~~In the United States, the~~The Oxygen Assist Module was granted Breakthrough Device Designation by the ~~United States Food and Drug Administration (“FDA”)~~FDA on April 2, 2020 for the following indication: ~~The~~ Oxygen Assist Module ~~(“OAM”)~~ 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. ~~OAM~~Oxygen Assist Module is intended to treat pediatric patients (neonates and infants ~~≥1000g)~~

≥1000g) in monitored clinical environments (e.g., the ~~neonatal intensive care unit, or “NICU”)~~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 ~~an Investigational Device Exemption and, if authorized, plan to initiate a NICU~~April 29, 2021. We began enrollment in this clinical study in the ~~first~~third quarter of 2021.

During the third quarter of 2021, we received FDA 510(k) clearance for our next generation High Velocity Therapy system, which we call HVT 2.0. The HVT 2.0 is targeted for a limited market release in the fourth quarter of 2021. The HVT 2.0 represents the next generation of High Velocity Therapy. The system retains the core High Velocity Therapy 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. We ~~generate~~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.

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 significant increase in U.S. hospitalizations experienced as a result of the Delta variant of COVID-19 during the third quarter of 2021 had a direct positive impact on our disposable sales and turn rates. 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 ~~related disposable~~actions taken to treat or contain COVID-19 or to otherwise limit its impact, the availability, adoption 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 ~~utilized with our Precision Flow systems. To a lesser extent,~~decrease from the higher than historical levels we ~~generate revenue from sales~~experienced during the height of the ~~Precision Flow system’s companion products, which include~~COVID-19 pandemic. As the ~~Vapotherm Transfer Unit 2.0, the Q50 compressor and various adaptors. We offer different options~~COVID-19 pandemic winds down, we expect to ~~our hospital customers for acquiring Precision Flow~~sell fewer capital units ~~ranging from~~as a percentage of our revenues, especially in the ~~purchase~~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 ~~Precision Flow capital units with payment in full at the time~~incidence of ~~purchase,~~flu and flu-related illnesses, which have negatively impacted and could continue to the financed purchase of 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.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 ~~other select countries outside~~Europe and the Middle East. We expanded the commercial launch of ~~the United States and United Kingdom.We intend to fully launch~~ our Oxygen Assist Module ~~commercially~~ throughout the United Kingdom, Europe, and the Middle East in the first quarter of ~~2021 through a direct sales organization in the United Kingdom and through distributors in other select countries in Europe and the Middle East.~~2021. In addition, we ~~have~~employ field-based clinical educators who ~~are experienced users of High Velocity Therapy and who~~ focus on ~~our~~ medical education ~~efforts to~~and training in the effective use of our products and help facilitate increased adoption and ~~increase utilization.~~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. WeAs of September 30, 2021, we have sold our Precision Flow systems to over ~~1,600~~2,000 hospitals across the United States, where they have been primarily deployed in the ICU setting.

We assemble our Precision Flow systems in our facility in New Hampshire and we rely on third-party suppliers for a majority of the components of our products, including many single source suppliers. Historically we maintained, and as of the present date we maintain, higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we have been and are currently subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. At times during the past nine months, however, as we sought to fulfill increased demand in connection with the COVID-19 pandemic, there were times when we were not able to carry higher levels of inventory, and as a result, we experienced and potentially in the future may again experience supply interruptions. We currently ship our Precision Flow systems from our facility in New Hampshire directly to our United States customers and many of our international distributors on a purchase order basis. Warehousing and shipping operations for some of our international distributors are handled by a third-party vendor with facilities located in the Netherlands. While our customers have the right to return purchased products subject to a restocking fee, our historical return experience has been immaterial. However, although we have priority shipping status with our carriers, as a result of the COVID-19 pandemic, we have experienced, and may in the future experience, shipping delays throughout the United States and internationally, and as a result, there have been and may in the future be delays in our ability to ship our product to customers and distributors in a timely manner, which may potentially result in a greater percentage of returned product than we have historically experienced.

Since inception, we have financed our operations primarily through ~~public offerings~~sales of our ~~common stock, private placements of our convertible preferred stock,~~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. For~~programs, including our Vapotherm Academy which was instrumental during the ~~third~~pandemic and used to train more than 33,000 caregivers during 2020 and the first nine months 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 ~~2020,~~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 ~~generated revenue~~continue to make significant investments in our Vapotherm Access offerings beyond Post Care.

On November 2, 2021, HGE completed an acquisition of ~~$30.6~~all outstanding interests in PCI Management Group LLC for total consideration of $1.2 million ~~and had~~in cash. Concurrently, we formed Vapotherm Access Care Management Network LLC, a ~~net loss~~subsidiary of ~~$12.4 million compared~~HGE. We undertook these activities to ~~revenue of $10.8 million and~~form a ~~net loss of $12.8 million~~value-based enterprise that will enter into value-based contracts with third-party payors for the ~~third quarter~~care of ~~2019. Our accumulated deficit as~~patients with respiratory disease and the provision of September 30, 2020 was $299.8 million. In the third quarter of 2020, 83.5% of our revenue was derived in the United States and 16.5% was derived outside the United States. No single customer accounted for more than 10% of our revenue.Vapotherm Access services.

We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives, ~~and~~expanding the number of clinical educators ~~expanding~~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~~have continued to ~~maintain~~make improvements and adjustments to our ~~current increased~~ production capacity in response to high demand for our products and ~~explore further expansion thereof~~labor shortages, including recently engaging a third-party manufacturer to ~~satisfy COVID-19 related demand,~~manufacture and assemble certain of our products at its facility in Tijuana, Mexico and hiring several temporary production workers. While these actions put pressure on our gross margins during the third quarter of 2021, and we expect towill continue to ~~make investments in our production capabilities.~~put pressure during the remainder of 2021, we anticipate long-term benefits of these actions. Because of these and other factors, we expect to continue to incur net losses for the next several years and we ~~may~~expect to require additional funding, which may include future equity including sales under our at-the-market sales agreement with Jefferies LLC dated December 20, 2019 under which we may offer and sell from time to time our common stock having aggregate sales proceeds of up to $50.0 million, and debt financings. ~~During April 2020, the Company sold 511,648 shares of its common stock through its at-the-market stock offering~~

program. The sales generated net proceeds of approximately $9.8 million, net of sales commissions and offering expenses. As of September 30, 2020, there was approximately $39.7 million in remaining capacity under the at-the-market stock offering program.

