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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of April 29, ~~2020,~~2021, there were ~~21,299,512~~25,911,595 outstanding common shares of Vapotherm, Inc.

2We use “Vapotherm,” “High Velocity Therapy,” “HVT,” “Precision Flow,” “Hi-VNI,” “OAM,” “HGE,” “Solus Medical,” and other marks as trademarks in the United States and/or in other countries. This Quarterly Report on Form 10-Q contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, including logos, artwork and other visual displays, may appear without the ^® or^TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these ~~words.~~words and the use of future dates. Forward-looking statements include, but are not limited to, statements concerning:

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the ~~Securities and Exchange Commission, or~~ SEC on ~~March 4, 2020, our Form 8-K filed with the SEC on April 13, 2020,~~February 24, 2021 and in our other filings with the SEC. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

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

Unless otherwise indicated, information contained in this Quarterly Report on Form 10-Q concerning our industry and the markets in which we operate, including our general expectations, market position and market opportunity, is based on our management’s estimates and research, as well as industry and general publications and research, surveys and studies conducted by third parties. We believe that the information from these third-party publications, research, surveys and studies included in this Quarterly Report on Form 10-Q is reliable. Management’s estimates are derived from publicly available information, their knowledge of our industry and their assumptions based on such information and knowledge, which we believe to be reasonable. This data involves a number of assumptions and limitations which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on March 4, 2020 and our Form 8-K filed with the SEC on April 13, 2020. These and other factors could cause our future performance to differ materially from our assumptions and estimates.

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

	March 31, 2020			December 31, 2019			March 31, 2021			December 31, 2020
	(unaudited)						(unaudited)
Assets
Current assets
Cash and cash equivalents	$	60,393		$	71,655		$	93,828		$	113,683
Accounts receivable, net		11,948			8,243			13,659			23,488
Inventories		9,103			9,137			26,935			19,873
Prepaid expenses and other current assets		4,021			4,066			6,485			5,041
Total current assets		85,465			93,101			140,907			162,085
Property and equipment, net		15,696			15,086			21,667			20,573
Operating lease right-of-use assets								7,835			8,260
Restricted cash		1,852			1,852			253			1,853
Goodwill		549			588			14,009			16,226
Intangible assets, net		303			353			5,201			5,694
Deferred income tax assets		63			66
Other long-term assets		856			844			1,166			967
Total assets	$	104,784		$	111,890		$	191,038		$	215,658
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	4,614		$	3,375		$	6,049		$	4,967
Contract liabilities		175			137			1,285			2,977
Accrued expenses and other current liabilities		12,152			9,187			19,535			34,033
Short-term line of credit		4,489			3,491
Revolving loan facility, current portion								1,158			-
Total current liabilities		21,430			16,190			28,027			41,977
Long-term loans payable, net		41,858			41,787			39,671			39,653
Revolving loan facility, net of current portion								3,731			4,888
Deferred income tax liabilities								9			6
Other long-term liabilities		127			174			12,598			15,229
Total liabilities		63,415			58,151			84,036			101,753
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019		-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of March 31, 2020 and December 31, 2019, 20,917,149 and 20,851,531 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		21			21
Preferred stock ($0.001 par value) 25,000,000 shares authorized; 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020								-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of March 31, 2021 and December 31, 2020, 25,834,208 and 25,722,984 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively								26			26
Additional paid-in capital		320,660			319,115			434,274			430,781
Accumulated other comprehensive income (loss)		(27	)		44
Accumulated other comprehensive income								52			41
Accumulated deficit		(279,285	)		(265,441	)		(327,350	)		(316,943	)
Total stockholders' equity		41,369			53,739			107,002			113,905
Total liabilities and stockholders’ equity	$	104,784		$	111,890		$	191,038		$	215,658

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

	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
Net revenue	$	19,115		$	12,299		$	32,308		$	19,115
Cost of revenue		9,898			7,120			15,140			9,898
Gross profit		9,217			5,179			17,168			9,217
Operating expenses
Research and development		3,362			3,273			4,910			3,362
Sales and marketing		13,317			9,161			13,900			13,317
General and administrative		5,251			4,879			8,059			5,251
Total operating expenses		21,930			17,313			26,869			21,930
Loss from operations		(12,713	)		(12,134	)		(9,701	)		(12,713	)
Other (expense) income
Foreign currency gain (loss)		24			(9	)		(70	)		24
Interest income		125			203			29			125
Interest expense		(1,295	)		(1,024	)		(665	)		(1,295	)
Other		15			-			-			15
Net loss	$	(13,844	)	$	(12,964	)	$	(10,407	)	$	(13,844	)
Other comprehensive loss, net of tax:
Other comprehensive income (loss):
Foreign currency translation adjustments		(71	)		-			11			(71	)
Total other comprehensive loss	$	(71	)	$	-
Total other comprehensive income (loss)							$	11		$	(71	)
Total comprehensive loss	$	(13,915	)	$	(12,964	)	$	(10,396	)	$	(13,915	)

Net loss per share attributable to common stockholders - basic and diluted	$	(0.66	)	$	(0.76	)
Net loss per share - basic and diluted							$	(0.40	)	$	(0.66	)
Weighted-average number of shares used in calculating net loss per share, basic and diluted		20,882,949			16,949,027			25,796,065			20,882,949

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

					Additional		Accumulated Other													Additional		Accumulated Other
	Common Stock				Paid-in		Comprehensive			Accumulated			Stockholders'			Common Stock				Paid-in		Comprehensive		Accumulated			Stockholders'
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity			Shares		Amount		Capital		Income		Deficit			Equity
Balance at December 31, 2019		20,851,531	$	21	$	319,115	$	44		$	(265,441	)	$	53,739
Balance at December 31, 2020																	25,722,984	$	26	$	430,781	$	41	$	(316,943	)	$	113,905
Issuance of common stock upon exercise of options		24,687		-		40		-			-			40			77,892		-		761		-		-			761
Issuance of restricted stock		40,931		-		58		-			-			58
Issuance of common stock with restricted stock units and awards																	33,332		-		47		-		-			47
Stock-based compensation expense		-		-		1,447		-			-			1,447			-		-		2,685		-		-			2,685
Foreign currency translation adjustments		-		-		-		(71	)		-			(71	)		-		-		-		11		-			11
Net loss		-		-		-		-			(13,844	)		(13,844	)		-		-		-		-		(10,407	)		(10,407	)
Balance at March 31, 2020		20,917,149	$	21	$	320,660	$	(27	)	$	(279,285	)	$	41,369
Balance at March 31, 2021																	25,834,208	$	26	$	434,274	$	52	$	(327,350	)	$	107,002

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 common 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
Balance at December 31, 2019		20,851,531	$	21	$	319,115	$	44		$	(265,441	)	$	53,739
Issuance of common stock upon exercise of options		24,687		-		40		-			-			40
Issuance of common stock with restricted stock units and awards		40,931		-		58		-			-			58
Stock-based compensation expense		-		-		1,447		-			-			1,447
Foreign currency translation adjustment		-		-		-		(71	)		-			(71	)
Net loss		-		-		-		-			(13,844	)		(13,844	)
Balance at March 31, 2020		20,917,149	$	21	$	320,660	$	(27	)	$	(279,285	)	$	41,369

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


	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
Cash flows from operating activities
Net loss	$	(13,844	)	$	(12,964	)	$	(10,407	)	$	(13,844	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense		1,447			1,903			2,685			1,447
Depreciation and amortization		1,097			621			1,574			1,097
Provision for bad debts		101			13			(156	)		101
Provision for inventories		23			2
Provision for inventory valuation								(12	)		23
Non-cash lease expense								422			256
Change in fair value of contingent consideration								202			-
Loss on disposal of property and equipment		3			23			23			3
Amortization of discount on debt		63			44			32			63
Deferred income taxes								3			-
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(3,875	)		847			9,987			(3,875	)
Inventories		(12	)		1,780			(7,042	)		(12	)
Prepaid expenses and other assets		33			197			(1,651	)		33
Accounts payable		1,310			(1,094	)		870			1,310
Contract liabilities		38			22			(1,730	)		143
Accrued expenses and other current liabilities		2,894			(1,225	)		(14,338	)		2,789
Operating lease liabilities, current and long-term								(424	)		(256	)
Net cash used in operating activities		(10,722	)		(9,831	)		(19,962	)		(10,722	)
Cash flows from investing activities
Purchases of property and equipment		(1,558	)		(1,128	)		(2,256	)		(1,558	)
Acquisition of business, net of cash acquired		-			(1,560	)
Net cash used in investing activities		(1,558	)		(2,688	)		(2,256	)		(1,558	)
Cash flows from financing activities
Short-term line of credit		995			837
Proceeds from short-term line of credit								-			995
Proceeds from exercise of stock options		40			-			761			40
Proceeds on loans		-			10,500
Debt issuance costs		-			(322	)
Net cash provided by financing activities		1,035			11,015			761			1,035
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(17	)		-			2			(17	)
Net decrease in cash, cash equivalents and restricted cash		(11,262	)		(1,504	)		(21,455	)		(11,262	)
Cash, cash equivalents and restricted cash
Beginning of period		73,507			60,022			115,536			73,507
End of period	$	62,245		$	58,518		$	94,081		$	62,245
Supplemental disclosures of cash flow information
Interest paid during the period	$	1,202		$	939		$	639		$	1,202
Property and equipment purchases in accounts payable and accrued expenses	$	36		$	42		$	263		$	36
Issuance of warrants in conjunction with debt draw down	$	-		$	293
Issuance of common stock upon vesting of restricted stock units							$	47		$	58

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

Vapotherm, Inc. (the “Company”) ~~was founded in 1993 and reincorporated under the laws of the State of Delaware in 2013. Since inception, the Company has~~is a global medical technology company primarily focused on the development and commercialization of its proprietary ~~Hi-VNI Technology~~High Velocity Therapy products that are used to treat patients of all ages suffering from respiratory distress. The Company’s ~~Hi-VNI Technology~~High Velocity Therapy delivers non-invasive ventilatory support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. The Company’s Precision Flow systems, which use ~~Hi-VNI Technology,~~High Velocity Therapy, are clinically validated alternatives to, and address many limitations of, the current standard of care for the treatment of respiratory distress in a hospital setting.

The Company offers ~~four~~4 versions of its Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision Flow Heliox. In certain countries outside of the United States, the Company offers the Oxygen Assist Module, which was launched in the United Kingdom, select European markets, and Israel in late 2020. The Company generates revenue ~~primarily~~ from sales of its Precision Flow systems and related disposable products utilized with its ~~proprietary~~ Precision Flow systems. The Company also generates revenue from ~~the capital units themselves, and to a lesser extent,~~ sales of its Precision Flow system’s companion products, which include the Vapotherm Transfer Unit 2.0, the Q50 compressor and various ~~adaptors.~~adapters. The Company offers different options to its hospital customers for acquiring Precision Flow capital units, ranging from the purchase of the Precision Flow capital units with payment in full at the time of purchase, to financed purchases of the Precision Flow capital units, to bundled discounts involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products.

