☒ 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:~~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~~“emerging growth ~~company"~~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 ☒

~~Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:~~

As of ~~May 7, 2019,~~October 27, 2022, there were ~~17,387,489~~26,705,925 outstanding shares of common ~~shares~~stock of Vapotherm, Inc.

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. 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, or SEC, on March 22, 2019, Part I, “Item 1A. Risk Factors” and in our other filings with the SEC. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required

by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

We use “Vapotherm,” “Vapotherm Access,” “High Velocity Therapy,” “HVT,” “HVT 2.0,” “Precision Flow,” ~~and “Hi-VNI”~~“Hi-VNI,” “OAM,” “HGE,” “Vapotherm UK,” and other marks as trademarks in the United States and/or in other countries. This Quarterly Report on Form 10-Q contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe that the information from these third-party publications, research, surveys and studies included in this Quarterly Report on Form 10-Q is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. This data involves a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section of our Annual Report on Form ~~10-K. These~~10-K for the year ended December 31, 2021 as filed with the Securities and ~~other factors could cause~~Exchange Commission (“SEC”) on February 24, 2022 and in our ~~future performance to differ materially from our assumptions and estimates.~~subsequent Quarterly Reports of Form 10-Q, including this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022.

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,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words and the use of future dates. Forward-looking statements include, but are not limited to, statements concerning:


	March 31, 2019			December 31, 2018			September 30, 2022			December 31, 2021
	(unaudited)						(unaudited)
Assets
Current assets
Cash and cash equivalents	$	56,666		$	58,223		$	28,709		$	57,071
Accounts receivable, net		6,658			7,107			8,136			10,909
Inventory		12,420			13,710
Inventories, net								36,433			36,562
Prepaid expenses and other current assets		2,456			2,683			3,201			5,205
Total current assets		78,200			81,723			76,479			109,747
Property and equipment, net		13,901			13,416			25,694			22,157
Operating lease right-of-use assets								6,676			7,045
Restricted cash		1,852			1,799			1,109			253
Goodwill		584			-			494			15,300
Intangible assets, net		455			-			25			4,398
Deferred income tax assets								32			78
Other long-term assets		350			308			2,115			1,107
Total assets	$	95,342		$	97,246		$	112,624		$	160,085
Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities
Accounts payable	$	1,508		$	3,148		$	1,507		$	5,923
Contract liability		176			79
Accrued expenses and other liabilities		6,657			7,653
Short term line of credit		3,982			3,163
Contract liabilities								1,478			2,081
Accrued expenses and other current liabilities								16,707			28,559
Revolving loan facility								-			6,608
Total current liabilities		12,323			14,043			19,692			43,171
Long-term loans payable		41,574			31,317
Deferred tax liability		97			-
Long-term loans payable, net								96,815			39,726
Other long-term liabilities		329			325			7,018			10,521
Total liabilities		54,323			45,685			123,525			93,418
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized as of March 31, 2019 and December 31, 2018, respectively; 0 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of March 31, 2019 and December 31, 2018, respectively; 16,899,685 and 16,782,837 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		17			17
Commitments and contingencies (Note 10)
Stockholders’ (deficit) equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021								-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of September 30, 2022 and December 31, 2021, 26,703,043 and 26,126,253 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively								27			26
Additional paid-in capital		268,348			265,926			458,023			443,358
Accumulated other comprehensive (loss) income								(386	)		26
Accumulated deficit		(227,346	)		(214,382	)		(468,565	)		(376,743	)
Total stockholders' equity		41,019			51,561
Total liabilities and stockholders’ equity	$	95,342		$	97,246
Total stockholders’ (deficit) equity								(10,901	)		66,667
Total liabilities and stockholders’ (deficit) equity							$	112,624		$	160,085

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

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENTS OF ~~OPERATIONS~~COMPREHENSIVE LOSS


	Three Months Ended March 31,						Three Months Ended September 30,					��	Nine Months Ended September 30,
	2019			2018			2022			2021			2022			2021
Net revenue	$	12,299		$	10,739		$	13,545		$	38,115		$	48,138		$	91,048
Cost of goods sold		7,120			6,494
Cost of revenue								11,682			19,291			36,018			45,649
Gross profit		5,179			4,245			1,863			18,824			12,120			45,399
Operating expenses
Research and development		3,273			2,225			4,382			3,979			16,241			13,466
Sales and marketing		9,161			8,051			11,460			20,465			36,615			47,169
General and administrative		4,879			2,382			6,477			7,262			20,754			23,948
Loss on disposal of fixed assets		-			3
Impairment of goodwill								-			-			14,701			-
Impairment of long-lived and intangible assets								2,139			-			6,175			-
Loss on disposal of property and equipment								321			-			321			-
Total operating expenses		17,313			12,661			24,779			31,706			94,807			84,583
Loss from operations		(12,134	)		(8,416	)		(22,916	)		(12,882	)		(82,687	)		(39,184	)
Other (expense) income
Interest expense								(3,276	)		(647	)		(7,872	)		(1,960	)
Interest income								56			21			113			74
Foreign currency loss		(9	)		(3	)		(73	)		(58	)		(188	)		(188	)
Interest income		203			1
Interest expense		(1,024	)		(616	)
Gain on change in fair value of warrant liabilities		-			128
Loss on extinguishment of debt								-			-			(1,114	)		-
Other								-			-			-			18
Net loss before income taxes							$	(26,209	)	$	(13,566	)	$	(91,748	)	$	(41,240	)
(Benefit) provision for income taxes								(8	)		-			74			-
Net loss	$	(12,964	)	$	(8,906	)	$	(26,201	)	$	(13,566	)	$	(91,822	)	$	(41,240	)
Net loss per share basic and diluted	$	(0.76	)	$	(11.33	)
Other comprehensive loss:
Foreign currency translation adjustments								(172	)		(40	)		(412	)		(22	)
Total other comprehensive loss							$	(172	)	$	(40	)	$	(412	)	$	(22	)
Total comprehensive loss							$	(26,373	)	$	(13,606	)	$	(92,234	)	$	(41,262	)
Net loss per share - basic and diluted							$	(0.98	)	$	(0.52	)	$	(3.46	)	$	(1.59	)
Weighted-average number of shares used in calculating net loss per share, basic and diluted		16,949,027			786,184			26,697,226			25,987,648			26,532,159			25,891,045

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

CONDENSED CONSOLIDATED STATEMENTS OF ~~REDEEMABLE CONVERTIBLE PREFERRED STOCK AND~~ STOCKHOLDERS’ EQUITY (DEFICIT)

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

1. Description of Business

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~~care of ~~its proprietary Hi-VNI Technology products that are used to treat~~ patients of all ages suffering from respiratory ~~distress.~~distress, whether associated with complex lung diseases such as chronic obstructive pulmonary disease (“COPD”), congestive heart failure, pneumonia, asthma and COVID-19 or other systemic conditions. The Company’s ~~Hi-VNI Technology~~strategy is to become the world’s preeminent complex lung disease and respiratory distress patient management company by combining digital and device solutions to create a healthcare ecosystem focused on improving the lives of these patients while reducing the cost of their care. The Company’s device solutions are focused on High Velocity Nasal Insufflation (“HVNI”, or “High Velocity Therapy”), which delivers non-invasive ventilatory support to patients by providing heated, humidified, ~~and~~ oxygenated air at high velocities through a small-bore nasal interface, and on closed loop control systems such as our Oxygen Assist Module (“OAM”), designed to automatically maintain a patient's pulse oxygen saturation (“SpO2”) levels within a specified range for a defined period of time. The Company’s digital solutions are focused on remote patient monitoring, using proprietary algorithms to predict impending respiratory episodes before they occur and coordinate timely intervention, obviating the need for costly hospital admissions and minimizing patient distress. Although the Company recently decided to exit its standalone remote patient monitoring business, the Company intends to use the underlying technology to develop digital capabilities for the Company’s home device. While these device and digital solutions function independently, the Company believes leveraging the two together can create a unique healthcare ecosystem, focused on delivering high quality, efficient respiratory care in a variety of settings.

High Velocity Therapy is an advanced form of high flow therapy that is differentiated due to its ability to deliver breathing gases, including oxygen, at a high velocity, tofor the treatment of spontaneously breathing patients ~~through a comfortable small-bore nasal interface.~~with either Type 1 hypoxic respiratory distress, like that experienced by patients with pneumonia or COVID-19, or Type 2 hypercapnic respiratory distress, like that experienced by patients with COPD. The Company’s HVT 2.0 and Precision Flow systems (together, “High Velocity Therapy systems”), which use ~~Hi-VNI Technology,~~High Velocity Therapy technology, are clinically validated alternatives to, and address many limitations of, the current standard of care for the treatment of respiratory distress in a hospital setting. The Company’s next generation High Velocity Therapy system, known as HVT 2.0, received 510k clearance from the FDA in 2021 and was in full market release as of August 2022.

In certain countries outside the United States, the Company currently offers its OAM, which launched in the United Kingdom, select European markets, and Israel in late 2020. The ~~Company offers four~~OAM can be used with most versions of ~~its~~the Company’s Precision Flow ~~systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic~~system and ~~Precision Flow Heliox.~~the HVT 2.0 has been enabled for future OAM use. The ~~Company generates revenue primarily from sales~~OAM helps clinicians maintain a patient’s SpO2 within a target SpO2 range over a greater period of ~~its Precision Flow systems, which~~time while requiring significantly fewer manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce the health risks associated with dosing too much, or too little, oxygen, particularly in neonates. In neonates, these risks include ~~capital units and single-use disposables, and to a lesser extent, sales of its companion products, which include the Vapotherm Transfer Unit 2.0, the Q50 compressor and various adaptors.~~ visual or developmental impairment or death.

The Company sells ~~Precision Flow~~its High Velocity Therapy systems to hospitals through a direct sales ~~force~~organization in the United States, the United Kingdom and Germany and through distributors in other select countries outside of those countries. The OAM is sold through a direct sales organization in the United Kingdom and Germany and through distributors in ~~select other countries outside~~Europe and the Middle East. The Company is in the process of seeking FDA approval to market the OAM in the United States. In addition, the Company ~~utilizes~~employs field-based clinical educators ~~who are experienced users of Hi-VNI Technology and~~ who focus on medical education ~~efforts to~~and training in the effective use of its products and help facilitate increased adoption and ~~increase~~ utilization. The Company ~~is focused~~focuses on physicians, respiratory therapists and nurses who work in acute hospital settings, including ~~the~~ emergency ~~department~~departments and adult, pediatric and neonatal intensive care ~~units (the “ICUs”).~~units. The Company’s relationship with these clinicians is particularly important, as it enables ~~its~~the Company’s products to follow patients through the care continuum.

~~Since inception,~~On November 2, 2021, HGE Health Care Solutions, LLC (“HGE”), a wholly owned subsidiary of the Company, affiliated with a leading pulmonology practice in Tulsa, Oklahoma known as Pulmonary Care Innovations, PLLC d/b/a RespirCare (“RespirCare”). RespirCare provides in-person and virtual care to COPD and other respiratory distress patients in Oklahoma (and potentially other states with licensure reciprocity). This affiliation was structured as an acquisition of RespirCare’s management company, PCI Management Group LLC, now known as Vapotherm Access Management Services LLC (“PCI”), and PCI’s arrangements with RespirCare and its physician shareholder. The Company consolidates PCI and RespirCare for accounting and tax purposes. (See Note 3) In August 2022, the Company made the decision to exit its relationship with RespirCare and on August 29, 2022, PCI provided RespirCare with a six-month without cause contract termination notice. The Company and RespirCare’s physician shareholder are presently in negotiations to consensually shorten the six-month contractual notice period. (See Note 11)

Going Concern

The Company had an accumulated deficit of $468.6 million as of September 30, 2022 and incurred a net loss of $91.8 million and generated a cash flow deficit from operations of $69.3 million, both for the nine months ended September 30, 2022. The Company expects to continue to incur significant product development, regulatory, sales and marketing and other expenses. The Company has historically funded its cash flow deficits primarily through the issuance of equity securities and debt and sales of High Velocity Therapy systems and their associated disposables. The Company expects to continue to incur significant expenses, operating losses and cash flow deficits for the foreseeable future. As such, the Company has ~~financed~~evaluated whether or not its cash, cash equivalents and restricted cash on hand and working capital would be sufficient to sustain forecasted operating activities through November 2, 2023, as required by Accounting Standards Codification (ASC) 205-40, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern.

Due to the inherent uncertainty in predicting future revenues and certain variable costs, management has considered its ability to reduce cash flow deficits and is in the process of implementing the following steps to reduce its cash flow deficits:

•

Move substantially all of the Company’s production operations ~~primarily through an initial public offering~~to Mexico to help reduce cost of ~~its common stock, private placements of its convertible preferred stock, sales of its Precision Flow systems~~labor and ~~amounts borrowed under its credit facilities. The Company has devoted the majority of its resources~~overhead;

•

Establish a Technology Center in Singapore to bring most research and development ~~activities related~~projects in-house to ~~its Precision Flow systems, including regulatory initiatives~~help reduce the cost of external design firms and ~~sales and marketing activities. The Company has invested heavily in its sales and marketing function by increasing~~access government grant funding;

•

Materially defer or limit the number of sales representatives and clinical educators to facilitate adoption and increase utilization of its Hi-VNI Technology products and expanded its digital marketing initiatives and medical education programs.

~~The Company is subject to risks common to companies~~Company’s spending on capital equipment;

•

Cease future commercial investments in the ~~medical device industry,~~Vapotherm Access standalone patient monitoring reporting unit and wind down its current commercial operations;

•

Restructure the Company’s commercial organization;

•

Normalize the level of commission payouts to match current sales levels;

•

Reduce the use of external consultants and contract resources; and

•

Other steps to be determined in the future.

Management believes its plans to reduce cash flow deficits can be effectively implemented as all of the actions are within the Company’s control. Actions completed during the three and nine months ended September 30, 2022 under the Company’s restructuring plans and their impacts on the Company’s condensed consolidated financial statements are further described in Note 11 “Restructuring.”

As of September 30, 2022, the Company had cash, cash equivalents and restricted cash of $29.8 million, working capital of $56.8 million and outstanding debt under its Loan and Security Agreement (the “SLR Loan Agreement”) with the lenders party thereto (each a “lender” and collectively, “SLR” or the “Lenders”) of $100.0 million. The SLR Loan Agreement provides for interest-only payments through February 18, 2026. The SLR Loan Agreement contains customary covenants and representations, including, ~~but~~without limitation, a minimum revenue covenant equal to a percentage of each month’s forecasted net product revenue (tested on a trailing six-month basis at the end of each fiscal month), and a $20 million minimum liquidity covenant (the “Liquidity Covenant”).

As of November 2, 2022, the Company expects its existing cash and cash equivalents will not ~~limited~~be sufficient to ~~the successful development and commercialization of its Precision Flow products, fluctuations~~remain 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~~Liquidity Covenant under its SLR Loan Agreement through at least the next twelve months from the issuance of ~~growth and effectiveness of marketing by~~these condensed consolidated financial statements. Therefore, substantial doubt exists about the ~~Company and by third parties.~~

~~On November 16, 2018,~~Company’s ability to continue as a going concern within one year after the Company 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 after deducting the underwriting discount of $4.5 million and offering expenses of $2.5 million.

~~On February 28, 2019, the Company acquired its United Kingdom based distributor. See Note 18 “Business Combinations” to~~date that these condensed consolidated financial statements ~~for details~~are issued. To ensure adequate liquidity, the Company is presently evaluating various external debt and equity financing scenarios in light of ~~this transaction.~~the Liquidity Covenant, although no assurance can be provided that it will be able to do so. There is inherent uncertainty associated with fundraising activity and it is not in the Company’s complete control. If the Company is unable to obtain additional financing, it may be required to delay the development, commercialization and marketing of the Company’s new products and services. Any additional debt or equity financing that the Company raises may contain terms that are not favorable to the Company or its stockholders.

The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties described above. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of ~~America.~~ 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, ~~2018~~2021 (the ~~“2018~~“2021 Form 10-K”). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our ~~2018~~2021 Form 10-K and are updated, as necessary, in this report. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.

~~VAPOTHERM, INC.~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited, continued)~~

~~(In thousands, except share and per share amounts)~~

Principles of Consolidation

These condensed consolidated financial statements include the financial statements of Vapotherm UK Ltd. (“Vapotherm UK,” formerly Solus Medical Ltd. ~~(“Solus"~~), a wholly owned subsidiary of the Company ~~based~~located in the United Kingdom, Vapotherm Deutschland GmbH, a wholly owned subsidiary of the Company located in Germany, HGE, a wholly owned subsidiary of the Company located in the United States, PCI, a wholly owned subsidiary of HGE which was acquired on November 2, 2021 located in the ~~first quarter~~United States, RespirCare, an affiliate of ~~2019.~~PCI, located in the United States, Vapotherm Holding Company, LLC, a wholly owned subsidiary located in the United States, and Vapotherm Technology Asia Pte. Ltd., a wholly owned subsidiary of the Company located in Singapore. All intercompany accounts and transactions have been eliminated upon consolidation.

Segment Information

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reporting segment, Vapotherm, Inc., and three reporting units, Vapotherm, Vapotherm UK and Vapotherm Access. Segment information is consistent with how the chief operating decision maker reviews the business, makes investing and resource allocation decisions and assesses operating performance.

As of September 30, 2022, the majority of the Company’s long-term assets are located in the United States. Long-term assets located outside the United States totaled $5.1 million and $2.4 million as of September 30, 2022 and December 31, 2021, respectively.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~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, ~~warrant liabilities,~~ realizability of inventories, allowance for bad ~~debt~~debts, accrued expenses, including the fair value of contingent consideration, the valuation allowances against deferred income tax assets, and ~~accrued expenses.~~assessments of impairment with respect to long-lived and intangible assets, including goodwill. Actual results may differ from these estimates.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of ~~March 31, 2019,~~September 30, 2022, and the condensed consolidated statements of ~~operations, redeemable convertible preferred stock~~comprehensive loss and stockholders’ (deficit) equity ~~(deficit)~~for the three and nine months ended September 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the ~~three~~nine months ended ~~March 31, 2019~~September 30, 2022 and ~~2018~~2021 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

adjustments, necessary for the fair statement of the Company’s financial position as of ~~March 31, 2019~~September 30, 2022 and the results of its operations for the three and ~~its~~nine months ended September 30, 2022 and 2021 and the cash flows for the ~~three~~nine months ended ~~March 31, 2019~~September 30, 2022 and ~~2018.~~2021. The financial data and other information disclosed in these notes related to the three and nine months ended ~~March 31, 2019~~September 30, 2022 and ~~2018~~2021 are also unaudited. The results of operations for the three and nine months ended ~~March 31, 2019,~~September 30, 2022 and 2021 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Reclassification

Certain amounts in 2021 have been reclassified to conform to the presentation in 2022. None of the reclassifications had any impact to the Company’s results of operations.

Financial Instruments and Concentrations of Credit Risk

~~Recently Adopted Accounting Pronouncements~~

~~Statement~~As of ~~Cash Flows (Topic 230): Restricted Cash~~

~~In November 2016,~~September 30, 2022, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 amends ASC 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The new standard requiresCompany’s financial instruments included cash and cash equivalents, ~~balances on~~restricted cash, accounts receivable, accounts payable and debt, the ~~statement~~carrying amounts of ~~cash flows~~which approximated fair value due to ~~include restricted~~their short-term nature or market interest rates. All of the Company’s cash and cash ~~equivalent balances. ASU 2016-18 requires~~equivalents are maintained at creditworthy financial institutions. At September 30, 2022, deposits exceed the ~~company~~amount of any insurance provided.

The Company extends credit to ~~provide appropriate disclosures about~~customers in the normal course of business but typically does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of its ~~accounting policies pertaining~~customers. An allowance for potentially uncollectible accounts is provided based on history, economic conditions, and composition of the accounts receivable aging. In some cases, the Company makes allowances for specific customers based on these and other factors. Provisions for the allowance for doubtful accounts are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive loss.

Supplier Risk

The Company obtains some of the components and subassemblies included in its High Velocity Therapy systems and its OAM from single source suppliers. The partial or complete loss of one or more of these suppliers could cause significant production delays, an inability to meet customer demand and a substantial loss in revenue.

Foreign Currency and Foreign Operations

The functional currency of the Company is the currency of the primary economic environment in which the entity operates, which is the U.S. dollar. For the Company’s non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of its foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive (loss) income, a separate component of stockholders’ (deficit) 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 (loss) income .