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019			2021			2020			2021			2020
	(in thousands)												(in thousands)
Net revenue	$	30,559		$	10,809		$	84,826		$	35,094		$	38,115		$	30,559		$	91,048		$	84,826
Cost of revenue		15,049			5,999			42,491			19,646			19,291			15,049			45,649			42,491
Gross profit		15,510			4,810			42,335			15,448			18,824			15,510			45,399			42,335
Operating expenses
Research and development		4,745			3,280			12,002			9,720			3,979			4,745			13,466			12,002
Sales and marketing		15,932			9,193			44,107			27,786			20,465			15,932			47,169			44,107
General and administrative		6,047			3,978			16,925			13,389			7,262			6,047			23,948			16,925
Total operating expenses		26,724			16,451			73,034			50,895			31,706			26,724			84,583			73,034
Loss from operations		(11,214	)		(11,641	)		(30,699	)		(35,447	)		(12,882	)		(11,214	)		(39,184	)		(30,699	)
Other expense, net		(1,228	)		(1,124	)		(3,619	)		(3,162	)		(684	)		(1,228	)		(2,056	)		(3,619	)
Net loss	$	(12,442	)	$	(12,765	)	$	(34,318	)	$	(38,609	)	$	(13,566	)	$	(12,442	)	$	(41,240	)	$	(34,318	)

	Three Months Ended September 30,															Three Months Ended September 30,
	2020					2019					Change					2021					2020					Change
	(in thousands, except percentages)															(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$		%			Amount		% of Revenue			Amount		% of Revenue			$			%
Product Revenue:
Capital Equipment	$	15,245		49.9	%	$	2,055		19.0	%	$	13,190		641.8	%	$	13,331		35.0	%	$	15,245		49.9	%	$	(1,914	)		-12.6	%
Disposable		13,044		42.7	%		7,827		72.4	%		5,217		66.7	%
Disposables																	21,674		56.8	%		13,044		42.7	%		8,630			66.2	%
Subtotal Product Revenue		28,289		92.6	%		9,882		91.4	%		18,407		186.3	%		35,005		91.8	%		28,289		92.6	%		6,716			23.7	%
Lease Revenue
Capital Equipment	$	1,129		3.7	%	$	463		4.3	%	$	666		143.8	%	$	1,294		3.4	%	$	1,129		3.7	%	$	165			14.6	%
Other		524		1.7	%		-	-				524		100.0	%		488		1.3	%		524		1.7	%		(36	)		-6.9	%
Service and Other Revenue		617		2.0	%		464		4.3	%		153		33.0	%		1,328		3.5	%		617		2.0	%		711			115.2	%
Net Revenue	$	30,559		100.0	%	$	10,809		100.0	%	$	19,750		182.7	%
Total Net Revenue																$	38,115		100.0	%	$	30,559		100.0	%	$	7,556			24.7	%

~~Revenue~~Net revenue increased ~~$19.8~~$7.6 million, or ~~182.7%~~24.7%, to $38.1 million for the third quarter of 2021 compared to $30.6 million for the third quarter of ~~2020~~2020. The increase in net revenue was primarily attributable to a $8.6 million increase in disposables revenue, partially

offset by a $1.9 million decrease in capital equipment revenue. Disposable revenue increased 66.2% in the third quarter of 2021 primarily driven by higher volume in the United States due to a surge of the COVID-19 pandemic in the United States and a larger installed base of Precision Flow units, and to a lesser extent, an increase in average selling prices. Capital equipment revenue decreased 12.6% in the third quarter of 2021 primarily due to decreased sales of our Precision Flow units in the United States. Lease revenue was fairly consistent in the third quarter of 2021 compared to ~~$10.8~~the same period in the prior year. The increase in service and other revenue in the third 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 generated in the United States increased $7.4 million, or 29.1%, to $33.0 million for the third quarter of ~~2019.~~2021, compared to $25.5 million for the third quarter of 2020. Net revenue generated in our International markets increased $0.1 million, or 2.6%, to $5.2 million for the third quarter of 2021, compared to $5.0 million for the third quarter of 2020. United States net revenue increase was primarily driven by an increase in the volume of disposables sold period over period due to a surge of the COVID-19 pandemic during the current year period and a larger installed base of Precision Flow units. International net revenue was relatively consistent during the third quarter of 2021 compared to the third quarter of 2020.

	Nine Months Ended September 30,
	2021					2020					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
Product Revenue:
Capital	$	29,519		32.4	%	$	39,548		46.6	%	$	(10,029	)		-25.4	%
Disposables		51,624		56.7	%		38,637		45.6	%		12,987			33.6	%
Subtotal Product Revenue		81,143		89.1	%		78,185		92.2	%		2,958			3.8	%
Lease Revenue
Capital Equipment		3,601		4.0	%		3,407		4.0	%		194			5.7	%
Other		1,619		1.8	%		1,427		1.7	%		192			13.5	%
Service and Other Revenue		4,685		5.1	%		1,807		2.1	%		2,878			159.3	%
Total Net Revenue	$	91,048		100.0	%	$	84,826		100.0	%	$	6,222			7.3	%

Net revenue increased $6.2 million, or 7.3%, to $91.0 million for the first nine months of 2021 compared to $84.8 million for the first nine months of 2020. The increase in net revenue was primarily attributable to a ~~$13.2~~$13.0 million and ~~$5.2~~$2.9 million increase in disposable and service and other revenue, respectively, partially offset by a $10.0 million decrease in capital equipment and disposable revenue, respectively. Capital equipment revenue increased 641.8% in the third quarter of 2020 primarily due to increased sales of our Precision Flow units due to increased demand related to the COVID-19 pandemic and increased average selling prices in the United States.revenue. Disposable revenue increased ~~66.7%~~33.6% in the ~~third quarter~~first nine months of ~~2020~~2021 primarily driven by an increase in the worldwide installed base of Precision Flow units, ~~and increased utilization~~higher United States volume due to a surge of the COVID-19 pandemic, a larger installed base of Precision Flow units, and higher average selling prices in the United States. ~~Lease~~The increase in service and other revenue ~~also increased~~in the first nine months of 2021 is primarily the result of Vapotherm Access revenue as a result of the HGE acquisition in the fourth quarter of 2020. Capital equipment revenue decreased 25.4% in the first nine months of 2021 primarily due to ~~a higher volume of leases~~decreased sales of our Precision Flow ~~units and, to a lesser extent, due to higher utilization of disposables for Precision Flow units under placement arrangements.~~units.