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

In March 2020, the World Health Organization declared a global pandemic related to the novel coronavirus (“COVID-19”). The Company’s ~~Hi-VNI Technology~~high velocity therapy is a first-line therapy for treating respiratory distress, which is experienced by many COVID-19 patients. The Journal of the American Medical Association published data from mainland China in April 2020 suggesting that 19% of all COVID-19 patients experience respiratory distress and require some amount of respiratory support. The Company’s hospital customers around the world are using ~~its~~the Company’s technology to support the respiratory distress experienced by many COVID-19 patients so that they can triage their sickest patients using ~~the~~a limited number of ventilators. As a result, the Company ~~has seen~~experienced a significant increase in worldwide demand for its products from both new and existing accounts ~~initially~~ in ~~Europe~~2020 and ~~the Middle East, and then later~~ during the first quarter of ~~2020, in~~2021, as compared to prior year periods. The full extent to which the ~~United States.~~

~~Since inception,~~COVID-19 pandemic will continue to impact the ~~Company has financed~~Company’s business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and variants of the virus and the actions taken to treat or contain COVID-19 or to otherwise limit its operations primarily through public offerings of its common stock, private placements of its convertible preferred stock, sales of its Precision Flow systems and amounts borrowed under its credit facilities. The Company has devotedimpact, including the majority of its resources to research and development activities related to its Precision Flow systems, including regulatory initiatives and sales and marketing activities. The Company has invested heavily in its sales and marketing function by increasing the number of sales representatives and clinical educators to 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 in the medical device industry, including, but not limited to, the successful development and commercialization of its Precision Flow products, fluctuations in operating results and financial risks, protection of proprietary knowledge and patent risks, dependence on key personnel and collaborative partners, competition, technological and manufacturing risks, customer acceptance and demand, compliance with the Food and Drug Administration and other governmental regulations, management of growthavailability and effectiveness of ~~marketing by the Company and by third parties.~~vaccines, among other factors.

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

~~On February 28, 2019,~~13, 2020, the Company acquired HGE Health Care Solutions LLC (“HGE”). The Company undertook the acquisition to expand its ~~United Kingdom based distributor.~~ capabilities by providing a remote monitoring platform designed to empower respiratory patients with chronic obstructive pulmonary disease (“COPD”) and providers to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life. See Note 3 “Business Combinations” to these condensed consolidated financial statements for details of this transaction.

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

On December 20, 2019, the Company entered into an Open Market Sales Agreement, or the ATM Agreement, with Jefferies LLC, or Jefferies, under which the Company may offer and sell its common stock having aggregate sales proceeds of up to $50.0 million from time to time through Jefferies as its sales agents. Subsequent to March 31, 2020, the Company sold 511,648 shares of common stock pursuant to the ATM Agreement for gross proceeds of $10.2 million, or $9.9 million net of commissions.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our ~~2019~~2020 Form 10-K and updated, as necessary, in this report. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.

These condensed consolidated financial statements include the financial statements of Solus Medical Ltd. (“Solus”), a wholly owned subsidiary of the Company based in the United Kingdom, ~~which was acquired~~HGE, a wholly owned subsidiary of the Company located in the ~~first quarter~~United States, and Vapotherm Deutschland GmbH, a new wholly owned subsidiary of ~~2019.~~the Company located in Germany. All intercompany accounts and transactions have been eliminated upon consolidation.

Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company globally manages the business within ~~one~~1 reporting segment, Vapotherm, Inc. and ~~two~~3 reporting units, Vapotherm, Solus and ~~Solus.~~HGE. Segment information is consistent with how management reviews the business, makes investing and resource allocation decisions and assesses operating performance.

The majority of the Company’s long-term assets are located in the United States. Long-term assets located outside the United States ~~total $0.1~~totaled $0.2 million as of each of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates relied upon in preparing these condensed consolidated financial statements include calculation of stock-based compensation, valuation of warrants, fair values of acquired assets and liabilities, including goodwill and intangibles assets, realizability of inventories, allowance for bad ~~debt,~~debts, accrued expenses, including the fair value of contingent consideration and estimated incurred but not reported insurance obligations, and the valuation allowances against deferred income tax assets. Actual results may differ from these estimates.

The accompanying condensed consolidated balance sheet as of March 31, ~~2020,~~2021, and the condensed consolidated statements of comprehensive loss, stockholders’ equity and of cash flows for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, ~~2020~~2021 and the results of its operations and its cash flows for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. The financial data and other information disclosed in these notes related to the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 are also unaudited. The results of operations for the three months ended March 31, ~~2020~~2021 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

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

As of March 31, ~~2020,~~2021, the Company’s financial instruments were comprised of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt, the carrying amounts of which approximated fair value due to ~~the~~their short-term nature ~~and~~or market interest rates. All of the Company’s cash and cash equivalents are maintained at creditworthy financial institutions. At March 31, ~~2020,~~2021, deposits ~~exceed~~exceeded the amount of any federal depository insurance provided.

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

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

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

The Company considers all highly liquid temporary investments purchased with original maturities of 90 days or less to be cash equivalents. The Company holds restricted cash related to certificates of deposits and collateral in relation to lease agreements. As of March 31, ~~2020, $0.3~~2021, $0.6 million of our ~~$62.2~~$94.1 million of cash, cash equivalents and restricted cash balance was located outside the United States.

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

	March 31, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Cash and cash equivalents	$	60,393	$	71,655	$	93,828	$	113,683
Restricted cash		1,852		1,852		253		1,853
Total cash, cash equivalents, and restricted cash	$	62,245	$	73,507	$	94,081	$	115,536

Property and equipment are recorded at cost. Depreciation is recognized over the estimated useful lives of the related assets on a straight-line basis, except for tooling for which depreciation is recognized utilizing the units-of-production method prospectively

beginning on January 1, 2021. The Company changed to the units-of-production method to better reflect the pattern of economic consumption of the tooling. The prospective change to the units-of-production depreciation method had an immaterial impact on the Company’s results of operations for the three months ended March 31, 2021. Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the remaining lease term or the estimated useful lives of the improvements and is included in depreciation expense. Demonstration equipment represents internally manufactured capital equipment that is used on-site at trade shows and at customer locations to demonstrate the Precision Flow system. Depreciation expense on demonstration equipment is recorded in sales and marketing expense in the condensed consolidated statements of comprehensive loss. Placement and evaluation systems represent capital equipment placed at customer locations under placement or evaluation agreements for which depreciation expense is included in cost of revenue in the accompanying condensed consolidated statements of comprehensive loss.

The Company provides its customers with a standard one-year warranty on its capital equipment sales. Warranty costs are accrued based on actual historical trends and estimated at the time of sale. The warranty liability is included within accrued expenses and other liabilities in the condensed consolidated balance sheets. A roll-forward of the Company’s warranty liability from December 31, ~~2019~~2020 to March 31, ~~2020~~2021 is as follows:


Balance at December 31, 2019	$	225
Balance at December 31, 2020				$	561
Provisions for warranty obligations		334			7
Settlements		(204	)		(106	)
Balance at March 31, 2020	$	355

Balance at March 31, 2021				$	462

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

The Company’s revenue ~~consists~~is primarily ofderived from the sale of products, leases and services. Product revenue consists of capital equipment and single-use disposables that are shipped and billed to customers both domestically and internationally. The Company’s main capital equipment products are the Precision Flow ~~Hi-VNI, Precision Flow Plus, Precision Flow Classic,~~systems, the Vapotherm Transfer Unit 2.0 and Q50 compressor. The Company’s main disposable products are single-use disposables and nasal interfaces, or cannulas, and adaptors. Lease revenue consists of two components which include capital equipment that the Company leases ~~out~~ to its customers and, in certain situations, an allocation from disposable revenue to other lease revenue upon the sale of disposable products in bundled arrangements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. Service revenue consists of fees associated with routine service of capital units, ~~and~~ the sale of extended service contracts and preventative maintenance plans, which are purchased by a small portion of the Company’s customer ~~base.~~base and revenue related to HGE’s “software as a service” platform. In addition, the Company sells small quantities of component parts in the United States, United Kingdom and to third-party international service centers who provide service on Precision Flow capital units outside of the United ~~States.~~States and United Kingdom. Freight revenue is based upon actual freight costs plus a percentage markup of such costs associated with the shipment of products domestically, and to a lesser extent, internationally, and is included in service revenue. Rebates and fees consist of contractually obligated administrative fees and percentage-of-sales rebates paid to Group Purchasing Organizations (“GPOs”), Integrated Delivery Networks (“IDNs”) and distributor partners and accounted for as a reduction of service revenue.

Under the Financial Accounting Standard ~~Board~~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 ~~entity~~Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and assesses whether each promised good or service is distinct and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value-added, and other taxes collected on behalf of third parties are excluded from revenue. The Company’s standard payment ~~term is~~terms are generally 30 days from the date of sale.

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative stand-alone selling prices of the promised products or services

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

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

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying ~~the~~a practical expedient ~~in paragraph 606-10-32-18,~~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~~NaN of the Company’s contracts contained a significant financing component during the three months ended March 31, ~~2020~~2021 or ~~2019.~~2020.

The Company’s contracts with its customers generally have a duration of less than one year. Therefore, the Company has elected to apply ~~the~~a practical expedient ~~in paragraph ASC 340-40-25-4~~ and recognizes the incremental costs of obtaining contracts as an expense. These costs are included in sales and marketing expense in the accompanying condensed consolidated statements of comprehensive loss.

The Company also enters into agreements to lease its capital equipment. For such sales, the Company accounts for revenue under ASC ~~840,~~ 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 ~~total~~present value of the lease payments due over the lease term toas revenue at the inception of the lease. The Company records the ~~current~~present value of future lease payments ~~under~~in prepaid expenses and other current assets in the accompanying condensed consolidated balance ~~sheets and~~sheets; these amounts totaled ~~$1.0~~$2.1 million and ~~$0.9~~$2.7 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the ~~capital~~sales-type or direct financing lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis ~~as it becomes receivable monthly~~ over the term of the lease.

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

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 ~~both~~ the three months ended March 31, 2021 and 2020 were $0.5 and ~~2019 was~~ $0.3 ~~million.~~million, respectively.

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

(In thousands, except share and ~~Amount of Revenue Recognition~~per share amounts)

The Company recognizes revenue on product sales and service of its capital equipment and product sales of disposables to its end users. In each instance, revenue is generally recognized when the customer obtains control of the Company’s product, which generally occurs at a point in time upon shipment based on the contractual shipping terms of a contract.

Product and service revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value amount method to which the Company expects to be entitled. As such, revenue on sales are 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 are 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 the estimated amounts to vary.

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

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. For performance-based awards, the related compensation cost is amortized over the performance period on an accelerated attribution basis. Compensation cost associated with performance awards is based on fair value on the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved. Cumulative adjustments are recorded each quarter to reflect estimated outcomes of the performance-related conditions until the results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the expected life (weighted average period of time that the options granted are expected to be outstanding), the volatility of the Company’s common stock and an assumed risk-free interest rate. Expected volatility is calculated based on historical volatility of a group of publicly traded companies that the Company considers a peer group. The expected life is estimated using the simplified method for “plain vanilla” options. The risk-free interest rate is based on U.S. Treasury rates with a remaining term that approximates the expected life assumed at the date of grant. NoNaN dividend yield is assumed as the Company does not pay, and does not expect to pay, dividends on its common stock. The Company estimates forfeitures based on historical experience with pre-vested forfeitures. To the extent actual forfeitures differ from the estimate, the difference is recorded to compensation expense in the period of the forfeiture.

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

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

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

The Company’s major tax jurisdictions are the United States, New Hampshire and the United Kingdom. There is no0 provision or benefit for income taxes for the three months ended March 31, ~~2020~~2021 or ~~2019~~2020 because the Company has historically incurred operating losses and maintains a full valuation allowance against its United States net deferred tax assets.

Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”) due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and tax credit carryforwards that can be utilized to offset future taxable income and reduce taxes, respectively. The Company has not currently completed an evaluation of ownership changes through ~~March~~December 31, 2020 ~~or December 31, 2019~~ to assess whether utilization of the Company’s net operating loss and tax credit carryforwards would be subject to an annual limitation under Sections 382 and 383 of the Code. To the extent an ownership change is determined to have occurred under Sections 382 and 383 of the Code, the net operating loss and tax credit carryforwards may be subject to limitation.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard clarifies the definitions of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. In July 2018, the FASB issued ASU No. 2018-11 Leases (Topic 842) (“ASU 2018-11”) which provided another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivative and Hedging (Topic 815) and Leases (Topic 842), which defers the effective date for ASU 2016-02 to annual periods beginning after December 15, 2020 and interim periods beginning after December 15, 2021. The new standard originally required a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements, but it does not require transition accounting for leases that expire prior to the date of the initial application. The Company has not yet determined the effects that the adoptions of ASU 2016-02 and ASU 2018-11 may have on its financial position, results of operations, cash flows, or disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used and establishes additional disclosures related to credit risks. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivative and Hedging (Topic 815) and Leases (Topic 842), which defers the effective date for ASU 2016-13 to interim and annual periods beginning after December 15, ~~2022.~~2022 for private companies, emerging growth companies following private company adoption dates, or public entities meeting the definition of smaller reporting companies as of the date of issuance of this update. Since the Company met the definition of a smaller reporting company as of the date of issuance of this update, the Company is not required to adopt ASU 2016-13 until January 1, 2023. The Company has not yet determined the effects, if any, that the adoption of ASU 2016-13 may have on its financial position, results of operations, cash flows, or ~~disclosures.~~disclosures.

On ~~February 28, 2019,~~November 13, 2020, the Company completed the acquisition of all outstanding ~~equity securities~~membership interests of ~~Solus,~~ HGE, whose principal assets included intangible assets related to ~~supplier agreements.~~customer relationships, developed technology, trademarks and trade names. The Company undertook the acquisition to ~~accelerate~~expand its ~~penetration in the United Kingdom market.~~ capabilities by providing a remote monitoring platform which is designed to empower respiratory patients with COPD and providers to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life.

The purchase price, net of cash acquired, of ~~$2.0~~$19.3 million was funded with an initial cash payment of ~~approximately $1.6~~$8.4 million and ~~a settlement~~$10.9 million of ~~a $0.4 million receivable from a preexisting relationship. Additionally,~~contingent consideration. The contingent consideration is payable in cash or common stock, at the sole discretion of the Company, ~~recognized $1.0 million~~and will be remitted in ~~contingent consideration as compensation expense~~future milestone payments, one following calendar year 2021, one following calendar year 2022, and one following calendar year 2023. The final three payments will be adjusted up or down based on the revenue performance of certain HGE service offerings during ~~2019 and expects to recognize contingent consideration of $1.2 million as compensation expense in 2020.~~ those three years. The acquisition has been accounted for as an acquisition of a business.

The Company is in the process of finalizing its valuation of the assets acquired and liabilities assumed. During the three months ended March 31, 2021, we recorded an adjustment to correct immaterial errors related to the acquisition which reduced the estimated purchase price by $2.3 million and decreased goodwill, intangible assets and other liabilities by $2.2 million, $0.3 million and $0.3 million, respectively. The following table summarizes the corrected preliminary purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities assumed as of ~~February 28, 2019:~~November 13, 2020:


Cash	$	466		$	2
Accounts receivable	411				518
Inventory	492				3
Prepaids and other assets	3
Prepaids and other current assets					238
Property and equipment	1				225
Operating lease right-of-use assets					2,329
Goodwill	592				13,398
Intangible assets	455				5,180
Other long-term assets					45
Total assets acquired		2,420			21,938
Accounts payable and accrued expenses		(241	)
Accounts payable					(32	)
Accrued expenses and other liabilities					(620	)
Contract liabilities		(75	)		(31	)
Deferred taxes		(78	)
Other long-term liabilities					(1,951	)
Total liabilities assumed		(394	)		(2,634	)
Total purchase price	$	2,026		$	19,304

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions.

~~In determining~~The fair values of assets acquired and liabilities assumed may be subject to change as additional information is received. The Company expects to finalize the purchase price allocation as soon as practicable, but not later than one year from the ~~Company considered, among other factors, the opportunity provided by a supplier agreement with the National Health Service.~~ acquisition date.

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

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

The ~~total weighted average~~ amortization period for each of the intangible assets is ~~approximately 3.83~~10 years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such assets. Goodwill associated with the acquisition was primarily attributable to the ~~market~~ expansion opportunity inof the ~~United Kingdom.~~remote monitoring platform for respiratory patients and providers. The goodwill ~~attributable to the United Kingdom jurisdiction~~ is ~~not~~ deductible for tax purposes.

The Company has included the financial results of ~~Solus~~HGE in the condensed consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were approximately $0.2 million and were recorded in general and administrative expense as incurred during ~~2019.~~2020.

The following table summarizes changes to the contingent consideration payable, a recurring Level 3 measurement, for the three months ended March 31, 2021:

The following unaudited pro forma information for the three months ended March 31, ~~2019~~2020 presents consolidated information as if the ~~Solus~~HGE acquisition occurred on January 1, ~~2019,~~2020, which iswas the first day of the Company’s fiscal year ~~2019:~~2020:

	Three Months Ended March 31,
	2019			Three Months Ended March 31, 2020
Net revenue	$	12,536		$	19,375
Net loss	$	(12,908	)	$	(14,217	)
Net loss per share, basic	$	(0.76	)	$	(0.68	)

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

fair value on a recurring basis. The Company’s cash equivalents primarily consist of money market deposits which total approximately ~~$53.3~~$77.3 million at March 31, ~~2020~~2021 and are valued based on Level 1 of the fair value hierarchy. ~~As described in Note 8 “Debt”, during 2019,~~The Company’s contingent consideration which totals $11.1 million at March 31, 2021 relates to the ~~Company granted warrants to purchase 19,790 shares~~2020 acquisition of ~~common stock in connection with an amendment to its financing arrangement. These equity-classified warrants were~~HGE and is valued ~~using the Black-Scholes pricing model, which falls within~~based on Level 3 of the fair value ~~hierarchy.~~

~~The assumptions used~~hierarchy as describe in ~~the Black-Scholes pricing model~~Note 3 “Business Combination.” There were ~~as follows at the date~~0 transfers in and out of ~~grant:~~

	March 31, 2020			December 31, 2019			March 31, 2021			December 31, 2020
United States	$	8,159		$	5,574		$	8,279		$	18,893
International		4,120			2,908			5,555			4,967
Total accounts receivable		12,279			8,482			13,834			23,860
Less: Allowance for doubtful accounts		(331	)		(239	)		(175	)		(372	)
Accounts receivable, net of allowance for doubtful accounts	$	11,948		$	8,243		$	13,659		$	23,488

NoNaN individual customer accounted for 10% or more of net revenue for the three months ended March 31, ~~2020~~2021 or ~~2019. No~~2020. NaN customers accounted for approximately 17% and 13% of total accounts receivable at March 31, 2021. NaN individual customers accounted for 10% or more of total accounts receivable at ~~either March 31, 2020 or~~ December 31, ~~2019.~~2020.

	March 31, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Component parts	$	4,723	$	4,948	$	14,453	$	10,367
Finished goods		4,380		4,189		12,482		9,506
Total inventory	$	9,103	$	9,137
Total inventories					$	26,935	$	19,873

The changes in the carrying amount of goodwill and intangible assets during ~~2020~~2021 are as follows:

	As of March 31, 2020						As of March 31, 2021
	Period of amortization		Gross Carrying Amount		Accumulated Amortization		Weighted Average Amortization Period in Years		Gross Carrying Amount		Accumulated Amortization
Customer relationships								10.00	$	2,420	$	(91	)
Developed technology								10.00		2,400		(90	)
Customer agreements		3.83	$	424	$	121		3.83		456		(241	)
Trade name / marks								10.00		360		(13	)
Total identifiable intangible assets			$	424	$	121		9.50	$	5,636	$	(435	)

The Company recognized $0.1 million of amortization expense within sales and marketing expenses related to the intangible assets during the three months ended March 31, 2021 and 2020. The Company also recognized less than $0.1 million of amortization expense within general and administrative expenses related to intangible assets during the three months ended March 31, 2021 with 0 such amounts being recorded within general and administrative expenses during the three months ended March 31, 2020.

On ~~November 16, 2016,~~October 21, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) which provides for a revolving loan facility of $12.0 million (the “Revolving Facility”) and a term loan facility of $40.0 million (the “Term Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the Facilities were used to repay the Company’s former revolving loan facility and term loan facility, described in more detail below.

The Revolving Facility will mature on October 21, 2022 and may be renewed on an annual basis thereafter by mutual agreement of the Company and CIBC. The Revolving Facility bears interest at a floating rate per annum equal to the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and is subject to a floor of 3.25%. At March 31, 2021, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $4.9 million at March 31, 2021 and there were letters of credit of $1.2 million outstanding at March 31, 2021. Availability under the Revolving Facility is determined based on eligible receivables reduced by letters of credit outstanding. At March 31, 2021, there were 0 additional borrowings available under the Revolving Facility.

The Term Facility will mature on October 21, 2025. Advances under the Term Facility bear interest at a floating rate equal to the WSJ Prime Rate plus 2.5% and is subject to a floor of 3.25%. At March 31, 2021, the interest rate was 5.75%. The outstanding balance was $40.0 million at March 31, 2021. The Loan Agreement provides for interest-only payments on the Term Facility for the first 36 months through October 21, 2023. Thereafter, amortization payments on the Term Facility will be payable monthly in 24 equal installments. The Term Facility may not be prepaid prior to October 21, 2021 without prepaying all of the interest that otherwise would have been payable on the Term Facility during the period commencing on October 21, 2020 and ending on October 21, 2021, plus a prepayment charge of 2.0%. Thereafter, the Term Facility may be prepaid in full, subject to a prepayment charge of (i) 2.0%, if such prepayment occurs after October 21, 2021 but on or prior to October 21, 2022, and (ii) 1.0%, if such prepayment occurs after October 21, 2022 but on or prior to October 21, 2023. The Term Facility and Revolving Facility are secured by a lien on substantially all of the Company’s assets, including intellectual property.

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

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

As of March 31, 2021, the Company was in compliance with all covenants under the Loan Agreement.

The annual principal maturities of the Company’s term loans as of March 31, 2021 are as follows:

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

As of March 31, 2020, the Company had $42.6 million of term debt outstanding under the Amended Credit Agreement and Guaranty, which accrued interest at an ~~Arizona Corporation,~~annual rate equal to 9.06% plus the greater of (a) one-month LIBOR or (b) 1.75% per year, and $4.5 million of outstanding borrowings under the Amended Revolver Agreement, which ~~replaced its then existing revolving~~accrued interest monthly on the average outstanding balance at the WSJ Prime Rate plus 1.75%, floating, subject to a floor of 3.5%. This prior term debt was scheduled to mature in 2023 and although the prior line of ~~credit.~~credit was scheduled to mature on September 30, 2020, this was extended during the third quarter of 2020, to April 6, 2023. The Amended Revolver Agreement had made available ~~$7.0~~up to $7.5 million of revolving credit ~~upon the closing date. Availability under the Revolver Agreement is calculated~~ based upon 80% of the eligible receivables (net of pre-paid deposits, pre-billed invoices, other offsets, and contras related to each specific account debtor). ~~The original maturity date was September 30, 2018.~~As previously mentioned, both of these term debt and revolving line of credit were paid off and terminated on October 21, 2020 when the Company established its new Facilities.

