VAPOTHERM INC (Form: 10-Q, Received: 07/29/2019 16:04:18)

Article 20 - Langue

Article 20 - Language

La version définitive du présent contrat qui lie les Parties est fa version française, la version anglaise de ce contrat n’étant fournie qu’à litre d’information. En cas de contradiction entre les versions française et anglaise, la version française prévaudra

The definitive version of this Agreement that binds the Parties is the French language version, the English version being provided for information purposes only. In the event of a contradiction between the two versions, the French version shall prevail.

Fait à Paris, France, le 14/03/2016

En deux exemplaires originaux,

/s/ Grégoire RAMADE

*M. Grégoire RAMADE

Signed at Pans, France, on 14/03/2016

In two original copies.

/s/ Grégoire RAMADE

*MR Grégoire RAMADE

/s/ Joseph F. ARMY

Pour Vapotherm, Inc.
*M. Joseph F. ARMY
Président Directeur Général

*Visa manuscrit « bon pour accord »

/s/ Joseph F. ARMY

For Vapotherm, Inc.

*Mr. Joseph F. ARMY

President, Chief Executive Officer

*Handwrite « bon pour accord » ( « good for agreement

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019

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

For the transition period from _______ to _______

Commission file number: 001-38740

Vapotherm, Inc.

(Exact name of registrant as specified in its charter)


Delaware	46-2259298
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
100 Domain Drive
Exeter, N.H. (Address of principal executive offices)	03833 (Zip Code)

(603) 658-0011

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

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 July 26, 2019, there were 17,499,391 outstanding common shares of Vapotherm, Inc.

Vapotherm, I nc.

Form 10-Q

For the Quarterly Period Ended June 30, 2019

TABLE OF CONTENTS


		Page No.
Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)	5
	Consolidated Balance Sheets - June 30, 2019 and December 31, 2018	5
	Consolidated Statements of Comprehensive Loss - Three and Six Months Ended June 30, 2019 and 2018	6
	Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) - Three and Six Months Ended June 30, 2019 and 2018	7
	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2019 and 2018	9
	Notes to Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4	Controls and Procedures	38

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	39
Item 1A	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6	Exhibits	40
Exhibit Index		40
Signatures		41

NOTE REGARDING FORWA RD-LOOKING STATEMENTS

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

•

estimates regarding the annual total addressable market for our Precision Flow systems, future results of operations, financial position, capital requirements and our needs for additional financing;

•

commercial success and market acceptance of our Precision Flow systems and any future products we may seek to commercialize;

•

competitive companies and technologies in our industry;

•

our ability to enhance our Hi-VNI Technology, expand our indications and develop and commercialize additional products;

•

our business model and strategic plans for our products, technologies and business, including our implementation thereof;

•

our ability to accurately forecast customer demand for our products and manage our inventory;

•

our ability to expand, manage and maintain our direct sales and marketing organization, and to market and sell our Hi-VNI Technology in markets outside of the United States;

•

our ability to hire and retain our senior management and other highly qualified personnel;

•

our ability to obtain additional financing in the future;

•

our ability to commercialize or obtain regulatory approvals for our products, or the effect of delays in commercializing or obtaining regulatory approvals;

•

U.S. Food and Drug Administration or other United States or foreign regulatory actions affecting us or the healthcare industry generally, including healthcare reform measures in the United States and international markets;

•

the timing or likelihood of regulatory filings and approvals;

•

our ability to establish and maintain intellectual property protection for our Hi-VNI Technology and Precision Flow systems or avoid claims of infringement;

•

the volatility of the trading price of our common stock; and

•

our expectations about market trends.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 22, 2019, Part I, “Item 1A. Risk Factors” and in our other filings with the SEC. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. Any forward-looking statements made herein speak only as of the date of this Quarterly Report on Form 10-Q, and you should not rely on forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

We use “Vapotherm,” “Precision Flow,” and “Hi-VNI” 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 v isual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

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

PART I. FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VAPOTHERM, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	June 30, 2019			December 31, 2018
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	46,055		$	58,223
Accounts receivable, net		7,304			7,107
Inventory		11,219			13,710
Prepaid expenses and other current assets		2,256			2,683
Total current assets		66,834			81,723
Property and equipment, net		14,142			13,416
Restricted cash		1,852			1,799
Goodwill		584			-
Intangible assets, net		415			-
Other long-term assets		347			308
Total assets	$	84,174		$	97,246
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	1,570		$	3,148
Contract liability		138			79
Accrued expenses and other current liabilities		7,936			7,653
Short-term line of credit		3,162			3,163
Total current liabilities		12,806			14,043
Long-term loans payable		41,645			31,317
Deferred tax liability		97			-
Other long-term liabilities		277			325
Total liabilities		54,825			45,685
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock ($0.001 par value) 25,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018		-			-
Common stock ($0.001 par value) 175,000,000 shares authorized as of June 30, 2019 and December 31, 2018, respectively; 17,166,368 and 16,782,837 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		17			17
Additional paid-in capital		269,556			265,926
Accumulated deficit		(240,226	)		(214,382	)
Accumulated other comprehensive income		2			-
Total stockholders' equity		29,349			51,561
Total liabilities and stockholders’ equity	$	84,174		$	97,246

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

Vapotherm, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except share and per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net revenue	$	11,986		$	10,563		$	24,285		$	21,302
Cost of goods sold		6,527			6,468			13,647			12,962
Gross profit		5,459			4,095			10,638			8,340
Operating expenses
Research and development		3,167			2,083			6,440			4,308
Sales and marketing		9,432			8,523			18,593			16,574
General and administrative		4,532			2,603			9,411			4,985
Loss on disposal of fixed assets		-			39			-			42
Total operating expenses		17,131			13,248			34,444			25,909
Loss from operations		(11,672	)		(9,153	)		(23,806	)		(17,569	)
Other (expense) income
Foreign currency gain (loss)		-			1			(9	)		(2	)
Interest income		213			12			416			13
Interest expense		(1,421	)		(498	)		(2,445	)		(1,114	)
Loss on extinguishment of debt		-			(1,842	)		-			(1,842	)
Gain on change in fair value of warrant liabilities		-			254			-			382
Net loss	$	(12,880	)	$	(11,226	)	$	(25,844	)	$	(20,132	)
Net loss per share basic and diluted	$	(0.76	)	$	(13.39	)	$	(1.52	)	$	(24.78	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		2			-			2			-
Total other comprehensive income		2			-			2			-
Total comprehensive loss	$	(12,878	)	$	(11,226	)	$	(25,842	)	$	(20,132	)

Weighted-average number of shares used in calculating net loss per share, basic and diluted		17,055,628			838,428			17,019,002			812,451

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

VAPOTHERM, INC.

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

(Unaudited)

(In thousands, except share amounts)

					Additional					Accumulated Other
	Common Stock				Paid-in		Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital		Deficit			Income		Equity
Balance at December 31, 2018		16,782,837	$	17	$	265,926	$	(214,382	)	$	-	$	51,561
Net loss		-		-		-		(25,844	)		-		(25,844	)
Foreign currency translation adjustments		-		-		-		-			2		2
Issuance of common stock warrants		-		-		293		-			-		293
Issuance of stock upon repayment of non-recourse loans		79,854		-		144		-			-		144
Issuance of stock upon exercise of warrants		12,164		-		-		-			-		-
Issuance of stock upon exercise of options		122,765		-		193		-			-		193
Issuance of restricted stock		168,748		-		385		-			-		385
Stock-based compensation expense		-		-		2,615		-			-		2,615
Balance at June 30, 2019		17,166,368	$	17	$	269,556	$	(240,226	)	$	2	$	29,349

					Additional					Accumulated Other
	Common Stock				Paid-in		Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital		Deficit			Income		Equity
Balance at March 31, 2019		16,899,685	$	17	$	268,348	$	(227,346	)	$	-	$	41,019
Net loss		-		-		-		(12,880	)		-		(12,880	)
Foreign currency translation adjustments		-		-		-		-			2		2
Issuance of stock upon repayment of non-recourse loans		79,854		-		144		-			-		144
Issuance of stock upon exercise of warrants		12,164		-		-		-			-		-
Issuance of stock upon exercise of options		122,497		-		193		-			-		193
Issuance of restricted stock		52,168		-		159		-			-		159
Stock-based compensation expense		-		-		712		-			-		712
Balance at June 30, 2019		17,166,368	$	17	$	269,556	$	(240,226	)	$	2	$	29,349

	Redeemable Convertible								Additional
	Preferred Stock				Common Stock				Paid-in		Accumulated			Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit)
Balance at December 31, 2017		10,515,351	$	152,637		672,321	$	1	$	45,056	$	(171,914	)	$	(126,857	)
Issuance of stock upon exercise of options		-		-		31,098		-		50		-			50
Issuance of restricted stock		-		-		71,624		-		120		-			120
Stock-based compensation expense		-		-		-		-		234		-			234
Net loss		-		-		-		-		-		(20,132	)		(20,132	)
Balance at June 30, 2018		10,515,351	$	152,637		775,043	$	1	$	45,460	$	(192,046	)	$	(146,585	)

	Redeemable Convertible								Additional
	Preferred Stock				Common Stock				Paid-in		Accumulated			Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			(Deficit)
Balance at March 31, 2018		10,515,351	$	152,637		736,198	$	1	$	45,273	$	(180,820	)	$	(135,546	)
Issuance of stock upon exercise of options		-		-		17,606		-		32		-			32
Issuance of restricted stock		-		-		21,239		-		37		-			37
Stock-based compensation expense		-		-		-		-		118		-			118
Net loss		-		-		-		-		-		(11,226	)		(11,226	)
Balance at June 30, 2018		10,515,351	$	152,637		775,043	$	1	$	45,460	$	(192,046	)	$	(146,585	)

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

VAPOTHERM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended June 30,
	2019			2018
	(unaudited)
Cash flows from operating activities
Net loss	$	(25,844	)	$	(20,132	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		1,407			991
Stock-based compensation expense		2,615			234
Loss on disposal of fixed assets		81			229
Provision for bad debts		64			10
Loss on extinguishment of debt		-			1,842
Amortization of discount on debt		108			40
Change in fair value of warrants		-			(382	)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		144			209
Inventory		2,988			805
Prepaid expenses and other assets		398			291
Accounts payable		(1,575	)		1,342
Contract liability		(16	)		7
Accrued expenses and other current liabilities		744			(2,571	)
Net cash used in operating activities		(18,886	)		(17,085	)
Cash flows from investing activities
Acquisition of business, net of cash acquired		(1,560	)		-
Purchases of property and equipment		(2,164	)		(2,468	)
Net cash used in investing activities		(3,724	)		(2,468	)
Cash flows from financing activities
Proceeds on loans		10,500			20,000
Repayment of loans payable		-			(21,328	)
Debt issuance costs		(322	)		(751	)
Short-term line of credit		(7	)		265
Proceeds from exercise of stock options and purchase of restricted stock		337			492
Net cash provided by (used in) financing activities		10,508			(1,322	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(13	)		-
Net decrease in cash, cash equivalents and restricted cash		(12,115	)		(20,875	)
Cash, cash equivalents and restricted cash
Beginning of period		60,022			28,360
End of period	$	47,907		$	7,485
Supplemental disclosures of cash flow information
Interest paid during the period	$	2,290		$	1,173
Issuance of warrants in conjunction with debt draw down	$	293		$	-
Property and equipment purchases in accrued expenses	$	115		$	32

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

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts)

1. Description of Business

Vapotherm, Inc. (the “Company”) was founded in 1993 and reincorporated under the laws of the State of Delaware in 2013. Since inception, the Company has focused on the development and commercialization of its proprietary Hi-VNI Technology products that are used to treat patients of all ages suffering from respiratory distress. The Company’s 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. The Company’s 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.

The Company offers four versions of its Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision Flow Heliox. The Company generates revenue primarily from sales of its Precision Flow systems, which include capital units and single-use disposables, and to a lesser extent, sales of its companion products, which include the Vapotherm Transfer Unit 2.0, the Q50 compressor and various adaptors. 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. In addition, the Company utilizes clinical educators who are typically experienced users of Hi-VNI Technology 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 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.