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid temporary investments purchased with original maturities of 90 days or less to be cash equivalents. The Company holds restricted cash related to certificates of deposits and collateral in ~~accordance with accounting principles generally accepted in the United States. Additionally, changes in restricted cash and restricted cash equivalents that result from transfers between~~relation to lease agreements. As of September 30, 2022, $0.9 million of its $29.8 million of cash, cash equivalents and restricted cash ~~and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. A company with a material~~ balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard is effective for interim and annual periods beginning after December 15, 2018. The Company had not previously included restricted cash as a component of cash and cash equivalents as presented on its consolidated statement of cash flows. The Company adopted the new standard in the first quarter of fiscal 2019, under the retrospective adoption method, and prior year restricted cash has been reclassified to conform to current year presentation.was located outside

1013

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

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

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


	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	28,709	$	57,071
Restricted cash		1,109		253
Total cash, cash equivalents, and restricted cash	$	29,818	$	57,324

Property and Equipment

Property and equipment are recorded at cost. Depreciation is recognized over the estimated useful lives of the related assets on a ~~Business (Topic 805):~~straight-line basis, except for tooling for which depreciation is recognized utilizing the units-of-production method. Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the remaining lease term or the estimated useful lives of the improvements and is included in depreciation expense. Demonstration equipment represents internally manufactured capital equipment that is used on-site at trade shows and at customer locations to demonstrate the High Velocity Therapy systems. Depreciation expense on demonstration equipment is recorded in sales and marketing expenses 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.

When impairment indicators are present, the Company evaluates the recoverability of its long-lived assets. If the assessment indicates an impairment, the affected assets are written down to fair value. (See Note 11)

Intangible Assets

~~In January 2017,~~Intangible assets are related to customer relationships, developed technology, and customer agreements and are amortized on a straight-line basis over their useful lives. Amortization is recorded within sales and marketing expenses in the ~~FASB issued ASU No. 2017-01~~ ~~Clarifying~~condensed consolidated statements of comprehensive loss for customer-related intangible assets while amortization of other intangible assets is included within general and administrative expenses in the ~~Definition~~condensed consolidated statements of ~~a Business (Topic 805)~~ ~~(“ASU 2017-01”). The new guidance changed~~comprehensive loss. Intangible assets are evaluated for impairment whenever events or circumstances indicate an asset may be impaired. (See Note 7)

Goodwill

Goodwill represents the ~~definition of a business to assist entities with evaluating when a set of transferred assets~~difference between the purchase price and ~~activities is a business. The guidance requires an entity to evaluate if substantially all of~~ the fair value of the ~~gross~~identifiable tangible and intangible net assets ~~acquired is concentrated~~when accounted for using the purchase method of accounting in a ~~single identifiable asset~~business combination. Goodwill is not amortized but reviewed for impairment. Goodwill is reviewed annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.

The Company compares the fair value of its three reporting units, Vapotherm, Vapotherm UK and Vapotherm Access, to their carrying values. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of the reporting unit, the Company would record an impairment loss equal to the difference. (See Note 7)

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

Product Warranty

The Company provides its customers with a standard one-year warranty on its capital equipment sales. Warranty costs are accrued based on actual historical trends and estimated at the time of sale. The warranty liability is included within accrued expenses and other current liabilities in the condensed consolidated balance sheets. A roll-forward of the Company’s warranty liability from December 31, 2021 to September 30, 2022 is as follows:


Balance at December 31, 2021	$	330
Provisions for warranty obligations		205
Settlements		(306	)
Balance at September 30, 2022	$	229

Revenue Recognition

The Company’s revenue is primarily derived from the sale of products, leases and services. Product revenue consists of capital equipment and single-use disposables that are shipped and billed to customers both domestically and internationally. The Company’s main capital equipment products are the High Velocity Therapy systems and the Vapotherm Transfer Unit 2.0. The Company’s main disposable products are single-use disposables and nasal interfaces, or cannulas, and adaptors. Lease revenue consists of two components which include capital equipment that the Company leases to its customers and, in certain situations, an allocation from disposable revenue to other lease revenue upon the sale of disposable products in bundled arrangements involving the placement of the High Velocity Therapy capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. Service revenue consists of fees associated with routine service of capital units and the sale of extended service contracts and preventative maintenance plans, which are purchased by a small portion of the Company’s customer base. In addition, the Company sells small quantities of component parts in the United States, United Kingdom, and to third-party international service centers who provide service on the High Velocity Therapy capital units outside of the United States and United Kingdom. Service revenue also includes fees from the standalone remote patient monitoring services sold through Vapotherm Access. Freight revenue is based upon actual freight costs plus a percentage markup of such costs associated with the shipment of products domestically, and to a lesser extent, internationally, and is included in service revenue. Rebates and fees consist of contractually obligated administrative fees and percentage-of-sales rebates paid to Group Purchasing Organizations (“GPOs”), Integrated Delivery Networks (“IDNs”) and distributor partners and are accounted for as a reduction of revenue.

Under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codifications (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and assesses whether each promised good or service is distinct and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value-added, and other taxes collected on behalf of third parties are excluded from revenue. The Company’s standard payment terms are generally 30 days from the date of sale.

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative stand-alone selling prices of the promised products or services underlying each performance obligation. The Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable through past transactions, the Company estimates the stand-alone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Revenue is generally recognized when the customer obtains control of the Company’s product, which generally occurs at a point in time upon shipment based on the contractual shipping terms of a contract.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

Product and service revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value amount method to which the Company expects to be entitled. As such, revenue on sales is recorded net of prompt pay discounts and payments made to GPOs, IDNs and distributors. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determination of whether to include estimated amounts in the transaction price is based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The Company believes that the estimates it has established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could result in different estimates.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying a practical expedient under ASC 606, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less.None of the Company’s contracts contained a significant financing component during the three or nine months ended September 30, 2022 or 2021.

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

Lease Revenue

The Company also enters into agreements to lease its capital equipment. For such sales, the Company accounts for revenue under ASC 842, Leases (“ASC 842”), and assesses and classifies these transactions as sales-type or operating leases based on whether the lease transfers ownership of the equipment to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term. Equipment included in arrangements including transfer of title are accounted for as sales-type leases and the Company recognizes the present value of the lease payments due over the lease term as revenue at the inception of the lease. The Company records the present value of future lease payments in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets; these amounts totaled less than $0.1 million and $0.7 million at September 30, 2022 and December 31, 2021, respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the sales-type or direct financing lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis over the term of the lease.

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

Shipping and Handling Costs

Amounts billed to customers for shipping and handling are included in service revenue. Shipping and handling costs are included in costs of sales. The total costs of shipping and handling for the three months ended September 30, 2022 and 2021 were $0.3 million and $0.8 million, respectively. The total costs of shipping and handling for the nine months ended September 30, 2022 and 2021 were $0.8 million and $1.5 million, respectively.

Sales and Value-Added Taxes

When required by local jurisdictions, the Company bills its customers for sales tax and value-added tax calculated on each sales invoice and records a liability for the sales and value-added tax payable, which is included in accrued expenses and other current liabilities in the condensed consolidated balance sheets. Sales tax and value-added tax billed to a customer are not included in the Company’s revenue.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

Stock-Based Compensation

The Company maintains an equity incentive plan to provide long-term incentives for employees, consultants, and members of the board of directors. The plan allows for the issuance of non-statutory and incentive stock options, restricted stock, unrestricted stock, stock units, including restricted stock units and performance stock units, and stock appreciation rights to employees, consultants and non-employee directors. The Company recognizes stock-based compensation expense for awards of equity instruments to employees and non-employees based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation (“ASC 718”). ASC 718 requires all equity-based compensation awards, including grants of restricted stock, restricted stock units and stock options, to be recognized as expense in the condensed consolidated statements of comprehensive loss based on their grant date fair values.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value of restricted stock and restricted stock units is measured at the market value of the related shares of the Company’s common stock on the grant date. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period and is generally three to four years. For performance-based awards, the related compensation cost is amortized over the performance period on an accelerated attribution basis. Compensation cost associated with performance awards is based on fair value on the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved. Cumulative adjustments are recorded each quarter to reflect estimated outcomes of the performance-related conditions until the results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the expected life (weighted average period of time that the options granted are expected to be outstanding), the volatility of the Company’s common stock and an assumed risk-free interest rate. For the year ended December 31, 2021, expected volatility was calculated based on historical volatility of a group of ~~similar identifiable assets; if so,~~publicly traded companies that the ~~set of transferred assets and activities is not~~Company considers a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The Company adopted ASU 2017-01 effectivepeer group. Effective January 1, ~~2019. Adoption of ASU 2017-01 did not have a significant impact on our consolidated financial statements and related disclosures.~~

~~Recently Issued Accounting Pronouncements~~

~~Leases (Topic 842):~~

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 leases2022, expected volatility is based on the ~~balance sheet as a lease liability~~historical volatility of the Company’s common stock. The expected life is estimated using the simplified method for “plain vanilla” options. The risk-free interest rate is based on U.S. Treasury rates with a ~~corresponding right-of-use asset for leases with a lease~~remaining term ~~of more than twelve months. The Company will adopt~~that approximates the ~~new standard during interim and annual periods beginning after December 15, 2019. The new standard originally required a modified retrospective transition for capital or operating leases existing~~expected life assumed 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 grant. No dividend yield is assumed as the ~~initial application. In July 2018,~~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 ~~FASB issued ASU No. 2018-11 Leases (Topic 842) (“ASU 2018-11”) which provided another transition method in addition~~extent actual forfeitures differ from the estimate, the difference is recorded to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earningscompensation expense in the period of ~~adoption.~~the forfeiture.

The Company recognizes stock-based compensation expense for shares of its common stock issued pursuant to the Vapotherm, Inc. 2018 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the related offering period. The Company estimates the fair value of shares to be issued under the ESPP based on a combination of options valuedusing the Black-Scholes option pricing model. The expected life is determined based on the contractual term. Dividend yield, risk-free interest rate, forfeiture rates, and expected volatility are estimated in a manner similar to option grants described above.

Income Tax

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

The Company accounts for uncertainty in income taxes recognized in the condensed consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

The Company’s major tax jurisdictions are the states of New Hampshire and Pennsylvania, and the United States, United Kingdom, Germany, Mexico, and Singapore. The benefit for income taxes for the three months ended September 30, 2022 totaled less than $0.1 million and related to a benefit for net deferred income tax assets deemed more likely than not to be realized by our foreign subsidiaries. The provision for income taxes for the nine months ended September 30, 2022 totaled $0.1 million and related to deferred tax liabilities for differences in the book and tax basis of indefinite-lived assets, partially offset by a benefit for net deferred income tax assets deemed more likely than not to be realized by our foreign subsidiaries. There was no provision or benefit for income taxes for the three or nine months ended September 30, 2021 because the Company has historically incurred operating losses and maintains a full valuation allowance against its United States net deferred tax assets.

Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income and reduce taxes, respectively. The Company has not ~~yet~~currently completed an evaluation of ownership changes through December 31, 2021 to assess whether utilization of the Company’s net operating loss and tax credit carryforwards would be subject to an annual limitation under Sections 382 and 383 of the Code. To the extent an ownership change is determined to have occurred under Sections 382 and 383 of the ~~effects, if any, that~~Code, the ~~adoptions of ASU 2016-02~~net operating loss and ~~ASU 2018-11~~tax credit carryforwards may ~~have on its financial position, results of operations, cash flows, or disclosures.~~be subject to limitation.

Recently Issued Accounting Pronouncements

Credit Losses (Topic 326):

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used and establishes additional disclosures related to credit risks. ~~The~~ ~~new standard is~~In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives 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, ~~2019.~~2022 for private companies, emerging growth companies following private company adoption dates, or public entities meeting the definition of smaller reporting companies as of the date of issuance of this update. Since the Company met the definition of a smaller reporting company as of the date of issuance of this update, the Company is not required to adopt ASU 2016-13 until January 1, 2023. The Company ~~has not~~expects to recognize a one-time cumulative effect adjustment to its asset portfolio as of the beginning of the first reporting period in which the new standards is effective, but cannot yet ~~determined~~determine the ~~effects, if any, that~~magnitude of such one-time adjustment or the overall impact of the adoption of ASU 2016-13 ~~may have~~and subsequent amendments to this standard on ~~its financial position, results of operations, cash flows, or disclosures.~~

~~Foreign Currency~~

~~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 non-U.S. subsidiary that transacts in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive income, a separate component of stockholders’ equity.

There were no assets or liabilities of foreign subsidiaries that were translated at period-end exchange rates as of December 31, 2018. As of March 31, 2019, the Solus entity was included in our consolidated results due to the acquisition in February 2019. See Note 18 “Business Combinations” to thesecondensed consolidated financial ~~statements~~statements.

3. Business Combination

On November 2, 2021, HGE affiliated with a leading pulmonology practice in Tulsa, Oklahoma known as RespirCare. RespirCare provides in-person and virtual care to COPD and other respiratory distress patients in Oklahoma (and potentially other states with licensure reciprocity). This affiliation was structured as an acquisition of RespirCare’s management company, PCI and PCI’s arrangements with RespirCare and its physician shareholder. The Company consolidates PCI and RespirCare for ~~details of this transaction.~~accounting and tax purposes. The f~~unctional currency for this entity is its local currency, Pound Sterling (GBP).~~principal assets acquired included goodwill and property and equipment.

1118

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

~~Realized foreign currency gains or losses arising from transactions denominated in foreign currencies, are recorded in other (expense) income in~~The purchase price, net of cash acquired, of $1.7 million was funded with cash payments of approximately $1.3 million and the ~~consolidated statements~~settlement of ~~operations. Unrealized foreign currency gains or losses arising from transactions denominated in foreign currencies are recorded in other comprehensive income.~~

~~Cash, Cash Equivalents,~~$0.4 million of preexisting transactions. The acquisition has been accounted for as an acquisition of a business. The following table summarizes the purchase price allocation that includes the fair value of the separately identifiable assets acquired and ~~Restricted Cash~~

~~The Company considers all highly liquid temporary investments purchased with original maturities~~liabilities assumed as of 90 days or less to be cash equivalents. At March 31, 2019 and December 31, 2018, the Company had restricted cash related to certificates of deposits and collateral in relation to lease agreements. At March 31, 2019 and December 31, 2018, the Company did not hold any cash equivalents.November 2, 2021:


Cash	$	39
Accounts receivable		101
Prepaids and other current assets		11
Property and equipment		397
Operating lease right-of-use assets		316
Goodwill		1,302
Other long-term assets		9
Total assets acquired		2,175
Accounts payable		(29	)
Other current liabilities		(111	)
Other long-term liabilities		(264	)
Total liabilities assumed		(404	)
Total purchase price	$	1,771

~~Intangible Assets~~

Intangible assets related to customer agreements are amortized on a straight-line basis, over their useful lives. Amortization is recorded within sales and marketing expenses in the consolidated statements of operations.

~~Goodwill~~

~~Goodwill represents the~~The excess of purchase consideration over the fair value of net tangible ~~and identifiable intangible~~ assets acquired ~~in a transaction accounted for using~~was recorded as goodwill. Goodwill associated with the ~~purchase method~~acquisition was primarily attributable to the expansion opportunity of ~~accounting. Goodwill is not amortized, but reviewed for impairment. Goodwill is reviewed annually, as of October 1,~~the Vapotherm Access standalone remote patient monitoring platform and ~~whenever events or changes in circumstances indicate that~~ the ~~carrying~~ value of the acquired workforce. The goodwill ~~may not be recoverable.~~

is deductible for tax purposes. The fair values assigned to tangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. There were no intangible assets identified as part of the acquisition. The Company ~~compares~~finalized the purchase price allocation during the second quarter of 2022.

During the three months ended June 30, 2022, the Company wrote down the value of goodwill recorded in connection with the acquisition due to a decrease in the fair values of the Vapotherm Access standalone remote patient monitoring reporting unit below its carrying value. The decrease was attributable to a significant decrease in future forecasted revenues and uncertainty related to the Company’s ability to scale its standalone remote patient monitoring business given slower than expected patient enrollment. (See Note 7)

During the three months ended September 30, 2022, the Company made the decision to cease future commercial investments in the Vapotherm Access standalone remote patient monitoring reporting unit and begin to wind down current commercial operations. As a result, the Company recorded an impairment charge of $0.6 million to write down the value of RespirCare’s property and equipment and operating lease right-of-use asset to its fair value. (See Note 11)

The Company has included the financial results of PCI and RespirCare in the condensed consolidated financial statements from the date of acquisition. Pro forma financial information has not been presented as the impact to the financial results is immaterial. The transaction costs associated with the acquisition were approximately $0.5 million and were recorded in general and administrative expenses as incurred during the fourth quarter of 2021.

4. Fair Value Measurements

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

Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets ~~assigned to~~or liabilities that the reporting ~~unit exceeds~~entity has the ~~fair value of~~ability to access at the ~~reporting unit, the Company would record an impairment loss equal~~measurement date.

VAPOTHERM, INC.

Notes to ~~the difference. As described in Note 17 “Segment Reporting”, the Company operates in one operating segment and has two reporting units, Vapotherm and Solus.~~

~~Disaggregated Revenue~~

The following table shows the Company’s net revenue disaggregated into categories the Company considers meaningful to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors:

Three Months Ended March 31, 2019

US

International

Total

Net revenue by:

Product Revenue

Capital

$
1,510

$
505

$
2,015

Disposable

7,547

1,472

9,019

Subtotal Product Revenue

9,057

1,977

11,034

Lease Revenue

663

-

663

Service and Other Revenue

329

273

602

Total Revenue

$
10,049

$
2,250

$
12,299

~~VAPOTHERM, INC.~~

~~Notes to~~Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

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

Three Months Ended March 31, 2018

US

International

Total

Net revenue by:

Product Revenue

Capital

$
1,572

$
711

$
2,283

Disposable

6,343

1,226

7,569

Subtotal Product Revenue

7,915

1,937

9,852

Lease Revenue

185

-

185

Service and Other Revenue

522

180

702

Total Revenue

$
8,622

$
2,117

$
10,739

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.

~~Service~~As of September 30, 2022, the Company had three items, cash equivalents, contingent consideration and ~~other revenue includes sales~~an embedded derivative, measured at fair value on a recurring basis. The Company’s cash equivalents primarily consist of ~~non-Vapotherm products sold by Solus. Net revenue by U.S.~~money market deposits which totaled approximately $13.0 million at September 30, 2022 and ~~International is~~are valued based on Level 1 of the ~~customer location~~fair value hierarchy. The Company’s contingent consideration, which had no remaining value at September 30, 2022, relates to ~~which~~ the ~~product~~2020 acquisition of HGE and is ~~shipped. No individual foreign country represents more than 10%~~valued based on Level 3 of the fair value hierarchy. The Company’s embedded derivative relates to the Company’s financing arrangement described in Note 9 “Debt.” Its fair value is deemed to be immaterial at September 30, 2022 and is valued based on Level 3 of the fair value hierarchy. There were no transfers in or out of Level 1, 2 or 3 during the three and nine months ended September 30, 2022.

The following table summarizes changes to the contingent consideration payable, a recurring Level 3 measurement, for the nine months ended September 30, 2022:


Balance at December 31, 2021	$	9,116
Change in fair value of contingent consideration		(3,351	)
Payments		(5,765	)
Balance at September 30, 2022	$	-

The change in fair value of contingent consideration was a reduction of $0.2 million and $3.4 million for the three and nine months ended September 30, 2022, respectively, and is included in general and administrative expenses in the accompanying condensed consolidated statement of comprehensive loss. The reduction in fair value of contingent consideration during the three and nine months ended September 30, 2022, was a result of a decrease in forecasted future revenues of Vapotherm Access and the Company’s decision to cease future commercial investments and begin to wind down current commercial operations.

There were no payments of contingent consideration for the three months ended September 30, 2022. Payments of contingent consideration included $0.2 million paid in cash and $5.6 million paid in 368,168 shares of the Company’s ~~total revenue.~~common stock for the nine months ended September 30, 2022.

~~Product Returns~~

~~The~~During the first quarter of 2022, 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 time of sale. The Company provides its customers with the rightgranted SLR warrants to ~~return products for a refund of the~~ purchase price or for an account credit, if the return is made within a specified number of days from the original invoice date. The Company records a product return liability based upon an estimate of specific returns and a review of historical returns experienced. Adjustments are made to the product return liability as returns data and historical experience change. The provision for product return estimates is recorded as a reduction of revenue. The product return liability of less than $0.1 million is included in other current liabilities.

~~Stock Split~~

On November 2, 2018, the Company’s Board of Directors and stockholders approved a 14:1 reverse stock split. The effect of this event has been reflected in all of the share quantities and per share amounts throughout these financial statements. The107,373 shares of common stock ~~retained a par value~~(the “Warrants”) and during the third quarter of ~~$0.001.~~

~~Business Combinations~~

2022, the Warrants were modified to amend the exercise price from $13.97 per share to $1.63 per share. The ~~Company uses its best estimates and assumptions to assign fair value to~~modification of the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to theWarrants resulted in an incremental increase in fair value of ~~these tangible~~the Warrants of less than $0.1 million, which the Company recorded as an addition to the debt discount for non-cash consideration paid to the Lenders. The issuance and ~~intangible assets acquired and liabilities assumed, with~~modification of the ~~corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded~~Warrants were made in connection with ~~a business combination as of the acquisition date. The Company continues to collect information and re-evaluates these estimates and assumptions quarterly and records any adjustments~~an amendment to the Company’s ~~preliminary estimates to goodwill provided that~~financing arrangement described in Note 9 “Debt”. These equity-classified Warrants were valued using the ~~Company is~~Black-Scholes pricing model, which falls within ~~the measurement period. Upon the conclusion of the measurement period or final determination~~Level 3 of the fair value ~~of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded~~hierarchy.