In May 2016, the Company entered into a lease agreement for office and storage space at 100 Domain Drive, Exeter New Hampshire and has entered into several amendments since then to lease additional space. In total, the Company occupies approximately 95,320 square feet of space at this facility and the lease, as most recently amended, is scheduled to expire on January 28, 2025. The Company ~~refinanced~~has the ~~Revolver Agreement in April 2018, increasing~~option to renew the ~~credit line~~lease for 2 additional five-year terms by providing written notice twelve months prior to ~~$7.5 million and extending~~end of the ~~maturity date to September 30, 2020.~~initial or first lease extension term. The ~~principal~~Company is ~~due upon maturity.~~ ~~On March 22,~~not reasonably certain that it will renew the lease beyond January 2025.

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

In November 2020, in connection with the ~~Company’s credit card program from $0.3 million~~acquisition of HGE, the Company assumed a real estate lease for 22,524 square feet of office space at 1301 Virginia Drive, Fort Washington, Pennsylvania. The lease term expires on July 31, 2025. The Company has the option to ~~$0.5 million.~~renew the lease for 1 additional five-year term by providing written notice six months prior to end of the current lease term. The Company is not reasonably certain that it will renew the lease beyond July 2025.

The Company adopted ASC 842 effective January 1, 2020. As a result, the March 31, 2020 condensed consolidated financial statements have been updated, as applicable, to reflect the ~~interest rate~~adoption of this standard. There was 5.25%. The outstanding balance under the Amended Revolver Agreement was $4.5 million at March 31, 2020 and there was $2.3 million remaining availability based on eligible receivables. At December 31, 2019, the interest rate was 6.50%. The outstanding balance under the ~~Revolver Agreement~~ was $3.5 million at December 31, 2019 and the remaining availability based on eligible receivables was $0.8 million. The Amended Revolver Agreement requires the Company to comply with a minimum liquidity covenant at all times. As of March 31, 2020, the Company was in compliance with all covenants.

~~The Amended Revolving Agreement is secured by substantially all~~no effect of the ~~Company’s assets, excluding intellectual property.~~

On April 6, 2018, 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 millionchange on the ~~closing date, April 6, 2018, which paid off~~Company’s 2020 results of operations as a former loan agreement in full. In connection with this draw down, the Company granted Perceptive warrants to purchase 37,693 shares of Series D preferred stock which were converted into warrants to purchase shares of common stock at the timeresult of the ~~initial public offering.~~adoption. The ~~warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at~~following table presents operating lease cost and information related to operating right-of-use assets and operating lease liabilities for the ~~option of the holder, in whole or in part, and expire in April 2028.~~periods indicated:

~~On July~~ 20 2018, pursuant to the Credit Agreement and Guaranty, the Company drew down the second tranche of $10.0 million. In connection with this draw down, the Company granted Perceptive warrants to purchase 18,846 shares of Series D preferred stock which were converted into warrants to purchase shares of common stock at the time of the initial public offering. The warrants 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 July 2028.

On September 27, 2018, the Company entered into the first amendment to the Credit Agreement and Guaranty (the “Amendment”, together with the Credit Agreement and Guaranty, the “Amended Credit Agreement and Guaranty”) with Perceptive. Pursuant to the Amended Credit Agreement and Guaranty, the Company was permitted to draw the final $12.5 million of availability at any time through March 31, 2019 and the minimum 2018 revenue requirement of $43.2 million that was required to draw down the final tranche was eliminated. Concurrently with the closing of the Amendment, the Company drew down $2.0 million of the remaining $12.5 million available. In connection with this draw down, the Company granted to Perceptive warrants to purchase 3,769 shares of its Series D preferred stock which were converted into warrants to purchase shares of common stock at the time of the initial public offering. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, are exercisable at the option of the holder, in whole or in part, and expire in September 2028.

On March 22, 2019, the Company drew the remaining $10.5 million of availability under the Amended Credit Agreement and Guaranty. In connection with this draw down, the Company granted Perceptive warrants to purchase 19,790 shares of common stock. The warrants have an exercise price of $15.92 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.

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.

Pursuant to the Amended Credit Agreement and Guaranty, the outstanding principal amount accrues interest at an annual rate equal to 9.06% plus the greater of (a) one-month LIBOR and (b) 1.75% per year. At March 31, 2020, the interest rate was 10.81%. The outstanding balance, including accretion of the additional final payment due upon maturity and described below, was $42.6 million at March 31, 2020 and there was no remaining availability. The Amended Credit Agreement and Guaranty is secured by substantially all of the Company’s assets, including intellectual property.

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

~~The annual principal~~31, 2021, future maturities of lease liabilities under the Company’s ~~term loans as of March 31, 2020~~noncancelable operating leases are as follows:

From time to time, the Company may become involved in various legal proceedings, including those that may arise in the ordinary course of business. On December 16, 2019, the Company settled a litigation with Engineered Medical Systems, Inc., or EMS, a former supplier of a component of our Precision Flow systems, whereby EMS agreed to pay the Company $0.65 million in a series of monthly payments through December 2021, and the both the Company and EMS agreed to release each from any other outstanding claims, which included $0.5 million of accounts payable the Company had previously recorded. The Rockingham Superior Court approved the parties’ stipulation of dismissal with prejudice on January 2, 2020. The Company believes there is no ~~other~~ litigation pending that could have, individually, or in the aggregate, a material adverse effect on the results of its operations or financial condition.

~~The Company’s~~There was 0 warrant activity ~~is summarized as follows:~~during the three months ended March 31, 2021. The Company had outstanding warrants to purchase 33,948 shares of its common stock at a price of $14.00 per share at both March 31, 2021 and December 31, 2020.

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:~~meaningful:

	Three Months Ended March 31,						Three Months Ended March 31,
	2020						2021
	US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital Equipment	$	3,301	$	1,697	$	4,998	$	6,232	$	4,932	$	11,164
Disposable		9,694		2,736		12,430		12,461		4,695		17,156
Subtotal Product Revenue		12,995		4,433		17,428		18,693		9,627		28,320
Lease Revenue
Capital Equipment		627		17		644		1,577		33		1,610
Other		317		75		392		544		136		680
Service and Other Revenue		402		249		651		1,255		443		1,698
Total Revenue	$	14,341	$	4,774	$	19,115
Total Net Revenue							$	22,069	$	10,239	$	32,308

	Three Months Ended March 31,						Three Months Ended March 31,
	2019						2020
	US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital Equipment	$	1,510	$	505	$	2,015	$	3,301	$	1,697	$	4,998
Disposable		7,547		1,472		9,019		9,694		2,736		12,430
Subtotal Product Revenue		9,057		1,977		11,034		12,995		4,433		17,428
Lease Revenue		663		-		663
Capital Equipment								627		17		644
Other								317		75		392
Service and Other Revenue		329		273		602		402		249		651
Total Revenue	$	10,049	$	2,250	$	12,299
Total Net Revenue							$	14,341	$	4,774	$	19,115

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.

Contract liabilities consist of deferred revenue and other contract liabilities associated with rebates and fees payable to GPOs, IDNs and distributor partners. ~~Deferred revenues are included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.~~ The following table presents changes in contract liabilities during the three months ended March 31, ~~2020:~~2021:

	Contract Liabilities			Deferred Revenue			Deferred Revenue			Other Contract Liabilities
Balance at December 31, 2019	$	137		$	344
Balance at December 31, 2020							$	2,518		$	459
Additions		175			195			1,361			326
Subtractions		(137	)		(97	)		(2,920	)		(459	)
Balance at March 31, 2020	$	175		$	442
Balance at March 31, 2021							$	959		$	326

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

	Three Months Ended March 31,				Three Months Ended March 31,
	2020		2019		2021		2020
Cost of goods sold	$	71	$	111	$	176	$	71
Research and development		201		265		341		201
Sales and marketing		440		513		921		440
General and administrative		735		1,014		1,247		735
Total	$	1,447	$	1,903	$	2,685	$	1,447

The Company granted options to purchase 357,140 shares of common stock at exercise prices ranging from $23.01 to $35.51 per share, with a weighted average exercise price of $27.06 per share, during the three months ended March 31, 2021. The Company granted options to purchase 909,960 shares of common stock at exercise prices ranging from $10.60 to $12.28 per share, with a weighted average exercise price of $12.13 per share, during the three months ended March 31, 2020. The Company granted options to purchase 752,346 shares of common stock at exercise prices ranging from $16.34 to $17.15 per share, with a weighted average exercise price of $17.11 per share, during the three months ended March 31, 2019. The weighted average fair value of stock options granted during the three months ended March 31, 2021 and 2020 was $19.73 and ~~2019 was~~ $8.93, ~~and $11.59,~~ respectively.

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

	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk free interest rate		1.8	%		2.5	%		0.5	%		1.8	%
Expected stock price volatility		87.6	%		75.5	%		88.3	%		87.6	%
Expected term (years)		6.1			6.1			6.1			6.1

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

A summary of restricted stock unit activity for the three months ended March 31, ~~2020~~2021 is as follows:

Weighted

Average

Grant Date

Shares

Fair Value

Unvested at December 31, 2019

229,913

$
3.76

Granted/purchased

36,367

10.40

Vested

(40,931
)

3.30

Canceled

-

-

Unvested at March 31, 2020

225,349

$
4.65

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2020		228,489		$	25.60
Granted		169,096			27.53
Vested		(1,921	)		22.35
Canceled		(2,050	)		12.74
Unvested at March 31, 2021		393,614		$	26.52

In connection with our initial public offering in November 2018, the Company’s board of directors adopted the ESPP and a total of 166,500 shares of common stock were initially reserved for issuance under the ESPP. The number of shares of common stock available for issuance under the ESPP is increased on the first day of each calendar year beginning January 1, 2019 and each year thereafter until 2028 by the lessor of (i) 1% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, and (ii) the number of shares of common stock determined by the Company’s board of directors up to such an initial maximum of 1,741,300 shares of common stock. The number of shares of common stock reserved under the plan at March 31, 2020 totals 548,437.

A summary of restricted stock award activity for the three months ended March 31, 2021 is as follows:

The ESPP provides for successive ~~discreet~~discrete offering periods of approximately six months or as determined by the plan administrator. ~~The~~Offering periods begin on each November 15^th and May 15^th or the first ~~offering period began on January 2, 2020 and has not yet concluded as of March 31, 2020. As a result, the Company has not yet issued any shares of common stock pursuant to the ESPP in any period.~~trading day thereafter.

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

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

~~The fair value of the purchase right for the ESPP option is estimated on the date of grant using the Black-Scholes model with the following assumptions for the initial offering period:~~

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

	As of March 31,				As of March 31,
	2020		2019		2021		2020
Options to purchase common stock		1,897,617		1,515,671		2,009,646		1,897,617
Unvested restricted stock units and awards						469,486		225,349
Warrants to purchase common stock		182,076		250,085		33,948		182,076
Unvested restricted stock		225,349		353,371
Employee stock purchase plan shares		21,086	-			63,581		21,086
		2,326,128		2,119,127		2,576,661		2,326,128

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

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 ended March 31, ~~2020,~~2021, included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the “Risk Factors” section of our ~~2019~~2020 Form 10-K filed with the SEC on ~~March 4, 2020, our Form 8-K filed with the SEC on April 13, 2020,~~ February 24, 2021 and this Quarterly Report on Form 10-Q.