Since inception, the Company has financed its operations primarily through an initial public offering 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 devoted 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 growth and effectiveness of marketing by the Company and by third parties.

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

On February 28, 2019, the Company acquired its United Kingdom based distributor. See Note 18 “Business Combinations” to these consolidated financial statements for details of this transaction.

2. Summary of Significant Accounting Policies

Basis of Presentation

The 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, 2018 (the “2018 Form 10-K”). Our accounting policies are described in the “ Notes to Consolidated Financial Statements ” in our 2018 Form 10-K and updated, as necessary, in this report. The year-end consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

Principles of Consolidation

These 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 in the first quarter of 2019. All intercompany accounts and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of 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 consolidated financial statements include calculation of stock-based compensation, fair values of acquired assets and liabilities, including goodwill and intangibles assets, realizability of inventories, allowance for bad debt and accrued expenses. Actual results may differ from these estimates.

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of June 30, 2019, the consolidated statements of comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows for the three and six months ended June 30, 2019 and 2018 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2019 and the results of its operations and its cash flows for the three and six months ended June 30, 2019 and 2018. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2019 and 2018 are also unaudited. The results of operations for the three and six months ended June 30, 2019, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

Recently Adopted Accounting Pronouncements

Statement of Cash Flows (Topic 230): Restricted Cash

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 amends Accounting Standards Codification (“ASC 230”) to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The new standard requires cash and cash equivalents balances on the statement of cash flows to include restricted cash and cash equivalent balances. ASU 2016-18 requires the company to provide appropriate disclosures about its accounting policies pertaining to restricted cash in accordance with U.S. GAAP. Additionally, changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, and restricted cash and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows. A company with a material balance of amounts generally described as restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard is effective for interim and annual periods beginning after December 15, 2018. The Company had not previously included restricted cash as a component of cash and cash equivalents as presented on its consolidated statement of cash flows. The Company adopted the new standard in the first quarter of fiscal 2019, under the retrospective adoption method, and prior year restricted cash presentation has been reclassified to conform to current year presentation.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

Clarifying the Definition of a Business (Topic 805):

In January 2017, the FASB issued ASU No. 2017-01 Clarifying the Definition of a Business (Topic 805) (“ASU 2017-01”). The new guidance changed the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The Company adopted ASU 2017-01 effective January 1, 2019. Adoption of ASU 2017-01 did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements

Leases (Topic 842):

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 establishes a comprehensive new lease accounting model. The new standard clarifies the definitions of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize 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 2019, the FASB issued a proposed ASU that would defer the effective date for ASU 2016-02. The Company intends to adopt the new standard during interim and annual periods beginning after December 15, 2020, in accordance with this proposed delay. 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. 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. The Company has not yet determined the effects, if any, that the adoptions of ASU 2016-02 and ASU 2018-11 may have on its financial position, results of operations, cash flows, or disclosures.

Credit Losses (Topic 326):

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. The new standard is effective for interim and annual periods beginning after December 15, 2019. 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.

Foreign Currency

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

There were no assets or liabilities of foreign subsidiaries that were translated at period-end exchange rates as of December 31, 2018. See Note 18 “Business Combinations” to these consolidated financial statements for details of the Solus acquisition. The f unctional currency for this entity is its local currency, Pound Sterling (GBP).

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

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

Intangible Assets

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

Goodwill

Goodwill represents the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired in a transaction accounted for using the purchase method of accounting. Goodwill is not amortized, but reviewed for impairment. Goodwill is reviewed annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.

The Company compares the fair value of its reporting units to their carrying values. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the Company would record an impairment loss equal to the difference. As described in Note 17 “Segment Reporting”, the Company operates in one operating segment and has two reporting units, Vapotherm and Solus.

Disaggregated Revenue

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019						2019
	US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital	$	1,599	$	1,046	$	2,645	$	3,109	$	1,551	$	4,660
Disposable		6,514		2,016		8,530		14,061		3,488		17,549
Subtotal Product Revenue		8,113		3,062		11,175		17,170		5,039		22,209
Lease Revenue		284		-		284		947		-		947
Service and Other Revenue		281		246		527		610		519		1,129
Total Revenue	$	8,678	$	3,308	$	11,986	$	18,727	$	5,558	$	24,285

	Three Months Ended June 30,						Six Months Ended June 30,
	2018						2018
	US		International		Total		US		International		Total
Net revenue by:
Product Revenue
Capital	$	1,936	$	1,270	$	3,206	$	3,508	$	1,981	$	5,489
Disposable		5,200		1,415		6,615		11,543		2,641		14,184
Subtotal Product Revenue		7,136		2,685		9,821		15,051		4,622		19,673
Lease Revenue		479		-		479		664		-		664
Service and Other Revenue		204		59		263		726		239		965
Total Revenue	$	7,819	$	2,744	$	10,563	$	16,441	$	4,861	$	21,302

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

Service and other revenue includes sales of non-Vapotherm products sold by Solus. Net rev enue by U.S. and International is based on the customer location to which the product is shipped. No individual foreign country represents more than 10% of the Company’s total revenue.

Product Returns

The Company provides its customers with a standard one-year warranty on its capital equipment sales. Warranty costs are accrued based on actual historical trends and estimated at time of sale. The Company provides its customers with the right to return products for a refund of the purchase price or for an account credit, if the return is made within a specified number of days from the original invoice date. The Company records a product return liability based upon an estimate of specific returns and a review of historical returns experienced. Adjustments are made to the product return liability as returns data and historical experience change. The provision for product return estimates is recorded as a reduction of revenue. The product return liability of less than $0.1 million is included in other current liabilities.

Stock Split

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

Business Combinations

The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The Company continues to collect information and re-evaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded in the Company’s consolidated statements of comprehensive loss.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is recognized over the estimated useful lives of the related assets using the straight-line method for consolidated financial statement purposes. The Company uses other depreciation methods (generally, accelerated depreciation methods) for tax purposes, where appropriate. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements and is included in depreciation expense. When impairment indicators are present, the Company evaluates the recoverability of its long-lived assets. If the assessment indicates an impairment, the affected assets are written down to fair value.

Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expenses.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

The lives used in computing straight-line depreciation for financial reporting purposes are as follows:

		Number of Years
Property and equipment placed in service
Equipment		3 - 7
Furniture		5 - 7
Manufacturing equipment		3 - 10
Software		3
Demonstration, placements and evaluation units		3 - 5
Leasehold improvements		Lesser of life of lease or 10 years

The Company’s policy is to periodically review the estimated useful life of all fixed assets. This review during fiscal year 2019 indicated that the estimated useful life of all fixed assets is consistent with fiscal year 2018, with the exception of manufacturing equipment. The maximum useful life increased from 7 years to 10 years.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid temporary investments purchased with original maturities of 90 days or less to be cash equivalents. The Company holds restricted cash related to certificates of deposits and collateral in relation to lease agreements. As of June 30, 2019, $0.4 million of our $47.9 million of cash, cash equivalents and restricted cash balance was located outside the U.S.

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

	June 30, 2019		December 31, 2018		June 30, 2018		December 31, 2017
Cash and cash equivalents	$	46,055	$	58,223	$	5,630	$	26,508
Restricted cash		1,852		1,799		1,855		1,852
Total cash, cash equivalents, and restricted cash	$	47,907	$	60,022	$	7,485	$	28,360

3. Accounts Receivable

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

	June 30, 2019			December 31, 2018
United States	$	4,703		$	4,948
International		2,881			2,493
Total accounts receivable		7,584			7,441
Less: Allowance for doubtful accounts		(280	)		(334	)
Accounts receivable, net of allowance for doubtful accounts	$	7,304		$	7,107

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

At June 30, 2019, the largest concentrations of accounts receivable, as a percentage of total accounts receivable, were with one distributor representing 9% and one distributor representing 3% of total accounts receivable, respectively. At December 31, 2018, the largest concentrations of accounts receivable, as a percentage of total accounts receivable, were with one distributor representing 7% and two distributors representing 4% of total accounts receivable, re spectively. No customers accounted for more than 10% of revenue or accounts receivable as of June 30, 2019 or December 31, 2018.

4. Financial Instruments

As of June 30, 2019 and December 31, 2018, the Company’s financial instruments were comprised of cash, accounts receivables, accounts payable and debt, the carrying amounts of which approximated fair value due to the short-term nature and market interest rates.

During the three months ended June 30, 2018, in connection with an amendment to the Credit Agreement and Guaranty as further described in Note 8 “Debt”, the Company granted warrants to purchase 37,693 shares Series D redeemable convertible preferred stock which were converted into 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 April 2028. The estimated fair value at the time of issuance was less than $0.1 million, and is recorded as a discount against the principal owed on the related debt, to be amortized over the contractual term of the debt instrument.

The Company did not grant any warrants in the three months ended June 30, 2019. During the three months ended June 30, 2019, 68,009 warrants were exercised of which 55,845 were forfeited and 12,164 were converted into shares of common stock as part of a cashless exercise. During the six months ended June 30, 2019, in connection with an amendment to the Credit Agreement and Guaranty as further described in Note 8 “Debt”, the Company 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, exercisable at the option of the holder, in whole or in part, and expire in March 2029. The estimated fair value at the time of issuance was less than $0.3 million, and is recorded as a discount against the principal owed on the related debt, to be amortized over the contractual term of the debt instrument.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

The Company’s warrant activity for the three and six months ended June 30, 2019 and 2018 are summarized as follows.

	Series A Redeemable							Series B Redeemable							Series C Redeemable							Series D Redeemable
	Convertible Preferred							Convertible Preferred							Convertible Preferred							Convertible Preferred						Total Warrants
	Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value		Weighted Average Exercise Price		Number of Shares		Estimated Fair Value
Outstanding at March 31, 2018		158,202	$	288		$	14.00		12,857	$	71		$	14.00		4,285	$	42		$	14.00		-	$	-	$	-	$	175,344	$	401
Warrants granted		-		-			-		-		-			-		-		-			-		37,693		59		15.92		37,693		59
Gain on change in fair value		-		(155	)		-		-		(61	)		-		-		(38	)		-		-		-		-		-		(254	)
Outstanding at June 30, 2018		158,202	$	133		$	14.00		12,857	$	10		$	14.00		4,285	$	4		$	14.00		37,693	$	59	$	15.92	$	213,037	$	206

	Common Stock Warrants
	Number of Shares			Weighted Average Exercise Price
Outstanding at March 31, 2019		250,085		$	14.61
Warrants granted		-			-
Warrants exercised		(68,009	)		(14.00	)
Outstanding at June 30, 2019		182,076		$	14.84

	Series A Redeemable							Series B Redeemable							Series C Redeemable							Series D Redeemable
	Convertible Preferred							Convertible Preferred							Convertible Preferred							Convertible Preferred						Total Warrants
	Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value			Weighted Average Exercise Price		Number of Shares		Estimated Fair Value		Weighted Average Exercise Price		Number of Shares		Estimated Fair Value
Outstanding at December 31, 2017		158,202	$	415		$	14.00		12,857	$	72		$	14.00		4,285	$	42		$	14.00		-	$	-	$	-		175,344	$	529
Warrants granted		-		-			-		-		-			-		-		-			-		37,693		59		15.92		37,693		59
Gain on change in fair value		-		(282	)		-		-		(62	)		-		-		(38	)		-		-		-		-		-		(382	)
Outstanding at June 30, 2018		158,202	$	133		$	14.00		12,857	$	10		$	14.00		4,285	$	4		$	14.00		37,693	$	59	$	15.92		213,037	$	206

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)


	Common Stock Warrants
	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2018		230,295		$	14.50
Warrants granted		19,790			15.92
Warrants exercised		(68,009	)		(14.00	)
Outstanding at June 30, 2019		182,076		$	14.84

5. Inventories

Inventories as of June 30, 2019 and December 31, 2018 consist of the following:

	June 30, 2019		December 31, 2018
Component parts	$	6,183	$	5,601
Finished goods		5,036		8,109
Total inventory	$	11,219	$	13,710