The assumptions used in the ~~Company’s consolidated statement~~Black-Scholes pricing model were as follows at the date of ~~operations.~~grant and date of modification, respectively:


	February 18, 2022			September 30, 2022
Expected dividend yield		0.0	%		0.0	%
Risk free interest rate		1.9	%		3.9	%
Expected stock price volatility		79.3	%		87.7	%
Expected term (years)		10.0			9.5

5. Accounts Receivable

Accounts receivable consists of the following:


	September 30, 2022			December 31, 2021
United States	$	6,553		$	8,894
International		1,926			2,147
Total accounts receivable		8,479			11,041
Less: Allowance for doubtful accounts		(343	)		(132	)
Accounts receivable, net of allowance for doubtful accounts	$	8,136		$	10,909

No individual customer accounted for 10% or more of net revenue for the three or nine months ended September 30, 2022 or 2021. No individual customers accounted for 10% or more of total accounts receivable at September 30, 2022 or December 31, 2021.

6. Inventories

Inventory balances, net of reserves, consist of the following:


	September 30, 2022		December 31, 2021
Finished goods	$	20,825	$	16,702
Raw materials		14,381		18,905
Component parts		1,227		955
Total inventories	$	36,433	$	36,562

The Company recorded a provision for excess and obsolete inventory of $1.8 million and $2.7 million for the three and nine months ended September 30, 2022, respectively. The increase in the provision for the three and nine months ended September 30, 2022 related to a decrease in anticipated future demand. There was no provision for excess and obsolete inventory recorded during the three or nine months ended September 30, 2021.

7. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill and intangible assets during the nine months ended September 30, 2022 are as follows:


	Goodwill			Intangible Assets
Balance at December 31, 2021	$	15,300		$	4,398
Impairment charges		(14,701	)		(4,036	)
Amortization		-			(325	)
Foreign currency exchange rate changes		(105	)		(12	)
Balance at September 30, 2022	$	494		$	25

The following table presents ~~the components~~a summary of ~~total cash, cash equivalents, and restricted cash as set forth in our consolidated statements of cash flows:~~acquired intangible assets:


	As of September 30, 2022
	Weighted Average Amortization Period in Years		Gross Carrying Amount		Accumulated Amortization
Customer agreements		3.83	$	456	$	(431	)

March 31,

December 31,

March 31,

December 31,

2019

2018

2018

2017

Cash and cash equivalents

$
56,666

$
58,223

$
15,175

$
26,508

Restricted cash

1,852

1,799

1,852

1,852

Total cash, cash equivalents, and restricted cash

$
58,518

$
60,022

$
17,027

$
28,360

~~3. Accounts Receivable~~

~~Accounts receivable owed to the Company by its customers and distributors consist of the following:~~

March 31, 2019

December 31, 2018

United States

$
4,738

$
4,948

International

2,203

2,493

Total accounts receivable

6,941

7,441

Less: Allowance for doubtful accounts

(283
)

(334
)
Accounts receivable, net of allowance for doubtful
accounts

$
6,658

$
7,107

At March 31, 2019, the largest concentrations of accounts receivable, as a percentage of total accounts receivable, were with two distributors each representing 3% and one distributor representing 2% of total accounts receivable, respectively. At December 31, 2018, the largest concentrations of accounts receivable, as a percentage of total accounts receivable, were with one distributor representing 7% and two distributors representing 4% of total accounts receivable, respectively. No customers accounted for more than 10% of revenue or accounts receivable as of March 31, 2019 and December 31, 2018.

~~4. Financial Instruments~~

As of March 31, 2019 and December 31, 2018, the Company’s financial instruments were comprised of cash, accounts receivables, accounts payable and debt, the carrying amounts of which approximated fair value due to the short-term nature and market interest rates.

1421

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

During the second quarter of 2022, a substantial decline in the Company’s stock price and other factors, including leadership changes in the Vapotherm Access reporting unit, represented indicators of long-lived asset impairment for the Vapotherm Access asset group, which triggered an interim impairment assessment. The Company determined that the carrying value of Vapotherm Access intangible assets was not recoverable based on the excess of the carrying value of the asset group over the undiscounted future cash flows. The decrease in the undiscounted future cash flows from the asset group was primarily attributable to a significant decrease in future forecasted revenues, which reflects the notification of non-renewal of certain HGE customer relationships during the second quarter of 2022, as well as uncertainty related to the Company’s ~~warrant activity for~~ability to scale its standalone remote patient monitoring business given slower than expected patient enrollment. As a result, the Company recognized an impairment charge of $4.0 million to write down HGE customer relationships and developed technology to their estimated fair value during the second quarter of 2022. The fair value of the intangible assets was estimated using discounted cash flows under the income approach, which the Company considers to be a Level 3 measurement. There were no impairments of intangible assets during the three months ended ~~March 31, 2019~~September 30, 2022, however, the Company recorded an impairment charge related to the long-lived assets, other than intangible assets, of Vapotherm Access and ~~March 31, 2018 are summarized as follows.~~

Series A Redeemable

Series B Redeemable

Series C Redeemable

Convertible Preferred

Convertible Preferred

Convertible Preferred

Total Warrants

Number
of
Shares

Estimated
Fair
Value

Weighted
Average
Exercise
Price

Number
of
Shares

Estimated
Fair
Value

Weighted
Average
Exercise
Price

Number
of
Shares

Estimated
Fair
Value

Weighted
Average
Exercise
Price

Number
of
Shares

Estimated
Fair
Value

Outstanding at December 31, 2017

158,202

$
415

$
14.00

12,857

$
72

$
14.00

4,285

$
42

$
14.00

175,344

$
529

Gain on change in fair value

-

(127
)

-

-

(1
)

-

-

-

-

-

(128
)
Outstanding at March 31, 2018

158,202

$
288

$
14.00

12,857

$
71

$
14.00

4,285

$
42

$
14.00

175,344

$
401

Common Stock Warrants

Number of Shares

Weighted Average
Exercise Price

Outstanding at December 31, 2018

230,295

$
14.50

Warrants granted

19,790

15.92

Outstanding at March 31, 2019

250,085

$
14.61

~~The Company did not grant any warrants in~~RespirCare of $2.1 million during the three months ended ~~March 31, 2018. During~~September 30, 2022. (See Note 11) There were no impairments of intangible assets during the three or nine months ended September 30, 2021.

The factors listed above, along with the long-lived asset impairment, also represented indicators of goodwill impairment which triggered an interim impairment assessment. Based on the results of the optional qualitative assessment, the Company determined that there were no indicators of impairment for the Vapotherm UK reporting unit, but the fair value of the Vapotherm Access reporting unit was more likely than not less than its carrying value. There is no goodwill allocated to the Vapotherm reporting unit.

To perform the quantitative assessment for the Vapotherm Access reporting unit, the Company determined the fair value using the income approach. The Company utilized a discounted cash flow analysis, which involves estimating the expected after-tax cash flows that will be generated by the reporting unit and then discounting those cash flows to present value, reflecting the relevant risks associated with the reporting unit and the time value of money. This approach requires the use of significant estimates and assumptions, including forecasted revenue growth rates, forecasted earnings before interest, taxes, depreciation and amortization margins, and discount rates. The Company’s forecasts are based on historical experience, expected market demand, and other industry information. The Company determined that the carrying value of the Vapotherm Access reporting unit exceeded the fair value, with the decrease in the fair value being primarily attributable to a significant decrease in future forecasted revenues, as discussed above. As a result, during the second quarter of 2022, the Company recognized an impairment charge of $14.7 million to write down the goodwill of the Vapotherm Access reporting unit to its estimated fair value. There was no impairment of goodwill during the three months ended ~~March 31, 2019, in connection with an amendment~~September 30, 2022 or 2021 or nine months ended September 30, 2021.

The Company recognized less than $0.1 million and $0.1 million of amortization expense within sales and marketing expenses related to the intangible assets during the three months ended September 30, 2022 and 2021, respectively, and recognized $0.2 million and $0.3 million of amortization expense within sales and marketing expenses related to the intangible assets during the nine months ended September 30, 2022 and 2021, respectively. The Company did not recognize any amortization expense within general and administrative expenses related to intangible assets during the three months ended September 30, 2022. The Company also recognized $0.1 million of amortization expense within general and administrative expenses related to intangible assets during the three months ended September 30, 2021, and recognized $0.1 million and $0.2 million of amortization expense within general and administrative expenses related to intangible assets during the nine months ended September 30, 2022 and 2021, respectively.

8. Accrued Expenses and Other Current Liabilities and Other Long-Term Liabilities

Accrued expenses and other current liabilities consist of the following:


	September 30, 2022		December 31, 2021
Accrued termination benefits	$	3,155	$	-
Accrued bonuses		2,446		6,988
Operating lease liabilities, current portion		2,445		1,753
Accrued payroll and employee-related costs		2,244		2,734
Accrued professional fees		904		1,682
Accrued taxes		786		1,450
Accrued commissions		750		5,181
Accrued vacation liability		667		786
Accrued inventory		404		1,111
Accrued freight		310		247
Product warranty reserve		229		330
Contingent consideration		-		3,952
Other		2,367		2,345
Total accrued expenses and other current liabilities	$	16,707	$	28,559

Other long-term liabilities consist of the following:


	September 30, 2022		December 31, 2021
Operating lease liabilities	$	6,025	$	5,357
Accrued term loan fees		993		-
Contingent consideration		-		5,164
Total other long-term liabilities	$	7,018	$	10,521

9. Debt

Current Credit ~~Agreement and Guaranty as further described in Note 8 “Debt”~~Facilities

On February 18, 2022 (the “Effective Date”), the Company entered into the SLR Loan Agreement with SLR which provided for a term A loan facility of $100.0 million (the “SLR Term A Loan Facility”) and a term B loan facility of $25.0 million (the “SLR Term B Loan Facility”). The SLR Term A Loan Facility was funded to the Company on the Effective Date. In connection with this draw down, the Company granted SLR warrants to purchase ~~19,790~~107,373 shares of the Company’s common stock. The warrants ~~have~~had an exercise price of ~~$15.92~~$13.97 per share, were fully vested upon issuance, are exercisable at the option of the holder, in whole or in part, and expire in ~~March 2029.~~February 2032. The ~~estimated fair value at~~SLR Term B Loan Facility was available to the ~~time~~Company upon achievement of ~~issuance~~a certain minimum revenue level as more fully described in the SLR Loan Agreement. The proceeds of SLR Term A Loan Facility were used to repay all indebtedness under the Company’s prior loan agreement, as described below.

On August 1, 2022, the Company entered into an Amendment No. 1 to the SLR Loan Agreement (the “First Amendment”) with SLR. Pursuant to the First Amendment, the Company was ~~less than $0.3~~provided with a one-month extension of its covenant-free period through August 31, 2022.

On September 30, 2022, the Company entered into an Amendment No. 2 to the SLR Loan Agreement (the “Second Amendment,” together with the SLR Loan Agreement, as amended, the “Amended SLR Loan Agreement”), with SLR. Pursuant to the Second Amendment, the Company’s minimum net product revenue covenant was modified for the remainder of 2022, a minimum liquidity covenant of $20.0 million ~~and is recorded as a discount against~~(the “Liquidity Covenant”) was added, the ~~principal owed on~~London Interbank Offered Rate was replaced with the ~~related debt,~~Secured Overnight Financing Rate (the “SOFR”), the exit fee was increased from 6.95% to ~~be amortized over the contractual term~~7.45% of the ~~debt instrument.~~aggregate principal amount of the Amended SLR Loan Agreement, and the SLR Term B Loan Facility and related facility fee were eliminated. Concurrently with the closing of the Second Amendment, the Company amended and restated SLR’s warrants to purchase 107,373 shares of the Company’s common stock to reset the exercise price to $1.63 per share.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

~~5. Inventories~~

~~Inventories~~Pursuant to the Amended SLR Loan Agreement, advances under the Amended SLR Loan Agreement bear interest at a floating rate per annum equal to (a) the greater of (i) 1.00% or (ii) the one-month SOFR, plus (b) 8.30%. At September 30, 2022, the interest rate was 11.44%. The outstanding balance was $100.0 million at September 30, 2022. The Amended SLR Loan Agreement provides for interest-only payments for the first 48 months following the Effective Date. Thereafter, payments on the Amended SLR Loan Agreement will be due monthly in 12 equal installments; provided that the Company shall have the option to extend the interest-only period for an additional 12 months upon achievement of a certain minimum revenue level as more fully described in the Amended SLR Loan Agreement. The Amended SLR Loan Agreement will mature on February 1, 2027 (the “Maturity Date”). The Amended SLR Loan Agreement may be prepaid in full, subject to a prepayment charge of (i) 3.0%, if such prepayment occurs on or prior to February 17, 2023, (ii) 2.0%, if such prepayment occurs after February 18, 2023 but on or prior to February 17, 2024, and (iii) 1.0%, if such prepayment occurs after February 18, 2024 but on or prior to the Maturity Date (the “Prepayment Penalty”). In addition to the payment of principal and accrued interest, the Company will be required to make a payment of 7.45% of the aggregate principal amount of the Amended SLR Loan Agreement funded (the “Facility Exit Fee”), which is payable on the earliest to occur of (i) the Maturity Date, (ii) the acceleration of the Amended SLR Loan Agreement prior to the Maturity Date, and (iii) the prepayment date of the Amended SLR Loan Agreement prior to the Maturity Date. The Facility Exit Fee of $7.5 million is considered fully earned by SLR as of ~~March 31, 2019~~the Effective Date and ~~December 31, 2018 consist~~is being accrued to interest expense over the term of the ~~following:~~

March 31, 2019

December 31, 2018

Component parts

$
5,464

$
5,601

Finished goods

6,956

8,109

Total inventory

$
12,420

$
13,710

~~6. Property and Equipment~~

~~Property and equipment are carried at cost, less accumulated depreciation and amortization. A summary~~Amended SLR Loan Agreement. The Amended SLR Loan Agreement is secured by a lien on substantially all of the ~~components~~assets, including intellectual property, of ~~property~~the Company.

The Amended SLR Loan Agreement contains customary covenants and ~~equipment, placed~~representations, including, without limitation, a minimum revenue covenant equal to a percentage of each month’s forecasted net product revenue as defined in ~~service~~the Amended SLR Loan Agreement (tested on a trailing six month basis at the end of each fiscal month, commencing with the six month period ending on August 31, 2022), the Liquidity Covenant, 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. As of September 30, 2022, the Company was in compliance with all covenants under the Amended SLR Loan Agreement.

The events of default under the Amended SLR 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 Amended SLR Loan Agreement or other loan documents, (2) the Company’s breach or default in the performance of any covenant under the Amended SLR 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 the Company’s funds or of 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, SLR is entitled to take enforcement action, including an incremental 5% interest rate increase or acceleration of amounts due under the Amended SLR Loan Agreement (the “Mandatory Prepayment Option”). The Company determined the Mandatory Prepayment Option to be an embedded derivative that is required to be bifurcated from the Amended SLR Loan Agreement. The Company determined the combined probability of an event of default and SLR exercising the Mandatory Prepayment Option to be remote and deemed its fair value to be immaterial as of ~~March 31, 2019~~September 30, 2022. The Company re-evaluates the fair value of the Mandatory Prepayment Option at the end of each reporting period, as applicable.

The Amended SLR Loan Agreement also contains other customary provisions, such as expense reimbursement and ~~December 31, 2018, is as follows:~~

confidentiality. SLR has indemnification rights and the right to assign the Amended SLR Loan Agreement, subject to customary restrictions.

March 31, 2019

December 31, 2018

Equipment

$
939

$
924

Furniture

962

957

Manufacturing equipment

4,175

4,166

Software

656

655

Demonstration, placements and evaluation units

8,013

7,135

Leasehold improvements

2,025

2,025

Construction in process

4,822

4,663

Total property and equipment

21,592

20,525

Less: Accumulated depreciation and amortization

(7,691
)

(7,109
)
Total property and equipment, net

$
13,901

$
13,416

~~Depreciation and amortization~~The annual principal maturities of ~~property and equipment was $0.6 million and $0.5 million during~~ the ~~three months ended March 31, 2019 and March 31, 2018, respectively.~~

~~7. Accrued Expenses and Other Liabilities~~

~~Accrued expenses and other liabilities~~Company’s Amended SLR Loan Agreement as of ~~March 31, 2019 and December 31, 2018 consist of the following:~~September 30, 2022 are as follows:


2022 (remaining 3 months)	$	-
2023		-
2024		-
2025		-
2026		83,333
Thereafter		16,667
Less: Unamortized deferred financing costs		(3,185	)
Long-term loans payable	$	96,815

March 31, 2019

December 31, 2018

Accrued inventory

$
860

$
1,070

Accrued commissions

747

1,464

Accrued bonuses

670

1,692

Accrued professional fees

644

253

Accrued payroll liability

435

86

Accrued vacation liability

431

427

Product warranty reserve

329

329

Accrued taxes

271

305

Refundable purchase price of unvested stock

265

346

Accrued employee reimbursement

177

178

Accrued rent and restoration costs

170

174

Accrued freight

85

52

Clinical studies

75

67

Accrued capital equipment

42

21

Other

1,456

1,189

Total accrued expenses and other liabilities

$
6,657

$
7,653

1624

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

On ~~November 16, 2016,~~February 18, 2022, the Company ~~entered a Business Financing~~used $47.4 million of the SLR Term A Loan Facility to pay off all obligations owing under, and to terminate, its prior Loan and Security Agreement (the ~~“Revolver~~“CIBC Loan Agreement”) with ~~Western Alliance~~Canadian Imperial Bank ~~an Arizona Corporation,~~of Commerce Innovation Banking (“CIBC”) which ~~replaced its then existing~~provided for a revolving ~~line~~loan facility of ~~credit. The Revolver~~$12.0 million (the “CIBC Revolving Facility”) and a term loan facility of $40.0 million (the “CIBC Term Facility” and, together with the Revolving Facility, the “CIBC Facilities”). As a result of the termination of the CIBC Loan Agreement, ~~made available $7.0~~the Company recorded a loss on extinguishment of debt of $1.1 million, which included the prepayment penalty, write-off of the remaining unamortized deferred financing costs, and legal fees during the first quarter of 2022.

As of December 31, 2021, the Company had $40.0 million of ~~revolving credit upon~~ the ~~closing date. Availability~~CIBC Term Facility outstanding under the ~~Revolver~~CIBC Loan Agreement, ~~is calculated based upon 80%~~which accrued interest at a floating rate equal to the Wall Street Journal (“WSJ”) Prime Rate plus 2.5% and was subject to a floor of 3.25%, and $4.9 million of outstanding borrowings under the ~~eligible receivables (net~~CIBC Revolving Facility, which accrued interest at a floating rate per annum equal to the WSJ Prime Rate plus 1.0% and was subject to a floor of ~~pre-paid deposits, pre-billed invoices, other offsets, and contras related to each specific account debtor)~~3.25%. The ~~original maturity date~~CIBC Term Facility was ~~September 30, 2018. The Company refinanced~~scheduled to mature on October 21, 2025 and the ~~Revolver Agreement in April 2018, increasing~~CIBC Revolving Facility was scheduled to mature on October 21, 2022. As previously mentioned, the ~~credit line to $7.5 million~~CIBC Facilities were fully repaid and ~~extending the maturity date to September 30, 2020. The principal is due upon maturity.~~ ~~On March 22, 2019,~~terminated on February 18, 2022 when the Company entered into ~~an amendment~~the SLR Loan Agreement.

10. Commitments and Contingencies

Lease Commitments

The Company’s operating lease commitments as of December 31, 2021 are described in Note 11 of the notes to the ~~Revolver Agreement~~ ~~(as amended,~~financial statements included in the “Amended Revolver Agreement”), which increased the allowable permitted indebtedness under the Amended Revolver Agreement in connection with the Company’s credit card program from $0.3 million to $0.5 million.2021 Form 10-K.