Vapotherm is a global medical technology company primarily focused on the development and commercialization of our proprietary ~~Hi-VNI Technology~~High Velocity Therapy products that are used to treat patients of all ages suffering from respiratory distress. Our ~~Hi-VNI Technology delivers~~High Velocity Therapy products deliver non-invasive ventilatory support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. Our Precision Flow systems, which use ~~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. As of March 31, ~~2020,~~2021, more than ~~2.2~~2.8 million patients have been treated with our Precision Flow systems, and we have a global installed base of over ~~17,000~~30,000 capital ~~units~~.units.

The efficacy of ~~Vapotherm’s~~our products is supported by a significant body of clinical evidence across multiple patient populations suffering from respiratory distress. We have developed the only high velocity nasal insufflation device clinically validated as an alternative to ~~be as effective as non-invasive positive pressure ventilation, or NIPPV,~~NiPPV while addressing many of its limitations, ~~including through~~evidenced in part by our sponsored 204 patient, multisite randomized controlled trial in the ~~emergency department, or~~ ED which was published in the July 2018 issue of Annals of Emergency Medicine. ~~Additionally, in~~In April 2020 Heart and Lung, the Journal of Cardiopulmonary and Acute Care, published a subgroup analysis from this ED study that showed ~~Hi-VNI Technology~~High Velocity Therapy may provide ventilatory support similar to ~~NIPPV~~NiPPV in patients presenting with acute hypercapnic respiratory failure.

~~Vapotherm’s Hi-VNI Technology is~~ In February 2021, Critical Care Explorations published a ~~first-line therapy~~multi-center, prospective observational case study that showed High Velocity Therapy was an effective tool for ~~treating~~reducing the respiratory ~~distress, which is experienced by many COVID-19 patients. The Journal of the American Medical Association published data from mainland China~~rate in ~~April~~COPD patients with acute hypercapnic respiratory failure.

Our business was significantly transformed during 2020 ~~suggesting that 19% of all COVID-19 patients experience respiratory distress and require some amount of respiratory support. Our hospital customers around the world are using our technology~~due to treat the respiratory distress experienced by many COVID-19 patients so that they can triage their sickest patients to a limited number of ventilators. As a result, we have seen a significant increase inincreased demand for our ~~products~~High Velocity Therapy technology for treatment of COVID-19 patients, as evidenced by year over year revenue growth of 161.4% from ~~both new and existing accounts, initially in Europe and the Middle East, and then later during~~2019 to 2020. For the first quarter of ~~2020,~~2021, our net revenues grew by 55.4% over the same period in the United States. Our operations team, with support from our primarily domestic supply chain, has more than tripled its production capacity, including adding additional shifts and production lines, and2020. In addition, our worldwide installed base of Precision Flow Hi-VNI systems grew ~~twice as fast in~~by 72.5% compared to the first quarter of ~~2020 than~~2020. The COVID-19 pandemic contributed to this transformation in at least two primary ways: First, it ~~did~~resulted in increased awareness of high flow therapy, including recognition by the CDC, WHO, NIH, Society for Critical Care Medicine, American College of Emergency Physicians, and the Chinese, German, Italian, and Australian thoracic societies of high flow therapy as an appropriate first line therapy for those suffering from low oxygen levels. Second, many respiratory distress patients who require ventilatory support are initially treated in a hospital’s ED with the goal of stabilizing these patients with a non-invasive ventilation therapy so their underlying condition can be treated. Our existing focus on hospital emergency departments as an effective entry point for our products resulted in our systems being in the ~~first quarter~~right place at the right time when the COVID-19 pandemic hit. This exposed a significant number of ~~2019. Looking ahead,~~new physicians to the efficacy of our ~~focus is on managing~~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 ~~supply chain to sustain~~High Velocity Therapy. We expect that increased awareness among physicians of the current production level, and potentially increasing it further, however, COVID-19 also represents both gross margin head winds, such as increases in air freight costs, expedite fees for components, and a higher mixefficacy of ~~capital equipment and international revenue, and many risks to~~ our business, so the full extent of its impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actionsHigh Velocity Therapy to treat patients in respiratory distress, whether they are hypoxic or ~~contain COVID-19 or to otherwise limit its impact, among others.~~hypercapnic, will result in expanded use of our products in a variety of settings.

We currently offer four versions of our Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision Flow Heliox. ~~We also initiated a limited release~~In certain countries outside of the United States we currently offer our Oxygen Assist Module, ~~to certain~~which was fully launched in the United Kingdom, ~~accounts~~select European markets, and Israel in February 2020 and we may expand that limited release to certain European accounts in the future. We also plan on offering the Oxygen Assist Module to some of our European customers for use with their adult hypoxic COVID-19 patients in the coming months. In the United States, the Oxygen Assist Module was granted Breakthrough Device Designation by the United States Food and Drug Administration, or FDA, on April 2, 2020 for on-demand titration of oxygen into warm humidified breathing gases delivered to spontaneously breathing patients based on continuous non-invasive monitoring of blood oxygen saturation. We are continuing to work on an Investigational Device Exemption and, if authorized, plan to initiate a neonate study by the end of the year.late 2020. The Oxygen Assist Module ~~is designed to~~can be used with all versions of our Precision Flow systems except for the Precision Flow Heliox. ~~Our~~The Oxygen Assist Module is designed to help clinicians maintain ~~the~~a patient’s pulse oxygen saturation ~~or SpO2,~~(“SpO2”) within ~~the~~a target SpO2 range over a ~~significantly~~ greater ~~proportion~~period of time while requiring significantly fewer manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce the health risks associated with dosing too much, or too little, ~~oxygen, such as~~oxygen. In neonates, these risks include visual or developmental impairment or death.

In February 2021, we upgraded the software on approximately 45 Oxygen Assist Module units outside of the United States from software version 2.2.0 to software version 2.5.0. Subsequently, a bug in software version 2.5.0 was discovered by one of our employees. Although there have been no reports of patient injury associated with this bug and ~~mortality~~we believe risk of patient injury is unlikely, out of an abundance of caution, we immediately notified our users and undertook a field action to remove software version

2.5.0 from all upgraded units and downgrade these units to software version 2.2.0 until the issue is resolved. All software downgrades have been completed.

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

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

~~We generate~~Historically, we have generated revenue primarily from sales of the disposable products utilized with our proprietary Precision Flow ~~systems. We also generate revenue~~systems and our Oxygen Assist Module, and to a lesser extent, from the sale or lease of the capital units themselves. ~~We offer different options~~However, due to demand for our ~~hospital customers for acquiring~~High Velocity Therapy technology during the COVID-19 pandemic, we generated revenue primarily from sales of our Precision Flow ~~capital units, ranging from~~systems in 2020, which although putting pressure on our margins also resulted in a 72.8% increase in our installed base, which we expect will drive future recurring disposable revenue. The extent to which the ~~purchase~~COVID-19 pandemic will impact our business during 2021 and beyond will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and variants of the ~~Precision Flow capital units with payment in full at~~virus, and the ~~time~~actions taken to treat or contain COVID-19 or to otherwise limit its impact, the availability and effectiveness of ~~purchase,~~vaccines, among other factors. For example, as COVID-19 hospitalizations continue to ~~financed~~

~~purchases~~decrease and vaccinations continue to increase, we expect our product mix to normalize back to historical levels and the overall demand for our products may be negatively impacted. Also, worldwide precautionary measures taken to reduce the spread of ~~the Precision Flow capital units,~~COVID-19 infections, have impacted, and may continue to ~~bundled discounts involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products.~~impact, flu and flu-related illnesses, which could negatively impact our future revenue.

We sell our Precision Flow systems to hospitals through a direct sales organization in the United States and in the United Kingdom and we sell our Precision Flow systems through distributors in other select countries outside of the United States and the United Kingdom. ~~We intend to fully launch our~~Our Oxygen Assist Module ~~commercially throughout the United Kingdom and Europe by the end of 2020~~is sold through a direct sales organization in the United Kingdom and through distributors in ~~other select countries~~Europe and the Middle East. We expanded the commercial launch of our Oxygen Assist Module throughout the United Kingdom, Europe, and the Middle East in ~~Europe.~~the first quarter of 2021. In addition, we ~~have~~employ field-based clinical educators who ~~are experienced users of Hi-VNI Technology and who~~ focus on ~~our~~ medical education ~~efforts to~~and training in the effective use of our products and help facilitate increased adoption and ~~increase~~ utilization. We focus on physicians, respiratory therapists and nurses who work in acute hospital settings, including the ED and adult, pediatric and neonatal ICUs. Our relationship with these clinicians is particularly important, as it enables our products to follow patients through the care continuum. WeAs of March 31, 2021, we have sold our Precision Flow systems to over ~~1,600~~1,700 hospitals across the United States, where they have been primarily deployed in the ICU setting.

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

Since inception, we have financed our operations primarily through ~~public offerings~~sales of our ~~common stock, private placements of our convertible preferred stock,~~equity securities, sales of our Precision Flow systems and their associated disposables, and amounts borrowed under our credit facilities. We have devoted the majority of our resources to research and development activities related to our Precision Flow systems, Oxygen Assist Module and HVT 2.0, including regulatory initiatives and sales and marketing activities. We have invested heavily in our sales and marketing function by increasing the number of sales representatives and clinical educators to facilitate adoption and increase utilization of our ~~Hi-VNI Technology~~High Velocity Therapy products and expanded our digital marketing initiatives and medical education ~~programs. For~~programs, including our Vapotherm Academy which was instrumental during the pandemic and used to train more than 28,000 caregivers during 2020 and the first quarter of 2020, we generated revenue of $19.1 million and had a net loss of $13.8 million compared to revenue of $12.3 million and a net loss of $13.0 million for the first quarter of 2019. Our accumulated deficit as of March 31, 2020 was $279.3 million. In the first quarter of 2020, 75.0% of our revenue was derived in the United States and 25.0% was derived outside the United States. No single customer accounted for more than 10% of our revenue.2021.

We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives, expanding the number of clinical educators internationally along with our international marketing programs and expanding worldwide direct to clinician digital marketing efforts to help facilitate further adoption among existing hospital accounts as well as broaden awareness of our products to new hospitals. We also expect to continue to make investments in research and development, regulatory affairs and clinical studies to develop future generations of our ~~Hi-VNI Technology~~High Velocity Therapy products, support regulatory submissions and demonstrate the clinical efficacy of our new products. In addition, as we seek to maintain our current increased production capacity, ~~and explore further expansion thereof to satisfy COVID-19 related demand,~~ we expect to continue to make investments in our production ~~capabilities.~~capabilities related to future generations of High Velocity Therapy products. Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require additional funding, which may include future equity including sales under our at-the-market sales agreement with Jefferies LLC dated March 20, 2019 under which we may offer and sell from time to time our common stock having aggregate sales proceeds of up to $50.0 million, and debt financings.