	Three Months Ended September 30,															Nine Months Ended September 30,
	2020					2019					Change					2021					2020					Change
	(in thousands, except percentages)															(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$		%			Amount		% of Revenue			Amount		% of Revenue			$		%
United States	$	25,526		83.5	%	$	8,035		74.3	%	$	17,491		217.7	%	$	66,349		72.9	%	$	65,549		77.3	%	$	800		1.2	%
International		5,033		16.5	%		2,774		25.7	%		2,259		81.4	%		24,699		27.1	%		19,277		22.7	%		5,422		28.1	%
Net Revenue	$	30,559		100.0	%	$	10,809		100.0	%	$	19,750		182.7	%
Total Net Revenue																$	91,048		100.0	%	$	84,826		100.0	%	$	6,222		7.3	%

~~Revenue~~Net revenue generated in the United States increased ~~$17.5~~$0.8 million, or ~~217.7%~~1.2%, to ~~$25.5~~$66.3 million for the ~~third quarter~~first nine months of ~~2020,~~2021, compared to ~~$8.0~~$65.5 million for the ~~third quarter~~first nine months of ~~2019. Revenue~~2020. The increase in net revenue in the United States was primarily due to an increase in the number of disposables sold period over period due to continued COVID-19 pandemic demand and a higher installed base, partially offset by a decrease in volume of sales of capital equipment. Net revenue generated in our International markets increased ~~$2.3~~$5.4 million, or ~~81.4%~~28.1%, to ~~$5.0~~$24.7 million for the ~~third quarter~~first nine months of ~~2020,~~2021, compared to ~~$2.8~~$19.3 million for the ~~third quarter~~first nine months of ~~2019. Both United States and~~2020. International net revenue growth was primarily driven by an increase in the number of ~~Precision Flow units~~disposables sold ~~year~~period over ~~year~~period. International net revenue growth was also driven by increased volume of sales of capital equipment due to ~~the~~continued COVID-19 pandemic ~~and an increase in single-use disposable sales due to higher installed bases of Precision Flow units, as well as higher~~demand, which growth was partially offset by decreased average selling prices ~~in the United States.~~

Nine Months Ended September 30,

2020

2019

Change

(in thousands, except percentages)

Amount

% of Revenue

Amount

% of Revenue

$

%

Product Revenue:

Capital

$
39,548

46.6
%

$
6,715

19.2
%

$
32,833

489.0
%
Disposable

38,637

45.6
%

25,376

72.3
%

13,261

52.3
%
Subtotal Product Revenue

78,185

92.2
%

32,091

91.5
%

46,094

143.6
%
Lease Revenue

Capital Equipment

3,407

4.0
%

1,410

4.0
%

1,997

141.6
%
Other

1,427

1.7
%

-

-

1,427

100.0
%
Service and Other Revenue

1,807

2.1
%

1,593

4.5
%

214

13.4
%
Net Revenue

$
84,826

100.0
%

$
35,094

100.0
%

$
49,732

141.7
%

~~Revenue increased $49.7 million, or 141.7%, to $84.8 million~~ for the first nine months of ~~2020~~2021 compared to ~~$35.1 million for~~ the first nine months of 2019. The increase in revenue was primarily attributable to a $32.8 million and $13.3 million increase in capital equipment and disposable revenue, respectively. Capital equipment revenue increased 489.0% in the first nine months of 2020 primarily due to increased sales of our Precision Flow units as a result of increased demand related to the COVID-19 pandemic and increased average selling prices in the United States and International. Disposable revenue increased 52.3% in the first nine months of 2020 primarily driven by an increase in the worldwide installed base of Precision Flow units and higher utilization due to the COVID-19 pandemic. Lease revenue also increased primarily due to a higher volume of leases of our Precision Flow units and, to a lesser extent, due to an increase in the number of disposables for Precision Flow units under placement arrangements.

Revenue generated in the United States increased $38.8 million, or 144.9%, to $65.5 million for the first nine months of 2020, compared to $26.8 million for the first nine months of 2019. Revenue generated in our International markets increased $10.9 million, or 131.4%, to $19.3 million for the first nine months of 2020, compared to $8.3 million for the first nine months of 2019. Both United States and International revenue growth was primarily driven by an increase in the number of Precision Flow units sold year over year due to COVID-19 as well as an increase in single-use disposable sales due to higher installed bases of Precision Flow units and higher disposable utilization.2020.

Cost of revenue increased ~~$9.1~~$4.2 million, or ~~150.9%~~28.2%, to $19.3 million in the third quarter of 2021 compared to $15.0 million in the third quarter of ~~2020 compared to $6.0 million in the third quarter of 2019.~~2020. Cost of revenue increased ~~$22.8~~$3.2 million, or ~~116.3%~~7.4%, to $45.6 million in the first nine months of 2021 compared to $42.5 million in the first nine months of ~~2020 compared to $19.6 million in the first nine months of 2019.~~2020. These increases were primarily due to higher materials and labor costs due to ~~a rapid~~an increase in sales volumes of our ~~Precision Flow units and~~ disposables ~~in order to meet demand~~ related to the surge in the COVID-19 ~~pandemic.~~pandemic in the United States and the current labor shortage.

Gross profit ~~increased~~decreased to 49.4% in the third quarter of 2021 compared to 50.8% in the third quarter of ~~2020 compared~~2020. Gross profit margin was negatively impacted by certain one-time charges related to ~~44.5%~~the transfer of certain activities to our contract manufacturer, partially offset by increased labor and overhead absorption due to higher disposable volumes in the third quarter of ~~2019. Gross profit increased to 49.9% in the first nine months of 2020~~2021 compared to ~~44.0% in~~ the ~~first nine months~~third quarter of ~~2019.~~ Gross profit was positively impacted by improved overhead absorption due to higher production volumes, partially offset by higher labor costs, increased supplier freight and expediting fees to meet the rapid increase in production capacity, and a higher mix of Precision Flow system sales. Gross2020. Third quarter 2021 gross profit was also positively impacted by geography mix with higher ~~average selling prices of capital equipment in the~~gross profit margins realized on United States ~~partially offset by lower average selling prices~~sales. Gross profit remained consistent at 49.9% in both the first nine months of ~~disposables in International markets.~~2021 and 2020.

Research and development expenses ~~increased $1.5~~decreased $0.8 million, or ~~44.7%~~16.1%, to $4.0 million in the third quarter of 2021 compared to $4.7 million in the third quarter of ~~2020 compared to $3.3 million in the third quarter of 2019.~~2020. As a percentage of revenue, research and development expenses decreased to 10.4% in the third quarter of 2021 compared to 15.5% in the third quarter of ~~2020 compared to 30.3% in the third quarter of 2019.~~2020.

Research and development expenses increased ~~$2.3~~$1.5 million, or ~~23.5%~~12.2%, to $13.5 million in the first nine months of 2021 compared to $12.0 million in the first nine months of ~~2020 compared to $9.7 million in the first nine months of 2019.~~2020. As a percentage of revenue, research and development expenses ~~decreased~~increased to 14.8% in the first nine months of 2021 compared to 14.1% in the first nine months of ~~2020~~2020.

The decrease in research and development expenses in the third quarter of 2021 compared to ~~27.7% in~~ the ~~first nine months~~third quarter of ~~2019.~~

2020 was primarily due to decreased prototype, tooling, and patent-related costs. The increase in research and development expenses ~~in both comparison periods~~for the first nine months of 2021 compared to the first nine months of 2020 was primarily due to increased product development ~~and prototype~~ costs associated with the development of our future generation High Velocity systems, ~~and~~ increased employee-related expenses and stock-based ~~compensation.~~compensation, and increased patent-related costs.