At March 31, 2019 the interest rate was 7.3%. The outstanding balance under the Amended Revolver Agreement was $4.0 million at March 31, 2019 and there was no remaining availability based on eligible receivables. At December 31, 2018 the interest rate was 7.3%. The outstanding balance under the ~~Revolver Agreement~~ ~~was $3.2 million at December 31, 2018 and the remaining availability based on eligible receivables was $1.0 million.~~

~~Term Loans~~

OnIn November ~~16, 2016,~~2021, the Company entered into a ~~Loan~~lease agreement, which commenced in January 2022, where the Company assumed a real estate lease for 23,877 square feet of manufacturing and ~~Security Agreement (the “Loan Agreement”) with Solar Capital Ltd. (“Solar”). Pursuant to the Loan Agreement, a total of $20.0 million was available~~warehouse space in ~~three tranches.~~Mesquite, Texas. The ~~first tranche was drawn down in the amount of $10.0 million upon closing which paid off the Company’s then existing~~lease term ~~loan balance of $6.0 million in full.~~expires on April 23, 2027. The Company ~~achieved~~has the ~~minimum revenue threshold required~~option to ~~draw down~~renew the ~~second tranche of $5.0 million of term debt financing and obtained a signed term sheet~~lease for an ~~equity financing in excess of $10.0 million, which allowed the Company to draw down the third and final tranche of $5.0 million term debt financing.~~additional five-year term. The Company ~~drew down~~is not reasonably certain that it will renew the ~~$5.0 million tranches in~~lease beyond April 2027.

In January ~~2017 and March 2017, respectively. The Company pledged all assets as collateral with a double negative pledge on intellectual property.~~

~~On April 6, 2018,~~2022, the Company entered into a Credit Agreement and Guaranty (the “Credit Agreement and Guaranty”) with Perceptive Credit Holdings II, LP (“Perceptive”). Pursuant to the Credit Agreement and Guaranty, a total of $42.5 million was available in three tranches. The first tranche was drawn down in the amount of $20.0 million on the closing date, April 6, 2018,supplier agreement, which ~~paid off the Loan Agreement in full.~~

~~On July 20, 2018, pursuant to the Credit Agreement and Guaranty,~~granted the Company ~~drew down~~ the ~~second tranche~~right to control the use of ~~$10.0 million. In connection with this draw down,~~7,442 square feet of manufacturing and warehouse space in Tijuana, Mexico. The term of the embedded lease expires on January 28, 2025. The Company ~~granted Perceptive warrants to purchase 18,846 shares of Series D preferred stock. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at~~has the option ofto renew the ~~holder, in whole or in part, and expire in July 2028.~~supplier agreement for an additional 12 month period. The Company is not reasonably certain that it will renew the agreement beyond January 2025.

~~On September 27, 2018,~~In May 2022, the Company entered into ~~the first amendment to the Credit Agreement and Guaranty (the “Amendment”~~a manufacturing service agreement, which, effective in July 2022, ~~together with the Credit Agreement and Guaranty, the “Amended Credit Agreement and Guaranty”) with Perceptive. Pursuant to the Amended Credit Agreement and Guaranty,~~granted the Company ~~may draw~~ the ~~final $12.5 million~~right to control the use of ~~availability at any time through March 31, 2019~~35,882 square feet of manufacturing and ~~eliminated the minimum 2018 revenue requirement of $43.2 million that was required to draw down the final tranche. Concurrently with the closing~~warehouse space in Tijuana, Mexico. The term of the ~~Amendment, the Company drew down $2.0 million of the remaining $12.5 million available. In connection with this draw down, the Company granted Perceptive warrants~~embedded lease expires on August 14, 2029.

VAPOTHERM, INC.

Notes to purchase 3,769 shares of our Series D preferred stock. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire in September 2028.

~~VAPOTHERM, INC.~~

~~Notes to~~Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

The following table presents operating lease cost and information related to operating lease liabilities for the periods indicated:


	Nine Months Ended September 30,
	2022			2021
Operating lease cost	$	2,122		$	1,788
Variable lease cost		347			299
Total	$	2,469		$	2,087
Operating cash flow impacts:
Cash paid for amounts included in measurement of lease liabilities	$	2,076		$	1,788
Operating right of use assets obtained in exchange for new operating lease liabilities	$	2,824		$	-
Weighted average remaining lease term - operating leases (in years)		3.6			3.5
Weighted average discount rate - operating leases		8.7	%		8.0	%

As of ~~December 31, 2018, the Company had drawn $32.0 million~~September 30, 2022, future maturities of ~~the $42.5 million available,~~lease liabilities under the Credit Agreement and Guaranty and on March 22, 2019, the Company drew the remaining $10.5 million. In connection with this draw down, the Company granted Perceptive warrants to purchase 19,790 shares of common stock. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire 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.~~

At March 31, 2019, the interest rate was 11.56%. The outstanding balance was $42.5 million at March 31, 2019 and there was no remaining availability. At December 31, 2018, the interest rate was 11.44%. The outstanding balance was $32.0 million at December 31, 2018 and the remaining availability was $10.5 million.

The 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. As of March 31, 2019, the Company was in compliance with these covenants.

~~The annual principal maturities of the Amended Credit Agreement and Guaranty as of March 31, 2019~~noncancelable operating leases are as follows:

2019

$
-

2020

-

2021

-

2022

-

2023

42,539

Less: Discount on loans payable

(965
)
Long-term loans payable

$
41,574


	Total Due
2022 (remaining 3 months)	$	721
2023		3,133
2024		3,195
2025		1,257
2026		723
Thereafter		936
Total payments		9,965
Less interest		(1,495	)
Total present value of lease payments	$	8,470

~~9. Commitments and Contingencies~~

The Company’s principal office is located at 100 Domain Drive, Exeter, New Hampshire 03833, where it leases approximately 84,140 square feet of office, manufacturing, research & development and warehouse space. The Company leases this space under an agreement that terminates on January 29, 2026.

~~The following table summarizes the future minimum combined lease payments for the years ended December 31, 2019 through 2023 and thereafter:~~

Total Due

As of March 31, 2019

Remainder of 2019

$
1,166

2020

1,577

2021

1,601

2022

1,626

2023

1,652

Thereafter

1,820

Total

$
9,442

~~Rent expense for each of the three months ended March 31, 2019 and March 31, 2018 was $0.5 million.~~

~~VAPOTHERM, INC.~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited, continued)~~

~~(In thousands, except share and per share amounts)~~

Legal Matters

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 is currently engaged in a litigation with Engineered Medical Systems, Inc. (“EMS”) a former supplier of a component of our Precision Flow systems. EMS filed a complaint against us in Indiana state court on June 12, 2018 alleging breach of contract and other causes of action and seeking damages of at least $800,000 and all other forms of just and appropriate relief. This matter was subsequently removed to the United States District Court for the Southern District of Indiana. The Company filed a complaint against EMS in Superior Court in Rockingham County, New Hampshire on June 15, 2018 alleging breach of contract, violation of the New Hampshire Consumer Protection Act, and other causes of action and seeking damages of at least $2.1 million and all other forms of just and appropriate relief. Each party filed a motion to dismiss against the other party’s complaint. EMS’ motion to dismiss in Superior Court in Rockingham County, New Hampshire was denied and discovery is now underway in the New Hampshire matter. Following this decision, EMS withdrew its complaint in Indiana. The Company does not believe this matter will have a material adverse impact on the consolidated financial statements.

~~The Company~~ believes there ~~are~~is no ~~other~~ litigation pending that could have, individually, or in the aggregate, a material adverse effect on the results of ~~our~~its operations or financial condition.

Guarantees

~~10. Income Taxes~~

~~There is no provision for income taxes because~~During the second quarter of 2022, in connection with the Company’s plan to move substantially all of its manufacturing operations from New Hampshire to Mexico, the Company ~~has historically incurred operating losses and maintains~~entered into an agreement with TACNA Services, Inc. (“TACNA”) under which TACNA will manage the Company’s manufacturing operations in Mexico. In furtherance thereof, Baja Fur, S.A. de C.V. (the “Lessee”), a ~~full valuation allowance against its net deferred tax assets. The reported amount~~subsidiary of ~~income tax expense for~~TACNA, entered into a lease agreement (the “Lease”) with Fraccionadora Residencial Hacienda Agua Caliente, S. de R.L. de C.V. (the “Lessor”), whereby the ~~years differs from the amount that would result from applying domestic federal statutory tax rates~~Lessee agreed to ~~pretax losses primarily because of changes~~lease property in ~~valuation allowance.~~

~~A reconciliation of income tax expense (benefit) is computed~~Tijuana, México to be used as the ~~statutory federal income tax rate~~Company’s manufacturing facility in Mexico. Under Mexican law, the Lease became a legally binding agreement on July 8, 2022. As an inducement to ~~income taxes~~the Lessee and Lessor to enter into the Lease, the Company entered into an absolute unconditional corporate guaranty agreement (the “Guaranty Agreement”) pursuant to which the Company agreed to guaranty the prompt and complete payment and performance when due, whether by acceleration or otherwise, of all obligations, liabilities and covenants of the Lessee to the Lessor pursuant to the Lease, including all amounts due under the Lease. The Guaranty Agreement will terminate once all obligations of the Lessee arising under the Lease have been satisfied in full and the Lease has been terminated or fully performed. The total obligation outstanding under the Guaranty Agreement was $1.6 million as ~~reflected in the financial statement as follows:~~of September 30, 2022.

Three Months Ended March 31,

2019

2018

Federal income tax (benefit) at statutory rate

21.0
%

34.0
%
(Increase) decrease income tax benefit resulting from:

Permanent differences

0.4
%

0.0
%
Change in valuation allowance

(21.0
)%

(34.0
)%
Other

(0.4
)%

0.0
%
Income tax expense (benefit)

0.0
%

0.0
%

1926

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

~~Significant components~~Other Commitments

The Company has non-cancellable purchase commitments for inventories, capital equipment and services which totaled $5.7 million at September 30, 2022, all of which are expected to be paid within one year.

11. Restructuring

On April 27, 2022, the Company committed to a plan (the “April 2022 Restructuring”) to relocate substantially all of its manufacturing operations from Exeter, New Hampshire to a company operated manufacturing facility in Tijuana, Mexico and announced a reduction in force at the Exeter, New Hampshire facility that, when implemented, would eliminate positions related to production, quality and operations services. As part of April 2022 Restructuring, the Company also incurred severance related expenses due to senior level personnel retirements and transitions. As a result, during the three and nine months ended September 30, 2022, the Company incurred restructuring expenses of approximately $0.3 million and $2.6 million, respectively, which comprise termination benefits including severance, benefits and other payroll-related charges, which are classified in the Company’s condensed consolidated statements of comprehensive loss in the manner in which the employees’ salaries and related costs were classified. The Company expects to incur additional restructuring expenses over the next three to six months as part of the April 2022 Restructuring consisting of additional termination benefits in the range of $0.3 million to $0.5 million, and all of which will result in future cash expenditures. The Company estimates that its total restructuring expenses for the April 2022 Restructuring, all of which relate to termination benefits, will be in the range of $2.9 million to $3.1 million and are expected to be paid through the end of the first quarter of 2023.

In late August 2022, in conjunction with the Company’s path to profitability and annual operating planning efforts, the Company committed to a plan (the “August 2022 Restructuring”) to exit the Vapotherm Access standalone remote patient monitoring business and RespirCare, and to restructure its commercial organization in the United States. The Company intends to use the underlying technology to develop digital capabilities for the Company’s home device.

As a result of the August 2022 Restructuring, in September 2022, the Company announced a reduction in force at Vapotherm Access that eliminated positions related to patient care, marketing and administrative services and a reduction in force of the Company’s ~~net deferred tax asset at March 31, 2019 and December 31, 2018 are as follows:~~

March 31,

December 31,

2019

2018

Deferred Tax Assets

Net operating loss carryforwards

$
45,793

$
42,444

Tax credit carryforwards

3,325

3,012

Deduction of research and development costs

4,676

4,239

Accounts receivable collection allowance

56

70

Inventory valuation reserves

306

154

Accrued bonus and vacation

278

579

Accrued warranty

86

86

Allowance for sales returns

18

18

Stock option expense attributed to non-ISO stock

567

358

Accrued other expenses

1,025

818

Other temporary differences

(178
)

(70
)
Total gross deferred tax assets

55,952

51,708

Less: Valuation allowance

(55,952
)

(51,708
)
Deferred tax asset after valuation allowance

$
-

$
-

~~The Company’s major tax jurisdictions are the~~ United States field teams. On August 29, 2022, PCI provided RespirCare with a six-month without cause contract termination notice of its Master Service Agreement with the clinic. The Company and ~~New Hampshire.~~RespirCare’s physician shareholder are presently in negotiations to consensually shorten the six-month contractual notice period. As part of ~~March 31, 2019,~~the August 2022 Restructuring, the Company ~~had federal and state net operating loss carryforwards of $192.2 million and $86.3 million, respectively, which begin~~also incurred severance related expenses due to ~~expire in 2020.~~personnel transitions. As ~~of March 31, 2019, the Company had federal research and development tax credits carryforwards of $3.1 million which begin to expire in 2021.~~

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a ~~full valuation allowance of $56.0 million and $51.7 million has been established at March 31, 2019 and December 31, 2018, respectively. The valuation allowance increased $4.3 million~~result, during the three months ended ~~March 31, 2019, due primarily~~September 30, 2022, the Company incurred restructuring expenses of approximately $3.4 million, which comprise impairments of long-lived assets and termination benefits including severance, benefits and other payroll-related charges, as further discuss below. The termination benefits are classified in the Company’s condensed consolidated statements of comprehensive loss in the manner in which the employees’ salaries and related costs were classified.

The decision to ~~net operating losses generated.~~

~~Utilization~~cease future commercial investments in the Vapotherm Access standalone remote patient monitoring reporting unit triggered an interim impairment assessment of the ~~net operating loss~~Vapotherm Access and ~~research and development credit carryforwards may be subject to a substantial annual limitation under Section 382~~RespirCare asset groups. The Company determined the carrying values of the ~~Internal Revenue Code~~asset groups were not recoverable based on the excess of ~~1986 due to ownership change limitations that have occurred previously or that could occur~~the carrying value of the asset groups over the undiscounted future cash flows. The decrease in the ~~future. These ownership changes may limit~~undiscounted future cash flows from the ~~amount of net operating loss~~asset groups was primarily attributable to the decision to cease future commercial investments and ~~research and development credit carryforwards that can be utilized annually~~begin to ~~offset future taxable income and tax, respectively.~~

~~On February 28, 2019,~~wind down current commercial operations. As a result, the Company ~~acquired~~recognized an impairment charge of $1.5 million and $0.6 million for the ~~shares~~Vapotherm Access and RespirCare asset groups, respectively, to write down the operating lease right-of-use assets and property and equipment to their estimated fair value during the three and nine months ended September 30, 2022. The fair value of ~~Solus For~~ the ~~period from February 29, 2019 to March 31,2019, Solus had a book loss of less than $0.1 million, resulting from sales of $0.2 million. Due to the short period of ownership,~~operating lease right-of-use assets and ~~related book loss, the tax provision for Solus is immaterial.~~

~~11. Stock Plans~~property and ~~Stock-Based Compensation~~

~~As of March 31, 2019 and December 31, 2018, 945,675 and 972,628 shares of common stock remain available for issuance~~equipment were estimated using discounted cash flows under the 2018 Stock Incentive Plan (the “2018 SI Plan”), respectively. Under the terms of the 2018 SI Plan, the exercise price of the options is determined by the Board of Directors at the time of grant. Options granted under the plans vest ratably over a period of one to four years from the date of grant and are exercisable over a period of not more than ten years from the date of grant.

~~On January 23, 2019,~~income approach, which the Company ~~established~~considers to be a ~~French Qualifying Subplan that sits underneath~~Level 3 measurement. There were no impairments of long-lived assets during the ~~2018 SI Plan which allows for the granting of stock options~~three or nine months ended September 30, 2021.

VAPOTHERM, INC.

Notes to ~~purchase shares of common stock for employees and officers who are residents of France. The options under the French Qualifying Subplan reside under the umbrella of the 2018 SI Plan.~~

~~VAPOTHERM, INC.~~

~~Notes to~~Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

The Company expects to incur additional restructuring expenses over the next three to six months as part of the August 2022 Restructuring consisting of additional termination benefits in the range of $0.1 million to $0.3 million, and all of which will result in future cash expenditures. The Company estimates that its total restructuring expenses for the August 2022 Restructuring, all of which relate to termination benefits and impairments of long-lived assets, will be in the range of $3.4 million to $3.6 million.

The following table summarizes the restructuring activity from December 31, 2021 to September 30, 2022:


	Termination Benefits			Asset Impairments			Total
Balance at December 31, 2021	$	-		$	-		$	-
April 2022 Restructuring costs incurred		2,324			-			2,324
Restructuring costs paid		(25	)		-			(25	)
Balance at June 30, 2022	$	2,299		$	-		$	2,299
April 2022 Restructuring costs incurred		252			-			252
August 2022 Restructuring costs incurred		1,248			2,139			3,387
Non-cash restructuring costs		-			(2,139	)		(2,139	)
Restructuring costs paid		(644	)		-			(644	)
Balance at September 30, 2022	$	3,155		$	-		$	3,155

Substantially all of the restructuring accrual at September 30, 2022 is expected to be paid by the end of the first quarter of 2023.

The following table summarizes the classification of restructuring expense, including related impairment of long-lived assets, in the condensed consolidated statements of comprehensive loss:


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Cost of revenue	$	314	$	794
Research and development		29		595
Sales and marketing		1,101		1,989
General and administrative		56		446
Impairment of long-lived assets		2,139		2,139
Total restructuring expense	$	3,639	$	5,963

There were no restructuring charges recorded during the three or nine months ended September 30, 2021.

12. Warrants

The Company’s warrant activity is summarized as follows:


	Common Stock Warrants
	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2021		33,948		$	14.00
Warrants granted		107,373			13.97
Warrants expired		(16,807	)		14.00
Outstanding at September 30, 2022		124,514		$	3.33

In connection with its financing arrangement described in Note 9 “Debt,” on February 18, 2022, the Company granted SLR the Warrants to purchase 107,373 shares of common stock. In connection with the Second Amendment, on September 30, 2022, the Warrants were modified to amend the exercise price from $13.97 per share to $1.63 per share. The Warrants were fully vested upon issuance, are exercisable at the option of the holder, in whole or in part, and expire in February 2032.

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

13. Revenue

Disaggregated Revenue

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,
	2022						2022
	US		International		Total		US		International		Total
Net revenue by:
Product revenue
Capital equipment	$	1,135	$	258	$	1,393	$	4,602	$	1,967	$	6,569
Disposable		7,736		1,727		9,463		24,646		7,609		32,255
Subtotal product revenue		8,871		1,985		10,856		29,248		9,576		38,824
Lease revenue
Capital equipment		55		110		165		370		335		705
Other		354		81		435		1,075		262		1,337
Service and other revenue		1,783		306		2,089		6,367		905		7,272
Total net revenue	$	11,063	$	2,482	$	13,545	$	37,060	$	11,078	$	48,138


	Three Months Ended September 30,						Nine Months Ended September 30,
	2021						2021
	US		International		Total		US		International		Total
Net revenue by:
Product revenue
Capital equipment	$	11,291	$	2,040	$	13,331	$	19,237	$	10,282	$	29,519
Disposable		19,043		2,631		21,674		38,831		12,793		51,624
Subtotal product revenue		30,334		4,671		35,005		58,068		23,075		81,143
Lease revenue
Capital equipment		1,195		99		1,294		3,425		176		3,601
Other		399		89		488		1,286		333		1,619
Service and other revenue		1,022		306		1,328		3,570		1,115		4,685
Total net revenue	$	32,950	$	5,165	$	38,115	$	66,349	$	24,699	$	91,048

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 net revenue for the three or nine months ended September 30, 2022 or 2021.

Contract Balances from Contracts with Customers

Contract liabilities consist of deferred revenue and other contract liabilities associated with rebates and fees payable to GPOs, IDNs and distributor partners. Deferred revenues are included in contract liabilities in the accompanying condensed consolidated balance sheets. The following table presents changes in contract liabilities during the nine months ended September 30, 2022:


	Deferred Revenue			Other Contract Liabilities
Balance at December 31, 2021	$	1,712		$	369
Additions		2,738			374
Subtractions		(3,346	)		(369	)
Balance at September 30, 2022	$	1,104		$	374

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

14. Stock-Based Compensation

As of September 30, 2022, 555,328 shares of common stock remained available for issuance under the Vapotherm, Inc. 2018 Equity Incentive Plan (as amended and restated, the “2018 Equity Plan”), assuming target performance under outstanding performance stock units. To date, stock options, performance awards, restricted stock awards, restricted stock units and performance stock units have been granted under the 2018 Equity Plan.