6. Property and Equipment

Property and equipment are carried at cost, less accumulated depreciation and amortization. A summary of the components of property and equipment, placed in service as of June 30, 2019 and December 31, 2018, is as follows:

	June 30, 2019			December 31, 2018
Equipment	$	985		$	924
Furniture		977			957
Manufacturing equipment		8,312			4,166
Software		713			655
Demonstration, placements and evaluation units		8,471			7,135
Leasehold improvements		2,078			2,025
Construction in process		1,033			4,663
Total property and equipment		22,569			20,525
Less: Accumulated depreciation and amortization		(8,427	)		(7,109	)
Total property and equipment, net	$	14,142		$	13,416

Depreciation and amortization of property and equipment was $0.7 million and $1.4 million during the three and six months ended June 30, 2019, respectively. Depreciation and amortization of property and equipment was $0.5 million and $1.0 million during the three and six months ended June 30, 2018, respectively.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities as of June 30, 2019 and December 31, 2018 consist of the following:

	June 30, 2019		December 31, 2018
Accrued payroll and employee related liabilities	$	1,336	$	170
Accrued bonuses		1,245		1,692
Accrued commissions		916		1,464
Accrued inventory		852		1,070
Accrued professional fees		644		253
Accrued vacation liability		522		427
Product warranty reserve		329		329
Accrued taxes		260		305
Refundable purchase price of unvested stock		236		346
Accrued rent and restoration costs		192		174
Accrued employee reimbursement		126		178
Accrued capital equipment		115		21
Accrued board of director retainers		106		52
Clinical studies		86		67
Accrued freight		74		52
Other		897		1,053
Total accrued expenses and other liabilities	$	7,936	$	7,653

8. Debt

Revolving Credit Line

On November 16, 2016, the Company entered a Business Financing Agreement (the “Revolver Agreement”) with Western Alliance Bank, an Arizona Corporation, which replaced its then existing revolving line of credit. The Revolver Agreement made available $7.0 million of revolving credit upon the closing date. Availability under the Revolver Agreement is calculated based upon 80% of the eligible receivables (net of pre-paid deposits, pre-billed invoices, other offsets, and contras related to each specific account debtor). The original maturity date was September 30, 2018. The Company refinanced the Revolver Agreement in April 2018, increasing the credit line to $7.5 million and extending the maturity date to September 30, 2020. The principal is due upon maturity. On March 22, 2019, the Company entered into an amendment to the Revolver Agreement (as amended, the “Amended Revolver Agreement”), which increased the allowable permitted indebtedness under the Amended Revolver Agreement in connection with the Company’s credit card program from $0.3 million to $0.5 million.

At June 30, 2019 the interest rate was 7.3%. The outstanding balance under the Amended Revolver Agreement was $3.2 million at June 30, 2019 and there was $0.3 million remaining availability based on eligible receivables. At December 31, 2018, the interest rate was 7.3%. The outstanding balance under the Revolver Agreement was $3.2 million at December 31, 2018 and the remaining availability based on eligible receivables was $1.0 million. The Amended Revolver Agreement requires the Company to comply with a minimum liquidity covenant at all times measured at the end of each fiscal month. As of June 30, 2019, the Company was in compliance with these covenants.

Term Loans

On November 16, 2016, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Solar Capital Ltd. (“Solar”). Pursuant to the Loan Agreement, a total of $20.0 million was available in three tranches. The first tranche was drawn down in the amount of $10.0 million upon closing which paid off the Company’s then existing term loan balance of $6.0 million in full. The Company achieved the minimum revenue threshold required to draw down the second tranche of $5.0 million of term debt financing and obtained a signed term sheet for an equity financing in excess of $10.0 million, which allowed the Company to draw down the third and final tranche of $5.0 million term debt financing. The Company drew down the $5.0 million tranches in January 2017 and March 2017, respectively. The Company pledged all assets as collateral with a double negative pledge on intellectual property.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

On April 6, 2018, the Company entered into a Credit Agreement and Guaranty (the “Credit Agreement and Guaranty”) with Perceptive Credit Holdings II, LP (“Perc eptive”). Pursuant to the Credit Agreement and Guaranty, a total of $42.5 million was available in three tranches. The first tranche was drawn down in the amount of $20.0 million on the closing date, April 6, 2018, which paid off the 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 shares of common stock at the time of the initial public offering. The warrants have an exercise pr ice 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 April 2028.

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

As of December 31, 2018, the Company had drawn $32.0 million of the $42.5 million available under the Credit Agreement and Guaranty and on March 22, 2019, the Company drew the remaining $10.5 million. In connection with this draw down, the Company granted Perceptive warrants to purchase 19,790 shares of common stock. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire in March 2029.

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

At June 30, 2019, the interest rate was 11.56%. The outstanding balance was $42.5 million at June 30, 2019 and there was no remaining availability. At December 31, 2018, the interest rate was 11.44%.

The Amended Credit Agreement and Guaranty requires the Company to comply with a minimum liquidity covenant at all times and a minimum revenue covenant measured at the end of each fiscal quarter. As of June 30, 2019, the Company was in compliance with these covenants.

The annual principal maturities of the Amended Credit Agreement and Guaranty as of June 30, 2019 are as follows:

2019	$	-
2020		-
2021		-
2022		-
2023		42,550
Less: Discount on loans payable		(905	)
Long-term loans payable	$	41,645

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

9. Commitments and Contingencies

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

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

	Total Due
As of June 30, 2019
Remainder of 2019	$	778
2020		1,577
2021		1,601
2022		1,626
2023		1,652
Thereafter		1,820
Total	$	9,054

Rent expense for the three and six months ended June 30, 2019 was $0.5 million and $1.0 million, respectively. Rent expense for the three and six months ended June 30, 2018 was $0.4 million and $0.9 million, respectively.

Legal Matters

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

The Company believes there are 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.

10. Income Taxes

There is no provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of changes in valuation allowance.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

A reconciliation of income tax expense (benefit) is computed as the statutory federal income tax rate to income taxes as reflected in the financial statement as fol lows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Federal income tax (benefit) at statutory rate		21.0	%		34.0	%		21.0	%		34.0	%
(Increase) decrease income tax benefit resulting from:
Permanent differences		(0.3	)%		(0.3	)%		(0.3	)%		(0.3	)%
Change in valuation allowance		(21.0	)%		(34.0	)%		(21.0	)%		(34.0	)%
Other		0.3	%		0.3	%		0.3	%		0.3	%
Income tax expense (benefit)		0.0	%		0.0	%		0.0	%		0.0	%

Significant components of the Company’s net deferred tax asset are as follows:

	June 30, 2019			December 31, 2018
Deferred Tax Assets
Net operating loss carryforwards	$	46,711		$	42,444
Tax credit carryforwards		3,537			3,012
Deduction of research and development costs		5,139			4,239
Accounts receivable collection allowance		56			70
Inventory valuation reserves		311			154
Accrued bonus and vacation		475			579
Accrued warranty		86			86
Allowance for sales returns		18			18
Stock option expense attributed to non-ISO stock		1,043			358
Accrued other expenses		1,355			818
Other temporary differences		(272	)		(70	)
Total gross deferred tax assets		58,459			51,708
Less: Valuation allowance		(58,459	)		(51,708	)
Deferred tax asset after valuation allowance	$	-		$	-

The Company’s major tax jurisdictions are the United States, New Hampshire and the United Kingdom. As of June 30, 2019, the Company had federal and state net operating loss carryforwards of $200.7 million and $90.7 million, respectively, which begin to expire in 2020. As of June 30, 2019, the Company had federal research and development tax credits carryforwards of $3.3 million which begin to expire in 2021.

Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards and research and development credits. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance of $58.5 million and $51.7 million has been established at June 30, 2019 and December 31, 2018, respectively. The valuation allowance increased $6.8 million during the six months ended June 30, 2019, due primarily to net operating losses generated.

Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 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 research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.

On February 28, 2019, the Company acquired the shares of Solus. For the period from March 1, 2019 to June 30,2019, Solus had a book loss of $0.2 million, resulting from sales of $1.0 million. Due to the short period of ownership, and related book loss, the tax provision for Solus is immaterial.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

11. Stock Plans and Stock-Based Compensation

As of June 30, 2019 and December 31, 2018, 937,400 and 972,628 shares of common stock remain available for issuance under the 2018 Stock Incentive Plan (the “2018 SI Plan”), respectively. Under the terms of the 2018 SI Plan, the exercise price of the options is determined by the fair value on the date of grant. Options granted under the plans vest ratably over a period of one to four years from the date of grant and are exercisable over a period of not more than ten years from the date of grant.

On January 23, 2019, the Company established a French Qualifying Subplan that sits underneath the 2018 SI Plan which allows for the granting of stock options to purchase shares of common stock for employees and officers who are residents of France. The options under the French Qualifying Subplan reside under the umbrella of the 2018 SI Plan.

The fair value of each option grant is estimated 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, related compensation cost is amortized over the performance period on an accelerated attribution basis. Compensation expense associated with performance awards are based upon the 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, net of estimated forfeitures. Cumulative adjustments are recorded each quarter to reflect estimated outcome of the performance-related conditions until the date results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the Company’s historical volatility. The average expected life was estimated using the simplified method for “plain vanilla” options. The risk-free rate is based on U.S. Treasury rates with a remaining term that approximates the expected life assumed at the date of grant. The Company assumed an average forfeiture rates of 4.78% and 4.76% for the three and six months ended June 30, 2019, respectively, based on historical experience with pre-vested forfeitures. The Company assumed an average forfeiture rates of 8.22% and 6.85% for the three and six months ended June 30, 2018, respectively, based on historical experience with pre-vested forfeitures.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Fair value of common stock	$	19.28		$	3.78		$	17.18		$	3.78
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Risk free interest rate		2.5	%		2.8	%		2.5	%		2.5	%
Expected stock price volatility		58.8	%		58.9	%		70.0	%		59.0	%
Expected term (years)		9.0			6.1			7.1			6.0

Stock Options

Stock option activity for the six months ended June 30, 2019 is as follows:

						Weighted
	Number of			Weighted		Average
	Underlying			Average		Remaining		Aggregate
	Common			Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Outstanding at December 31, 2018		786,989		$	2.41		7.87	$	13,801
Options granted		776,196			17.18
Options exercised		(122,765	)		1.58
Options canceled		(42,988	)		3.12
Outstanding at June 30, 2019		1,397,432		$	10.69		8.76	$	17,203
Exercisable at June 30, 2019		361,419		$	1.94		7.19	$	7,611

Vested and unvested expected to vest at June 30, 2019		1,397,432		$	10.69		8.76	$	17,203

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

The weighted average grant date fair value of options granted during the three months ended June 30, 2019 and 2018 was $12.73 and $1.68 per share, respectively. The weighted average grant date fair value of options granted during the six months ended June 30, 2019 and 2018 was $11.97 and $1.68 per share, respectively. The aggregate intrinsic value of options exercised during the three months ended June 30, 2019 and 2018 was $2.0 million and less than $0.1 million, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2019 and 2018 was $2.1 million and less than $0.1 million, respectively. The aggregate intrinsic value was calculated based on a posit ive difference between the closing stock price on June 30, 2019 and the exercise price per share of the underlying options. The aggregate intrinsic value was calculated based on a positive difference between the estimated fair value of the Company’s common stock as of June 30, 2018 of $0.95 per share, and the exercise price per share of the underlying options.

The compensation expense associated with stock options recognized during the three months ended June 30, 2019 and 2018 was $0.3 million and less than $0.1 million, respectively. The compensation expense associated with stock options recognized during the six months ended June 30, 2019 and 2018 was $0.7 million and $0.1 million, respectively. Stock-based compensation is recorded in the consolidated statements of comprehensive loss . As of June 30, 2019, the Company had unrecognized stock-based compensation expense related to its unvested stock options awards of $7.0 million, which is expected to be recognized over the remaining weighted average vesting period of 2.8 years.