Sales and marketing expenses increased ~~$6.7~~$4.5 million, or ~~73.3%~~28.5%, to $20.5 million in the third quarter of 2021 compared to $15.9 million in the third quarter of ~~2020 compared~~2020. As a percentage of revenue, sales and marketing expenses increased to ~~$9.2 million~~53.7% in the third quarter of ~~2019.~~2021 compared to 52.1% in the third quarter of 2020.

Sales and marketing expenses increased $3.1 million, or 6.9%, to $47.2 million in the first nine months of 2021 compared to $44.1 million in the first nine months of 2020. As a percentage of revenue, sales and marketing expenses decreased to ~~52.1% in the third quarter of 2020 compared to 85.0% in the third quarter of 2019.~~

~~Sales and marketing expenses increased $16.3 million, or 58.7%, to $44.1 million~~51.8% in the first nine months of ~~2020~~2021 compared ~~to $27.8 million in the first nine months of 2019. As a percentage of revenue, sales and marketing expenses decreased~~ to 52.0% in the first nine months of ~~2020 compared to 79.2% in the first nine months of 2019.~~2020.

The increase in sales and marketing expenses infor both comparison periods was primarily due to increased sales ~~commissions as a result of increased revenue due to the COVID-19 pandemic along with increases in the size of the sales and marketing organization~~commission expenses, employee-related expenses, stock-based compensation, travel expenses and increased ~~stock-based compensation, partially offset by a reduction in travel expenses due to COVID-19. Additionally, the increase in sales and~~spend on marketing ~~expenses during the first nine months of 2020 was also partially offset by a reduction in marketing initiatives such as trade shows and training costs due to the COVID-19 pandemic.~~materials.

General and administrative expenses increased ~~$2.1~~$1.2 million, or ~~52.0%~~20.1%, to $7.3 million in the third quarter of 2021 compared to $6.0 million in the third quarter of ~~2020 compared to $4.0 million in the third quarter of 2019.~~2020. As a percentage of revenue, general and administrative expenses decreased to 19.1% in the third quarter of 2021 compared to 19.8% in the third quarter of ~~2020 compared to 36.8% in the third quarter of 2019.~~2020.

General and administrative expenses increased ~~$3.5~~$7.0 million, or ~~26.4%~~41.5%, to $23.9 million in the first nine months of 2021 compared to $16.9 million in the first nine months of ~~2020 compared to $13.4 million in the first nine months of 2019.~~2020. As a percentage of revenue, general and administrative expenses ~~decreased~~increased to 26.3% in the first nine months of 2021 compared to 20.0% in the first nine months of ~~2020 compared to 38.2% in the first nine months of 2019.~~2020.

The increase in general and administrative expenses infor both comparison periods was primarily due to increases in employee-related expenses and stock-based compensation and increased insurance, legal, rent and annual event costs, partially offset by changes in the value of contingent consideration. The increase in the first nine months of 2021 also related to increased audit and compliance related costs ~~legal costs~~ and ~~insurance. Additionally, the increase in general and administrative expenses during the first nine months of 2020 was related to increased~~ bank ~~services~~service charges, ~~and reserves for bad debt due to increased revenue,~~ partially offset by a reduction in ~~travel expenses due to the COVID-19 pandemic.~~reserves for uncollectible accounts receivable.

Other expense, net ~~increased $0.1~~decreased $0.5 million, or ~~9.3%~~44.3%, to $0.7 million in the third quarter of 2021 compared to $1.2 million in the third quarter of ~~2020 compared~~2020. Other expense, net decreased $1.6 million, or 43.2%, to ~~$1.1~~$2.1 million in the ~~third quarter~~first nine months of ~~2019. Other expense, net increased $0.4 million, or 14.5%,~~2021 compared to $3.6 million in the first nine months of ~~2020 compared to $3.2 million in the first nine months of 2019.~~2020. The ~~increase~~decrease in other expense, net in both the third quarter and first nine months of ~~2020~~2021 was ~~due to decreased interest income~~ primarily due to ~~lower interest rates on invested balances, partially offset by~~ a decrease in interest expense ~~primarily~~ due to lower average interest rates on outstanding ~~borrowings. The increase~~borrowings in ~~other expense, net~~2021 compared to the same periods in ~~the first nine months of~~ 2020 ~~was due~~and, to a ~~decreased interest income primarily~~lesser extent, was also due to lower ~~interest rates~~average outstanding borrowings on ~~invested balances and an increase~~the revolving facility in ~~interest expense primarily related~~2021 compared to ~~additional borrowings under our credit facilities.~~2020.

As of September 30, ~~2020,~~2021, we had cash, cash equivalents and restricted cash of ~~$140.9~~$70.6 million, working capital of $86.6 million and an accumulated deficit of ~~$299.8~~$358.2 million. Our primary sources of capital to date have been from ~~public offerings~~sales of our ~~common stock, private placements of our since-converted preferred stock,~~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 ~~$162.6~~$371.9 million in net proceeds from ~~private placements~~sales of our ~~convertible preferred stock.~~ On November 16, 2018, we completed an initial public offering of 4,600,000 shares of common stock at a price of $14.00 per share, which raised net proceeds of $57.4 million. In August 2019, we completed a public offering of 3,570,750 shares of common stock, which included the full exercise by the underwriters of their option to purchase 465,750 shares of common stock, at a price of $14.50 per share, which raised net proceeds of $48.3 million after deducting the underwriting discount of $3.1 million and offering expenses of $0.4 million.

On December 20, 2019, the Company entered into an Open Market Sales Agreement (the “ATM Agreement”) with Jefferies LLC (“Jefferies”) under which the Company may offer and sell its common stock having aggregate sales proceeds of up to $50.0 million from time to time through Jefferies as its sales agents. During April 2020, we sold 511,648 shares of common stock pursuant to the ATM Agreement for gross proceeds of $10.2 million, or $9.8 million net of commissions and offering expenses.

In May 2020, we completed a public offering of 3,852,500 shares of common stock, which included the full exercise by the underwriters of their option to purchase 502,500 shares of common stock, at a price of $26.00 per share, which raised net proceeds of $93.8 million after deducting the underwriting discount of $6.0 million and offering expenses of $0.3 million.

As of September 30, 2020, we had $4.5 million of outstanding borrowings and $0.8 million of availability under the Third Amended Revolver Agreement. As of September 30, 2020, we had $42.6 million of term debt outstanding under our 2020 Amended Credit Agreement and Guaranty.

On October 21, 2020, we entered into a loan and security agreement with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) (the “Loan Agreement”). The Loan Agreement 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 existing revolving loan facility and term loan facility and for general corporate and working capital purposes.equity securities.