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,
	2022		2021		2022		2021
Cost of revenue	$	193	$	181	$	620	$	537
Research and development		337		274		1,316		888
Sales and marketing		643		613		2,531		2,434
General and administrative		508		1,011		3,158		3,338
Total	$	1,681	$	2,079	$	7,625	$	7,197

Stock Options

The Company granted options to purchase an aggregate of 1,478,669 shares of common stock at exercise prices ranging from $1.55 to $20.71 per share, with a weighted average exercise price of $5.88 per share, during the nine months ended September 30, 2022. The Company granted options to purchase an aggregate of 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 weighted average fair value of ~~each option grant is estimated using~~stock options granted during 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, related compensation cost is amortized over the performance period on an accelerated attribution basis.~~ Compensation expense associated with performance awards are based upon the stock price 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, net of estimated forfeitures. Cumulative adjustments are recorded each quarter to reflect estimated outcome of the performance-related conditions until the date results are determined and settled.Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the Company’s historical volatility. The average expected life was estimated using the simplified method for “plain vanilla” options. The risk-free rate is based on U.S. Treasury rates with a remaining term that approximates the expected life assumed at the date of grant. The Company assumed an average forfeiture rates of 4.74% and 5.07% for the ~~three~~nine months ended ~~March 31, 2019~~September 30, 2022 and ~~2018, respectively, based on historical experience with pre-vested forfeitures.~~2021 was $4.31 and $19.46 per share, respectively.

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


	Nine Months Ended September 30,
	2022			2021
Expected dividend yield		0.0	%		0.0	%
Risk free interest rate		2.7	%		0.6	%
Expected stock price volatility		83.8	%		87.7	%
Expected term (years)		6.3			6.1

Restricted Stock Units and Restricted Stock Awards

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

Three Months Ended March 31,

2019

2018

Estimated fair value of common stock

$
19.65

$
1.68

Expected dividend yield

0.0
%

0.0
%
Risk free interest rate

2.5
%

2.4
%
Expected stock price volatility

75.5
%

59.1
%
Expected term (years)

6.1

6.0

~~Stock Options~~

~~Stock option~~A summary of restricted stock unit activity for the ~~three~~nine months ended ~~March 31, 2019~~September 30, 2022 is as follows:


				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2021		509,388		$	24.69
Granted		418,192			18.59
Vested		(113,996	)		24.55
Canceled		(125,362	)		22.72
Unvested at September 30, 2022		688,222		$	21.36

Weighted

Number of

Weighted

Average

Underlying

Average

Remaining

Aggregate

Common

Exercise

Contractual

Intrinsic

Shares

Price

Term

Value

Outstanding at December 31, 2018

786,989

$
2.41

7.87

$
13,801

Options granted

752,346

17.11

Options exercised

(268
)

1.64

Options canceled

(23,396
)

2.73

Outstanding at March 31, 2019

1,515,671

$
9.71

8.59

$
15,071

Exercisable at March 31, 2019

449,659

$
1.83

6.46

$
8,014

Vested and unvested expected to vest at March 31, 2019

1,515,671

$
9.71

8.59

$
15,071

The weighted average grant date fair value of options granted during the three months ended March 31, 2019 and 2018 was $11.59 and $0.95 per share, respectively. The aggregate intrinsic value of options exercised during the three months ended March 31, 2019 and 2018 was less than $0.1 million. The aggregate intrinsic value was calculated based on a positive difference between the closing stock price on March 31, 2019 and the exercise price per share of the underlying options. The aggregate intrinsic value was calculated based on a positive difference between the estimated fair value of the Company’s common stock as March 31, 2018 of $0.95 per share, and the exercise price per share of the underlying options.

The compensation expense associated with stock options recognized during the three months ended March 31, 2019 and 2018 was $1.5 million and less than $0.1 million, respectively. Stock-based compensation is recorded in the consolidated statements of operations. As of March 31, 2019, the Company had unrecognized stock-based compensation expense related to its unvested stock options awards of $7.9 million, which is expected to be recognized over the remaining weighted average vesting period of 2.4 years.

2130

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)

~~Restricted Stock~~

A summary of restricted stock award activity for the ~~three~~nine months ended ~~March 31, 2019~~September 30, 2022 is as follows:


				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2021		7,989		$	1.68
Granted/purchased		545			20.72
Vested		(8,061	)		2.97
Canceled		(473	)		1.68
Unvested at September 30, 2022		-		$	-

Performance Stock Units

The Company has granted performance stock units. The quantity of shares that will ultimately vest and be issued upon settlement of the performance stock units range from 0% to 200% of a targeted number of shares and will be determined based on, and subject to, individual grant milestones.

Weighted

Average

Grant Date

Shares

Fair Value

Unvested at December 31, 2018

399,485

$
1.68

Granted/purchased

70,466

2.09

Vested

(116,580
)

1.67

Canceled

-

-

Unvested at March 31, 2019

353,371

$
1.68

A summary of performance stock units activity, assuming target level of performance, for the nine months ended September 30, 2022 is as follows:


			Weighted
			Average
			Grant Date
	Shares		Fair Value
Unvested at December 31, 2021		-	$	-
Granted/purchased		177,698		18.78
Vested		-		-
Canceled		-		-
Unvested at September 30, 2022		177,698	$	18.78

Employee Stock Purchase Plan

As of September 30, 2022, 871,547 shares of common stock remained available for issuance under the ESPP.

The ~~weighted average grant date~~ESPP provides for successive discrete offering periods of approximately six months or as determined by the plan administrator. Effective January 1, 2022, offering periods begin on each January 1st and July 1st or the first trading day thereafter.

The ESPP permits eligible employees to elect to purchase shares of common stock through fixed whole percentage contributions from eligible compensation during each offering period, not to exceed 10% of the eligible compensation a participant receives during an offering period and not to accrue at a rate which exceeds $25,000 of the fair value of ~~restricted~~the stock ~~granted~~(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 ~~three months ended March 31, 2019~~exercise date and ~~2018 was $15.65 and $0.94 per share, respectively.~~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 2022:

~~The compensation expense associated with restricted stock recognized during the three months ended March~~ 31 2019 and 2018 was $0.4 million and less than $0.1 million, respectively. Stock-based compensation is recorded in the consolidated statements of operations. As of March 31, 2019, the Company had unrecognized stock-based compensation expense related to its unvested restricted stock of $1.2 million, which is expected to be recognized over the remaining weighted average vesting period of 3.1 years.

~~12. Earnings Per Share~~

~~Net Loss per Share~~

~~Basic and diluted net loss per share attributable to common shareholders was calculated as follows:~~

Three Months Ended March 31,

2019

2018

Numerator:

Net loss

$
(12,964
)

$
(8,906
)
Net loss attributable to common stockholders

$
(12,964
)

$
(8,906
)

Denominator:

Weighted average common shares outstanding—basic
and diluted

16,949,027

786,184

Net loss per share attributable to common stockholders—
basic and diluted

$
(0.76
)

$
(11.33
)

VAPOTHERM, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

~~(Unaudited, continued)~~

(In thousands, except share and per share amounts)


Expected dividend yield		0.0%
Risk free interest rate		0.2% - 2.5%
Expected stock price volatility		45.0% - 106.6%
Expected term (years)		0.5

15. Net Loss Per Share

The Company excluded the following potential shares of common ~~shares, presented~~stock, 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,
	2022		2021
Options to purchase common stock		3,173,168		1,906,111
Unvested restricted stock units and awards and performance stock units		865,920		442,796
Warrants to purchase common stock		124,514		33,948
Employee stock purchase plan shares		67,925		35,739
		4,231,527		2,418,594

16. Subsequent Events

Three Months Ended March 31,

2019

2018

Options to purchase common stock

1,515,671

745,078

Warrants to purchase redeemable convertible preferred stock
(as converted to common stock)

250,085

175,345

Unvested restricted stock

353,371

388,888

Redeemable convertible preferred stock (as converted to
common stock)

-

10,515,351

2,119,127

11,824,662

~~13. Employee Benefit Plan~~

On October 31, 2022, the Company substantially completed the abandonment of its Vapotherm Access standalone remote patient monitoring business. The Company has a 401(k) retirement plan (the “401(k) Plan”) for the benefit of eligible employees, as defined. Each participant may elect to contribute up to 25% of his or her compensation to the 401(k) Plan each year, subject to certain Internal Revenue Service limitations. On April 1, 2017, the Company began an employer 401(k) match. The match was effective for any funds contributed after April 1, 2017 at a rate of 50% of the first 4% of employee contributions. The employer match is capped at $1,000 per year for employees with annual earnings less than $50,000 and $500 for employees with annual earnings greater than $50,000. The Company contributed less than $0.1 million for the three months ended March 31, 2019 and March 31, 2018, respectively.

~~14. Related Party Transactions~~

~~As described in Note 15~~ ~~“Redeemable Convertible Preferred Stock~~”, of the 2018 Form 10-K, the Company issued Series A, B, C and D preferred stock to private investors. Certain executive officers of the Company are owners/investors in certain venture funds who purchased Series A, B, C and D preferred stock. The total amount of preferred stock purchased by related party organizations as of December 31, 2018 was $33.2 million. ~~Pursuant to the initial public offering in November 2018, all outstanding redeemable convertible preferred stock converted to common stock on a one-to-one basis.~~

The Company has two investors that are vendors of the Company. The total amount billed from these vendors during the three months ended March 31, 2019 and 2018 was less than $0.1 million and $0.7 million, respectively. The accounts payable balance for these vendors was $0.5 million as of March 31, 2019 and December 31, 2018, respectively.

In addition, the Company sells its products to a hospital customer who is an affiliate of a current investor. The total amount billed to this customer during the three months ended March 31, 2019 and 2018 was $0.4 million, respectively. The accounts receivable balance for this customer was $0.1 million as of March 31, 2019 and December 31, 2018, respectively. All transactions are at arms’ length and occur at published list prices.

~~15. Warrants~~

In connection with certain of its redeemable convertible preferred stock issuances, the Company issued warrants for shares of its redeemable convertible preferred stock in fiscal year 2018 and earlier. See ~~Note 4~~ ~~“Financial Instruments”~~ ~~of the 2018 Form 10-K~~ for a discussion of these warrants. Such warrants were recorded as liabilities as a result of non-standard anti-dilution rights and were carried at their estimated fair value using the Black-Scholes valuation model. In connection with the Company’s initial public offering in November 2018, these warrants converted to common stock warrants.

~~VAPOTHERM, INC.~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited, continued)~~

~~(In thousands, except share and per share amounts)~~

~~There was no outstanding redeemable convertible preferred stock as of March 31, 2019 or December 31, 2018. See~~ ~~Note “4 Financial Instruments” in this Quarterly Report on Form 10-Q for a rollforward of the Company’s common stock warrants.~~ In connection with the draw down of the remaining $10.5 million under the Amended Credit Agreement and Guaranty in March 2019, the Company granted warrants to Perceptive to purchase 19,790 shares of common stock. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire in March 2029. During the three months ended March 31, 2018, the Company recorded a gain of $0.1 million on the change in fair value of the preferred stock warrants.

~~16. Stockholders’ Equity~~

~~Preferred Stock~~

As of March 31, 2019 and December 31, 2018, the Company has authorized 25,000,000 shares of preferred stock, respectively, at a par value of $0.001. As of March 31, 2019 and December 31, 2018, there were no shares of preferred stock outstanding.

~~Prior to the completion of the Company’s initial public offering in November 2018, the Company was authorized to issue common stock and Series A, Series B, Series C, and Series D preferred stock.~~

~~A summary of the terms of the various types of redeemable convertible preferred stock at March 31, 2018, is as follows:~~

Series

A

B

C

D

Total

Shares authorized

2,560,863

1,727,143

3,575,714

2,848,417

10,712,137

Shares issued

2,402,649

1,714,286

3,571,429

2,826,987

10,515,351

Conversion rate

1.0

1.0

1.0

1.0

Liquidation preference per share

$
14.000

$
14.000

$
14.000

$
15.918

~~Pursuant to the initial public offering in November 2018, all outstanding redeemable convertible preferred stock converted to common stock on a one-to-one basis.~~

~~Common Stock~~

As of March 31, 2019 and December 31, 2018, the Company has authorized 175,000,000 shares of common stock, respectively, at a par value of $0.001. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding.

~~17. Segment Reporting~~

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one reporting segment, Vapotherm, Inc. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance. All assets are in the United States, United Kingdom or at contracted suppliers.

~~VAPOTHERM, INC.~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited, continued)~~

~~(In thousands, except share and per share amounts)~~

~~18. Business Combinations~~

~~On February 28, 2019, the Company completed the acquisition of the outstanding equity securities of~~ ~~Solus Medical Ltd. (“Solus”)~~ whose principal assets included intangible assets related to supplier agreements. The Company undertook the acquisition to accelerate its penetration in the United Kingdom market. The purchase price, net of cash acquired, of $2.0 million was funded with an initial cash payment of approximately $1.6 million and a loss of $0.4 million on settlement of a preexisting relationship. Additionally, the Company will recognize an estimated $2.4 million in contingent payments as compensation that will be paid over the next two years. The acquisition has been accounted for as an acquisition of a business.

The Company has not yet finalized the purchase accounting for the Solus acquisition during the first quarter of 2019. The following table summarizes the preliminary purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities assumed as of February 28, 2019:

Cash

$
466

Accounts receivable

411

Inventory

492

Prepaids and other assets

11

Property and equipment

1

Goodwill

584

Intangible assets

455

Total assets acquired

2,420

Accounts payable and accrued expenses

(222
)
Deferred revenue

(75
)
Deferred taxes

(97
)
Total liabilities assumed

(394
)
Total purchase price

$
2,026

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed, including income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Accordingly, the provisional measurements of fair value of the income taxes payable and deferred taxes set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

In determining the purchase price allocation, the Company considered, among other factors, the opportunity provided by supplier agreements with the National Health Service. The fair value of the intangible assets associated with this agreement were 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 forecast was built based upon specific intangible asset revenue and expense estimates.

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.~~

The total weighted average amortization period for the intangible assets is approximately 3.83 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 aredisclosed restructuring charges expected to be ~~utilized based upon~~incurred in connection with this action, including an estimate of the total range of amounts expected to be incurred, the estimated ~~cash flows generated from such assets. Goodwill~~range of amounts for each major type of cost associated with the ~~acquisition was primarily attributable to the market expansion opportunity in the U.K. The goodwill attributable to the United Kingdom jurisdiction is not deductible for tax purposes.~~

~~VAPOTHERM, INC.~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited, continued)~~

~~(In thousands, except share and per share amounts)~~

~~The Company has included the financial results~~course of Solus in the 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.

~~Pro Forma Financial Information~~

The following unaudited pro forma information for the first quarter of fiscal year 2019 and 2018, respectively presents consolidated information as if the Solus acquisition occurred on January 1, 2018, which is the first day of our fiscal year 2018:

March 31,

2019

2018

Net revenue

$
12,536

$
11,506

Net loss

$
(13,252
)

$
(9,138
)
Net loss per share, basic

$
(0.78
)

$
(11.62
)

~~19. Subsequent Events~~

As disclosed in the Company’s 2018 Form 10-K and in other filings with the SEC, in 2018 Stamford Devices Limited filed an opposition against its European patent – EP2806926. The title of the invention is Systems for Providing Respiratory Therapy. The patent is part of the accessory technologies in our patent portfolio. It provides an improved system for delivering breathing gas and aerosolized medications. The claims opposed were not embodied in any of the Company’s current commercialized products. A hearing on the matter with no payments exchanged in either direction was scheduled for May 9, 2019, however, the Company and Stamford Devices Limited reached an agreement on the matter and as a result Stamford Devices Limited withdrew their opposition on April 29, 2019action and the ~~Opposition Division of the European Patent Office canceled the hearing on May 7, 2019, noting the matter would be continued with a written decision.~~estimated amounts that will result in future cash expenditures. (See Note 11)

ITEM 2. MANAGEMENT’S DISCUSSION AND ~~ANALYSI~~SANALYSIS 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~~three and nine months ended ~~March 31, 2019,~~September 30, 2022, included elsewhere in this Quarterly Report on Form ~~10-~~Q.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 ~~2018~~2021 Form ~~10-K.~~.10-K filed with the SEC on February 24, 2022 and in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022.

~~We are~~Vapotherm is a global medical technology company focused on the ~~development and commercialization~~care of ~~our proprietary Hi-VNI Technology products that are used to treat~~ patients of all ages suffering from respiratory ~~distress.~~distress, whether associated with complex lung diseases such as chronic obstructive pulmonary disease (“COPD”), congestive heart failure (“CHF”), COVID-19, influenza (“flu”), respiratory syncytial virus (“RSV”), pneumonia, asthma and other systemic conditions. Our ~~Hi-VNI Technology~~strategy is to become the world’s preeminent complex lung disease and respiratory distress patient management company by combining digital and device solutions to create a healthcare ecosystem focused on improving the lives of complex lung disease and respiratory distress patients while reducing the cost of their care. Our device solutions are focused on High Velocity Therapy, which delivers non-invasive ventilatory support to patients by providing heated, humidified, ~~and~~ oxygenated air at high velocities through a small-bore nasal interface, and on closed loop control systems such as our Oxygen Assist Module (“OAM”), designed to automatically maintain pulse oxygen saturation (“SpO2”) levels within a specified range for a defined period of time. Our digital solutions are focused on remote patient monitoring, using proprietary algorithms to predict impending respiratory episodes before they occur and coordinate timely intervention, obviating the need for costly hospital admissions and minimizing patient distress. Although we recently decided to exit our standalone remote patient monitoring business, we intend to use the underlying technology to develop digital capabilities for our home device. While these device and digital solutions function independently, we believe leveraging the two together can create a unique healthcare ecosystem, focused on delivering high quality, efficient respiratory care in a variety of settings.

High Velocity Therapy is an advanced form of high flow therapy that is differentiated due to its ability to deliver breathing gases, including oxygen, at a high velocity, tofor the treatment of spontaneously breathing patients ~~through a comfortable small-bore nasal interface.~~with either Type 1 hypoxic respiratory distress, like that experienced by patients with pneumonia or COVID-19, or Type 2 hypercapnic respiratory distress, like that experienced by patients with COPD. Our HVT 2.0 and Precision Flow systems (together, “High Velocity Therapy systems”), which use ~~Hi-VNI Technology,~~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. Our next generation High Velocity Therapy system, known as HVT 2.0, received 510k clearance from the FDA in 2021 and was in full market release as of August 2022. The HVT 2.0 platform is approved for therapy in multiple settings of care, including the home. As of ~~March 31, 2019,~~September 30, 2022, more than ~~1.8~~3.6 million patients have been treated with our ~~Precision Flow~~High Velocity Therapy systems, and we have a global installed base of over ~~14,000 capital~~36,300 units, an increase of 5.2% compared to September 30, 2021.

Our business was significantly transformed during 2020 due to increased demand at that time for our High Velocity Therapy technology for treatment of COVID-19 patients, as evidenced by year over year revenue growth of 161.4% from 2019 to 2020, and a 53.5% compounded annual revenue growth rate from 2019 to 2021. The COVID-19 pandemic contributed to this transformation in at least two primary ways: first, it resulted in increased awareness of the unique efficacy of our High Velocity Therapy for the treatment of COVID-19 patients, and generally, resulting in high global demand at that time for our technology and the concomitant rapid growth of our installed base. Today, our brand is a recognized and respected name in an ever-increasing number of hospitals around the world. Second, many respiratory distress patients who require ventilatory support are initially treated in a hospital’s emergency department with the goal of stabilizing these patients with a non-invasive ventilation therapy so their underlying condition can be treated. Our focus on hospital emergency departments as an effective entry point for our products resulted in our systems being in the right place at the right time when the COVID-19 pandemic hit. This exposed a significant number of new physicians to the efficacy of our High Velocity Therapy technology, especially as they were able to see patients moved out of the emergency room and into lower acuity settings in the hospital after receiving our High Velocity Therapy. We expect that increased awareness among physicians of the efficacy of our High Velocity Therapy to treat respiratory distress will result in the long-term in expanded use of our products to treat all forms of respiratory distress in a variety of settings.

We sell our High Velocity Therapy systems to hospitals through a direct sales organization in the United States, the United Kingdom and Germany and through distributors in other select countries outside of those countries. In certain countries outside the United States, we currently offer our OAM, which launched in the United Kingdom, select European markets, and Israel in late 2020. The OAM can be used with most versions of our Precision Flow system and the HVT 2.0 has been enabled for OAM use. The OAM helps clinicians maintain a patient’s SpO2 within a target SpO2 range over a greater period of time while requiring significantly fewer

manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce the health risks associated with dosing too much, or too little, oxygen, particularly in neonates where these risks include visual or developmental impairment or death. Our OAM is sold through a direct sales organization in the United Kingdom and Germany and through distributors in Europe and the Middle East. We are in the process of seeking FDA approval to market the OAM in the United States, and are currently enrolling in an Investigational Device Exemption clinical study to support the regulatory filing. In addition, we employ field-based clinical educators who focus on medical education and training in the effective use of our products and help facilitate increased adoption and utilization. We focus on physicians, respiratory therapists and nurses who work in acute hospital settings, including the emergency departments and adult, pediatric and neonatal intensive care units. WeOur relationship with these clinicians is particularly important, as it enables our products to follow patients through the care continuum. As of September 30, 2022, we have sold our ~~Precision Flow~~High Velocity Therapy systems to over ~~1,400~~2,400 hospitals across the United States, ~~where they have been primarily deployed~~and 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~~over 42 countries outside of the ~~components of~~United States. Although presently our ~~products, including many single source suppliers and a sole source supplier. We maintain higher levels of inventory to protect ourselves~~revenues are derived principally from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. We currently ship our Precision Flow systems from our facility in New Hampshire directly to our United States customers, from our facility in the United Kingdom directly to our United Kingdom customers, and many of our international distributors in other countries 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.