Restricted Stock

A summary of restricted stock activity for the six months ended June 30, 2019 is as follows:

				Weighted
				Average
				Grant Date
	Shares			Fair Value
Unvested at December 31, 2018		399,485		$	1.68
Granted/purchased		74,483			17.44
Vested		(168,748	)		4.58
Canceled		-			-
Unvested at June 30, 2019		305,220		$	3.95

The weighted average grant date fair value of restricted stock granted during the six months ended June 30, 2019 and 2018 was $17.44 and $0.94 per share, respectively.

The compensation expense associated with restricted stock recognized during the three months ended June 30, 2019 and 2018 was $0.4 million and less than $0.1 million, respectively. The compensation expense associated with restricted stock recognized during the six months ended June 30, 2019 and 2018 was $1.9 million and $0.1 million, respectively. Stock-based compensation is recorded in the consolidated statements of comprehensive loss . As of June 30, 2019, the Company had unrecognized stock-based compensation expense related to its unvested restricted stock of $0.6 million, which is expected to be recognized over the remaining weighted average vesting period of 2.8 years.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

12. Earnings Per Share

Net Loss per Share

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Numerator:
Net loss	$	(12,880	)	$	(11,226	)	$	(25,844	)	$	(20,132	)
Net loss attributable to common stockholders	$	(12,880	)	$	(11,226	)	$	(25,844	)	$	(20,132	)
Denominator:
Weighted average common shares outstanding— basic and diluted		17,055,628			838,428			17,019,002			812,451
Net loss per share attributable to common stockholders— basic and diluted	$	(0.76	)	$	(13.39	)	$	(1.52	)	$	(24.78	)

The Company excluded the following potential common shares, presented 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:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Options to purchase common stock		1,397,432		773,868		1,397,432		773,868
Warrants to purchase redeemable convertible preferred stock (as converted to common stock)		182,076		213,038		182,076		213,038
Unvested restricted stock		305,220		622,455		305,220		622,455
Redeemable convertible preferred stock (as converted to common stock)		-		10,515,351		-		10,515,351
		1,884,728		12,124,712		1,884,728		12,124,712

13. Employee Benefit Plan

The Company has a 401(k) retirement plan (the “401(k) Plan”) for the benefit of eligible employees, as defined. Each participant may elect to contribute up to 25% of his or her compensation to the 401(k) Plan each year, subject to certain Internal Revenue Service limitations. On April 1, 2017, the Company began an employer 401(k) match. The match was effective for any funds contributed after April 1, 2017 at a rate of 50% of the first 4% of employee contributions. The employer match is capped at $1,000 per year for employees with annual earnings less than $50,000 and $500 for employees with annual earnings greater than $50,000. The Company contributed less than $0.1 million and $0.1 million for the three and six months ended June 30, 2019, respectively. The Company contributed less than $0.1 million for each of the three and six months ended June 30, 2018, respectively.

14. Related Party Transactions

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

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

The Company has two stockhol ders that are vendors of the Company. The total amount billed from these vendors during the three months ended June 30, 2019 and 2018 was less than $0.1 million and $0.5 million, respectively. The total amount billed from these vendors during the six month s ended June 30, 2019 and 2018 was less than $0.1 million and $1.2 million, respectively. The accounts payable balance for these vendors was $0.5 million as of June 30, 2019 and December 31, 2018, respectively.

In addition, the Company sells its products to a hospital customer who is an affiliate of a current stockholder. The total amount billed to this customer during the three months ended June 30, 2019 and 2018 was $0.3 million and $0.4 million, respectively. The total amount billed to this customer during the six months ended June 30, 2019 and 2018 was $0.7 million and $1.2 million, respectively. The accounts receivable balance for this customer was $0.1 million as of June 30, 2019 and December 31, 2018, respectively. All transactions are at arms’ length and occur at published list prices.

15. Warrants

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

There was no outstanding redeemable convertible preferred stock as of June 30, 2019 or December 31, 2018. See Note “4 Financial Instruments” in this Quarterly Report on Form 10-Q for a rollforward of the Company’s common stock warrants. In connection with the draw down of the remaining $10.5 million under the Amended Credit Agreement and Guaranty in March 2019, the Company granted warrants to Perceptive to purchase 19,790 shares of common stock. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire in March 2029. During the three and six months ended June 30, 2018, the Company recorded a gain of $0.3 million and $0.4 million, respectively, on the change in fair value of the preferred stock warrants.

16. Stockholders’ Equity

Preferred Stock

As of June 30, 2019 and December 31, 2018, the Company has authorized 25,000,000 shares of preferred stock, respectively, at a par value of $0.001. As of June 30, 2019 and December 31, 2018, there were no shares of preferred stock outstanding.

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

A summary of the terms of the various types of redeemable convertible preferred stock at June 30, 2018, is as follows:

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

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

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

Common Stock

As of June 30, 2019 and December 31, 2018, the Company has authorized 175,000,000 shares of common stock, respectively, at a par value of $0.001. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding.

17. Segment Reporting

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

18. Business Combinations

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

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

Cash	$	466
Accounts receivable		411
Inventory		492
Prepaids and other assets		11
Property and equipment		1
Goodwill		584
Intangible assets		455
Total assets acquired		2,420
Accounts payable and accrued expenses		(222	)
Deferred revenue		(75	)
Deferred taxes		(97	)
Total liabilities assumed		(394	)
Total purchase price	$	2,026

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

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

In determining the purch ase price allocation, the Company considered, among other factors, the opportunity provided by supplier agreements with the National Health Service. The fair value of the intangible assets associated with this agreement were estimated using a discounted ca sh 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 aft er deducting contributory asset charges. An income and expenses forecast was built based upon specific intangible asset revenue and expense estimates.

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

The total weighted average amortization period for the intangible assets is approximately 3.83 years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the economic benefits of the intangible assets 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 in the United Kingdom. The goodwill attributable to the United Kingdom jurisdiction is not deductible for tax purposes.

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

Pro Forma Financial Information

The following unaudited pro forma information for the three and six months ended June 30, 2019 and 2018, respectively presents consolidated information as if the Solus acquisition occurred on January 1, 2018, which is the first day of our fiscal year 2018:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net revenue	$	11,986		$	11,511		$	24,522		$	23,017
Net loss	$	(12,880	)	$	(11,440	)	$	(26,134	)	$	(20,578	)
Net loss per share, basic	$	(0.76	)	$	(13.64	)	$	(1.54	)	$	(25.33	)

19. Intangibles

The following table presents a summary of acquired intangible assets:

	As of June 30, 2019
	Period of amortization	Gross Carrying Amount		Accumulated Amortization
Customer agreements	3.83 years	$	455	$	(40	)
Total identifiable intangible assets		$	455	$	(40	)

The Company recognized less than $0.1 million of amortization expense within sales and marketing expenses related to the intangible assets during the six months ended June 30, 2019. The Company did not recognize any amortization expense related to the intangible assets during the three and six months ended June 30, 2018, respectively, as the assets were acquired in acquisition of Solus in February 2019.

VAPOTHERM, INC.

Notes to Consolidated Financial Statements

(Unaudited, continued)

(In thousands, except share and per share amounts)

The estimated amortization expense for intangible assets for each of the five succeeding fiscal years is as follows:

	In thousands
Estimated Amortization Expense
Remainder of 2019	$	60
2020		119
2021		118
2022		118
2023		-
Total	$	415

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSI S 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 consolidated financial statements for the fiscal quarter ended June 30, 2019, 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 2018 Form 10-K .

Overview

We are 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 June 30, 2019, more than 1.9 million patients have been treated with our Precision Flow systems, and we have a global installed base of over 15,000 capital units. We have sold our Precision Flow systems to over 1,400 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. We maintain higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we are subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. We currently ship our Precision Flow systems from our facility in New Hampshire directly to our United States customers, from our facility in the United Kingdom directly to our United Kingdom customers, and many of our international distributors in other countries on a purchase order basis. Warehousing and shipping operations for some of our international distributors are handled by a third-party vendor with facilities located in the Netherlands. While our customers have the right to return purchased products subject to a restocking fee, our historical return experience has been immaterial.

Since inception, we have financed our operations primarily through an initial public offering of our common stock, private placements of our convertible preferred stock, sales of our Precision Flow 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 second quarter of 2019, we generated revenue of $12.0 million and had a net loss of $12.9 million compared to revenue of $10.6 million and a net loss of $11.2 million for the second quarter of 2018. Our accumulated deficit as of June 30, 2019 was $240.2 million. In the second quarter of 2019, 72.4% of our revenue was derived in the United States and 27.6% 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 in an effort to develop new products that enhance our current portfolio or expand our markets, support regulatory submissions, and demonstrate the clinical efficacy of our new products. Examples of in-development products that may enhance our current portfolio include our next generation ProSoft cannula, which is designed to improve patient comfort, and an aerosol disposable patient circuit, which is designed to streamline workflows associated with continuous aerosol medication delivery. Examples of in-development products that may expand our market include our oxygen management module, which is designed to simplify and automate adjustments to the Precision Flow systems’ delivery of oxygenated breathing gases based on feedback provided by oxygen levels in the patient, and our next generation Hi-VNI Technology product, which is designed to provide high velocity nasal insufflation using a portable device, removing the requirement for access to built-in wall air outlets. Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require additional funding, which may include future equity and debt financings.

Results of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net revenue	$	11,986		$	10,563		$	24,285		$	21,302
Cost of goods sold		6,527			6,468			13,647			12,962
Gross profit		5,459			4,095			10,638			8,340
Operating expenses
Research and development		3,167			2,083			6,440			4,308
Sales and marketing		9,432			8,523			18,593			16,574
General and administrative		4,532			2,603			9,411			4,985
Loss on disposal of fixed assets		-			39			-			42
Total operating expenses		17,131			13,248			34,444			25,909
Loss from operations		(11,672	)		(9,153	)		(23,806	)		(17,569	)
Other expense, net		(1,208	)		(2,073	)		(2,038	)		(2,563	)
Net loss	$	(12,880	)	$	(11,226	)	$	(25,844	)	$	(20,132	)

Revenue

	Three Months Ended June 30,
	2019					2018					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
Product Revenue
Capital	$	2,645		22.0	%	$	3,206		30.4	%	$	(561	)		-17.5	%
Disposable		8,530		71.2	%		6,615		62.6	%		1,915			28.9	%
Subtotal Product Revenue		11,175		93.2	%		9,821		93.0	%		1,354			13.8	%
Lease Revenue		284		2.4	%		479		4.5	%		(195	)		-40.7	%
Service and Other Revenue		527		4.4	%		263		2.5	%		264			100.4	%
Total Revenue	$	11,986		100.0	%	$	10,563		100.0	%	$	1,423			13.5	%

Revenue increased $1.4 million, or 13.5%, to $12.0 million for the second quarter of 2019 compared to $10.6 million for the second quarter of 2018. The increase in revenue was primarily attributable to a $1.9 million increase in disposable revenue as a result of an increase in the installed base and increased utilization of Precision Flow capital units worldwide partially offset by a decrease in the sales and leases of our Precision Flow capital units worldwide.

Revenue information by geography is summarized as follows:

	Three Months Ended June 30,
	2019					2018					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$		%
United States	$	8,678		72.4	%	$	7,819		74.0	%	$	859		11.0	%
International		3,308		27.6	%		2,744		26.0	%		564		20.6	%
Total Revenue	$	11,986		100.0	%	$	10,563		100.0	%	$	1,423		13.5	%

Revenue generated in the United States increased $0.9 million, or 11.0%, to $8.7 million for the second quarter of 2019, compared to $7.8 million for the second quarter of 2018. Revenue growth in the United States was primarily due to increased disposable sales resulting from a larger installed base and higher utilization of Precision Flow units partially offset by a decrease in the sales and leases of our Precision Flow units.

Revenue generated in our International markets increased $0.6 million, or 20.6%, to $3.3 million for the second quarter of 2019, compared to $2.7 million for the second quarter of 2018. Revenue growth in the International markets was primarily due to increased disposable sales resulting from a larger installed base and higher utilization of Precision Flow un its partially offset by a decrease in the sale of Precision Flow units.