We believe that our existing cash resources and availability under our ~~Revolving Facility~~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 make additional borrowings under our existing line of credit facility~~securities or enter new debt financing arrangements. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. ~~Debt~~Additional debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any additional debt ~~financing~~ or ~~additional~~ equity financing 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 ~~Precision Flow systems~~products and ~~Oxygen Assist Module.~~services.

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

	Nine Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2021			2020
	(in thousands)						(in thousands)
Net cash provided by (used in):
Operating activities	$	(32,109	)	$	(28,530	)	$	(39,222	)	$	(32,109	)
Investing activities		(5,944	)		(4,692	)		(4,814	)		(5,944	)
Financing activities		105,451			58,600			(907	)		105,451
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(37	)		(26	)
Net increase in cash, cash equivalents and restricted cash	$	67,361		$	25,352
Effect of exchange rate on cash, cash equivalents and restricted cash								(5	)		(37	)
Net increase (decrease) in cash, cash equivalents and restricted cash							$	(44,948	)	$	67,361

The net cash used in operating activities was $39.2 million in the first nine months of 2021 and consisted primarily of a net loss of $41.2 million and an increase in net operating assets of $10.0 million, partially offset by $12.0 million in non-cash charges.

The net cash used in operating activities was $32.1 million in the first nine months of 2020 and consisted primarily of a net loss of $34.3 million and an increase in net operating assets of ~~$5.7~~$6.6 million, partially offset by ~~$7.9~~$8.8 million in non-cash charges. Non-cash charges for both periods consisted primarily of stock-based compensation expense, ~~and~~ depreciation and amortization, and non-cash lease expense.

The net cash used in operating activities was $28.5 million in the first nine months of 2019 and consisted primarily of a net loss of $38.6 million, partially offset by a decrease of $5.2 million in net operating assets and $4.9 million in non-cash charges. Non-cash charges consisted primarily of stock-based compensation expense and depreciation and amortization expense.

Net cash used in investing activities for the first nine months of ~~2020~~2021 and ~~2019~~2020 consisted of purchases of property and equipment of $4.8 million and $5.9 million, ~~and $3.1 million,~~ respectively. ~~In addition, the net~~

Net cash used in ~~investing~~financing activities was $0.9 million in the first nine months of ~~2019 included $1.6~~2021 and consisted primarily of repayments on our revolving loan facility of $3.2 million, ~~to acquire Solus.~~

~~Financing Activities~~partially offset by proceeds received from the exercise of stock options of $1.4 million and proceeds from common stock issuances in connections with our ESPP of $0.9 million.

Net cash provided by financing activities was $105.5 million in the first nine months of 2020 and consisted of proceeds from the issuance of common stock in connection with 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 $0.5 million, respectively, partially offset by common stock offering costs of $0.5 million.

Net cash provided by financing activities was $58.6 million in the first nine months of 2019 and consisted of proceeds from the issuance of common stock in connection with a public offering of $48.7 million, net proceeds from borrowings of $10.2 million under our credit facilities, and proceeds from common stock issuances in connection with stock option exercises and purchases of restricted stock of $0.4 million, partially offset by common stock offering costs of $0.4 million and debt issuance costs of $0.3 million.

In November 2016, we entered into the Revolver Agreement with Western Alliance Bank, which provided for $7.0 million of available borrowings. Availability under the Revolving Facility is calculated based upon 80% of the eligible receivables (net of pre-paid deposits, pre-billed invoices, other offsets, and contras related to each specific account debtor). Facilities

On April 6, 2018, we amended and restated the Revolving Facility (the “Amended Revolver Agreement”) to extend the maturity date from September 30, 2018 to September 30, 2020 and increase the revolving line of credit to $7.5 million. On March 22, 2019, we amended and restated the Amended Revolver Agreement (the “First Amended Revolver Agreement”), which increased the allowable permitted indebtedness under the First Amended Revolver Agreement in connection with our credit card program from $0.3 million to $0.5 million. On July 7,October 21, 2020, we entered into a ~~second amendment to the Amended Revolver~~Loan and Security Agreement ~~(as amended, the “Second Amended Revolver~~(the “Loan Agreement”), with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) which ~~under certain circumstances, reduced the amount~~provides for a revolving loan facility of funds required to be held on deposit with Western Alliance Bank. On September 29, 2020, the Company entered into a third amendment to the Amended Revolver Agreement (as amended, the “Third Amended Revolver Agreement”), which extended the maturity date to February 28, 2023. Under the Third Amended Revolver Agreement, interest is required to be paid monthly on the outstanding balance at the Wall Street Journal Prime Rate in effect from time to time, subject to a floor of 3.25%. The interest rate was 3.25% at September 30, 2020

~~The outstanding balance under the Third Amended Revolver Agreement was $4.5~~$12.0 million at September 30, 2020. The remaining amount available to borrow based on eligible receivables was $0.8 million at September 30, 2020. The Third Amended Revolver Agreement is secured by substantially all of our assets, excluding intellectual property.

~~As discussed below, we fully repaid~~(the “Revolving Facility”) and ~~terminated the Third Amended Revolver Agreement on October 21, 2020.~~

~~On April 6, 2018, we entered into the Credit Agreement and Guaranty with Perceptive. The Credit Agreement and Guaranty initially provided for~~ a term loan facility in the amount of $42.5 million, available in three tranches, of which the first tranche of $20.0 million was drawn upon closing. This first tranche was used to repay the borrowings under a former loan arrangement. A second tranche of $10.0 million was drawn on July 20, 2018. The availability of the final tranche of $12.5 million was dependent upon the Company achieving a minimum of $43.2 million in revenue in 2018. On September 27, 2018, the Credit Agreement and Guaranty was amended to remove this revenue requirement and extend the final draw down date to March 31, 2019. We borrowed $2.0 million from this third tranche on September 27, 2018. On March 22, 2019, we drew the remaining $10.5 million under the Amended Credit Agreement and Guaranty increasing the total outstanding balance to $42.5 million. We also entered into a second amendment to the Amended Credit Agreement and Guaranty increasing the allowable permitted indebtedness in connection with our credit card program from $0.3 million to $0.5 million. On June 16, 2020, we entered into a third amendment to the Amended Credit Agreement and Guaranty (the “2020 Amended Credit Agreement and Guaranty”), which amended the prepayment premium by clarifying the methodology for calculating Perceptive’s annualized internal rate of return under the term loan.

The outstanding principal amount of the 2020 Amended Credit Agreement and Guaranty accrues interest at an annual rate equal to the applicable margin of 9.06% plus the greater of (a) one-month LIBOR and (b) 1.75% per year. The term loan is secured by substantially all our personal property including intellectual property. All unpaid and accrued unpaid interest with respect to each such term loan is due and payable in full on the maturity date at April 6, 2023. On the maturity date, in addition to the payment principal and accrued interest, we will be required to make a payment of 0.5% of the total amount borrowed under the 2020 Amended Credit Agreement and Guaranty, unless we have already made such payment in connection with an acceleration or prepayment of borrowings under the term loan. In the event we prepay all or part of this term loan facility prior to the maturity date, we may be subject to additional prepayment fees which decrease as the time to maturity decreases.