~~Since inception, we have financed our operations primarily through an initial public offering of our common stock, private placements of our convertible preferred stock,~~ sales of ~~our Precision Flow~~High Velocity Therapy systems and ~~amounts borrowed under our credit facilities. We have devoted~~sales of the ~~majority of our resources to research~~single-use disposable vapor transfer cartridges these systems require, we also derive revenues from ancillary products and ~~development activities~~services related to our ~~Precision Flow systems including regulatory initiatives~~High Velocity Therapy systems.

During the first half of 2022 and ~~sales and marketing activities. We have invested heavily~~continuing through the third quarter of 2022, there was a significant slowdown in ~~our sales and marketing function by increasing~~ the number of ~~sales representatives~~patients worldwide needing acute respiratory interventions whether due to flu, RSV, COPD, CHF or COVID-19, resulting in lower than anticipated revenue as well as an unsustainable cost and ~~clinical educators~~inventory structure, even as our underlying post-COVID business continued to ~~facilitate adoption~~grow significantly relative to pre-COVID levels. Our revenues decreased to $48.1 million for the nine months ended September 30, 2022 from $91.0 million for the nine months ended September 30, 2021 primarily due to lower worldwide respiratory census and ~~increase utilization~~decreased demand in disposables from our customers, as the Delta related COVID surge in the third quarter of 2021 drove significant worldwide demand for our products at that time and did no repeat itself in the current year period. Revenue from single-use disposables represented approximately 67.0% and 56.7% of our ~~Hi-VNI Technology products~~total revenues for the nine months ended September 30, 2022 and ~~expanded~~2021, respectively, and decreased 37.5% on a year over year basis. For the nine months ended September 30, 2022 and 2021, we incurred net losses of $91.8 million and $41.2 million, respectively.

During the third quarter of 2022, we made a strategic decision to cease future commercial investment in our Vapotherm Access standalone remote patient monitoring reporting unit which includes, Vapotherm Access, formerly “HGE Healthcare Solutions, LLC” or “HGE,” and Pulmonary Care Innovations, PLLC d/b/a RespirCare. Vapotherm Access was originally acquired in late 2020 and we undertook the acquisition to expand our capabilities by providing a remote monitoring platform designed to empower respiratory patients with COPD, as well as payors and providers, to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life. In mid-2021, we re-branded HGE as Vapotherm Access and launched “Vapotherm Access – Post Care” to hospitals, a program dedicated to reducing 30-day readmissions of recently discharged COPD patients. We also launched “Vapotherm Access – 365” to hospitals, providers and payors, extending the 30 days of post care to full year patient monitoring. As part of this initiative, we established a small direct sales force focused exclusively on Vapotherm Access – Post Care and Vapotherm Access – 365. In late 2021, we became affiliated with RespirCare, a leading pulmonology practice in Tulsa, Oklahoma, that provides in-person and virtual care to COPD and other respiratory distress patients in Oklahoma. The decision to cease future commercial investment came as we were unable to scale the Vapotherm Access platform due to leadership changes at Vapotherm Access, loss of key customers, low patient enrollment and continued operating losses. Although we are in the process of winding down these two businesses, we plan to redirect our digital ~~marketing initiatives~~strategy towards the development of a remote patient monitoring platform that will be integrated into our devices to continue our strategy to become the world’s preeminent complex lung disease and ~~medical education programs. For~~respiratory distress patient management company.

Also during the ~~first~~nine months ended September 30, 2022, our stock price declined significantly, and during the second quarter of ~~2019,~~2022 we ~~generated revenue~~experienced leadership changes in our Vapotherm Access reporting unit and were notified of ~~$12.3~~the non-renewal of certain Vapotherm Access customer relationships. As a result of these factors and uncertainty related to our ability to scale our standalone remote patient monitoring business given slower than expected Vapotherm Access patient enrollment, we recognized an impairment charge of $4.0 million to write off HGE customer relationships and developed technology and an impairment charge of $14.7 million to write off the goodwill of the Vapotherm Access reporting unit, in each case to their estimated fair value, during the second quarter of 2022. During the third quarter of 2022, in connection with the decision to cease future commercial investment in the Vapotherm Access reporting unit, we announced a reduction in force at Vapotherm Access and on August 29, 2022, PCI Management Group LLC, now known as Vapotherm Access Management Services LLC (“PCI”), provided RespirCare with a six-month without cause contract termination notice of its Master Service Agreement with the clinic. We and RespirCare’s physician shareholder are presently in negotiations to consensually shorten the six-month contractual notice period. As a result of these factors, we recognized an impairment charge of $2.1 million to write off Vapotherm Access and RespirCare long-lived assets to their estimated fair value, during the third quarter of 2022.

On September 27, 2022, we received notice from the New York Stock Exchange, Inc. (the “NYSE”) that we are not in compliance with the continued listing standards set forth in Section 802.01B of the NYSE Listed Company Manual. Such noncompliance of Section 802.01B of the NYSE Listed Company Manual is based on our average global market capitalization for the prior 30 trading-day period being below $50 million at the same time as our stockholders’ equity is less than $50 million. We intend to submit a plan to cure the deficiency by November 11, 2022 and return to compliance with the NYSE continued listing
requirements by March 27, 2024 or earlier. No assurance can be provided, however, that the NYSE will accept our plan or that we will be able to regain compliance with the applicable NYSE listing standards or otherwise maintain compliance with the other NYSE listing standards.

As a result of our ongoing losses, we had an accumulated deficit of $468.6 million as of September 30, 2022 and incurred a net loss of ~~$13.0 million compared to revenue of $10.7~~$91.8 million and generated a ~~net loss~~cash flow deficit from operations of ~~$8.9~~$69.3 million, both for the nine months ended September 30, 2022. We expect to continue to incur significant product development, regulatory, sales and marketing and other expenses. We have historically funded our cash flow deficits primarily through the issuance of equity securities and debt and sales of High Velocity Therapy systems and their associated disposables. We expect to continue to incur significant expenses, operating losses and cash flow deficits for the foreseeable future. As such, we have evaluated whether or not our cash, cash equivalents and restricted cash on hand and working capital would be sufficient to sustain our forecasted operating activities through November 2, 2023, as required by Accounting Standards Codification (ASC) 205-40, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern.

Due to the inherent uncertainty in predicting future revenues and certain variable costs, we have considered our ability to reduce our cash flow deficits and are in the process of implementing the following steps to reduce our cash flow deficits:

We believe our plans to reduce our cash flow deficits can be effectively implemented as all of the actions are within our control. Actions completed during the three and nine months ended September 30, 2022 under our restructuring plans and their impacts on our condensed consolidated financial statements are further described below and in Note 11 “Restructuring” of the notes to condensed consolidated financial statements in this report.

As of September 30, 2022, we had cash, cash equivalents and restricted cash of $29.8 million, working capital of $56.8 million and outstanding debt under our loan agreement of $100.0 million. Our loan agreement provides for interest-only payments through February 18, 2026. On September 30, 2022, we entered into an amendment which modified our minimum revenue covenant for the remainder of 2022 and added a $20 million minimum liquidity covenant (the “Liquidity Covenant”).

As of November 2, 2022, we expect our existing cash and cash equivalents will not be sufficient to remain in compliance with our Liquidity Covenant under our loan agreement through at least the next twelve months from the issuance of these condensed consolidated financial statements. Therefore, substantial doubt exists about our ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued. To ensure adequate liquidity, we are presently evaluating various external debt and equity financing scenarios in light of the Liquidity Covenant, although no assurance can be provided that we will be able to complete any such financing. There is inherent uncertainty associated with fundraising activity and it is not within our complete control. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our products and services. Any additional debt or equity financing that we raise may contain terms that are not favorable to us or our stockholders. See Note 1 “Description of Business” of the notes to condensed consolidated financial statements in this report.

In connection with the release of our first quarter 2022 financial results, we announced our “path to profitability” goals for the remainder of ~~2018. Our accumulated deficit as~~2022 and 2023, which include:

As part of ~~March 31, 2019 was $227.3 million.~~this strategy, we announced our plan to move substantially all of our manufacturing operations from New Hampshire to Mexico, and during second quarter of 2022, we immediately began delivering on key milestones, including entering into an agreement with TACNA Services, Inc. (“TACNA”) under which TACNA will manage our manufacturing operations in Mexico for products currently manufactured at our New Hampshire facility and we took steps to bring back our research and development operations in-house by terminating arrangements with third party research and development design firms. In the ~~first~~third quarter of ~~2019, 81.7%~~2022, through a subsidiary of TACNA, we entered into a lease agreement to lease property in Tijuana, México which will be used as our new manufacturing facility in Mexico and we began construction of improvements to the leased property to prepare the property for commencement of our ~~revenue was derived~~manufacturing operations in late 2022 and into 2023. In addition, we established a subsidiary in Singapore, signed a letter of intent to lease research and development space, and onboarded a Singapore-based research and development team to bring research and development projects in-house to reduce the cost of external design firms and access government grant funding. We also took meaningful steps towards right sizing our commercial organization, including exiting Vapotherm Access and RespirCare and making reductions to our field teams in the United States and ~~18.3% was derived outside~~internationally. Presently, we are working on several initiates to drive down our inventory balance and increase our turnover of inventory, which we expect will return approximately $20 million of cash to our consolidated balance sheet, however, the exact timing of the conversion of inventory into cash is not easy to predict.

Despite our near-term challenges, we still believe our anticipated long-term growth will be driven by the following strengths:

Despite our ~~products to new hospitals. We also~~current cost savings initiatives, we expect to continue to make investments in research and development, regulatory affairs, and clinical studies to develop future generations of our ~~Hi-VNI Technology~~High Velocity Therapy products which historically have driven higher average sale prices of our products, support regulatory submissions, and demonstrate the clinical efficacy of our new products. During the second and third quarters of 2022, we leveraged the decreased respiratory censuses in hospitals to give our sales force full access to our customers and execute on our One Hospital One Day, or 1H1D, strategy. Through 1H1D, we educate our customers on the full capabilities of our technology to help patients through all four care areas of their hospital that we serve today, regardless of whether patients are hypoxic or hypercapnic. We believe our 1H1D strategy will allow us to return our disposable utilization, or turn, rates to their pre-COVID historical levels over time as we go deeper and wider in our largest accounts. The turn rate is the average number of disposables purchased per month per capital unit from a customer account. We also plan to extend our 1H1D strategy in 2023 to increase awareness of the efficacy of our devices in addressing the respiratory distress associated with shock. We continue to focus on our long-term product roadmap which will introduce additional high growth products to our respiratory care offerings. While these and other actions put pressure on our margins and adversely affected our financial results during the first nine months of 2022 and will continue to put pressure on our gross margins during the rest of 2022, we anticipate

long-term benefits of these past and anticipated future actions. Because of these and other factors, we expect to continue to incur net losses for the next several years and ~~we expect to require~~are evaluating additional funding, which may include ~~future~~ equity and debt financings.

~~Revenue increased $1.6~~Net revenue decreased $24.6 million, or ~~14.5%~~64.5%, to ~~$12.3~~$13.5 million for the ~~first~~third quarter of ~~2019~~2022 compared to ~~$10.7~~$38.1 million for the ~~first~~third quarter of ~~2018.~~2021. The ~~increase~~decrease in net revenue was primarily attributable to decreases of $12.2 million, $11.9 million and $1.1 million in disposables, capital equipment and capital equipment lease revenues, respectively, partially offset by a ~~$1.5~~$0.8 million increase in ~~disposable~~service and other revenues. Disposables and capital equipment revenues decreased 56.3% and 89.6%, respectively, in the third quarter of 2022 primarily due to lower sales volume and decreased sales of our High Velocity Therapy units, respectively. The revenues generated in the third quarter of 2022 were lower as the Delta related COVID surge in the third quarter of 2021 drove significant worldwide demand for our products at that time and did not repeat itself in the current year period. Capital equipment lease revenue asdecreased 87.2% in the third quarter of 2022 due to a decrease in rental arrangements. The increase in service and other revenue in the third quarter of 2022 was primarily the result of ~~an increase in the installed base of Precision Flow capital units worldwide. Additionally, there was a $0.5 million increase in lease~~Vapotherm Access revenue due to ~~a larger volume of lease contracts for~~ the PCI acquisition ~~of Precision Flow units~~ in the ~~first~~fourth quarter of ~~2019 compared to the first quarter of 2018.~~2021.

~~Revenue~~Net revenue generated in the United States ~~increased $1.4~~decreased $21.9 million, or ~~16.6%~~66.4%, to ~~$10.0~~$11.1 million for the third quarter of 2022, compared to $33.0 million for the third quarter of 2021. Net revenue generated in our International markets decreased $2.7 million, or 51.9%, to $2.5 million for the third quarter of 2022, compared to $5.2 million for the third quarter of 2021. The decrease in net revenue in the United States and International markets was primarily due to the Delta related COVID surge in the third quarter of 2021, which drove significant worldwide demand for our products at that time and did not repeat itself in the current year period.

Net revenue decreased $42.9 million, or 47.1%, to $48.1 million for the first ~~quarter~~nine months of ~~2019,~~2022 compared to ~~$8.6~~$91.0 million for the first nine months of 2021. The decrease in net revenue was primarily attributable to decreases of $23.0 million, $19.4 million and $2.9 million in capital equipment, disposables and capital equipment lease revenues, respectively, partially offset by a $2.6 million increase in service and other revenues. Capital equipment and disposables revenues decreased 77.7% and 37.5%, respectively, in the first nine months of 2022 primarily due to surges of the COVID pandemic in the first nine months of 2021, which drove significant increases in the worldwide installed base of High Velocity Therapy units and disposables volume at that time, that did not repeat itself in the current year period. Capital equipment lease revenue decreased 80.4% in the first nine months of 2022 due to a decrease in rental arrangements. The increase in service and other revenue in the first nine months of 2022 was due to the PCI acquisition in the fourth quarter of ~~2018. Revenue growth~~2021.

Net revenue generated in the United States decreased $29.3 million, or 44.1%, to $37.1 million for the first nine months of 2022, compared to $66.3 million for the first nine months of 2021. Net revenue generated in our International markets decreased $13.6 million, or 55.1%, to $11.1 million for the first nine months of 2022, compared to $24.7 million for the first nine months of 2021. The decrease in net revenue in the United States was primarily due to ~~increased disposable~~a decrease in volume of sales ~~resulting from~~of capital equipment and a ~~larger installed base~~decrease in the number of ~~Precision Flow units.~~disposables sold due to lower demand in the first nine months of 2022 compared to the first nine months of 2021. The decrease in international net revenue was primarily driven by a decrease in volume of sales of capital equipment and a decrease in the number of disposables sold in the first nine months of 2022, compared to the first nine months of 2021.

~~Revenue generated in our International markets increased $0.1~~Cost of revenue decreased $7.6 million, or ~~6.3%~~39.4%, to ~~$2.2~~$11.7 million ~~for~~in the third quarter of 2022 compared to $19.3 million in the third quarter of 2021. Cost of revenue decreased $9.6 million, or 21.1%, to $36.0 million in the first ~~quarter~~nine months of ~~2019,~~2022 compared to ~~$2.1~~$45.6 million ~~for~~in the first ~~quarter~~nine months of ~~2018. Revenue growth in the International markets~~2021. The decrease for both comparison periods was primarily due to ~~increased disposable sales resulting from a larger installed base of Precision Flow units.~~

Cost of goods sold increased $0.6 million, or 9.0%, to $7.1 million in the first quarter of 2019 compared to $6.5 million in the first quarter of 2018. The increase was primarily due to increased productlabor costs due to ~~higher~~a decrease in sales volumes of our ~~Precision Flow~~disposables and capital ~~units~~equipment, partially offset by an increase in our reserves for excess and ~~disposables.~~obsolete inventory.

Gross ~~margin increased~~profit as a percent of revenue decreased to ~~42.1%~~13.8% in the third quarter of 2022 compared to 49.4% in the third quarter of 2021. Gross profit as a percent of revenue decreased to 25.2% in the first ~~quarter~~nine months of ~~2019~~2022 compared to ~~39.5%~~49.9% in the first ~~quarter~~nine months of ~~2018. The increase in gross margin was driven by favorable sales mix of disposables as well~~2021. Gross profit as a ~~decrease in disposable component costs in~~percent of revenue for both comparison ~~to the first quarter of 2018. Additionally, we achieved operating efficiency~~periods was negatively impacted by ~~holding operating overhead constant while increasing throughput of our manufacturing facility to support continued sales growth.~~increased reserves for excess and obsolete inventory, lower revenue and production levels and increased termination costs.

Research and development expenses increased ~~$1.0~~$0.4 million, or ~~47.1%~~10.1%, to ~~$3.3~~$4.4 million in the ~~first~~third quarter of ~~2019~~2022 compared to ~~$2.2~~$4.0 million in the ~~first~~third quarter of ~~2018.~~2021. As a percentage of revenue, research and development expenses increased to ~~26.6%~~32.4% in the third quarter of 2022 compared to 10.4% in the third quarter of 2021.

Research and development expenses increased $2.8 million, or 20.6%, to $16.2 million in the first ~~quarter~~nine months of ~~2019~~2022 compared to ~~20.7%~~$13.5 million in the first ~~quarter~~nine months of ~~2018.~~ 2021. As a percentage of revenue, research and development expenses increased to 33.7% in the first nine months of 2022 compared to 14.8% in the first nine months of 2021.

The increase in research and development expenses for both comparison periods was primarily due to anincreases in termination costs, employee-related expenses, production development costs associated with the development of our future generation High Velocity Therapy systems, and stock-based compensation, partially offset by decreased patent-related costs, prototype, and tooling costs. The increase in research and development ~~headcount~~expenses as a percentage of revenue for both comparison periods was primarily due to a decrease in revenues in the third quarter and ~~other employee-related expenses, including stock-based compensation and~~first nine months of 2022 compared to ~~new product development costs.~~the same periods in 2021.

Sales and marketing expenses ~~increased $1.1~~decreased $9.0 million, or ~~13.8%~~44.0%, to ~~$9.2~~$11.5 million in the ~~first~~third quarter of ~~2019~~2022 compared to ~~$8.1~~$20.5 million in the ~~first~~third quarter of ~~2018.~~2021. As a percentage of revenue, sales and marketing expenses increased to 84.6% in the third quarter of 2022 compared to 53.7% in the third quarter of 2021.

Sales and marketing expenses decreased $10.6 million, or 22.4%, to ~~74.5%~~$36.6 million in the first ~~quarter~~nine months of ~~2019~~2022 compared to ~~75.0%~~$47.2 million in the first ~~quarter~~nine months of ~~2018.~~2021. As a percentage of revenue, sales and marketing expenses increased to 76.1% in the first nine months of 2022 compared to 51.8% in the first nine months of 2021.

The decrease in sales and marketing expenses for both comparison periods was primarily due to decreased sales commission expenses, employee-related expenses and stock-based compensation, partially offset by increased termination costs and travel expenses. The increase in sales and marketing expenses as a percentage of revenue for both comparison periods was primarily due to ~~increased compensation, travel~~a decrease in revenues in the third quarter and ~~other employee-related expenses, including stock-based compensation,~~first nine months of 2022 compared to the same periods in ~~our sales and marketing organizations and to investments in marketing initiatives and clinical studies.~~2021.

General and administrative expenses ~~increased $2.5~~decreased $0.8 million, or ~~104.8%~~10.8%, to ~~$4.9~~$6.5 million in the ~~first~~third quarter of ~~2019~~2022 compared to ~~$2.4~~$7.3 million in the ~~first~~third quarter of ~~2018.~~2021. As a percentage of revenue, general and administrative expenses increased to ~~39.7%~~47.8% in the third quarter of 2022 compared to 19.1% in the third quarter of 2021.

General and administrative expenses decreased $3.2 million, or 13.3%, to $20.8 million in the first ~~quarter~~nine months of ~~2019~~2022 compared to ~~22.2%~~$23.9 million in the first ~~quarter~~nine months of ~~2018.~~2021. As a percentage of revenue, general and administrative expenses increased to 43.1% in the first nine months of 2022 compared to 26.3% in the first nine months of 2021.

The decrease in general and administrative expenses for both comparison periods was primarily due to favorable changes in value of contingent consideration and decreased legal and consulting expenses, partially offset by higher employee-related expenses, including termination costs, and stock-based compensation. The increase in general and administrative expenses as a percentage of revenue for both comparison periods was primarily due to ~~increases~~a decrease in ~~headcount~~revenues in the third quarter and ~~other employee-related expenses, including stock-based compensation,~~first nine months of 2022 compared to the same periods in 2021.

