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10-Q: VAPOTHERM INC

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements for the fiscal quarter ended March 31, 2020, 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 Form 10-K filed with the SEC on March 4, 2020, our Form 8-K filed with the SEC on April 13, 2020, and this Quarterly Report on Form 10-Q.

Vapotherm is a global medical technology company focused on the development and commercialization of our proprietary Hi-VNI Technology products that are used to treat patients of all ages suffering from respiratory distress. Our Hi-VNI Technology 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. Our Precision Flow systems, which use Hi-VNI 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, more than 2.2 million patients have been treated with our Precision Flow systems, and we have a global installed base of over 17,000 capital units.

The efficacy of Vapotherm's 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 to be as effective as non-invasive positive pressure ventilation, or NIPPV, while addressing many of its limitations, including through 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 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 may provide ventilatory support similar to NIPPV in patients presenting with acute hypercapnic respiratory failure.

Vapotherm's Hi-VNI Technology is a first-line therapy for treating the respiratory distress, which is experienced by many COVID-19 patients. The Journal of the American Medical Association published data from mainland China in April 2020 suggesting that 19% of all COVID-19 patients experience respiratory distress and require some amount of respiratory support. Our hospital customers around the world are using our technology to 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 in demand for our products from both new and existing accounts, initially in Europe and the Middle East, and then later during the first quarter of 2020, 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, and our worldwide installed base of Precision Flow systems grew twice as fast in the first quarter of 2020 than it did in the first quarter of 2019. Looking ahead, our focus is on managing our supply chain to sustain 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 mix 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 actions to treat or contain COVID-19 or to otherwise limit its impact, among others.

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 of our Oxygen Assist Module to certain United Kingdom accounts 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. The Oxygen Assist Module is designed to be used with all versions of our Precision Flow systems except for the Precision Flow Heliox. Our Oxygen Assist Module is designed to help clinicians maintain the pulse oxygen saturation, or SpO2, within the target SpO2 range over a significantly greater proportion 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 visual or developmental impairment and mortality in neonates. We intend to fully launch the Oxygen Assist Module commercially throughout the United Kingdom and Europe by the end of 2020, at which time we believe we will begin generating revenue from the product.

We generate revenue primarily from sales of the disposable products utilized with our proprietary Precision Flow systems. We also generate revenue from the capital units themselves. We offer different options to our 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.

We sell our Precision Flow systems to hospitals through a direct sales organization in the United States and in the United Kingdom and through distributors in other select countries outside of the United States and United Kingdom. We intend to fully launch our Oxygen Assist Module commercially throughout the United Kingdom and Europe by the end of 2020 through a direct sales organization in the United Kingdom and through distributors in other select countries in Europe. In addition, we have clinical educators who are experienced users of Hi-VNI Technology and who focus on our medical education efforts to facilitate 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. We have sold our Precision Flow systems to over 1,600 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 of our common stock, private placements of our convertible preferred stock, sales of our Precision Flow systems 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 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 products and expanded our digital marketing initiatives and medical education programs. For 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.

We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales representatives, expanding our international marketing programs and expanding 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 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. 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.







        Results of Operations
                                                  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 )
        








        Revenue
                                                     Three Months Ended March 31,
                                                  2020                            2019                       Change
                                                  (in thousands, except percentages)
                                        Amount       % of Revenue       Amount      % of Revenue         $            %
        Product Revenue:
        Capital Equipment             $    4,998              26.2 %   $  2,015              16.4 %   $  2,983        148.0 %
        Disposable                        12,430              65.0 %      9,019              73.3 %      3,411         37.8 %
        Subtotal Product Revenue          17,428              91.2 %     11,034              89.7 %      6,394         57.9 %
        Lease Revenue
        Capital Equipment             $      644               3.4 %   $    663               5.4 %   $    (19 )       (2.9 )%
        Other                                392               2.0 %          -                 -          392        100.0 %
        Service and Other Revenue            651               3.4 %        602               4.9 %         49          8.1 %
        Total Revenue                 $   19,115             100.0 %   $ 12,299             100.0 %   $  6,816         55.4 %
        


Revenue increased $6.8 million, or 55.4%, to $19.1 million for the first quarter of 2020 compared to $12.3 million for the first quarter of 2019. The increase in revenue was primarily attributable to a $3.4 million and $3.0 million increase in disposable revenue and capital equipment revenue, respectively. Capital equipment revenue increased 148.0% in the first quarter of 2020 primarily due to increased sales of our Precision Flow units, increased average selling prices in the United States and increased demand due to COVID-19. Disposable revenue increased 37.8% in the first quarter of 2020 primarily driven by an increase in the worldwide installed base of Precision Flow units and increased utilization due to COVID-19.