	Six Months Ended June 30,
	2019					2018					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$			%
Product Revenue
Capital	$	4,660		19.2	%	$	5,489		25.8	%	$	(829	)		-15.1	%
Disposable		17,549		72.3	%		14,184		66.6	%		3,365			23.7	%
Subtotal Product Revenue		22,209		91.5	%		19,673		92.4	%		2,536			12.9	%
Lease Revenue		947		3.9	%		664		3.1	%		283			42.6	%
Service and Other Revenue		1,129		4.6	%		965		4.5	%		164			17.0	%
Total Revenue	$	24,285		100.0	%	$	21,302		100.0	%	$	2,983			14.0	%

Revenue increased $3.0 million, or 14.0%, to $24.3 million in the first six months of 2019 compared to $21.3 million for the first six months of 2018. The increase in revenue was primarily attributable to a $3.4 million increase in disposable revenue as a result of an increase in the installed base and higher utilization of Precision Flow capital units worldwide partially offset by a decrease in the sale and lease of the Precision Flow units worldwide.

Revenue information by geography is summarized as follows:

	Six Months Ended June 30,
	2019					2018					Change
	(in thousands, except percentages)
	Amount		% of Revenue			Amount		% of Revenue			$		%
United States	$	18,727		77.1	%	$	16,441		77.2	%	$	2,286		13.9	%
International		5,558		22.9	%		4,861		22.8	%		697		14.3	%
Total Revenue	$	24,285		100.0	%	$	21,302		100.0	%	$	2,983		14.0	%

Revenue generated in the United States increased $2.3 million, or 13.9%, to $18.7 million for the first six months of 2019, compared to $16.4 million for the first six months of 2018. Revenue growth in the United States was primarily due to increased disposable sales resulting from a larger installed base and increased utilization of Precision Flow units partially offset by a decrease in the sale and lease of Precision Flow units.

Revenue generated in our International markets increased $0.7 million, or 14.3%, to $5.6 million for the first six months of 2019, compared to $4.9 million for the first six months of 2018. Revenue growth in the International markets was primarily due to increased disposable sales resulting from a larger installed base, partially offset by a decrease in the sale and lease of Precision Flow units.

Cost of Goods Sold and Gross Margin

Cost of goods sold of $6.5 million remained constant in the second quarter of 2019 compared to the second quarter of 2018. Cost of goods sold increased $0.6 million, or 5.3%, to $13.6 million in the first six months of 2019 compared to $13.0 million in the first six months of 2018. The increase was due to increased product costs due to higher sales volumes of our disposables.

Gross margin increased to 45.5% in the second quarter of 2019 compared to 38.8% in the second quarter of 2018. The increase in gross margin was driven by a favorable sales mix of disposables and a decrease in disposable component costs. Gross margin increased to 43.8% in the first six months of 2019 compared to 39.2% in the first six months of 2018. The increase in gross margin was driven by a favorable sales mix of disposables and a decrease in disposable component costs in comparison to the first six months of 2018. Additionally, we improved operating efficiency by holding operating overhead constant while increasing throughput in our manufacturing facility to support continued sales growth.

Research and Development Expenses

Research and development expenses increased $1.1 million, or 52.0%, to $3.2 million in the second quarter of 2019 compared to $2.1 million in the second quarter of 2018. As a percentage of revenue, research and development expenses increased to 26.4% in the second quarter of 2019 compared to 19.7% in the second quarter of 2018.

Research and development expenses increased $2.1 million, or 49.5%, to $6.4 million in the first six months of 2019 compared to $4.3 million in the first six months of 2018. As a percentage of revenue, research and development expenses increased to 26.5% in the first six months of 2019 compared to 20.2% in the first six months of 2018.

The increase in research and development expenses in both comparison periods was due to increases in new product development costs and research and development headcount and other employee-related expenses, including stock-based compensation.

Sales and Marketing Expenses

Sales and marketing expenses increased $0.9 million, or 10.7%, to $9.4 million in the second quarter of 2019 compared to $8.5 million in the second quarter of 2018. As a percentage of revenue, sales and marketing expenses decreased to 78.7% in the second quarter of 2019 compared to 80.7% in the second quarter of 2018.

Sales and marketing expenses increased $2.0 million, or 12.2%, to $18.6 million in the first six months of 2019 compared to $16.6 million in the first six months of 2018. As a percentage of revenue, sales and marketing expenses decreased to 76.6% in the first six months of 2019 compared to 77.8% in the first six months of 2018.

The increase in sales and marketing expenses in both comparison periods was primarily due to increased compensation, travel and other employee-related expenses, including stock-based compensation, in our sales and marketing organizations. Additionally, the increase in sales and marketing expenses in the six months ended June 30, 2019 compared to June 30, 2018 was related to investments in marketing initiatives.

General and Administrative Expenses

General and administrative expenses increased $1.9 million, or 74.1%, to $4.5 million in the second quarter of 2019 compared to $2.6 million in the second quarter of 2018. As a percentage of revenue, general and administrative expenses increased to 37.8% in the second quarter of 2019 compared to 24.6% in the second quarter of 2018.

General and administrative expenses increased $4.4 million, or 88.8%, to $9.4 million in the first six months of 2019 compared to $5.0 million in the first six months of 2018. As a percentage of revenue, general and administrative expenses increased to 38.8% in the first six months of 2019 compared to 23.4% in the first six months of 2018.

The increase in general and administrative expenses in both comparison periods was primarily due to increases in headcount and other employee-related expenses, including stock-based compensation, and to a lesser extent, legal, advisory and consulting fees, and public company costs.

Loss on Disposal of Fixed Assets

The loss on disposal of fixed assets for the first six months of 2018 was attributable to the loss on the disposal of fixed assets associated with our facility consolidation. We expect loss on disposal of fixed assets to vary over time.

Other Expense, Net

Other expense, net decreased $0.9 million, or 41.7%, to $1.2 million in the second quarter of 2019 compared to $2.1 million in the second quarter of 2018. Other expense, net decreased $0.6 million, or 20.4%, to $2.0 million in the first six months of 2019 compared to $2.6 million in the first six months of 2018. The decrease in other expense, net was due to debt extinguishment that occurred in the second quarter of 2018, but did not occur in the second quarter of 2019, and an increase in interest expense related to additional borrowings under our credit facilities, partially offset by an increase in interest income due to higher cash balances resulting from proceeds received in November 2018 from our initial public offering and the debt drawdown in March 2019.

Liquidity and Capital Resources

As of June 30, 2019, we had cash, cash equivalents and restricted cash of $47.9 million and an accumulated deficit of $240.2 million. Our primary sources of capital to date have been from an initial public offering of our common stock, private placements of our convertible preferred stock, sales of our Precision Flow 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. As of June 30, 2019, we had $3.2 million of outstanding borrowings and $0.3 million availability under our Revolving Facility. As of June 30, 2019, we had $42.5 million of term debt outstanding under our Credit Agreement and Guaranty.

We believe that our existing cash resources and availability under our 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 flow for the periods indicated:

	Six Months Ended June 30,
	2019			2018
	(in thousands)
Net cash provided by (used in):
Operating activities	$	(18,886	)	$	(17,085	)
Investing activities		(3,724	)		(2,468	)
Financing activities		10,508			(1,322	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(13	)		-
Net decrease in cash, cash equivalents and restricted cash	$	(12,115	)	$	(20,875	)

Operating Activities

The net cash used in operating activities was $18.9 million in the first six months of 2019 and consisted primarily of a net loss of $25.8 million, offset by $4.3 million in non-cash charges and a decrease of $2.6 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 $17.1 million in the first six months of 2018 and consisted primarily of a net loss of $20.1 million and offset by $3.0 million in non-cash charges. Non-cash charges consisted primarily of the loss on debt extinguishment of debt and depreciation and amortization expense.

Investing Activities

Net cash used in investing activities for the first six months of 2019 and 2018 consisted of purchases of property and equipment of $2.1 million and $2.5 million, respectively. In addition, the net cash used in investing activities in the first six months of 2019 included $1.6 million to acquire Solus.

Financing Activities

Net cash provided by financing activities was $10.5 million in the first six months of 2019 and consisted primarily of borrowings of $10.5 million under our credit facilities.

Net cash used in financing activities was $1.3 million in the first six months of 2018 and consisted primarily of borrowings of $20.0 million under our credit facilities offset by $21.3 million in repayment of loans.

Effective January 1, 2019, and further described in Note 2 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q, we consider restricted cash as a component of cash and cash equivalents as presented on our consolidated statements of cash flows. Previously the net change in restricted cash was considered an in vesting activity. Prior period presentations have been reclassified to conform to current year presentation.

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 7.3% at June 30, 2019 and December 31, 2018.

On April 6, 2018, we amended and restated the Revolving Facility (the “Amended Revolving Facility”) to primarily extend the maturity date from September 30, 2018 to September 30, 2020 and increase the revolving line of credit to $7.5 million. On March 22, 2019, we amended and restated the Amended Revolving Facility, which increased the allowable permitted indebtedness under the agreement in connection with our credit card program from $0.3 million to $0.5 million.

The outstanding balance under the Amended Revolving Facility, as amended, was $3.2 million at June 30, 2019 and December 31, 2018, respectively. The remaining amount available to borrow based on eligible receivables was $0.3 million and $1.0 million at June 30, 2019 and December 31, 2018.

Term Debt

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

On April 6, 2018, we entered into the Credit Agreement and Guaranty with Perceptive. The Credit Agreement and Guaranty initially provided for a term 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 the Loan and Security Agreement with Solar in full. A second tranche of $10.0 million was drawn on July 20, 2018. The availability of the final tranche of $12.5 million was dependent upon the Company achieving a minimum of $43.2 million in revenue in 2018. On September 27, 2018, the Credit Agreement and Guaranty was amended (the “Amended Credit Agreement and Guaranty”) to remove this revenue requirement and extend the final draw down date to March 31, 2019. We borrowed $2.0 million from this third tranche on September 27, 2018. On March 22, 2019, we drew the remaining $10.5 million under the Amended Credit Agreement and Guaranty increasing the total outstanding balance to $42.5 million. We also entered into a second amendment to the Amended Credit Agreement and Guaranty increasing the allowable permitted indebtedness in connection with our credit card program from $0.3 million to $0.5 million.

The outstanding principal amount of the Amended Credit Agreement and Guaranty accrues interest at an annual rate equal to the applicable margin of 9.06% plus the greater of (a) one-month LIBOR and (b) 1.75% per year. The term loan is secured by substantially all our personal property including intellectual property. All unpaid and accrued unpaid interest with respect to each such term loan is due and payable in full on the maturity date at April 6, 2023. On the maturity date, in addition to the payment principal and accrued interest, we will be required to make a payment of 0.5% of the total amount borrowed under the Amended Credit Agreement and Guaranty, unless we have not already made such payment in connection with an acceleration or prepayment of borrowings under the term loan. In the event we prepay all or part of this term loan facility prior to the maturity date, we may be subject to additional prepayment fees which decrease as the time to maturity decreases.

We issued warrants to Perceptive to purchase 37,693, 18,846 and 3,769 shares of our Series D convertible preferred stock at an exercise price of $15.92 per share in April 2018, July 2 018 and September 2018, respectively. Pursuant to the initial public offering in November 2018 these warrants converted to common stock warrants at an exercise price of $15.92. Each of the warrants has a term of 10 years. In connection with the draw down o n 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, exercisable at the option of the holder, in whole or in part, and expire in March 202 9.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commitments

Our contractual obligations and commitments as of June 30, 2019 are summarized in the table below:

	Payments Due by Year
(in thousands)	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Long-term debt (1)	$	42,550	$	-	$	-	$	42,550	$	-
Operating leases (2)		9,054		778		3,178		3,278		1,820
Line of credit (1)		3,177		3,177		-		-		-
Total contractual obligations	$	54,781	$	3,955	$	3,178	$	45,828	$	1,820

(1)	The total amount outstanding under our credit facilities was approximately $45.7 million at June 30, 2019.

(2)	We currently lease approximately 84,140 square feet for our headquarters in Exeter, New Hampshire under a lease that expires in January 2026.