We recorded a goodwill impairment charge of $14.7 million related to the write off of goodwill of the Vapotherm Access reporting unit to its estimated fair value during the first nine months of 2022. There were no goodwill impairment charges recorded for the third quarter of 2022 or 2021, or the first nine months of 2021.

We recorded a long-lived and intangible asset impairment charge of $2.1 million during the third quarter of 2022, related to the write off of Vapotherm Access and RespirCare property and equipment and operating lease right-of-use assets no longer deemed to be recoverable. There were no long-lived asset impairment charges recorded in the third quarter of 2021.

Impairment of long-lived and intangible assets totaled $6.2 million for the first nine months of 2022. The impairment charges included those discussed in the preceding paragraph and a ~~lesser extent, legal, advisory~~long-lived and ~~consulting fees,~~intangible asset impairment charge of $4.0 million related to the write off of HGE customer relationships and ~~public company costs.~~developed technology intangible assets no longer deemed to be recoverable during the second quarter of 2022. There were no long-lived and intangible asset impairment charges recorded in the first nine months 2021.

~~The~~We recorded a loss on disposal of ~~fixed assets for~~certain property and equipment of $0.3 million during the third quarter and first nine months of 2022. There was no such loss recorded during the third quarter or first nine months of ~~2018 was attributable to the loss on the disposal of fixed assets associated with our facility consolidation. We expect loss on disposal of fixed assets to vary over time.~~2021.

Other expense, net increased ~~$0.3~~$2.6 million, or ~~69.4%~~381.4%, to ~~$0.8~~$3.3 million in the third quarter of 2022 compared to $0.7 million in the third quarter of 2021. Other expense, net increased $7.0 million, or 340.7%, to $9.1 million in the first ~~quarter~~nine months of ~~2019~~2022 compared to ~~$0.5~~$2.1 million in the first ~~quarter~~nine months of ~~2018.~~2021. The increase in other expense, net for both comparison periods was primarily due to an increase in interest expense due to higher average interest rates on higher average outstanding borrowings during the current year periods compared to the same periods in 2021. The increase in the first nine months of 2022 was also attributable to the first quarter 2022 extinguishment of our debt under our prior financing arrangement.

The benefit for income taxes for the third quarter of 2022 totaled less than $0.1 million and related to ~~additional borrowings under~~a benefit for net deferred income tax assets deemed more likely than not to be realized by our ~~credit facilities,~~foreign subsidiaries. The provision for income taxes for the first nine months of 2022 totaled $0.1 million and related to deferred tax liabilities for differences in the book and tax basis of indefinite-lived assets, partially offset by ~~an increase in interest~~a benefit for net deferred income tax assets deemed more likely than not to be realized by our foreign subsidiaries. We have not recorded any federal or state income tax benefits related to domestic operating losses due to ~~higher cash balances resulting from proceeds received in November 2018 from our initial public offering.~~uncertainty about future taxable income. There were no such provisions or benefits recorded during the third quarter or first nine months of 2021.

As of ~~March 31, 2019,~~September 30, 2022, we had cash, cash equivalents and restricted cash of ~~$58.5~~$29.8 million, working capital of $56.8 million and an accumulated deficit of ~~$227.3~~$468.6 million. As of December 31, 2021, we had cash, cash equivalents and restricted cash of $57.3 million, working capital of $66.6 million and an accumulated deficit of $376.7 million. Our primary sources of capital to date have been from ~~an initial public offering of our common stock, private placements of our convertible preferred stock,~~ sales of our ~~Precision Flow~~equity securities, sales of our High Velocity Therapy systems and their associated disposables and amounts borrowed under credit facilities. ~~Since inception,~~

As we ~~have raised~~continue to incur losses and cash flow deficits, our transition to profitability is dependent upon achieving a ~~total~~level of ~~$162.6 million in net proceeds from private placements~~revenues adequate to support our cost structure and reducing our cash operating expenses and capital expenditures to pre-COVID levels. Based on our current forecasts of annual cash flow deficits, there is substantial doubt about our ~~convertible preferred stock.~~ ~~On November 16, 2018, we completed an initial public offering of 4,600,000 shares of common stock at~~ability to continue as a ~~price of $14.00 per share, which raised net proceeds of $57.4 million.~~ ~~As of March 31, 2019, we had $4.0 million of outstanding borrowings~~going concern and ~~no availability under~~ our ~~Revolving Facility. As of March 31, 2019, we had $42.5 million of term debt outstanding under our Credit Agreement and Guaranty.~~

~~We believe that our existing cash resources and availability under our credit facilities will be sufficient~~ability to meet our capital requirements ~~and fund our operations~~ for at least the next 12 ~~months. If these sources~~months from the filing of this report. To ensure adequate liquidity, we are ~~insufficient~~presently evaluating various external debt and equity financing scenarios and believe we will be able to ~~satisfy~~complete a financing in the fourth quarter of 2022 to remain in compliance with the Liquidity Covenant, although no assurance can be provided that we will do so. There is inherent uncertainty associated with fundraising activity and it is not in our ~~liquidity requirements we may seek to sell additional equity or make additional borrowings under our existing credit facilities or enter new debt financing arrangements.~~complete control. If we raise additional funds by issuing equity securities, our stockholders would experience ~~dilution. Debt~~dilution and 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 in amounts or on terms unacceptable to us.~~sub-optimal terms. If we are unable to obtain additional financing ~~we may~~on reasonably acceptable terms, there could be ~~required~~material adverse effects on our business and call into question our ability to ~~delay the development, commercialization and marketing of our Precision Flow systems.~~continue as a going concern.

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

The net cash used in operating activities was ~~$9.8~~$69.3 million in the first ~~quarter~~nine months of ~~2019~~2022 and consisted primarily of a net loss of ~~$13.0~~$91.8 million and an increase in net operating assets of $13.5 million, partially offset by $36.0 million in non-cash charges. Non-cash charges for the first nine months of 2022 consisted primarily of impairment of goodwill, stock-based compensation expense, impairment of long-lived assets, depreciation and amortization expense, and a provision for inventory valuation, partially offset by a ~~decrease~~favorable change in fair value of ~~$2.6~~contingent consideration.

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 $10.3 million, partially offset by $12.3 million in non-cash ~~charges and a decrease of $0.6 million in net operating assets.~~charges. Non-cash charges for the first nine months of 2021 consisted primarily of stock-based compensation expense and depreciation and amortization expense.

The net cash used in operating activities was $10.5 million in the first quarter of 2018 and consisted primarily of a net loss of $8.9 million and an increase of $2.2 million in net operating assets offset by non-cash charges of $0.6 million. Non-cash charges consisted primarily of depreciation and amortization expense, losses on disposals of fixed assets and stock-based compensation expense.

Net cash used in investing activities for the first ~~quarter~~nine months of ~~2019~~2022 and ~~2018~~2021 consisted of purchases of property and equipment of ~~$1.1~~$8.3 million and ~~$1.2~~$4.8 million, respectively. ~~In addition, the net cash used in investing activities in the first quarter of 2019 included $1.6 million to acquire Solus.~~ Effective January 1, 2019, and further described in Note 2 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q, we consider restricted cash as a component of cash and cash equivalents as presented on our consolidated statements of cash flows. Previously the net change in restricted cash was considered an investing activity. Prior periods have been reclassified to conform to current year presentation.

Net cash provided by financing activities was ~~$11.0~~$50.2 million in the first ~~quarter~~nine months of ~~2019~~2022 and consisted primarily of ~~borrowings of $11.3 million~~net proceeds under our credit facilities of $52.5 million, proceeds received from the exercise of stock options of $0.1 million and proceeds

from common stock issuances in connections with our ESPP of $0.1 million, partially offset by ~~$0.3 million in~~payments of debt issuance ~~costs.~~costs of $1.6 million, debt extinguishment costs of $0.8 million and contingent consideration payments of $0.1 million.

Net cash ~~provided by~~used in financing activities was ~~$0.4~~$0.9 million in the first ~~quarter~~nine months of ~~2018~~2021 and consisted primarily of ~~$0.4~~repayments on our revolving loan facility of $3.2 million, inpartially offset by proceeds received from the exercise of ~~equity-based awards.~~stock options of $1.4 million and proceeds from common stock issuances in connection with our ESPP of $0.9 million.

~~In November 2016,~~On February 18, 2022 (the “Effective Date”), we entered into the Revolving Facility, 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).

Interest is paid monthly on the average outstanding balance, at the Wall Street Journal Prime Rate plus 1.75%, floating, subject to a floor of 3.5%. The interest rate was 7.3% at March 31, 2019 and December 31, 2018.

On April 6, 2018, we amended and restated the Revolving Facility (the “Amended Revolving Facility”) to primarily 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 Revolving Facility, which increased the allowable permitted indebtedness under the agreement in connection with our credit card program from $0.3 million to $0.5 million.

The outstanding balance under the Amended Revolving Facility, as amended, was $4.0 million and $3.2 million at March 31, 2019 and December 31, 2018, respectively. The remaining amount available to borrow based on eligible receivables was $0 million and $1.0 million at March 31, 2019 and December 31, 2018.

~~In November 2016, we entered into a~~SLR Loan ~~and Security~~ Agreement with ~~Solar Capital Ltd., or Solar, for a total facility amounting to $20.0 million, available in three tranches. The first tranche was drawn down in the amount of $10.0 million on the effective date~~SLR which paid off in full our previous term loan facility of $6.0 million. We achieved the minimum revenue threshold required to draw down the second tranche of $5.0 million of term debt financing which we did in January 2017. In addition, we obtained a signed term sheet for an equity financing in excess of $10.0 million which allowed us to draw down the third and final tranche of $5.0 million term debt financing, which we elected to do in March 2017, bringing our total balance outstanding under this facility to $20.0 million. Pursuant to the Loan and Security Agreement with Solar, interest was to be paid monthly, and the interest rate for all principal amounts advanced under the loan is equal to “LIBOR Rate” plus 8.99%. We pledged all assets as collateral with a double negative pledge on intellectual property. The facility had a 24-month period from the date of funding where interest only payments were payable. This debt was extinguished in April 2018.

~~On April 6, 2018, we entered into the Credit Agreement and Guaranty with Perceptive. The Credit Agreement and Guaranty initially~~ provided for a term A loan facility inof $100.0 million (the “SLR Term A Loan Facility”) and a term B loan facility of $25.0 million (the “SLR Term B Loan Facility”). The SLR Term A Loan Facility was funded to us on 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 paid off the borrowings under the Loan and Security AgreementEffective Date. In connection with Solar in full. 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 (the “Amended Credit Agreement and Guaranty”) 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.

The outstanding principal amount of the 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 Amended Credit Agreement and Guaranty, unless we have not 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~~granted SLR warrants to ~~Perceptive to~~ purchase ~~37,693, 18,846 and 3,769~~107,373 shares of our ~~Series D convertible preferred stock at~~common stock. The warrants had an exercise price of $15.92 per share in April 2018, July 2018 and September 2018, respectively. Pursuant to the 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 19,790 shares of common stock. The warrants have an exercise price of $15.92$13.97 per share, were fully vested upon issuance, are exercisable at the option of the holder, in whole or in part, and expire in ~~March 2029.~~ February 2032. The SLR Term B Loan Facility was available to us upon achievement of a certain minimum revenue level as more fully described in the SLR Loan Agreement. The proceeds of SLR Term A Loan Facility were used to repay all indebtedness under our prior loan agreement, as described below.

~~Off-Balance Sheet Arrangements~~On August 1, 2022, we entered into an Amendment No. 1 to the SLR Loan Agreement (the “First Amendment”) with SLR. Pursuant to the First Amendment, we were provided with a one-month extension of our covenant-free period through August 31, 2022.

~~We do not~~On September 30, 2022, we entered into an Amendment No. 2 to the SLR Loan Agreement (the “Second Amendment,” together with the SLR Loan Agreement, as amended, the “Amended SLR Loan Agreement”), with SLR. Pursuant to the Second Amendment, our minimum net product revenue covenant was modified for the remainder of 2022, a minimum liquidity covenant of $20.0 million (the “Liquidity Covenant”) was added, the London Interbank Offered Rate was replaced with the Secured Overnight Financing Rate (the “SOFR”), the exit fee was increased from 6.95% to 7.45% of the aggregate principal amount of the Amended SLR Loan Agreement, and the SLR Term B Loan Facility and related facility fee were eliminated. Concurrently with the closing of the Second Amendment, we amended and restated SLR’s warrants to purchase 107,373 shares of our common stock to reset the exercise price to $1.63 per share.

Pursuant to the Amended SLR Loan Agreement, advances under the Amended SLR Loan Agreement bear interest at a floating rate per annum equal to (a) the greater of (i) 1.00% or (ii) the one-month SOFR, plus (b) 8.30%. At September 30, 2022, the interest rate was 11.44%. The outstanding balance was $100.0 million at September 30, 2022. The Amended SLR Loan Agreement provides for interest-only payments for the first 48 months following the Effective Date. Thereafter, payments on the Amended SLR Loan Agreement will be due monthly in 12 equal installments; provided that we shall have ~~any off-balance sheet arrangements,~~the option to extend the interest-only period for an additional 12 months upon achievement of a certain minimum revenue level as more fully described in the Amended SLR Loan Agreement. The Amended SLR Loan Agreement will mature on February 1, 2027 (the “Maturity Date”). The Amended SLR Loan Agreement may be prepaid in full, subject to a prepayment charge of (i) 3.0%, if such prepayment occurs on or prior to February 17, 2023, (ii) 2.0%, if such prepayment occurs after February 18, 2023 but on or prior to February 17, 2024, and (iii) 1.0%, if such prepayment occurs after February 18, 2024 but on or prior to the Maturity Date (the “Prepayment Penalty”). In addition to the payment of principal and accrued interest, we will be required to make a payment of 7.45% of the aggregate principal amount of the Amended SLR Loan Agreement funded (the “Facility Exit Fee”), which is payable on the earliest to occur of (i) the Maturity Date, (ii) the acceleration of the Amended SLR Loan Agreement prior to the Maturity Date, and (iii) the prepayment date of the Amended SLR Loan Agreement prior to the Maturity Date. The Facility Exit Fee of $7.5 million is considered fully earned by SLR as of the Effective Date and is being accrued to interest expense over the term of the Amended SLR Loan Agreement. The Amended SLR Loan Agreement is secured by a lien on substantially all of our assets, including intellectual property.

The Amended SLR Loan Agreement contains customary covenants and representations, including, without limitation, a minimum revenue covenant equal to a percentage of each month’s forecasted net product revenue as defined ~~by applicable regulations~~in the Amended SLR Loan Agreement (tested on a trailing six month basis at the end of each fiscal month, commencing with the ~~SEC,~~six month period ending on August 31, 2022), the Liquidity Covenant, 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. As of September 30, 2022, we were in compliance with all covenants under the Amended SLR Loan Agreement.

The events of default under the Amended SLR Loan Agreement include, without limitation, and subject to customary grace periods, (1) our failure to make any payments of principal or interest under the Amended SLR Loan Agreement or other loan documents, (2) our breach or default in the performance of any covenant under the Amended SLR Loan Agreement, (3) the

occurrence of a material adverse effect or an event that ~~are~~is reasonably likely to ~~have~~result in a ~~current~~material adverse effect, (4) the existence of an attachment or ~~future~~levy on a material ~~effect on~~portion of our ~~financial condition, results~~funds or of ~~operations, liquidity, capital expenditures~~our subsidiaries, (5) our insolvency or ~~capital resources.~~

~~Contractual Obligations~~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, SLR is entitled to take enforcement action, including an incremental 5% interest rate increase or acceleration of amounts due under the Amended SLR Loan Agreement (the “Mandatory Prepayment Option”). We determined the Mandatory Prepayment Option to be an embedded derivative that is required to be bifurcated from the Amended SLR Loan Agreement. We determined the combined probability of an event of default and ~~Commitments~~

~~Our contractual obligations~~SLR exercising the Mandatory Prepayment Option to be remote and ~~commitments~~deemed its fair value to be immaterial as of ~~March 31,~~September 30, 2022. We re-evaluate the fair value of the Mandatory Prepayment Option at the end of each reporting period, as applicable.

The Amended SLR Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. SLR has indemnification rights and the right to assign the Amended SLR Loan Agreement, subject to customary restrictions.

On February 18, 2022, we used $47.4 million of the SLR Term A Loan Facility to pay off all obligations owing under, and to terminate, our prior Loan and Security Agreement (the “CIBC Loan Agreement”) with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) which provided for a revolving loan facility of $12.0 million (the “CIBC Revolving Facility”) and a term loan facility of $40.0. million (the “CIBC Term Facility” and, together with the Revolving Facility, the “CIBC Facilities”). As a result of the termination of the CIBC Loan Agreement, we recorded a loss on extinguishment of debt of $1.1 million, which included the prepayment penalty, write-off of the remaining unamortized deferred financing costs, and legal fees during the first quarter of 2022.

On December 20, 2019, ~~are summarized~~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, 2022 or 2021. The ATM Agreement will remain in full force and effect until terminated by either party pursuant to the ~~table below:~~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, 2022, there was approximately $39.8 million in remaining capacity under this program.

~~This management’s discussion and analysis~~The preparation of ~~financial condition and results of operations is based on our~~the condensed consolidated financial statements ~~which have been prepared~~ in ~~accordance~~conformity with ~~GAAP. The preparation of these financial statements~~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 consolidated 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 factors~~from external factors. The critical accounting policies that we believe ~~are reasonable under~~affect our more significant judgements and estimates used in the ~~circumstances, the results~~preparation of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes 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 “Significant Accounting Policies” of notes to~~ condensed consolidated financial statements ~~and our critical accounting policies within the section entitled “Management’s~~presented in this Quarterly Report on Form 10-Q are described in Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations and in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K ~~filed~~for the year ended December 31, 2021, with the ~~SEC on March 22, 2019. There have been no material changes, other than those listed below.~~

~~We adopted the Accounting Standards Codifications “Statement of Cash Flows (Topic 230): Restricted Cash”~~ ~~and~~ ~~“Clarifying the Definition of a Business (Topic 805)”~~ ~~during the three months ended March 31, 2019. See Note 2 “Significant Accounting Policies” of notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q.~~

~~We also updated our accounting policies related to foreign currency, goodwill and intangible assets, which are discussed below.~~

~~Our functional currency is the currency~~addition of the ~~primary economic environment in which the entity operates, which is the U.S. dollar.~~ For our non-U.S. subsidiary that transacts in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive income, a separate component of stockholders’ equity.revised disclosure below.

There were no assets or liabilities of foreign subsidiaries that were translated at period-end exchange rates as of December 31, 2018. As of March 31, 2019, our UK entity, Solus, was included in our consolidated results from the date of the acquisition in February 2019, see Note 18 “Business Combinations” to these consolidated financial statements for details of this transaction. The f~~unctional currency for this entity is its local currency, Pound Sterling (GBP).~~Goodwill Impairment

Realized foreign currency gains or losses arising from transactions denominated in foreign currencies, are recorded in other (expense) income in the consolidated statements of operations. Unrealized foreign currency gains or losses arising from transactions denominated in foreign currencies are recorded in other comprehensive income.

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of ~~accounting.~~accounting in a business combination. Goodwill is not amortized but reviewed for impairment. Goodwill is reviewed annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.

We ~~compare~~test goodwill for impairment at the reporting unit level. A reporting unit is a segment or one level below an operating segment (referred to as a component) to which goodwill is assigned when initially recorded. Under U.S. GAAP, we have the option to first assess qualitative factors to determine whether the existence of current events or circumstances would lead to a determination that it is more likely than not that the fair value of one of our reporting units ~~to their~~is greater than its carrying ~~values.~~value. If we determine it is more likely than not that the ~~carrying~~fair value of ~~the net assets assigned to~~ a reporting unit ~~exceeds~~is greater than its carrying value, no further testing is necessary. However, if we conclude otherwise, then we are required to perform a quantitative impairment test by calculating the fair value of the reporting unit ~~we would record~~and comparing the fair value with the carrying value of the reporting unit. If the fair value of the reporting unit is less than its carrying value, a non-cash impairment charge is recorded in an ~~impairment~~amount equal

to that difference with the loss ~~equal~~not to exceed the total amount of goodwill allocated to the ~~difference. As described in Note 17 “Segment Reporting”~~reporting unit. We have the option to ~~these unaudited consolidated financial statements, we operate in one operating segment,~~bypass the qualitative assessment for any reporting unit and ~~have two~~proceed directly to performing the quantitative goodwill impairment test. For reporting units ~~Vapotherm and Solus.~~

~~Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is~~where we perform the quantitative test, we determine the fair value using the income approach or a ~~process designed to provide reasonable assurance regarding~~combination of the ~~reliability of financial reporting~~income approach and the ~~preparation~~market approach as appropriate. For a company such as ours, the income and market approaches will generally provide the most reliable indications of ~~financial statements in accordance~~fair value because the value of such companies is dependent on their ability to generate earnings. In the income approach, we utilize a discounted cash flow analysis, which involves estimating the expected after-tax cash flows that will be generated by each reporting unit and then discounting those cash flows to present value, reflecting the relevant risks associated with ~~accounting principles generally accepted~~each reporting unit and the time value of money. This approach requires the use of significant estimates and assumptions, including forecasted revenue growth rates, forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins, and discount rates. Our forecasts are based on historical experience, current backlog, expected market demand, and other industry information. In the market approach, we utilize the guideline company method, which involves calculating revenue and EBITDA multiples based on operating data from guideline publicly traded companies. Multiples derived from guideline companies provide an indication of how much a knowledgeable investor in the ~~United States.~~marketplace would be willing to pay
for a company. These multiples are evaluated and adjusted based on specific characteristics of the reporting units relative to the selected guideline companies and applied to the reporting units' operating data to arrive at an indication of value. Changes in key assumptions utilized in our assessment could significantly impact our fair value calculations which could result in goodwill impairments in future periods.