We issued warrants to Perceptive to purchase 37,693, 18,846 and 3,769 shares of our Series D convertible preferred stock at an exercise price of $15.92 per share in April 2018, July 2018 and September 2018, respectively. In connection with our initial public offering in November 2018 these warrants converted to common stock warrants at an exercise price of $15.92. Each of the warrants has a term of 10 years. In connection with the draw down on March 22, 2019, we granted warrants to purchase 19,789 shares of common stock. The warrants had an exercise price of $15.92 per share, were fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and would have expired by March 2029. On June 10, 2020, Perceptive exercised all of its outstanding warrants in a cashless exercise transaction resulting in the issuance of 41,066 shares of common stock to Perceptive.

~~We were in compliance with all debt covenants under both the Third Amended Revolver Agreement and 2020 Amended Credit Agreement and Guaranty at September 30, 2020.~~

~~As discussed below, we fully repaid and terminated the 2020 Amended Credit Agreement and Guaranty on October 21, 2020.~~

~~On October 21, 2020 (the “Closing Date”), we entered into the Loan Agreement with CIBC. The Loan Agreement provides for a Revolving Facility of $12.0 million and a Term 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 ~~existing revolving loan facility and~~former term loan facility and ~~for general corporate~~revolving line of credit, which are described in more detail below. As of September 30, 2021, we had $1.7 million and ~~working capital purposes.~~$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 ~~the Company~~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 September 30, 2021, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $1.7 million at September 30, 2021 and there were letters of credit of $1.2 million outstanding at September 30, 2021. Availability under the Revolving Facility is determined based on eligible receivables reduced by letters of credit outstanding. At September 30, 2021, there was $9.1 million of additional borrowings available under the Revolving Facility.

The Term Facility will mature on October 21, 2025. Advances under the ~~Facilities shall~~Term Facility bear interest at a floating rate ~~per annum~~ equal to ~~(i) in the case of the Revolving Facility, the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and (ii) in the case of the Term Facility,~~ the WSJ Prime Rate plus 2.5%~~. In each case, the WSJ Prime Rate~~ and is subject to a floor of 3.25%. At September 30, 2021, the interest rate was 5.75%. The outstanding balance was $40.0 million at September 30, 2021. The Loan Agreement provides for interest-only payments on the Term Facility for the first ~~thirty-six~~36 months ~~following the Closing Date.~~through October 21, 2023. Thereafter, amortization payments on the Term Facility will be payable monthly in ~~twenty-four~~24 equal installments. The Term Facility may not be prepaid prior to ~~the first anniversary of the Closing Date~~October 21, 2021 without prepaying all of the interest that otherwise would have been payable on the Term Facility during the period commencing on ~~the Closing Date~~October 21, 2020 and ending on ~~the first anniversary of the Closing Date~~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 ~~the first anniversary of the Closing Date~~October 21, 2021 but on or prior to ~~the second anniversary of the Closing Date,~~October 21, 2022, and (ii) 1.0%, if such prepayment occurs after ~~the second anniversary of the Closing Date~~October 21, 2022 but on or prior to ~~the third anniversary of the Closing Date.~~October 21, 2023. The ~~Facilities~~Term Facility and Revolving Facility are secured by a lien on substantially all of our assets, including intellectual property.

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.

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

On October 21, 2020, we used ~~approximately~~ $40 million of the Term Facility, approximately $4.9 million of the Revolving Facility, and approximately ~~$5.7~~$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

~~2020~~ termination of the Amended Credit Agreement and Guaranty and the ~~Third~~ Amended Revolver Agreement, we recorded a loss on extinguishment of debt of $4.2 million, which included athe prepayment penalty, ~~and~~ exit fees, write-off of ~~$3.7 million.~~the remaining unamortized deferred financing costs, and legal fees, during the fourth quarter of 2020.

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 nine months ended September 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 September 30, 2021, there was approximately $39.8 million in remaining capacity under this program.

The following table presents a summary of our contractual obligations as of September 30, 2021:

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, ~~revenue or expenses,~~ results of operations, liquidity, capital expenditures or capital ~~resources that is material to investors.~~resources.

This management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of ~~these~~the condensed financial statements in conformity with accounting principles generally accepted in the United States requires usmanagement to make estimates and assumptions that affect the amounts reported ~~amounts of assets~~in the condensed financial statements and ~~liabilities~~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 ~~disclosure of contingent assets and liabilities at~~resulting estimates are reasonable for use in the ~~date~~preparation of the condensed financial ~~statements,~~statements. Actual results could differ from these estimates.

Critical accounting policies are defined as ~~well as~~those that are reflective of significant judgements and uncertainties, the ~~reported revenue~~most important and ~~expenses during the reporting periods. We monitor~~pervasive accounting policies used and ~~analyze these items for changes in facts and circumstances, and~~areas most sensitive to material changes ~~in these estimates could occur in the future. We base our estimates on historical experience and on various other assumptions~~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 reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changesdescribed in ~~estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.~~

For further information regarding our critical accounting policies, see Note 2 “Summary of Significant Accounting Policies” of Notes to Consolidated Financial Statements and our critical accounting policies within the section entitled “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations and in the Notes to our Consolidated Financial Statements included in our ~~2019~~Annual Report on Form 10-K. There have been no changes in our accounting policies except for certain new policies or enhanced policy descriptions, which are discussed below related to self-insurance, other lease revenues, and stock compensation expense related to our 2018 Employee Stock Purchase Program (ESPP”).

Effective January 1, 2020, we are self-insured for certain obligations related to health insurance. We also purchase stop-loss insurance to protect us from material losses. Judgments and estimates are used in determining the potential value associated with reported claims and for events that have occurred, but have not been reported. Our estimates consider expected claim experience and other factors. Receivables for insurance recoveries are recorded as assets, on an undiscounted basis. Our liabilities are based on estimates, and, while we believe that our accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in claims experience, our ability to settle claims or other estimates and judgments used by us could have a material impact on the amount and timing of expense for any period.

We enter into agreements to lease our capital equipment. For such sales, we account for revenue under ASC 840, Leases, and assess and classify 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 provides10-K for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. Equipment included in arrangements including transfer of title are accounted for as sales-type leases and we recognize the total value of the lease payments due over the lease term to revenue at the inception of the lease. We record the current value of future lease payments under prepaid expenses and other current assets in the condensed consolidated balance sheets and these amounts totaled $1.7 and $0.9 million at September 30, 2020 andyear ended December 31, 2019, respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the capital lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis as it becomes receivable monthly over the term of the lease.