	Three Months Ended March 31,
	2021			2020
	(in thousands)
Net revenue	$	32,308		$	19,115
Cost of revenue		15,140			9,898
Gross profit		17,168			9,217
Operating expenses
Research and development		4,910			3,362
Sales and marketing		13,900			13,317
General and administrative		8,059			5,251
Total operating expenses		26,869			21,930
Loss from operations		(9,701	)		(12,713	)
Other expense, net		(706	)		(1,131	)
Net loss	$	(10,407	)	$	(13,844	)

Three Months Ended March 31,

2020

2019

(in thousands)
Net revenue

$
19,115

$
12,299

Cost of revenue

9,898

7,120

Gross profit

9,217

5,179

Operating expenses

Research and development

3,362

3,273

Sales and marketing

13,317

9,161

General and administrative

5,251

4,879

Total operating expenses

21,930

17,313

Loss from operations

(12,713
)

(12,134
)

Other expense, net

(1,131
)

(830
)

Net loss

$
(13,844
)

$
(12,964
)

	Three Months Ended March 31,																Three Months Ended March 31,
	2020					2019					Change						2021					2020					Change
	(in thousands, except percentages)																(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%			Amount		% of Revenue			Amount		% of Revenue			$		%
Product Revenue:
Capital Equipment	$	4,998		26.2	%	$	2,015		16.4	%	$	2,983			148.0	%	$	11,164		34.6	%	$	4,998		26.2	%	$	6,166		123.4	%
Disposable		12,430		65.0	%		9,019		73.3	%		3,411			37.8	%
Disposables																		17,156		53.1	%		12,430		65.0	%		4,726		38.0	%
Subtotal Product Revenue		17,428		91.2	%		11,034		89.7	%		6,394			57.9	%		28,320		87.7	%		17,428		91.2	%		10,892		62.5	%
Lease Revenue
Capital Equipment	$	644		3.4	%	$	663		5.4	%	$	(19	)		(2.9	)%	$	1,610		5.0	%	$	644		3.4	%	$	966		150.0	%
Other		392		2.0	%		-	-				392			100.0	%		680		2.1	%		392		2.0	%		288		73.5	%
Service and Other Revenue		651		3.4	%		602		4.9	%		49			8.1	%		1,698		5.2	%		651		3.4	%		1,047		160.8	%
Total Revenue	$	19,115		100.0	%	$	12,299		100.0	%	$	6,816			55.4	%
Total Net Revenue																	$	32,308		100.0	%	$	19,115		100.0	%	$	13,193		69.0	%

~~Revenue~~Net revenue increased ~~$6.8~~$13.2 million, or ~~55.4%~~69.0%, to $32.3 million for the first quarter of 2021 compared to $19.1 million for the first quarter of ~~2020 compared to $12.3 million for the first quarter of 2019.~~2020. The increase in net revenue was primarily attributable to a ~~$3.4~~$6.2 million and ~~$3.0~~$4.7 million increase in ~~disposable revenue~~capital equipment and ~~capital equipment~~disposable revenue, respectively. Capital equipment revenue increased ~~148.0%~~123.4% in the first quarter of ~~2020~~2021 primarily due to increased sales of our Precision Flow units as a result of increased demand related to the COVID-19 pandemic and increased average selling prices in the United ~~States and increased demand due to COVID-19.~~States. Disposable revenue increased ~~37.8%~~38.0% in the first quarter of ~~2020~~2021 primarily driven by an increase in the worldwide installed base of Precision Flow units, ~~and increased utilization~~higher volume due to ~~COVID-19.~~the COVID-19 pandemic and higher average selling prices in the United States. Lease revenue also increased primarily due to a higher volume of leases of our Precision Flow units and, to a lesser extent, due to higher utilization of disposables for Precision Flow units under placement arrangements. The increase in service and other revenue in the first quarter of 2021 is primarily the result of HGE revenue as a result of the acquisition in the fourth quarter of 2020.

	Three Months Ended March 31,															Three Months Ended March 31,
	2020					2019					Change					2021					2020					Change
	(in thousands, except percentages)															(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$		%			Amount		% of Revenue			Amount		% of Revenue			$		%
United States	$	14,341		75.0	%	$	10,049		81.7	%	$	4,292		42.7	%	$	22,069		68.3	%	$	14,341		75.0	%	$	7,728		53.9	%
International		4,774		25.0	%		2,250		18.3	%		2,524		112.2	%		10,239		31.7	%		4,774		25.0	%		5,465		114.5	%
Total Revenue	$	19,115		100.0	%	$	12,299		100.0	%	$	6,816		55.4	%
Total Net Revenue																$	32,308		100.0	%	$	19,115		100.0	%	$	13,193		69.0	%

Revenue generated in the United States increased ~~$4.3~~$7.7 million, or ~~42.7%~~53.9%, to $22.1 million for the first quarter of 2021, compared to $14.3 million for the first quarter of ~~2020, compared to $10.0 million for the first quarter of 2019.~~2020. Revenue generated in our International markets increased ~~$2.5~~$5.5 million, or ~~112.2%~~114.5%, to $10.2 million for the first quarter of 2021, compared to $4.8 million for the first quarter of ~~2020, compared to $2.3 million for the first quarter of 2019.~~2020. Both United States and International revenue growth was primarily driven by an increase in ~~single-use~~the number of Precision Flow units sold period over period due to the COVID-19 pandemic and an increase in disposable sales due to higher installed bases of Precision Flow ~~units and increased utilization as well as~~units. Revenue growth in the United States was also driven by an increase in average selling prices on capital equipment and disposables for the ~~number~~first quarter of ~~Precision Flow units sold year over year due~~2021 compared to ~~COVID-19.~~the first quarter of 2020.

Cost of revenue increased ~~$2.8~~$5.2 million, or ~~39.0%~~53.0%, to $15.1 million in the first quarter of 2021 compared to $9.9 million in the first quarter of ~~2020 compared to $7.1 million in the first quarter of 2019. These increases were~~2020. This increase was primarily due to higher materials and labor costs due to ~~increased~~an increase in sales volumes of our Precision Flow units and disposables in order to meet demand related to the COVID-19 ~~demand.~~pandemic.

Gross profit increased to 53.1% in the first quarter of 2021 compared to 48.2% in the first quarter of ~~2020 compared to 42.1% in the first quarter of 2019.~~ 2020. Gross profit was positively impacted by improved overhead and labor absorption due to higher ~~production capacity and reduced scrap costs due to improved quality control. Partially offsetting these positive factors were~~volumes, partially offset by higher labor costs, ~~and~~ increased supplier freight and expediting fees to meet the rapid increase in production capacity, and ~~to a lesser extent~~ a higher mix of ~~capital equipment and International revenue.~~Precision Flow system sales. Gross profit was also positively impacted by higher average selling prices of capital equipment and disposables in the United States, ~~and capital equipment in International markets,~~ partially offset by lower average selling prices of ~~capital equipment in the United States and~~ disposables in International markets.

Research and development expenses increased ~~$0.1~~$1.5 million, or ~~2.7%~~46.0%, to $4.9 million in the first quarter of 2021 compared to $3.4 million in the first quarter of ~~2020 compared to $3.3 million in the first quarter of 2019.~~2020. As a percentage of revenue, research and development expenses decreased to 15.2% in the first quarter of 2021 compared to 17.6% in the first quarter of ~~2020 compared~~2020. The increase in research and development expenses was due to ~~26.6%~~increased product development, prototype, and patent-related costs associated with the development of our future generation High Velocity systems and increased employee-related expenses and stock-based compensation.

Sales and marketing expenses increased $0.6 million, or 4.4%, to $13.9 million in the first quarter of 2019. Research and development expenses were consistent year over year as increased development costs for the Oxygen Assist Module and the Next Generation Hi-VNI system in the first quarter of 2020 were largely offset by the completion of our ProSoft cannulas and Aerosolized Disposable Patient Circuit which were launched in the first quarter of 2020.

~~Sales and marketing expenses increased $4.2 million, or 45.4%,~~2021 compared to $13.3 million in the first quarter of ~~2020 compared to $9.2 million in the first quarter of 2019.~~2020. As a percentage of revenue, sales and marketing expenses decreased to 43.0% in the first quarter of 2021 compared to 69.7% in the first quarter of ~~2020 compared to 74.5% in the first quarter of 2019.~~2020. The increase in sales and marketing expenses ~~were~~was primarily due to increased ~~sales commissions~~employee-related expenses as a result of ~~increased revenue along with increases~~an increase in the size of the sales and marketing ~~organization. The increase in sales~~organization and ~~marketing expenses was~~increased stock-based compensation, partially offset by a reduction in travel expenses and certain marketing initiatives, such as trade shows, due to ~~COVID-19.~~the COVID-19 pandemic.

General and administrative expenses increased ~~$0.4~~$2.8 million, or ~~7.6%~~53.5%, to $8.1 million in the first quarter of 2021 compared to $5.3 million in the first quarter of ~~2020 compared to $4.9 million in the first quarter of 2019.~~2020. As a percentage of revenue, general and administrative expenses decreased to 24.9% in the first quarter of 2021 compared to 27.5% in the first quarter of ~~2020 compared to 39.7% in the first quarter of 2019.~~2020. The increase in general and administrative expenses was primarily due to increases in employee-related expenses, stock-based compensation, audit and compliance related costs, changes in the value of contingent consideration, and increased insurance, legal costs, bank services charges and ~~reserves for bad debt~~rent, partially offset by a reduction in ~~stock-based compensation and travel expenses.~~reserves for uncollectible accounts receivable.

Other expense, net ~~increased $0.3~~decreased $0.4 million, or ~~36.3%~~37.6%, to $0.7 million in the first quarter of 2021 compared to $1.1 million in the first quarter of ~~2020 compared~~2020. The decrease in other expense, net was primarily due to ~~$0.8 million~~a decrease in interest expense due to lower average interest rates on outstanding borrowings in the first quarter of 2019. The increase in other expense, net was due to an increase in interest expense related to additional borrowings under our credit facilities and, to a lesser extent, a decrease in interest income due to lower interest rates in the first quarter of 20202021 compared to the first quarter of ~~2019.~~2020.

As of March 31, ~~2020,~~2021, we had cash, cash equivalents and restricted cash of ~~$62.2~~$94.1 million and an accumulated deficit of ~~$279.3~~$327.4 million. Our primary sources of capital to date have been from ~~public offerings~~sales of our ~~common stock, private placements of our convertible preferred stock,~~equity securities, sales of our Precision Flow systems and their associated disposables and amounts borrowed under credit facilities. Since inception, we have raised a total of $162.6 million in net proceeds from ~~private placements~~sales of our ~~convertible preferred stock.~~ On November 16, 2018, we completed an initial public offering of 4,600,000 shares of common stock at a price of $14.00 per share, which raised net proceeds of $57.4 million. In August 2019, we completed a public offering of 3,570,750 shares of common stock, which included the full exercise by the underwriters of their option to purchase 465,750 shares of common stock, at a price of $14.50 per share, which raised net proceeds of $48.3 million after deducting the underwriting discount of $3.1 million and offering expenses of $0.4 million. Subsequent to March 31, 2020, we have raised gross proceeds of $10.2 million, or $9.9 million net of commissions, through our ATM Agreement.

As of March 31, 2020, we had $4.5 million of outstanding borrowings and $2.3 million availability under the Amended Revolver Agreement. As of March 31, 2020, we had $42.6 million of term debt outstanding under our Credit Agreement and Guaranty.equity securities.

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

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

	Three Months Ended March 31,						Three Months Ended March 31,
	2020			2019			2021			2020
	(in thousands)						(in thousands)
Net cash provided by (used in):
Operating activities	$	(10,722	)	$	(9,831	)	$	(19,962	)	$	(10,722	)
Investing activities		(1,558	)		(2,688	)		(2,256	)		(1,558	)
Financing activities		1,035			11,015			761			1,035
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(17	)		-
Net decrease in cash, cash equivalents and restricted cash	$	(11,262	)	$	(1,504	)
Effect of exchange rate on cash, cash equivalents and restricted cash								2			(17	)
Net increase in cash, cash equivalents and restricted cash							$	(21,455	)	$	(11,262	)

The net cash used in operating activities was $20.0 million in the first quarter of 2021 and consisted primarily of a net loss of $10.4 million and an increase in net operating assets of $14.3 million partially offset by $4.7 million in non-cash charges. Non-cash charges consisted primarily of stock-based compensation expense and depreciation and amortization expense.