During the quarter ended June 30, 2022, a substantial decline in our stock price and actual and forecasted revenues, and other factors such as leadership changes in the Vapotherm Access reporting unit, represented indicators of impairment which triggered an interim impairment assessment. As a result, during the nine months ended September 30, 2022, we recognized an impairment charge of ~~becoming a public company, we will be required, under Section 404~~$14.7 million to write off the goodwill of the ~~Sarbanes-Oxley Act,~~Vapotherm Access reporting unit to ~~furnish a report by management on, among other things,~~its estimated fair value. There was no impairment of goodwill during the ~~effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year~~three months ended December 31, 2019. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The SEC defines a material weakness as a deficiency,September 30, 2022 or ~~combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual~~2021, or ~~interim financial statements will not be detected or prevented on a timely basis.~~nine months ended September 30, 2021.

In accordance with the provisions of the Sarbanes-Oxley Act, neither we nor our independent registered public accounting firm has performed an evaluation of our internal control over financial reporting during any period included in this Quarterly Report on Form 10-Q.

A discussion of recent accounting pronouncements is included in Note 2 to our ~~unaudited~~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. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies.

ITEM 3. QUANTITATIVE AND ~~QUALITATIVE~~QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to interest rate risk arises primarily from variable interest rates applicable to borrowings under our SLR Facilities and interest rates associated with our invested cash balances. Borrowings under our SLR Facilities bear interest at a floating rate per annum equal to (a) the greater of (i) 1.00% and (ii) the one month Secured Overnight Financing Rate (the “SOFR Rate”), plus (b) 8.30%. At September 30, 2022, the interest rate was 11.44%. As of September 30, 2022, borrowings under our SLR Facilities totaled $100.0 million. Based on our outstanding borrowings and the SOFR Rate, a 100 basis point increase in the annual interest rate on our outstanding borrowings would have a $1.0 million impact on our interest expense on an annual basis.

On September 30, 2022, we had cash invested in money market deposits of $13.0 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 less than 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. In addition, we engage in other foreign operations that transact in currencies other than the U.S. dollar. Our principal exchange rate risk is between the U.S. dollar and the British pound sterling, and to a lesser extent, the euro, Mexican peso, and the Singapore dollar. Adjustments resulting from the translation of the financial statements of our non-U.S. subsidiaries’ foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive (loss) income, a separate component of stockholders’ equity. Income and expense items are translated at the average foreign currency exchange rates for the period. Transaction gains and losses resulting from currency fluctuations related to our other foreign operations are included in the determination of our net loss. 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, Mexican peso, and the Singapore dollar. Revenues denominated in currencies other than the U.S. dollar represented approximately 7.8% and 2.9% of consolidated net revenues for the three months ended September 30, 2022 and 2021, respectively. Revenues denominated in currencies other than the U.S. dollar represented approximately 6.9% and 2.9% of consolidated net revenues for the nine months ended September 30, 2022 and 2021, respectively. Total assets denominated in both the British pound sterling and the euro represented approximately 2.5% and 1.8% of our total assets at September 30, 2022 and December 31, 2021, respectively. There were no material assets denominated in the Mexican peso or the Singapore dollar at September 30, 2022 or December 31, 2021. 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.

Many of the commodities used in the production and transportation of our products are purchased in the open market. The prices we pay for such items are subject to fluctuation, and we manage this risk through the use of purchase orders and pricing agreements. During the three and nine months ended September 30, 2022, we continued to experience inflationary pressures on transportation and commodities costs, which we expect to continue for the remainder of 2022. A number of external factors, including adverse weather conditions, supply chain disruptions (including raw material shortages) and labor shortages, have impacted and may continue to impact transportation and commodities costs. When prices increase, we may or may not ~~required~~pass on such increases to ~~provide the information required by this item.~~our customers without suffering reduced volume, revenue, margins and operating results.

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, 2022. 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, 2022, 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).

~~For~~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 ~~discussion~~material adverse effect on the results of ~~legal matters as of May 7, 2019, please read~~ ~~Part I. Item 1. Note 9 Commitments and Contingencies~~ ~~to our unaudited consolidated~~its operations or financial ~~statements included in this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.~~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 ~~2018~~2021 Form 10-K which could materially affect our business, financial condition or future results. ~~There~~Except as set forth below, there have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of our ~~2018~~Annual Report on Form ~~10-K.~~10-K filed with the SEC on February 24, 2022.

Our plan to move substantially all manufacturing operations from New Hampshire to Mexico involves significant risks which, if not mitigated, could have a material adverse effect on our business and operations.

We are in the process of relocating substantially all of our manufacturing operations from our present leased manufacturing facility in New Hampshire to a leased manufacturing facility in Mexico pursuant to our Manufacturing Service Agreement with TACNA Services, Inc. (“TACNA”), under which TACNA will provide a shared Mexican corporation through which the assembly and manufacture of our products will take place in Mexico. Baja Fur, S.A. de C.V., a subsidiary of TACNA, entered into a lease agreement with Fraccionadora Residencial Hacienda Agua Caliente, S. de R.L. de C.V., for a property in Tijuana, México, to be used as our manufacturing facility in Mexico. Relocating our manufacturing operations to Mexico involves significant risks, including:

Although we have developed (and continue to develop) plans and strategies to mitigate these risks, there can be no assurance we will be successful in this regard. Consequently, the occurrence of one or more of the foregoing risks could have a material adverse effect on our business and operations.

If we fail to continue to meet the listing requirements of the NYSE, our common stock may be delisted from the NYSE, and if we are unable to list our common stock on the NYSE or another exchange such as Nasdaq, we could face significant adverse consequences.

Our common stock is listed on the NYSE. The NYSE requires us to continue to meet certain listing standards, including standards related to our global market capitalization, stockholders’ equity and average closing share price. Specifically, the quantitative continued listing standards applicable to us include the following:

We would be considered “below criteria” by NYSE Regulation if we trigger any one of the above standards. If we do not meet the NYSE’s continued listing standards, we will be notified by the NYSE and required to take corrective action to meet the continued listing standards; otherwise our common stock will be delisted from the NYSE. If our common stock is delisted from the NYSE and we are unable to correct this or list our common stock on another exchange such as Nasdaq, we could face significant adverse consequences including:

As previously disclosed on October 3, 2022, we received written notice from the NYSE that we do not satisfy the listing requirements. In order to avoid delisting, we have 45 days from the receipt of the notice to submit a plan to bring the company into conformity with continued listed standards within 18 months of receipt of the notice. If the plan is not submitted on a timely basis or is not accepted by the NYSE, the NYSE could initiate delisting proceedings.

We may fail to satisfy the required steps and, consequently, fail to maintain the listing of our common stock on the NYSE. Any suspension of trading or delisting of our common stock from the NYSE would reduce liquidity in our common stock and may result in a decline in the market price of our common stock. In addition, our ability to raise additional necessary capital through equity or debt financing, and attract and retain personnel by means of equity compensation, would be impaired.

Our amended loan agreement added a $20 million minimum liquidity covenant we may be unable to satisfy without an additional capital infusion. If we are unable to satisfy the requirements of our amended loan agreement, including the minimum liquidity covenant, and our lender declares a default, or if we are otherwise unable to satisfy our debts as they come due, our ability to continue as a going concern could be severely jeopardized.

As previously disclosed, on February 18, 2022, we entered into a Loan and Security Agreement with SLR Investment Corporation which provided for a term A loan facility of $100.0 million and a term B loan facility of $25.0 million (the “SLR Facility”). On September 30, 2022, we entered into Amendment No. 2 to the SLR Facility which, among other things, eliminated the $25 million term loan B availability and added a $20 million minimum liquidity covenant. Despite the resurgence of seasonal respiratory illness which began late in the third quarter of 2022 and is continuing, our near term revenues may be inadequate to satisfy the new minimum liquidity covenant. We are currently exploring debt and equity financing alternatives to ensure adequate liquidity. However, there can be no assurance our financing efforts will be successful, or that the Company will not be forced to accept sub-optimal terms. A failure to obtain additional financing on reasonably acceptable terms could have a material adverse effect on our business and call into question our ability to continue as a going concern.

We may encounter unplanned claims or expenses associated with our exit from the Vapotherm Access standalone remote patient monitoring reporting unit which, individually or in the aggregate, could be material. A material amount of unplanned claims or expenses could have a material adverse effect on our business.

We completed our exit from the Vapotherm Access standalone remote patient monitoring business on October 31, 2022. Despite our belief we identified and properly accounted for the costs of this exit in all material respects, it is possible unplanned claims and expenses could arise. If unplanned costs and expenses arise which, individually or in the aggregate, are material, this could have a material adverse effect on our business.

On October 31, 2022, Vapotherm, Inc. substantially completed the abandonment of ~~Proceeds~~

~~On November 13, 2018,~~its Vapotherm Access standalone remote patient monitoring business, which constitutes a “disposition” of a “significant amount” of its assets within the ~~SEC declared effective our Registration Statement on~~meaning of Item 2.01 of Form ~~S-1 (File No. 333-227897), as amended, filed~~8-K. Restructuring charges expected to be incurred in connection with ~~our initial public offering, or~~this action, including an estimate of the ~~Registration Statement. Pursuant~~total range of amounts expected to be incurred, the estimated range of amounts for each major type of cost associated with the course of action and the estimated amounts that will result in future cash expenditures, are disclosed in Note 11 “Restructuring” to the ~~Registration Statement, we registered~~condensed consolidated financial statements in this report, which is incorporated herein by reference. Pro forma financial information reflecting the ~~offer and sale~~disposition of ~~4,000,000 shares~~Vapotherm Access is omitted since it is not required under Rule 8-05 of our common stock with an aggregate offering price of approximately $56.0 million. Merrill Lynch, Pierce, Fenner & Smith Incorporated and William Blair & Company, L.L.C. acted as representatives of the underwriters for the offering. On November 13, 2018, the underwriters fully exercised their option to purchase 600,000 additional shares of common stock with an aggregate offering price of approximately $8.4 million pursuant to the underwriting agreement. On November 14, 2018, we issued and sold 4,600,000 shares of our common stock at a price to the public of $14.00 per share. Upon completion of the initial public offering on November 16, 2018, we received net proceeds of approximately $57.4 million, after deducting the underwriting discount of $4.5 million and offering expenses of $2.5 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.SEC Regulation S-X.

The offering terminated after the sale of all securities registered pursuant to the Registration Statement. The net proceeds of approximately $57.4 million from our initial public have been invested in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. There has been no material change in the expected use of the net proceeds from our initial public as described in our final prospectus, dated November 13, 2018, filed with the SEC pursuant to Rule 424(b) relating to our Registration Statement on Form S-1.

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	☒☐

~~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~~


		Page No.
Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION
Item 1	Financial Statements ~~(unaudited)~~(interim periods unaudited)	5
	Condensed Consolidated Balance Sheets ~~- March 31, 2019~~– September 30, 2022 and December 31, ~~2018~~2021	5
	Condensed Consolidated Statements of ~~Operations -~~Comprehensive Loss – Three and Nine Months ~~Ended March 31, 2019~~ended September 30, 2022 and ~~2018~~2021	6
	Condensed Consolidated Statements of ~~Redeemable Convertible Preferred Stock and Stockholders'~~Stockholders’ Equity (Deficit) -– Three and Nine Months ~~Ended March 31, 2019~~ended September 30, 2022 and ~~March 2018~~2021	7
	Condensed Consolidated Statements of Cash Flows ~~- Three~~– Nine Months ~~Ended March 31, 2019~~ended September 30, 2022 and ~~2018~~2021	89
	Notes to Condensed Consolidated Financial Statements	910
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2733
Item 3	Quantitative and Qualitative Disclosures About Market Risk	3445
Item 4	Controls and Procedures	3446

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	3547
Item 1A	Risk Factors	3547
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	3549
Item 65	~~Exhibits~~Other Information	3649
Item 6	Exhibits	50
Exhibit Index		3650
Signatures		3751

					Additional
	Common Stock				Paid-in		Accumulated			Stockholders'
	Shares		Amount		Capital		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 stock upon exercise of options		268		-		-		-			-
Issuance of restricted stock		116,580		-		226		-			226
Stock-based compensation expense		-		-		1,903		-			1,903
Net loss		-		-		-		(12,964	)		(12,964	)
Balance at March 31, 2019		16,899,685	$	17	$	268,348	$	(227,346	)	$	41,019


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

Issuance of common stock upon exercise of options		16,380		-		43		-			-			43
Issuance of common stock with restricted stock units and awards		49,218		-		2		-			-			2
Issuance of common stock under the Employee Stock Purchase Plan		62,973		-		135		-			-			135
Issuance of common stock for services		4,493		-		88		-			-			88
Stock-based compensation expense		-		-		2,410		-			-			2,410
Foreign currency translation adjustments		-		-		-		(185	)		-			(185	)
Net loss		-		-		-		-			(42,683	)		(42,683	)
Balance at June 30, 2022		26,692,883	$	27	$	456,290	$	(214	)	$	(442,364	)	$	13,739

Issuance of common stock upon exercise of options		5,985		-		10		-			-			10
Issuance of common stock with restricted stock units and awards		350		-		3		-			-			3
Issuance of common stock for services		3,825		-		67		-			-			67
Modification of common stock warrants		-		-		39		-			-			39
Stock-based compensation expense		-		-		1,614		-			-			1,614
Foreign currency translation adjustments		-		-		-		(172	)		-			(172	)
Net loss		-		-		-		-			(26,201	)		(26,201	)
Balance at September 30, 2022		26,703,043	$	27	$	458,023	$	(386	)	$	(468,565	)	$	(10,901	)

	Redeemable Convertible								Additional					Stockholders'
	Preferred Stock				Common Stock				Paid-in		Accumulated			Equity
	Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit)
Balance at December 31, 2017		10,515,351	$	152,637		672,321	$	1	$	45,056	$	(171,914	)	$	(126,857	)
Issuance of stock upon exercise of options		-		-		13,492		-		18		-			18
Issuance of restricted stock		-		-		50,385		-		83		-			83
Stock-based compensation expense		-		-		-		-		116		-			116
Net loss		-		-		-		-		-		(8,906	)		(8,906	)
Balance at March 31, 2018		10,515,351	$	152,637		736,198	$	1	$	45,273	$	(180,820	)	$	(135,546	)

	Three Months Ended March 31, 2019
	US		International		Total
Net revenue by:
Product Revenue
Capital	$	1,510	$	505	$	2,015
Disposable		7,547		1,472		9,019
Subtotal Product Revenue		9,057		1,977		11,034
Lease Revenue		663		-		663
Service and Other Revenue		329		273		602
Total Revenue	$	10,049	$	2,250	$	12,299

	Three Months Ended March 31, 2018
	US		International		Total
Net revenue by:
Product Revenue
Capital	$	1,572	$	711	$	2,283
Disposable		6,343		1,226		7,569
Subtotal Product Revenue		7,915		1,937		9,852
Lease Revenue		185		-		185
Service and Other Revenue		522		180		702
Total Revenue	$	8,622	$	2,117	$	10,739

	March 31,		December 31,		March 31,		December 31,
	2019		2018		2018		2017
Cash and cash equivalents	$	56,666	$	58,223	$	15,175	$	26,508
Restricted cash		1,852		1,799		1,852		1,852
Total cash, cash equivalents, and restricted cash	$	58,518	$	60,022	$	17,027	$	28,360

	Series A Redeemable							Series B Redeemable							Series C Redeemable
	Convertible Preferred							Convertible Preferred							Convertible Preferred						Total Warrants
	Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value		Weighted Average Exercise Price		Number of Shares		Estimated Fair Value
Outstanding at December 31, 2017		158,202	$	415		$	14.00		12,857	$	72		$	14.00		4,285	$	42	$	14.00		175,344	$	529
Gain on change in fair value		-		(127	)		-		-		(1	)		-		-		-		-		-		(128	)
Outstanding at March 31, 2018		158,202	$	288		$	14.00		12,857	$	71		$	14.00		4,285	$	42	$	14.00		175,344	$	401


	Common Stock Warrants
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2018		230,295	$	14.50
Warrants granted		19,790		15.92
Outstanding at March 31, 2019		250,085	$	14.61

	March 31, 2019			December 31, 2018
Equipment	$	939		$	924
Furniture		962			957
Manufacturing equipment		4,175			4,166
Software		656			655
Demonstration, placements and evaluation units		8,013			7,135
Leasehold improvements		2,025			2,025
Construction in process		4,822			4,663
Total property and equipment		21,592			20,525
Less: Accumulated depreciation and amortization		(7,691	)		(7,109	)
Total property and equipment, net	$	13,901		$	13,416

2019	$	-
2020		-
2021		-
2022		-
2023		42,539
Less: Discount on loans payable		(965	)
Long-term loans payable	$	41,574

	Total Due
As of March 31, 2019
Remainder of 2019	$	1,166
2020		1,577
2021		1,601
2022		1,626
2023		1,652
Thereafter		1,820
Total	$	9,442

						Weighted
	Number of			Weighted		Average
	Underlying			Average		Remaining		Aggregate
	Common			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at December 31, 2018		786,989		$	2.41		7.87	$	13,801
Options granted		752,346			17.11
Options exercised		(268	)		1.64
Options canceled		(23,396	)		2.73
Outstanding at March 31, 2019		1,515,671		$	9.71		8.59	$	15,071
Exercisable at March 31, 2019		449,659		$	1.83		6.46	$	8,014

Vested and unvested expected to vest at March 31, 2019		1,515,671		$	9.71		8.59	$	15,071

Series	A		B		C		D		Total
Shares authorized		2,560,863		1,727,143		3,575,714		2,848,417		10,712,137
Shares issued		2,402,649		1,714,286		3,571,429		2,826,987		10,515,351
Conversion rate		1.0		1.0		1.0		1.0
Liquidation preference per share	$	14.000	$	14.000	$	14.000	$	15.918

	Payments Due by Year
(in thousands)	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Long-term debt (1)	$	42,539	$	-	$	-	$	42,539	$	-
Operating leases (2)		9,442		1,166		3,178		3,278		1,820
Line of credit		4,000		4,000		-		-		-
Total contractual obligations	$	55,981	$	5,166	$	3,178	$	45,817	$	1,820


Exhibit Number		Description

~~31.1~~
10.1		Lease Agreement, dated June 17, 2022, by and among Fraccionadora Residencial Hacienda Agua Caliente, S. de R.L. de C.V. and Baja Fur, S.A. de C.V. (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on July 11, 2022 (File No. 001-38740) and incorporated herein by reference)

10.2		Absolute Unconditional Corporate Guaranty Agreement, dated June 24, 2022, by Vapotherm, Inc. (previously filed as Exhibit 10.2 to the Current Report on Form 8-K filed on July 11, 2022 (File No. 001-38740) and incorporated herein by reference)

10.3		Amendment No. 1 to Loan and Security Agreement dated as of August 1, 2022 among Vapotherm, Inc., SLR Investment Corp., as Collateral Agent, and the Lenders Party Thereto (previously filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022 (File No. 001-38740) and incorporated herein by reference)

10.4		Amendment No. 2 to Loan and Security Agreement, dated as of September 30, 2022, among Vapotherm, Inc., SLR Investment Corp., as Collateral Agent, and the Lenders Party Thereto (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 3, 2022 (File No. 001-38740) and incorporated herein by reference

10.5		Form of Amended and Restated Warrant to Purchase Common Stock, dated February 18, 2022, issued by Vapotherm, Inc. in Connection with Credit Facility (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 3, 2022 (File No. 001-38740) and incorporated herein by reference

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

32.1		~~Certifications~~Certification 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~~Certification 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.

~~May 10, 2019~~November 2, 2022	By:	/s/ Joseph Army
		Joseph Army
		President and Chief Executive Officer


~~May 10, 2019~~November 2, 2022	By:	/s/ John Landry
		John Landry
		Senior Vice President and Chief Financial Officer