Critical Accounting Policies and Estimates

This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe 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. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

For further information regarding our critical accounting policies, see Note 2 “Summary of Significant Accounting Policies” of notes to condensed consolidated financial statements and our critical accounting policies within the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed with the SEC on March 22, 2019. There have been no material changes, other than those listed below.

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

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

Foreign Currency

Our functional currency is the currency of the primary economic environment in which the entity operates, which is the U.S. dollar. For our non-U.S. subsidiary that transacts in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange

rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net loss and are recorded in accumulated o ther comprehensive income, a separate component of stockholders’ equity.

There were no assets or liabilities of foreign subsidiaries that were translated at period-end exchange rates as of December 31, 2018. As of June 30, 2019, our UK entity, Solus, was included in our consolidated results from the date of the acquisition in February 2019, see Note 18 “Business Combinations” to these consolidated financial statements for details of this transaction. The f unctional currency for this entity is its local currency, Pound Sterling (GBP).

Realized foreign currency gains or losses arising from transactions denominated in foreign currencies, are recorded in other (expense) income in the 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.

Intangible Assets

Goodwill

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

We compare the fair value of our reporting units to their carrying values. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of the reporting unit, we would record an impairment loss equal to the difference. As described in Note 17 “Segment Reporting” to these unaudited consolidated financial statements, we operate in one operating segment, and have two reporting units, Vapotherm and Solus.

Internal Controls over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ended December 31, 2019. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The SEC defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be detected or prevented on a timely basis.

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

Recent Accounting Pronouncements

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

JOBS Act

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 QUALI TATIVE DISCLOSURES ABOUT MARKET RISK

As a "smaller reporting company," we are not required to provide the information required by this item.

ITEM 4. CONTROLS AND PROCEDURES

(a)	Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as 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 controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We recognize that any controls system, no matter how well designed and operated, can provide only reasonable assurance of achieving its objectives, and our management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

( b)	Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a discussion of legal matters as of July 26, 2019, please read Part I. Item 1. Note 9 Commitments and Contingencies to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this quarterly report, you should carefully consider the factors discussed in “Risk Factors” in our 2018 Form 10-K, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in our 2018 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Use of Proceeds

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 at a price to the public of $14.00 per share. Upon completion of the initial public offering on November 16, 2018, we received net proceeds of approximately $57.4 million, after deducting the underwriting discount of $4.5 million and offering expenses of $2.5 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

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

ITEM 6. EXHIBITS

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

EXHIBIT INDEX

Exhibit Number		Description

10.1 †		Indefinite Term Employment Contract by and between Vapotherm, Inc. and Gregoire Ramade, dated March 14, 2016

10.2 †		Letter Agreement by and between Vapotherm, Inc. and David Blouin, dated December 8, 2017

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		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

†	Indicates management contract or compensatory plan

SIGNAT URES

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

	VAPOTHERM, INC.

July 29, 2019	By:	/s/ Joseph Army
		Joseph Army
		President and Chief Executive Officer

July 29, 2019	By:	/s/ John Landry
		John Landry
		Vice President and Chief Financial Officer

Exhibit 10.1

CONTRA T DE TRAVAIL A DUREE INDETERMINEE

INDEFINITE TERM EMPLOYMENT CONTRACT


Entre:				English Translation for information purposes only By and between:

La société Vapotherm, Inc. , société de droit américain, dont le siège social est situé 22 Industrial Drive, Suite 1, Exeter, NH 03833, Etats-Unis d’Amérique, immatriculée sous le Numéro SIRET 818 620 650 00015, représentée par Monsieur Joseph F. Army, agissant en qualité de Président Directeur Général de la Société,				Vapotherm, Inc. , an American company, which registered address is at 22 Industrial Drive, Suite I, Exeter, NH 03833, United-States of America, registered under the SIRET number 818 620 650 00015, represented by Mr. Joseph F. Army, acting in the capacity as President, Chief Executive Officer of the Company,
ci-après “la Société” d’une part,				Hereinafter “the Company” of the first part,
et				and
Monsieur Grégoire RAMADE , de nationalité française, né [* * ] à Beyrouth au Liban, immatriculé à la Sécurité Sociale sous le numéro [ * ], demeurant au [ * *], France.				Mr. Grégoire Ramade , a French citizen, born on [* * ], in Beirut, Lebanon, registered in the Social Security under number [ * ], whose address is at [ * *], France.
ci-après “le Salarié” d’autre part,				Hereinafter “the Employee” of the second part,
Collectivement désignées ci-après par les «Parties» et individuellement par la « Partie ».				Collectively designated hereinafter by the “Parties” and individually by the “Party”.
Il a été convenu ce qui suit:				The Parties have agreed as follows:
Article 1 - Engasement-Période d’essai				Article 1 – Engagement-Trial period
Par le présent contrat, la Société engage le Salarié, qui accepte, en qualité de Vice-Président des Ventes Internationales sous réserve des résultats de la visite médicale d’embauche, et pour un contrat à durée indéterminée.				The Company hereby hires the Employee, who accepts, in the quality as Vice President of International Sales, subject to the results of the hiring medical check up, for an indefinite term contract.
Cet emploi relève de la Catégorie Cadre correspondant à la position IIIC, coefficient 240 (24) de la convention collective applicable à la Métallurgie (Ingénieurs et Cadres).				The position is in Category Cadre corresponding to position IIIC, coefficient 240 (24) of the collective bargaining agreement applicable to Metal Industry (Engineers and Cadres).


Le Salarié déclare formellement être libre de tout engagement vis-à-vis de tout autre employeur, et notamment ne pas supporter d’obligation spécifique en matière de non-concurrence.				The Employee hereby formally states that he is free from any undertaking towards another employer, including from any specific non competition duty.
Les relations entre les Parties au présent contrat seront régies par les dispositions légales et réglementaires en vigueur, par celles de la Convention Collective Nationale actuellement appliquée au sein de la Société, qui à titre d’information, est celle de la Métallurgie (Ingénieurs et Cadres), ainsi que par les dispositions du présent contrat.				The relationship between the Parties to this contract shall be governed by applicable legal and regulatory provisions, by the Collective Bargaining Agreement currently applicable within the Company, which for information purposes, is that of the Metal Industry (Engineers and Cadres), and by the provisions of this contract.
Les Parties conviennent expressément d’une période d’essai -réciproque de quatre (4) mois durant laquelle chacune d’elle pourra mettre fin au contrat sans indemnité, en respectant, le cas échéant, le délai de prévenance conventionnel, ou s’il s’avérait être supérieur, le délai de prévenance fixé impérativement par la loi.				The Parties formally agree on a mutual trial period of four (4) months during which each party may terminate the contract without compensation, subject to the notice period provided for in the collective bargaining agreement, or if longer the notice period provided for by law.
Cette période d’essai pourra, le cas échéant, être renouvelée une fois pour une période de deux (2) mois par accord entre les Parties.				This trial period may be renewed once for a period of two (2) months, by agreement between the two Parties.
Article 2 - Durée du contrat				Article 2 - Term of the contract
Le présent contrat est conclu pour une durée indéterminée à compter du 23 Mai 2016 au plus tard				This contract is entered into for an indefinite time period, beginning May 23 2016 at the latest.
Il pourra être rompu à l’initiative de l’une ou l’autre des Parties, sous réserve de respecter les dispositions de l’article L. 1231-1 du Code du travail et, sauf faute grave ou lourde, un délai de préavis déterminé conformément aux stipulations de la Convention Collective applicable.				It may be terminated by either Party, subject to complying with the provisions of article L. 1231-1 of the Labour Code and, except in the event of serious misconduct, a notice period determined in accordance with the stipulations of the applicable Collective Bargaining Agreement.

-2 -


II pourra également être rompu par consentement mutuel conformément à l’article L.1237-11 du Code du Travail.					It may also be terminated by mutual consent, according to article L. 1237-11 of the Labour Code.
Article 3 - Fonctions					Article 3 - Responsibilities
Dans le cadre de ses fonctions de Vice-Président des Ventes Internationales, le Salarié aura les responsabilités qui sont détaillées dans la description de tâches jointe en annexe au présent contrat.					As part of his position as Vice President of International Sales, the Employee will have the duties which are detailed in the job description in appendix to this contract.
Le Salarié rapportera au Président Directeur Général de la Société, à savoir actuellement Monsieur Joseph F. Army.					The Employee will report to the Company’s Chief Executive Officer, who is currently Mr. Joseph F. Army.
La définition des fonctions en annexe n’est pas exhaustive, et il est expressément convenu que les attributions, tâches et rapports hiérarchiques du Salarié pourront être modifiés ou adaptés selon les besoins de la Société.					It is formally agreed that the responsibilities, assignments defined in the appendix, as well as the line of command of the Employee may be changed or adapted based on the Company’s needs.
Le Salarié s’engage à consacrer son temps et tous ses efforts au profit de la Société et devra exécuter ses tâches au mieux de ses capacités, en respectant les politiques et procédures le cas échéant mises en place par la Société, susceptibles de modifications qui seront alors portées à la connaissance du Salarié.					The Employee undertakes to devote his work time and all his efforts for the benefit of the Company and shall perform his duties to the best of his ability, in the full respect of all policies and procedures if applicable set by the Company and subject to changes about which the Employee shall be informed.

Article 4 - Lieu du travail et mobilité géographique					Article 4 - Place of work and geographical mobility
Le Salarié exercera principalement ses fonctions depuis son domicile qui à la date de signature du présent contrat est situé [* * *], France.					The Employee shall perform his duties from his domicile located at the time of signature of the current contract at [* * *], France.
En dehors de ses déplacements, le Salarié sera rattaché à l’adresse de son domicile [* * *]. Le Salarié accepte expressément toute mobilité géographique qui le rattacherait à tout(e) autre bureau ou agence, existant(e) ou à créer, silué(e) à Paris ou dans toute la région Ile-de-France.					When not travelling, the Employee shall be based on his home address located [* * *]. The Employee formally agrees to any geographical mobility, relocating him to any other office, or agency, whether present or future, located in Paris or in the region of Ile de France.
Il est expressément entendu qu’un tel changement d’affectation géographique ou le					It is specifically agreed that such a change in the geographical assignment or the fact for the Employee to no longer work from his domicile

-3 -

fait pour le Salarié de ne plus travailler depuis son domicile ne serait pas considéré comme une modification du contrat de travail.							shall not be considered as a change of the employment contract.
Par ailleurs, il est expressément convenu et accepté que le Salarié sera amené à effectuer, au titre des fonctions qui lui sont confiées par la Société, de très fréquents déplacements tant en France qu’à l’étranger, notamment en Union Européenne, dont Royaume-Uni, aux Etats-Unis d’Amérique, au Brésil et au Japon.							In addition it is expressly agreed and accepted that the Employee will be required, in the course of his duties, to perform very frequent travels in France as well as abroad, notably within European Union, including United-Kingdom, United-States of America, Brazil and Japan.
Les conditions des déplacements du Salarié se feront conformément à la politique de déplacements professionnels en vigueur dans la Société au moment des déplacements et dans le respect de la réglementation française en vigueur en la matière.							The conditions in which the Employee will travel will be in accordance with the Company’s most recent Travel Policy at the time of the travel and accordingly to the applicable French regulations on this matter.

Article 5 - Durée et organisation du travail							Article 5 - Working time organization
5.1 Compte tenu de la grande indépendance dont bénéficiera le Salarié dans l’organisation de son emploi du temps, de son niveau de rémunération qui se situe dans les plus élevés des systèmes de rémunération pratiqués dans l’entreprise, et dans la mesure où il est habilité à prendre des décisions de façon largement autonome, le Salarié sera considéré comme cadre dirigeant au regard de l’article L. 3111-2 du Code du travail, et ne sera donc pas soumis à la législation sur la durée du travail.							5.1 Because of the great independence that the Employee will have in organising his working time, his level of compensation, one of the highest in the company’s compensation system, and to the extent he is authorised to make decisions in a broadly autonomous manner, the Employee shall be considered as an executive manager with regards to article L.3111-2 of the Labour Code, and shall therefore not be subjected to the working time regulations.
5.2 Le Salarié pourra être joint par téléphone à son domicile entre 9 heures et 19 heures. Ces plages horaires permettront à la Société de joindre le Salarié dans le cadre de l’exécution de ses fonctions.							5.2 The Employee may be contacted by phone at his home between 09:00 a.m. 07:00 p.m. These time slots will enable the Company to call the Employee in the framework of the fulfillment of his duties.