The net cash used in operating activities was $10.7 million in the first quarter of 2020 and consisted primarily of a net loss of $13.8 million, partially offset by $2.7 million in non-cash charges and a decrease of $0.4 ~~million in net operating assets. Non-cash charges consisted primarily of stock-based compensation expense and depreciation and amortization expense.~~

The net cash used in operating activities was $9.8 million in the first quarter of 2019 and consisted primarily of a net loss of $13.0 million, offset by $2.6 million in non-cash charges and a decrease of $0.6 million in net operating assets. Non-cash charges consisted primarily of stock-based compensation expense and depreciation and amortization expense.

Net cash used in investing activities for the first quarter of ~~2020~~2021 and ~~2019~~2020 consisted of purchases of property and equipment of $2.3 million and $1.6 million, ~~and $1.1~~respectively.

Net cash provided by financing activities was $0.7 million ~~respectively. In addition, the net cash used in investing activities~~ in the first quarter of ~~2019 included $1.6 million to acquire Solus.~~

~~Financing Activities~~2021 and consisted of proceeds received from the exercise of stock options.

Net cash provided by financing activities was $1.0 million in the first quarter of 2020 and consisted primarily of borrowings of $1.0 million under our short-term line of credit.

Net cash provided by financing activities was $11.0 million in the first quarter of 2019 and consisted of borrowings of $11.3 million under our credit facilities offset by $0.3 million in debt issuance costs.

~~In November 2016,~~On October 21, 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Canadian Imperial Bank of Commerce Innovation Banking (“CIBC”) which provides for a revolving loan facility of $12.0 million (the “Revolving Facility”) and a term loan facility of $40.0 million (the “Term Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the Facilities were used to repay our former term loan facility and revolving line of credit, which ~~provided for $7.0~~are described in more detail below. As of March 31, 2021, we had $4.9 million and $40.0 million of ~~available borrowings.~~outstanding borrowings under our Revolving Facility and Term Facility, respectively.

The Revolving Facility will mature on October 21, 2022 and may be renewed on an annual basis thereafter by mutual agreement of us and CIBC. The Revolving Facility bears interest at a floating rate per annum equal to the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and is subject to a floor of 3.25%. At March 31, 2021, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $4.9 million at March 31, 2021 and there were letters of credit of $1.2 million outstanding at March 31, 2021. Availability under the Revolving Facility is ~~calculated~~determined based ~~upon 80% of the~~on eligible receivables ~~(net~~reduced by letters of ~~pre-paid deposits, pre-billed invoices, other offsets, and contras related~~credit outstanding. At March 31, 2021, there were no additional borrowings available under the Revolving Facility.

The Term Facility will mature on October 21, 2025. Advances under the Term Facility bear interest at a floating rate equal to ~~each specific account debtor).~~

~~Interest is paid monthly on~~ the ~~average outstanding balance at the Wall Street Journal~~WSJ Prime Rate plus ~~1.75%, floating,~~2.5% and is subject to a floor of ~~3.5%~~3.25%. ~~The~~At March 31, 2021, the interest rate was ~~5.25% at March 31, 2020.~~

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.

5.75%. The outstanding balance ~~under the Amended Revolving Facility, as amended,~~ was ~~$4.5~~$40.0 million at March 31, ~~2020.~~ 2021. The ~~remaining amount available~~Loan Agreement provides for interest-only payments on the Term Facility for the first 36 months through October 21, 2023. Thereafter, amortization payments on the Term Facility will be payable monthly in 24 equal installments. The Term Facility may not be prepaid prior to ~~borrow based~~October 21, 2021 without prepaying all of the interest that otherwise would have been payable on ~~eligible receivables was $2.3 million at March 31, 2020.~~the Term Facility during the period commencing on October 21, 2020 and ending on October 21, 2021, plus a prepayment charge of 2.0%. Thereafter, the Term Facility may be prepaid in full, subject to a prepayment charge of (i) 2.0%, if such prepayment occurs after October 21, 2021 but on or prior to October 21, 2022, and (ii) 1.0%, if such prepayment occurs after October 21, 2022 but on or prior to October 21, 2023. The ~~Amended~~Term Facility and Revolving Facility ~~as amended, is~~are secured by a lien on substantially all of our assets, ~~excluding~~including intellectual property.

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

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

As of March 31, 2021, we were in compliance with all covenants under the Loan Agreement.

On ~~April 6, 2018,~~October 21, 2020, we ~~entered into~~used $40 million of the Term Facility, approximately $4.9 million of the Revolving Facility, and approximately $6.3 million of cash on hand to pay off all obligations owing under, and to terminate, both our prior Credit Agreement and Guaranty, ~~with Perceptive. The~~as amended (the “Amended Credit Agreement and ~~Guaranty initially provided for~~Guaranty”), with Perceptive Credit Holdings II, LP (“Perceptive”) and our Business Financing Agreement, as amended (the “Amended Revolver Agreement”) with Western Alliance Bank. As a term loan facility in the amount of $42.5 million, available in three tranches, of which the first tranche of $20.0 million was drawn upon closing. This first tranche paid off the borrowings under a former loan arrangement. A second tranche of $10.0 million was drawn on July 20, 2018. The availabilityresult of the final tranche of $12.5 million was dependent upon the Company achieving a minimum of $43.2 million in revenue in 2018. On September 27, 2018, the Credit Agreement and Guaranty was amended to remove this revenue requirement and extend the final draw down date to March 31, 2019. We borrowed $2.0 million from this third tranche on September 27, 2018. On March 22, 2019, we drew the remaining $10.5 million under the Amended Credit Agreement and Guaranty increasing the total outstanding balance to $42.5 million. We also entered into a second amendment to the Amended Credit Agreement and Guaranty increasing the allowable permitted indebtedness in connection with our credit card program from $0.3 million to $0.5 million.

~~The outstanding principal amount~~termination of the Amended Credit Agreement and Guaranty ~~accrues interest at an annual rate equal to~~and the ~~applicable margin~~Amended Revolver Agreement, we recorded a loss on extinguishment of ~~9.06% plus~~debt of $4.2 million, which included 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%prepayment penalty, exit fees, write-off of the ~~total amount borrowed~~remaining unamortized deferred financing costs, and legal fees, during the fourth quarter of 2020.

On December 20, 2019, we entered into an Open Market Sales Agreement (the “ATM Agreement”) with Jefferies LLC (“Jefferies”) under the Amended Credit Agreement and Guaranty, unless we have already made such payment in connection with an acceleration or prepayment of borrowings under the term loan. In the event we prepay all or part of this term loan facility prior to the maturity date,which we may ~~be subject~~offer and sell our common stock having aggregate sales proceeds of up to ~~additional prepayment fees which decrease as the~~$50.0 million from time to ~~maturity decreases.~~

time through Jefferies as our sales agent. We ~~issued warrants to Perceptive to purchase 37,693, 18,846 and 3,769~~did not sell any shares of our ~~Series D convertible preferred~~common stock during the three months ended March 31, 2021 or 2020. The ATM Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement. As of March 31, 2021, there was approximately $39.8 million in remaining capacity under this program.

The following table presents a summary of our contractual obligations as of March 31, 2021:

	Payments Due by Period
			Less Than						More Than
	Total		1 Year		1 - 3 Years		3-5 Years		5 Years
Amounts Reflected in Condensed Consolidated Balance Sheet:
Revolving Credit Facility	$	4,888	$	1,158	$	3,730	$	-	$	-
Term Facility		40,000		-		6,400		33,600		-
Operating Leases		9,427		2,354		4,741		2,332		-
Amounts Not Reflected in Condensed Consolidated Balance Sheet:
Interest on Debt ^(a)		8,438		2,300		4,685		1,453		-
Total	$	62,753	$	5,812	$	19,556	$	37,385	$	-

The amounts reflected in the table above exclude estimated contingent consideration of up to $11.1 million related to the HGE acquisition which is payable in cash or Vapotherm common stock, at an exercise price of $15.92 per share in April 2018, July 2018 and September 2018, respectively. In connection with our initial public offering in November 2018 these warrants converted to common stock warrants at an exercise price of $15.92. Eachthe sole discretion of the ~~warrants has a term~~Company, and will be remitted in future milestone payments, one following calendar year 2021, one following calendar year 2022, and one following calendar year 2023. The three payments will be adjusted up or down based on the revenue performance of 10certain HGE service offerings during those three years. ~~In connection with~~See further discussion in Note 3 to our condensed consolidated financial statements.

Portions of these payments are denominated in foreign currencies and were translated in the ~~draw down~~table above based on March 22, 2019, we granted 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, are exercisable at the option of the holder, in whole or in part, and expire in March 2029.

~~We were in compliance with all debt covenants under both the Amended Revolving Facility and Amended Credit Agreement and Guaranty~~their respective U.S. dollar exchange rates at March 31, ~~2020.~~2021. These future payments are subject to foreign currency exchange rate risk.

The amounts reflected in the table above for operating leases represent future minimum lease payments under non-cancelable operating leases primarily for certain office space and equipment.

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

This management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of ~~these~~the condensed financial statements in conformity with accounting principles generally accepted in the United States requires usmanagement to make estimates and assumptions that affect the amounts reported ~~amounts of assets~~in the condensed financial statements and ~~liabilities~~accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. Management believes that such estimates have been based on reasonable and supportable assumptions and the ~~disclosure of contingent assets and liabilities at~~resulting estimates are reasonable for use in the ~~date~~preparation of the condensed financial ~~statements,~~statements. Actual results could differ from these estimates.

Critical accounting policies are defined as ~~well as~~those that are reflective of significant judgements and uncertainties, the ~~reported revenue~~most important and ~~expenses during the reporting periods. We monitor~~pervasive accounting policies used and ~~analyze these items for changes in facts and circumstances, and~~areas most sensitive to material changes ~~in these estimates could occur in the future. We base our estimates on historical experience and on various other factors~~from external factors. The critical accounting policies that we believe affect our more significant judgements and estimates used in the preparation of our condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changesdescribed in ~~estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.~~

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

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

We enter into agreements to lease our capital equipment. For such sales, we account for revenue under ASC 840, Leases, and assess and classify these transactions as sales-type or operating leases based on whether the lease transfers ownership of the equipment to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides10-K for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. Equipment included in arrangements including transfer of title are accounted for as sales-type leases and we recognize the total value of the lease payments due over the lease term to revenue at the inception of the lease. We record the current value of future lease payments under prepaid expenses and other current assets in the condensed consolidated balance sheets and these amounts totaled $1.0 and $0.9 million at March 31, 2020 andyear ended December 31, 2019, respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the capital lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis as it becomes receivable monthly over the term of the lease.

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

We maintain an equity incentive plan to provide long-term incentives for employees, consultants, and members of the board of directors. The plan allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and non-employee directors.