We also enter into agreements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. In these bundled arrangements, revenue recognized for the sale of the disposables is allocated between disposable revenue and other lease revenue based on the estimated relative stand-alone selling prices of the individual performance obligations.

We maintain 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 to employees and non-statutory stock options to consultants and non-employee directors.

We recognize 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 all2020.

equity-based compensation awards, including grants of restricted shares 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 our 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 we consider 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 we do not pay, and do not expect to pay, dividends on our common stock. We estimate 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.

We recognize stock-based expense for shares issued pursuant to our ESPP on a straight-line basis over the related offering period. We estimate the fair value of shares to be issued under the ESPP based on a combination of options valuedusing the Black-Scholes option-pricing model. The expected life is determined based on the contractual term. Expected volatility, dividend yield and forfeiture rates are estimated in a manner similar to option grants described above.

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.

As a company with (i) less than $1.07 billion in revenue during our last fiscal year (ii) a market value of our common stock of less than $700.0 million as of our most recently completed second quarter and (iii) less than $1.0 billion of non-convertible debt over a three-year period, we qualify as an “emerging growth company,” as defined in the JOBS Act, as of the date of our last annual evaluation which occurred on December 31, 2019. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. We expect we will no longer qualify as an emerging growth company as of December 31, 2020 and, at that time, will begin to adopt certain accounting pronouncements at dates applicable to public companies.

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 September 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 September 30, 2021, the interest rate was 5.75%. As of September 30, 2021, borrowings under our Revolving Facility and Term Facility total $1.7 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 September 30, 2021, we had cash invested in money market deposits of $49.5 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.

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 ~~“smaller reporting company,”~~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 2.7% and 2.9% of consolidated net revenues for the nine months ended September 30, 2021 and 2020, respectively. Total assets denominated in the British pound sterling and euros represented approximately 1% of our total assets at both September 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.

Inflationary factors, such as increases in our cost of revenue and selling and operating expenses, may adversely affect our operating results. Although we ~~are~~do not ~~required~~believe that inflation has had a material impact on our financial position or results of operations to ~~provide~~date, a high rate of inflation in the ~~information required by this item.~~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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures ~~(as~~as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this quarterly report.~~

~~Based on this evaluation, we concluded that, as of such date, our disclosure~~means controls and other procedures ~~were effective~~of a company that are designed to ~~provide reasonable assurance~~ensure that ~~the~~ information required to be disclosed by usa company in the reports ~~we file~~that it files or ~~submit~~submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and ~~forms,~~forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that ~~such~~ 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 ~~our Chief Executive Officer~~its principal executive and ~~Chief Financial Officer,~~principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

~~We recognize~~ Management recognizes that any controls ~~system,~~and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving ~~its~~their objectives and ~~our~~ management necessarily applies its judgment in evaluating the ~~benefits~~cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures ~~relative to their costs.~~as of September 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.

There were no changes in our internal control over financial reporting during the period covered by this ~~quarterly report~~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).

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.

In addition to the other information set forth in this ~~quarterly report,~~Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Risk Factors” in our ~~2019~~2020 Form 10-K which could materially affect our business, financial condition or future results. Except as set forth below, 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 ~~March 4, 2020, our Quarterly Report on Form 10-Q filed with the SEC on May 5, 2020, our Quarterly Report on Form 10-Q filed with the SEC on August 4, 2020, and in our other filings with the SEC.~~February 24, 2021.

~~A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, has~~We currently, and ~~may~~ in the future ~~adversely affect~~may, manufacture a portion of the components of our ~~business.~~

~~If a pandemic, epidemic or outbreak of an infectious disease occurs, our business may be adversely affected. Such events may result in a period of business~~products in-house and ~~manufacturing disruption or in~~the inability to produce the components we manufacture in-house could cause significant production delays, an inability to ~~scale our production to~~ meet ~~increased~~customer demand and a substantial loss in ~~a cost-effective manner or at all, any of which could materially affect our business, financial condition~~revenue.

We currently, and results of operations. For example, in 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus has now spread globally, and United States residents and businesses were hit especially hard during March, April, and May in major urban centers like New York City, and in July throughout the sunbelt in states like Florida, Texas, and Arizona. Additionally, as we move further into the fall and schools and communities continue to implement plans to reopen, new hot spots of COVID-19 infection have emerged and are continuing to emerge. A resurgence in the outbreak and spread of COVID-19 may result in renewed stay-at-home orders and mandatory closings for non-essential businesses. The spread of COVID-19 during the first, second, and third quarters of 2020 resulted in certain disruptions to our business and may in the future may, manufacture our products or a portion of the components of our products in-house. As a result, we are dependent upon the uninterrupted and efficient operation of our manufacturing facility in ~~additional disruptions to our business. Examples~~Exeter, New Hampshire. The operations at this facility may be disrupted by a number of ~~such disruptions include without limitation the following:~~factors, including:

The U.S. federal government has cancelled, and the U.S. federal government and/or state or international governments may in the future cancel contracts they have entered into with suppliers to procure competitive respiratory support technologies, thereby leaving those suppliers with significant inventory of components and/or finished goods and creating motivation for those suppliers to enter markets around the world with those devices at extremely competitive pricing; to the extent those suppliers and their products would compete with us, our existing business in markets where we already are established and/or our ability to enter into new markets may be negatively impacted.

There can be no assurance that the occurrence of these or any other operational problems at our facility would not cause significant production delays, an inability to meet customer demand and a substantial loss in revenue. In addition, ~~the increases~~if any of these events occur at our Exeter, New Hampshire facility, we may need to engage contract manufacturers to assist us in demand we have at times experienced since the onset of the COVID-19 pandemic are correlated with the number of patients suffering from COVID-19 who are being treated for respiratory distress; these increases in demand may not continue after the COVID-19 pandemic subsides. Moreover, the increases in demand we have experienced to date may result in decreased demand formanufacturing our products ~~after the COVID-19 pandemic subsides as hospitals may~~or product components. To this end, we recently engaged a third-party manufacturer to manufacture and assemble certain of our products at its facility in Tijuana, Mexico.