-4 -


Article 6 - Rémunération				Article 6 - Remuneration
6.1 Salaire fixe de base et indemnité de sujétion				6.1 Fixed annual remuneration and inconvenience allowance
En contrepartie de l’exécution de ses fonctions, le Salarié perceira une rémunération forfaitaire annuelle d’un montant brut de cent-quatre-vingt-quînze-mille euros (195.000,00€), incluant l’indemnité de sujétion liée à l’utilisation à titre professionnel d’une partie de son domicile, d’un montant annuel brut de sept-mille-deux-cents euros (7.200,00€).				As consideration for the performance of his duties, the Employee shall receive a fixed annual compensation in a gross amount of one hundred ninety five thousand Euros (€195,000.00), including the inconvenience allowance related to the use for professional purposes of a part of his domicile, which gross yearly amount is seven thousand two hundred Euros (€7,200.00).
Cette rémunération sera versée par douzième chaque mois.				The salary shall be paid by one twelfth each month.
Il est d’ores et déjà convenu que si, à la demande de la Société, le lieu de travail du Salarié ne devait plus être son domicile personnel, le montant de l’indemnité de sujétion serait réintégré dans son salaire de base.				It is already agreed, that in the event where the Company asks the Employee to no longer have his place of work at his private home, the inconvenience allowance will be integrated into his base salary.
6.2 Rémunération variable				6.2 Variable compensation
Le Salarié pourra par ailleurs recevoir une rémunération variable pour chaque année travaillée dans te cadre du présent contrat. Le montant et l’attribution de cette rémunération variable sont subordonnés à l’atteinte d’objectifs par la Société et/ou à l’atteinte d’objectifs individuels par le Salarié qui lui seront communiqués au moins une fois par an et en tout état de cause dans un délai raisonnable préalablement à toute modification. Les conditions, ainsi que les modalités de calcul et de paiement de cette rémunération variable sont détaillées dans le document « Plan de Rémunération Variable, Vice-Président Ventes Internationales ».				The Employee may also receive a variable remuneration for each year worked in the framework of this contract. The amount and granting of this variable remuneration will be contingent upon achievement of goals by the Company and/or individual goals by the Employee which will be communicated to him at least once a year and in any case within a reasonable time prior to any change. The conditions and the method of calculation and payment of this bonus are detailed in the document “VP Int’l Sales Commission Plan”.
Le Plan de Rémunération Variable sera révisé annuellement par la Société et fera également l’objet d’une discussion entre le Salarié et la				The Commission Plan will be reviewed on an annual basis by the Company and will also be discussed between the Employee and the

-5 -

Société, qui le lui communiquera dans sa version finale en temps opportun.				Company, which will communicate it to him in its final version in a timely manner.
Le Plan de Rémunération Variable pour l’année 2016 sera communiqué au Salarié dans les meilleurs délais et avant sa date d’embauche. Dans le cadre du présent contrat, les Parties conviennent des conditions essentielles dudit Plan qui seront les suivantes:				The Commissions Plan for the year 2016 will be communicated as soon as possible to the Employee and before his hiring date. In the framework of this contract, the Parties agree to essential conditions of the said Plan which will be as follows:
– Le montant brut de rémunération variable qui pourra être versé au Salarié pourrait atteindre soixante-quinze-mille euros (75.000,00€), à 100% des objectifs atteints et pour l’année complète travaillée;				– The gross amount of variable remuneration that may be paid to the Employee would be equal to seventy five thousand Euros (€75,000.00) at 100% targets achieved and for full year worked;
– Si le Salarié dépassait les objectifs individuels fixes au titre de l’année de référence, le Salarié percevrait un montant de rémunération variable supplémentaire conformément aux conditions et modalités de calcul détaillées dans ledit Plan de Rémunération Variable;				– If the Employee would go beyond the set individual objectives for the reference year, the Employee would earn additional commission in accordance with the conditions and method of calculations as detailed in the said Commission Plan;
– En cas d’année incomplète, ce montant sera proratisé;				– In case of incomplete year, this amount will be prorated;
– Le montant de rémunération variable sera payé trimestriellement conformément aux modalités de paiement déterminées dans le Plan de Rémunération Variable.				– The amount of commissions will be paid on a quarterly basis in accordance with the conditions of payment as determined in the Commission Plan.
6.3 Avances sur rémunération variable garantie				6.3 Advances on guaranteed commissions
A titre exceptionnel, la Société s’engage à verser au Salarié une avance sur rémunération variable garantie durant les deux premiers trimestres de son emploi au sein de la Société, d’un montant trimestriel bmt de dix-huit-mille- sept-cent-cinquante euros (18.750,00€). Le paiement de l’avance sur rémunération variable garantie sera effectué au terme de chaque mois durant les deux premiers				On an exceptional basis, the Company commits to pay to the Employee an advance on guaranteed variable remuneration during the first two quarters of his employment within the Company, of a gross quarterly amount of eighteen thousand seven hundred fifty Euros (€18,750.00). The payment of the advance on guaranteed variable remuneration will be made at the end of each month during the first two

-6 -


trimestres de l’emploi du Salarié au sein de la Société, soit un paiement mensuel brut de six-mille-deux-cent-cinquante euros (6.250,00€).				quarters of his employment within the Company that is a gross monthly payment of six thousand two hundred fifty Euros (€6,250.00).
Toute rémunération variable à laquelle le Salarié pourrait prétendre pendant sa première année d’activité, au titre de l’atteinte de ses objectifs et dans les conditions exposées dans le « Plan de Rémunération Variable, Vice-Président Ventes Internationales », sera imputée en premier lieu sur ces avances sur rémunération variable garantie et le Salarié recevra en sus des avances, seulement la partie de rémunération variable excédant le montant des avances versées.				Any variable remuneration which could claim the Employee during his first year of employment under his goals achievement and conditions set out in the “VP Int’l Sales Commission Plan”, will be charged firstly on these advances on guaranteed commissions and the Employee will receive on top of advances only the part of the variable remuneration exceeding the amount of advances paid.

Artide 7 - Frais professionnels				Artide 7 - Professional Expenses

7.1 Les frais professionnels raisonnables engagés à juste titre par le Salarié dans le cadre de l’exercice de ses fonctions en vertu du présent contrat et dans le respect de la politique de la Société en matière de frais professionnels en vigueur au moment où le Salarié aura exposé lesdits frais professionnels, lui seront remboursés dans la limite prévue par ladite politique. Ce remboursement s’effectuera à la condition que le Salarié présente les factures, reçus ou documents justificatifs des dépenses réclamées.				7.1 The Employee shall be reimbursed all reasonable and expenses properly incurred in the discharge of the Employee’s duties in accordance with this contract and in compliance with the Company’s policy regarding professional expenses as applicable at the time where professional expenses will have been incurred by the Employee, will be reimbursed to him within the limit of the said policy. As a pre-condition of payment, the Employee will be expected to produce vouchers, receipts, or other evidence of the expenses in respect of which the Employee claims reimbursement.

7.2 Le Salarié devra utiliser son véhicule personnel pour des déplacements professionnels. La Société lui versera une indemnité véhicule d’un montant mensuel brut de mille- sept-cents euros (1.700,00€), afin de le compenser pour tous les frais occasionnés par l’utilisation de son véhicule à titre professionnel.				7.2 The Employee will be required to use his personal car for professional trips. The Company will pay the Employee a gross monthly car allowance of one thousand seven hundred Euros (€1,700.00) in order to compensate the Employee for all expenses related to the use of his car during the performance of his duties.

Cette allocation sera intégralement soumise à charges sociales.				This allowance will be subject to social contributions.

-7 -


Le Salarié doit être possesseur des documents nécessaires à la conduite du véhicule utilisé, et être régulièrement couvert par une assurance comportant obligatoirement une clause garantissant l’employeur contre le recours de la compagnie d’assurances ou des tiers.				The Employee must be in possession of the necessary documents to be able to drive the said vehicle and be properly covered by an insurance policy, which must include a clause guaranteeing the employer against any recourse by the insurance company or by third parties.

Le Salarié devra communiquer à la Société une copie de son permis de conduire et de l’assurance du véhicule. Le Salarié s’engage à informer immédiatement la Société de toute modification ultérieure dans la validité de ces documents.				The Employee must provide to the Company a copy of his driver’s license and car insurance. The Employee commits to inform the Company immediately of any change in the validity of these documents.

7.3 Les frais engendrés par l’utilisation de son domicile à titre professionnel (chauffage, électricité, internet) seront pris en charge forfaitairement par la Société par le versement d’une indemnité forfaitaire mensuelle d’un montant brut de cent-soixante-quinze euros (175,00 €) au Salarié. Cette indemnité forfaitaire sera soumise à cotisations sociales.				7.3 Expenses incurred by the use of a home office (heating, electricity, internet) will be supported on a flat-rate basis by the Company by payment of a gross monthly lump sum of one hundred seventy five euros (€175.00) to the Employee. This lump sum will be subject to social contributions.

Le Salarié a été informé de ce qu’il devra prévenir sa compagnie d’assurance de l’utilisation de son logement à titre professionnel. Dans le cas où le contrat d’assurance devrait être modifié, le Salarié transmettra à la Société le contrat d’assurance en vigueur avant l’utilisation du domicile à titre professionnel et le contrat d’assurance éventuellement modifié. Dans le cas où le coût de l’assurance augmenterait suite à la déclaration de l’activité professionnelle auprès de la compagnie d’assurance, la Société remboursera le différentiel au Salarié.				The Employee has been informed that he will have to tell to his insurance company that he will use his accommodation for professional purposes. If the insurance contract has to be modified, the Employee will communicate to the Company the effective insurance contract before the use of his accommodation for professional purposes and the insurance contract possibly modified. If the insurance cost would increase following the professional activity communication to the insurance company, the Company would reimburse the differential to the Employee.

7.4 Le Salarié souscrira un abonnement téléphonique dédié à l’utilisation du téléphone portable mis à sa disposition par la Société dans le cadre de l’exécution de ses fonctions. La Société lui remboursera le montant de l’abonnement sur présentation d’une note de frais accompagnée de la facture mensuelle correspondante. Le montant versé au Salarié au titre du remboursement de l’abonnement				7.4 The Employee will subscribe a phone subscription dedicated to the use of the cell phone put at his disposal by the Company for the performance of his duties. The Company will reimburse to him the amount of the subscription upon presentation of an expense report with the corresponding monthly bill. The amount paid to the Employee for the reimbursement of the phone subscription will

-8 -


téléphonique sera exonéré de charges sociales conformément à la réglementation en vigueur en la matière, soit actuellement à hauteur de 50% du montant remboursé, à moins que le Salarié soit en mesure de démontrer que l’intégralité des appels téléphoniques est de nature professionnelle. Dans ce cas, conformément à la réglementation applicable à la date de signature du présent contrat de travail, 100% du montant remboursé serait exonéré de charges sociales. A cet effet, le Salarié devra être en mesure de communiquer à la Société la liste mensuelle des appels téléphoniques et d’identifier chaque appel comme se rapportant à l’exécution de ses fonctions au titre du présent contrat de iravail.				be exempted from social contributions in accordance with the applicable regulation in this domain that is currently up to 50% of the reimbursed amount, except if the Employee is able to prove that all phone calls are work-related. In this case, in accordance with the applicable regulation at the time of signature of this employment contract, 100% of the reimbursed amount would be exempted from social contributions. To this effect, the Employee shall be able to communicate to the Company the monthly list of phone calls and identify each call as being related to the performance of his duties under this employment contract.