We recognize stock-based compensation expense for awards of equity instruments to employees and non-employees based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation (ASC 718). ASC 718 requires all equity-based compensation awards, including grants of restricted shares and stock options, to be recognized as expense in the condensed consolidated statements of comprehensive loss based on their grant date fair values.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. For performance-based awards, the related compensation cost is amortized over the performance period on an accelerated attribution basis. Compensation cost associated with performance awards is based on fair value on the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved. Cumulative adjustments are recorded each quarter to reflect estimated outcomes of the performance-related conditions until the results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs, including the expected life (weighted average period of time that the options granted are expected to be outstanding), the volatility of our common stock and an assumed risk-free interest rate. Expected volatility is calculated based on historical volatility of a group of publicly traded companies that we consider a peer group. The expected life is estimated using the simplified method for “plain vanilla” options. The risk-free interest rate is based on U.S. Treasury rates with a remaining term that approximates the expected life assumed at the date of grant. No dividend yield is assumed as we do not pay, and do not expect to pay, dividends on our common stock. We estimate forfeitures based on historical experience with pre-vested forfeitures. To the extent actual forfeitures differ from the estimate, the difference is recorded to compensation expense in the period of the forfeiture.

We recognize stock-based expense for shares issued pursuant to our 2018 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the related offering period. We estimate the fair value of shares to be issued under the ESPP based on a combination of options valued using the Black-Scholes option-pricing model. The expected life is determined based on the contractual term. Expected volatility, dividend yield and forfeiture rates are estimated in a manner similar to option grants described above.2020.

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

As a company with (i) less than $1.07 billion in revenue during our last fiscal year (ii) a market value of our common stock of less than $700.0 million as of our most recently completed second quarter and (iii) less than $1.0 billion of non-convertible debt over a three-year period, we qualify as an “emerging growth company,” as defined in the JOBS Act. 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 Revolving Facility and our Term Facility and interest rates associated with our invested cash balances. Borrowings under our Revolving Facility bear interest at a floating rate per annum equal to the WSJ Prime Rate plus 1.0% and is subject to a floor of 3.25%. At March 31, 2021, the interest rate was 4.25%. Borrowings under our Term Facility bear interest at a floating rate equal to the WSJ Prime Rate plus 2.5% and is subject to a floor of 3.25%. At March 31, 2021, the interest rate was 5.75%. As of March 31, 2021, borrowings under our Revolving Facility and Term Facility total $4.9 million and $40.0 million, respectively. Based on our outstanding borrowings and the WSJ Prime Rate, a 100 basis point increase in the annual interest rate on our outstanding borrowings would have a $0.5 million impact on our interest expense on an annual basis.

On March 31, 2021, we had cash invested in money market deposits of $77.3 million. We believe that a 10 basis point change in interest rates is reasonably possible in the near term. Certain of our cash and cash equivalents balances exceed FDIC insured limits. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. Based on our current level of cash investments, an increase or decrease of 10 basis points in interest rates would have a $0.1 million impact to our interest income on an annual basis.

For our non-U.S. subsidiary that transacts in a functional currency in British pound sterling, assets and liabilities are translated at current rates of exchange as of the balance sheet date. Adjustments resulting from the translation of the financial statements of its foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Income and expense items are translated at the average foreign currency exchange rates for the period. As a ~~“smaller reporting company,”~~result, our financial condition and operating results are affected by fluctuations in the value of the U.S. dollar as compared to the British pound sterling. Revenues denominated in currencies other than the U.S. dollar represented approximately 2.4% and 4.9% of consolidated net revenues for the three months ended March 31, 2021 and 2020, respectively. Total assets denominated in the British pound sterling represented less than 0.1% of our total assets at both March 31, 2021 and December 31, 2020, respectively. Given the immateriality of net revenues and assets denominated in currencies other than the U.S. dollar, a 10% fluctuation in exchange rates would have an immaterial impact to our consolidated net revenues and consolidated total assets. We do not use foreign exchange contracts or derivatives to hedge any foreign currency exposures.

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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures ~~(as~~as of March 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the “Exchange Act”) at the end of the period covered by this quarterly report.~~

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

~~We recognize~~ Management recognizes that any controls ~~system,~~and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving ~~its~~their objectives and ~~our~~ management necessarily applies its judgment in evaluating the ~~benefits~~cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures ~~relative to their costs.~~as of March 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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

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

In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed in “Risk Factors” in our ~~2019~~2020 Form 10-K which could materially affect our business, financial condition or future results. ~~Except as set forth below, there~~There have been no material changes from the risk factors previously disclosed in ~~our 2019 Form 10-K.~~

~~A pandemic, epidemic or outbreak of an infectious disease, such as~~ the ~~novel coronavirus, or COVID-19, has and may in the future adversely affect our business.~~

If a pandemic, epidemic or outbreak of an infectious disease occurs, our business may be adversely affected. Such events may result in a period of business and manufacturing disruption or in an inability to scale our production to meet increased demand in a cost-effective manner or at all, any of which could materially affect our business, financial condition and results of operations. For example, in December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus has now spread globally, with epicenters in Europe and the Middle East early in the fiscal quarter ending March 31, 2020, and more recently, with epicenters in the United States. United States residents and businesses have been hit especially hard in major urban centers like New York City. The spread of COVID-19 has resulted in certain disruptions to our business and may in the future result in additional disruptions to our business. Examples of both include without limitation the following:

In addition, the increase in demand we are currently experiencing for our products to treat the respiratory distress of patients suffering from COVID-19 may not continue after the COVID-19 pandemic subsides. Moreover, the increase in demand may result in decreased demand for our products after the COVID-19 pandemic subsides as hospitals may have a large surplus of ventilators and other respiratory support equipment after the pandemic subsides. As a result, any present increase in our revenue may not be sustained and our revenue may significantly decrease after the COVID-19 pandemic subsides, which could have an adverse effect on our business. Any sudden and significant decrease in demand may result in a substantial inventory position, which could also have an adverse effect on our business.

The full extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to treat or contain COVID-19 or to otherwise limit its impact, among others. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section ~~and in~~of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, such as those relating to our significant amount of indebtedness, our need to generate sufficient cash flows to service our substantial indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, expeditiously and effectively evaluate product complaints and promotional matters, or otherwise prevent new or modified products indications from being developed, cleared or approved, or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA to hire, retain, or deploy key leadership and other personnel, expeditiously and effectively evaluate product complaints and promotional matters, or otherwise review and clear or approve new or modified products and indications can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, a dramatic increase in Emergency Use Authorizations or other regulatory submissions, a dramatic increase in the issuance of guidance documents, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may impede the FDA’s ability to expeditiously evaluate product complaints and promotional matters, and may also slow the time necessary for new medical devices or modifications to cleared or approved medical devices or indications to be reviewed and/or approved by necessary government agencies, which would adversely affect our business.

For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop critical activities. As another example, following the FDA’s issuance of certain Emergency Use Authorization communications in March 2020 that identified the product code that includes our Precision Flow Hi-VNI system, QAV, on a list of ventilators and/or ventilatory support devices, we prepared a letter-to-file to modify the indications for use of the Precision Flow Hi-VNI system. We believe these modifications are consistent with the FDA’s recent communication and our clinical data. However, to the extent we market the Precision Flow Hi-VNI system using the modified labeling, the possibility exists that the FDA may not agree with the decision that a new clearance or approval was unnecessary for this label revision for any number of reasons, including, without limitation, that we used an inappropriate intended use statement, and as a result may require us to submit a new 510(k) notification, request for ~~de novo~~ classification, premarket approval (PMA) (or PMA supplements or amendments) or subject us to other consequences. In addition, on April 29, 2020 the FDA reached out with an informal inquiry regarding our marketing of the Precision Flow Hi-VNI system. We are in process of responding to that inquiry, but it is possible we will encounter delays or the FDA may ultimately determine that our website or other promotional materials, sales practices, or training constitute the improper promotion of a medical device.

Additionally, in response to the global pandemic of COVID-19, on March 10, 2020, the FDA announced its intention to postpone most foreign inspections of manufacturing facilities and products through April 2020, and subsequently, on March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our marketing applications, clinical trial authorizations, emergency use applications, or other regulatory submissions, which could have a material adverse effect on our business.

On November 13, 2018, the SEC declared effective our Registration Statement on Form S-1 (File No. 333-227897), as amended, filed in connection with our initial public offering, or the Registration Statement. Pursuant to the Registration Statement, we registered the offer and sale of 4,000,000 shares 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 to the public at a price 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.

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 offering 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 offering as described in our final prospectus, dated November 13, 2018, filed with the SEC ~~pursuant~~on February 24, 2021.

On April 21, 2021, the Board of Directors of the Company, upon recommendation of the Compensation Committee, approved an amendment to ~~Rule 424(b) relating~~the Company’s 2018 Equity Incentive Plan (the “Plan”) providing for double-trigger vesting in the event of a change in control (as defined in the Plan). The addition of double-trigger vesting is consistent with prevailing market practice and is intended to ~~our Registration Statement~~help attract and retain top talent. Under the amendment, if the acquirer in a change of control does not offer a Plan participant a substantially similar job and equity grant, all unvested equity awards held by such participant would accelerate and vest, and all unvested performance awards held by such participant (if any) would accelerate and vest and be paid out for the entire performance period based on the higher of target or actual performance.

The foregoing description of the Plan amendment does not purport to be complete and is qualified in its entirety by reference to the amended and restated Plan, itself, which is filed as Exhibit 10.1 to this Quarterly Report on Form ~~S-1.~~10-Q and is incorporated herein by reference.

The exhibits filed as part of this quarterly report are set forth on the Exhibit Index, which is incorporated herein by reference.

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


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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	VAPO	New York Stock Exchange

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


		Page No.
Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements (interim periods unaudited)	5
	Condensed Consolidated Balance Sheets -– March 31, ~~2020~~2021 and December 31, ~~2019~~2020	5
	Condensed Consolidated Statements of Comprehensive Loss – Three ~~months~~Months ended March 31, ~~2020~~2021 and ~~2019~~2020	6
	Condensed Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity -– Three ~~months~~Months ended March 31, ~~2020~~2021 and ~~2019~~2020	7
	Condensed Consolidated Statements of Cash Flows – Three ~~months~~Months ended March 31, ~~2020~~2021 and ~~2019~~2020	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2425
Item 3	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4	Controls and Procedures	3233

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	3334
Item 1A	Risk Factors	33
~~Item 2~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	3634
Item 6	Exhibits	3735
Exhibit Index		3735
Signatures		3836

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

Balance at December 31, 2020	$	13,187
Change in value of contingent consideration based on correction of purchase price calculation		(2,258	)
Change in fair value of contingent consideration		202
Balance at March 31, 2021	$	11,131

2021		0
2022		0
2023		3,200
2024		19,200
2025		17,600
Less: Unamortized deferred financing costs		(329	)
Long-term loans payable	$	39,671

	Total Due
2021 (remaining 9 months)		1,772
2022		2,343
2023		2,380
2024		2,417
2025		515
Total payments		9,427
Less interest		(1,476	)
Total present value of lease payments	$	7,951

	Common Stock Warrants
	Number of Shares		Weighted Average Exercise Price
Outstanding at December 31, 2019		182,076	$	14.84
Warrants granted		-		-
Warrants exercised		-		-
Outstanding at March 31, 2020		182,076	$	14.84

Exhibit Number		Description

~~10.1~~10.1		~~Employment Offer Letter between~~ Vapotherm, Inc. Amended and ~~John Coolidge, dated February 19, 2014~~Restated 2018 Equity Incentive Plan

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

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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

	VAPOTHERM, INC.

May 5, ~~2020~~2021	By:	/s/ Joseph Army
		Joseph Army
		President and Chief Executive Officer

May 5, ~~2020~~2021	By:	/s/ John Landry
		John Landry
		Senior Vice President and Chief Financial Officer