Revenue information by geography is summarized as follows:







                                        Three Months Ended March 31,
                                     2020                            2019                      Change
                                     (in thousands, except percentages)
                           Amount       % of Revenue       Amount      % of Revenue         $           %
         United States   $   14,341              75.0 %   $ 10,049              81.7 %   $ 4,292        42.7 %
         International        4,774              25.0 %      2,250              18.3 %     2,524       112.2 %
         Total Revenue   $   19,115             100.0 %   $ 12,299             100.0 %   $ 6,816        55.4 %
        


Revenue generated in the United States increased $4.3 million, or 42.7%, to $14.3 million for the first quarter of 2020, compared to $10.0 million for the first quarter of 2019. Revenue generated in our International markets increased $2.5 million, or 112.2%, to $4.8 million for the first quarter of 2020, compared to $2.3 million for the first quarter of 2019. Both United States and International revenue growth was driven by an increase in single-use disposable sales due to higher installed bases of Precision Flow units and increased utilization as well as an increase in the number of Precision Flow units sold year over year due to COVID-19.

Cost of Revenue and Gross Profit

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

Gross profit increased to 48.2% in the first quarter of 2020 compared to 42.1% in the first quarter of 2019. Gross profit was positively impacted by improved overhead absorption due to higher production capacity and reduced scrap costs due to improved quality control. Partially offsetting these positive factors were 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. Gross profit was also positively impacted by higher average selling prices of 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

Research and development expenses increased $0.1 million, or 2.7%, to $3.4 million in the first quarter of 2020 compared to $3.3 million in the first quarter of 2019. As a percentage of revenue, research and development expenses decreased to 17.6% in the first quarter of 2020 compared to 26.6% 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

Sales and marketing expenses increased $4.2 million, or 45.4%, to $13.3 million in the first quarter of 2020 compared to $9.2 million in the first quarter of 2019. As a percentage of revenue, sales and marketing expenses decreased to 69.7% in the first quarter of 2020 compared to 74.5% in the first quarter of 2019. The increase in sales and marketing expenses were primarily due to increased sales commissions as a result of increased revenue along with increases in the size of the sales and marketing organization. The increase in sales and marketing expenses was partially offset by a reduction in travel expenses due to COVID-19.

General and Administrative Expenses

General and administrative expenses increased $0.4 million, or 7.6%, to $5.3 million in the first quarter of 2020 compared to $4.9 million in the first quarter of 2019. As a percentage of revenue, general and administrative expenses decreased to 27.5% in the first quarter of 2020 compared to 39.7% in the first quarter of 2019. The increase in general and administrative expenses was primarily due to increases in employee-related expenses, insurance and reserves for bad debt offset by a reduction in stock-based compensation and travel expenses.

Other Expense, Net

Other expense, net increased $0.3 million, or 36.3%, to $1.1 million in the first quarter of 2020 compared to $0.8 million 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 2020 compared to the first quarter of 2019.

Liquidity and Capital Resources

As of March 31, 2020, we had cash, cash equivalents and restricted cash of $62.2 million and an accumulated deficit of $279.3 million. Our primary sources of capital to date have been from public offerings of our common stock, private placements of our convertible preferred stock, sales of our Precision Flow systems and amounts borrowed under credit facilities. Since inception, we have raised a total of $162.6 million in net proceeds from private placements 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.

We believe that our existing cash resources and availability under our line of credit facility 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 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 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.







        Cash Flows
        The following table presents a summary of our cash flows for the periods
        indicated:
                                                                        Three Months Ended March 31,
                                                                          2020                 2019
                                                                               (in thousands)
        Net cash provided by (used in):
        Operating activities                                         $       (10,722 )     $      (9,831 )
        Investing activities                                                  (1,558 )            (2,688 )
        Financing activities                                                   1,035              11,015
        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 )
        


Operating Activities

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, 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.

Investing Activities

Net cash used in investing activities for the first quarter of 2020 and 2019 consisted of purchases of property and equipment of $1.6 million and $1.1 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

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.

Indebtedness

Revolving Line of Credit

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

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

The outstanding balance under the Amended Revolving Facility, as amended, was $4.5 million at March 31, 2020. The remaining amount available to borrow based on eligible receivables was $2.3 million at March 31, 2020. The Amended Revolving Facility, as amended, is secured by substantially all of our assets, excluding intellectual property.

Term Debt

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

The outstanding principal amount of the Amended Credit Agreement and Guaranty accrues interest at an annual rate equal to the applicable margin of 9.06% plus . . .

May 05, 2020

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