Several of our components are sole source from either our own internal processes or outside suppliers. These sole source components have ~~a large surplus of ventilators and other respiratory support equipment, including high flow nasal cannula devices, potentially including Vapotherm’s Precision Flow systems. Additionally,~~no immediate alternate supply channels. If we were ~~awarded~~to encounter a ~~blanket purchase agreement from the Department of Defense and may~~disruption in ~~the future be compelled to or otherwise enter into other blanket purchase agreements or~~ supply, agreements with domestic or foreign governmental entities, and orders may not materialize thereunder for a variety of reasons, including without limitation, the COVID-19 pandemic subsiding or any decision by the relevant domestic or foreign governmental entity to otherwise cancel or alter their purchase order or supply agreement. Even if any such agreement is ultimately fulfilled, the domestic or foreign governmental entity might fail to adequately distribute and install our technology in hospitals where the potential exists for it to generate an ongoing disposable revenue stream. As a result, any present increase or potential future increase in our capital or disposable revenuewe may not be ~~sustained~~able to find an alternate supplier or enter into a new manufacturing and ~~our revenue may significantly decrease after the COVID-19 pandemic subsides, which~~supply agreement. A failure to find an alternate supplier or enter into a new manufacturing and supply agreement could ~~have an adverse effect on our business. Any sudden and significant decrease in demand may~~ result in aan inability to manufacture our products and cause substantial ~~inventory position, which could also have an adverse effect on our business.~~

The full extent to which the COVID-19 pandemic impacts our 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 the actions taken to treat or contain COVID-19 or to otherwise limit its impact, among others. Additionally, strategies relating to limiting the impact of COVID-19 have become highly politicized around the world, includingloss in connection with the 2020 U.S. Presidential election, the outcome of which may result in significant political, economic, and civil instability. To the extent the COVID-19 pandemic, whether on its own or in connection with any political, economic, and civil instability resulting from the 2020 U.S. Presidential election adversely affects our business and financial results, our distributors’ and suppliers’ business and financial results, or our customers’ business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, including without limitation those relating to our ability to generate revenue and improve on or hold our current gross margin, the price of our common stock, our susceptibility to securities or other types of litigation, our significant amount of indebtedness, our need to generate sufficient cash flows to service our substantial indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.revenue.

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

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.


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

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

Large accelerated filer	☐☒	Accelerated filer	☒☐
Non-accelerated filer	☐	Smaller reporting company	☒☐
Emerging growth company	☒☐


		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 – September 30, ~~2020~~2021 and December 31, ~~2019~~2020	5
	Condensed Consolidated Statements of Comprehensive Loss – Three and ~~nine months~~Nine Months ended September 30, ~~2020~~2021 and ~~2019~~2020	6
	Condensed Consolidated Statements of Stockholders’ Equity – Three and ~~nine months~~Nine Months ended September 30, ~~2020~~2021 and ~~2019~~2020	7
	Condensed Consolidated Statements of Cash Flows – Nine ~~months~~Months ended September 30, ~~2020~~2021 and ~~2019~~2020	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2827
Item 3	Quantitative and Qualitative Disclosures About Market Risk	3836
Item 4	Controls and Procedures	3837

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	3938
Item 1A	Risk Factors	3938
Item 6	Exhibits	4339
Exhibit Index		4339
Signatures		4440

~~Expected dividend yield~~	~~0.0~~	%
~~Risk free interest rate~~	~~2.4~~	%
~~Expected stock price volatility~~	~~60.9~~	%
~~Expected term (years)~~	~~10.0~~

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		(457	)
Balance at September 30, 2021	$	10,472

	September 30, 2021		December 31, 2020
Component parts	$	15,460	$	10,367
Finished goods		9,270		9,506
Total inventories	$	24,730	$	19,873

	As of September 30, 2021
	Weighted Average Amortization Period in Years		Gross Carrying Amount		Accumulated Amortization
Customer relationships		10.00	$	2,420	$	(212	)
Developed technology		10.00		2,400		(210	)
Customer agreements		3.83		456		(305	)
Trade name / marks		10.00		360		(32	)
Total identifiable intangible assets		9.50	$	5,636	$	(759	)

	As of September 30, 2020
	Period of amortization		Gross Carrying Amount		Accumulated Amortization
Customer agreements		3.83	$	440	$	(182	)
Total identifiable intangible assets			$	440	$	(182	)

2021		0
2022		0
2023		3,200
2024		19,200
2025		17,600
Less: Unamortized deferred financing costs		(293	)
Long-term loans payable	$	39,707

	Total Due
2021 (remaining 3 months)		590
2022		2,343
2023		2,380
2024		2,417
2025		515
Total payments		8,245
Less interest		(1,476	)
Total present value of lease payments	$	6,769

	Common Stock Warrants
	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2019		182,076		$	14.84
Warrants granted		-			-
Warrants exercised		(105,271	)		15.46
Outstanding at September 30, 2020		76,805		$	14.00

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2020		228,489		$	25.60
Granted		244,632			26.05
Vested		(27,201	)		29.40
Canceled		(27,725	)		25.13
Unvested at September 30, 2021		418,195		$	25.65

Expected dividend yield	0.0%
Risk free interest rate	0.2% ~~- 1.6%~~
Expected stock price volatility	~~107.9% - 115.8%~~55.0%
Expected term (years)		~~0.4 -~~ 0.5

	Payments Due by Period
			Less Than						More Than
	Total		1 Year		1 - 3 Years		3-5 Years		5 Years
Amounts Reflected in Condensed Consolidated Balance Sheet:
Revolving Credit Facility	$	1,726	$	-	$	1,726	$	-	$	-
Term Facility		40,000		-		17,600		22,400		-
Operating Leases		8,259		2,360		4,778		1,121		-
Amounts Not Reflected in Condensed Consolidated Balance Sheet:
Interest on Debt ^(a)		7,279		2,300		4,179		800		-
Purchase Commitments ^(b)		5,855		5,855		-		-		-
Total	$	63,119	$	10,515	$	28,283	$	24,321	$	-

Exhibit Number		Description

~~10.1~~		~~Form of Restricted Stock Unit Agreement for Employees who are Executive Officers pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan~~

~~10.2~~		~~Form of Restricted Stock Unit Agreement for Employees who are not Executive Officers pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan~~

~~10.3~~		~~Form of Restricted Stock Unit Agreement for Non-Employee Directors pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan RSU~~

~~10.4~~		~~Form of Restricted Stock Unit Agreement for Consultants pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan RSU~~

~~10.5~~		~~Form of Non-Statutory Stock Option Agreement for Consultants pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan RSU~~

~~10.6~~		~~Amended and Restated Vapotherm, Inc. 2018 Equity Incentive Plan French Qualifying Subplan, dated August 31, 2020~~

~~10.7~~		~~First Amendment dated September 15, 2020 to Indefinite Term Employment Contract by and between Vapotherm, Inc. and Gregoire Ramade, dated March 14, 2016~~

~~10.8~~		~~Third Amendment to Amended and Restated Business Finance Agreement, dated September 29, 2020, between Vapotherm, Inc. and Western Alliance Bank~~

~~10.9~~		~~Fourth Amendment to Lease Agreement, dated August 23, 2020, between 100 Domain Drive EI, LLC, as administrator of the tenancy in common with 100 Domain Drive DD and Vapotherm, Inc.~~
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 ~~2002~~2002

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)

	VAPOTHERM, INC.

November ~~4, 2020~~3, 2021	By:	/s/ Joseph Army
		Joseph Army
		President and Chief Executive Officer

November ~~4, 2020~~3, 2021	By:	/s/ John Landry
		John Landry
		Senior Vice President and Chief Financial Officer