Article 8 - Equipement				Article 8 - Equipment

8.1 Le Salarié bénéficiera, à des fins exclusivement professionnelles, de l’équipement nécessaire au bon accomplissement de ses fonctions:				8.1 The Employee will be provided, only for professional- related purposes, with the necessary equipment for the proper performance of his functions:

– un ordinateur portable; – un Ipad; – un téléphone portable.				– a laptop computer; – an Ipad; – a cell phone.

Tous ces équipements demeurent la propriété de la Société, y compris le téléphone portable que le Salarié aura acheté et dont la Société lui aura remboursé le coût d’achat sur présentation de la facture correspondante. La Société qui aura remboursé le prix d’achat du téléphone portable au Salarié, en deviendra propriétaire, ce que le Salarié reconnaît et accepte expressément par la signature du présent contrat de travail.				The above mentioned equipment will remain in the property of the Company, including the cell phone that the Employee will have bought and of which the Company will have reimbursed to him the purchase cost upon presentation of corresponding invoice. The Company which will have reimbursed the purchase cost of the cell phone to the Employee will become its owner that the Employee expressly acknowledges and agrees by signing this employment contract.
Le Salarié n’est pas autorisé à utiliser ces équipements à des fins personnelles, sauf en cas d’urgence.				The Employee is not authorized to use such equipment for personal purposes except in case of emergency,

-9 -


Le Salarié s’engage à maintenir ces équipements en bon état de marche et d’entretien.				The Employee undertakes to maintain the equipment in good working order and state of repair.
L’installation, la maintenance et l’assurance du matériel professionnel mis à la disposition du Salarié seront pris en charge par la Société.				The installation, the maintenance and the insurance of the professional equipment provided to the Employee will be supported by the Company.

8.2 Le Salarié déclare que son logement est compatible avec une utilisation à titre professionnelle dans la mesure où il existe un espace réservé au trav ail.				8.2 The Employee declares that his housing is compatible with a use for professional purposes in that there is a space dedicated to work.

Le Salarié déclare également la conformité des installations électriques avec la réglementation en vigueur.				The Employee also states the conformity of electrical equipment with the regulations in force.

8.3 La Société pourra être amenée à contrôler, dans le respect de la législation applicable et dans le but d’assurer la protection de son système informatique, l’utilisation faite par le Salarié des équipements et outils informatiques et de communication mis à sa disposition par la Société dans le cadre de l’exécution de ses fonctions.				8.3 The Company may have to control in compliance with applicable legislation and in order to ensure the protection of its IT system the use made by the Employee of IT and communication equipment and tools put at his disposal by the Company in the framework of the performance of his duties.

Article 9 - Obligations professionnelles 9.1 Le Salarié s’interdit, pendant la durée du présent contrat, de s’intéresser, directement ou indirectement, de quelque manière ou à quelque titre que ce soit, à toute activité qui serait susceptible de concurrencer les activités de la Société.				Article 9 - Professional duties 9.1 The Employee undertakes, during the term of this Contract, not to take any interest, directly or indirectly, by whatever means or capacity, in any professional activity, which is likely to compete with those of the Company.

9.2 Les cadeaux et autres avantages reçus de la part de tiers, en particulier des partenaires d’affaires de la Société, qui pourraient se rapporter aux fonctions exercées par le Salarié au sein de la Société, devront être immédiatement refusés par le Salarié ou remis à la Société.				9.2 Gifts and other benefits from third parties, especially from business partners of Company, which might relate to Employee’s services for the Company, shall be immediately rejected by Employee or be handed over to Company.

9.3 A la cessation de son emploi, ou sur toute demande de la Société, le Salarié restituera tous les biens qui appartiennent à la				9.3 Upon termination of his contract, or on the Company’s request at any time, the Employee shall return all the Company’s

-10 -



Société et, notamment, tout document original, copie et reproduction totale ou partielle, de tous les documents, données et informations, sous quelque forme que ce soit, concernant la situation économique de la Société et de son groupe, ses actions marketing et de publicité, ses marques, inventions, secrets commerciaux, ou les activités de recherche, développement, création, présentes el à venir de la Société.				property including but not limited to any original document, copy and full or partial reproduction, of any documents, data and information, in any form, regarding the Company’s economic situation and that of its group, its marketing campaigns and its advertising, its brands, inventions, business secrets, or its research, development, creation work, whether present or future.

Article 10- Confidentialité - Non divulgation Le Salarié reconnaît que son engagement par’ la Société établira entre eux une relation de confiance, et que l’utilisation ou la divulgation non autorisée de renseignements confidentiels concernant la Société, le groupe Vapotlierm, ou des sociétés affiliées existantes ou à créer, relatifs aux affaires de celles-ci, à leurs clients, leurs fournisseurs, leurs produits, ou à leurs méthodes de travail pourrait porter préjudice à la Société.				Article 10- Confidentiality -Non disclosure The Employee acknowledges that his engagement by the Company will establish a relationship of trust and that the unauthorized use or disclosure of confidential information about the Company, the group Vapotherm, or existing or future affiliated companies, relating to the business thereof, that of their clients, suppliers, products or work methods may be harmful to the Company.

Le Salarié s’engage à conserver strictement confidentiel des documents, données et informations, sous quelque forme que ce soit, notamment ceux concernant:				The Employee agrees to keep strictly confidential documents, data and information in any form including those relating:

– la situation économique et financière de la Société et de son groupe, ses actions de vente, marketing et de publicité, ses secrets commerciaux,				– To the economic and financial position of the Company and its group, its sales, marketing and advertising actions, its business secrets,

– ses processus confidentiels, techniques, secrets de fabrique, savoir faire, brevets, marques, méthodes, systèmes, capacités opérationnelles, logiciels, matériel informatique,				– Its confidential, technical processes, its manufacturing secrets, know how, patents, brands, methods, systems, operational capabilities, software, hardware,

– ses activités de recherche, développement, création, création de logiciel, ses inventions, appareils, découvertes, concepts, idées, formules, ainsi que toute amélioration ou modification de ceux-ci,				– Its research and development work, its creation work, software development, its inventions, machines, discoveries, concepts, ideas, formulas, as well as any improvement thereof or change therein,

-11 -



– ses listes de clients présents et à venir de la Société, du Groupe et de ses sociétés affiliées.				– Client lists, whether present or future, of the Company, the Group and its affiliated companies.

Le Salarié s’engage formellement à ne pas utiliser ni divulguer à qui que ce soit, de tels documents, données ou informations, en dehors de ce qui lui est strictement nécessaire pour l’exercice de ses fonctions et dans ce cas s’engage à respecter les règles en matière de sécurité et confidentialité en vigueur au sein de la Société au moment de l’utilisation ou de la divulgation de tels documents, données ou informations.				The Employee formally agrees not to use or disclose to anyone any such documents, data or information, except as absolutely required for the performance of his duties and in this case commits to comply with the policies in the domain of security and confidentiality applicable within the Company at the time of use or disclose of such documents, data or information.

Le Salarié s’engage à respecter scrupuleusement cette obligation de secret, de confidentialité et de discrétion pendant toute la durée de son engagement, et dix ans après la rupture du présent contrat, quelle qu’en soit la cause.				The Employee agrees to comply with this secrecy, confidentiality and discretion clause throughout the term of his contract and ten years after the termination thereof, whatever the cause thereof.

Le Salarié s’engage de plus fort à ne pas utiliser ces connaissances à son profit, et se déclare à cet effet lié par le secret professionnel le plus absolu.				The Employee agrees additionally not to use such knowledge for his own profit, and states that he is bound for that purpose by utmost secrecy.

Le Salarié a pris connaissance à la signature du présent contrat, des pénalités encourues, notamment aux termes de l’article L. 1227-1 du Code du travail.				The Employee is aware upon executing this contract, of penalties incurred, including under article L. 1227-1 of the Labour Code.

Article 11 - Inventions 11.1 Inventions de mission Dans l’hypothèse où les fonctions du Salarié consisteraient en tout ou partie en la réalisation d’inventions, qu’elles soient brevetables ou non, elles appartiendront à la Société dès lors qu’elles auront été réalisées par lui en exécution du présent contrat, conformément à l’article L. 611-7-1° du Code de la propriété intellectuelle français. La Société sera en conséquence seule habilitée le cas échéant à en assurer la protection ou la défense.				Article 11 - Inventions 11.1 Assignment Inventions Should the employment functions of the Employee comprise an inventive assignment, in whole or part, whether patentable or not, the inventions resulting there from shall be the exclusive property of the Company if they have been made within the performance of this contract, in accordance with the provisions of article L. 611-7-1° of the French Intellectual Property Code. The Company shall solely be

-12 -



				entitled if need be to protect and defend these inventions.
11.2 Inventions hors mission attnbuables				11.2 Non-assignment but Attributable Inventions

Conformément à l’article L. 611-7-2° du Code de la propriété intellectuelle, la Société aura le droit de se faire attribuer la propriété ou la jouissance, en tout ou en partie, des droits attachés aux brevets protégeant tes inventions hors mission qui seront réalisées par le Salarié seul ou avec l’aide de tiers, pendant la durée de ses fonctions, soit dans le cours de l’exécution de ses fonctions, soit dans le domaine de l’activité de la Société qui est celui du développement, de la fabrication, de la commercialisation et de la distribution de technologie de dispositifs médicaux, soit par la connaissance ou l’utilisation des techniques ou de moyens spécifiques à la Société ou de données procurées par elle.				In accordance with the provisions of article L. 611-7-2° of the French Intellectual Property Code, the Company shall be entitled to be assigned the ownership, in whole or part of all rights relating to the patents covering non-assignment inventions, which have been made by the Employee, alone or with a third party’s assistance, during performance of this contract, either in the course of his duties or within the field of the Company’s activities, which is the development, manufacture, commercialization, and distribution of medical device technology, or by knowledge or use of the Company’s technologies or specific means or of data provided by the Company.

11.3 Inventions hors mission non attribuables				11.3 Non-assignment and non-attributable Inventions

Pour le cas où le Salarié réaliserait une invention ne relevant pas de l’une des deux catégories qui précèdent et sans préjudice de l’obligation de déclaration visée ci-après, les Parties se rencontreront afin d’envisager les conditions de cession de ladite invention. L’article 11.5 ne trouve pas application dans ce cadre.				In the event the Employee would make an invention which would not fall within one of the two aforesaid categories and without prejudice to the obligation to declare said invention as provided hereinafter, the Parties shall meet to consider the condition of assignment of said invention to the Company. Section 11.5 does not apply in this specific case.

11.4 Classement des Inventions				11.4 Classification of Inventions

Le Salarié s’engage, conformément à l’article R. 611-1, Ier alinéa du Code de la propriété intellectuelle à déclarer immédiatement à la Société, par lettre recommandée avec accusé de réception, toutes les inventions dont il sera l’auteur ou le coauteur pendant la période d’exécution du présent contrat, qu’il s’agisse d’inventions de mission ou hors mission,				According to the provisions of article R. 611-1-1° of the French Intellectual Property Code, the Employee shall declare immediately to the Company, by registered letter with acknowledgement of receipt, of all inventions made by him or as a co-invenlor during performance of this contract, whether assignment or non-assignment inventions,

-13 -


désignées par lui comme étant atlribuables ou non attribuables.		designated by him as being attributable or not attributable.
Cette déclaration devra contenir toutes les informations nécessaires en sa possession pour permettre à la Société d’apprécier le classement de l’invention, conformément à l’article R. 611-2 dudit Code.		This declaration shall comprise all necessary information he holds for the purposes of assisting the Company in the classification of the invention, in accordance with the provisions of article R. 611-2 of the French Intellectual Property Code.

Dans tous les cas, la déclaration d’invention du Salarié devra contenir les éléments suivants:		In any cases, the declaration of invention of the Employee will have to contain the following information:
– Le classement de l’invention tel qu’il apparaît au Salarié; – L’objet de l’invention ainsi que les applications envisagées; – Les circonstances de sa réalisation, par exemple: toutes instructions ou directives reçues, expériences ou travaux de l’entreprise utilisés, collaborations obtenues, etc.		– The category of the invention according to the Employee: – The subject of the invention and the contemplated applications; – The circumstances of its creation, for example: any instructions and directives received, use of experimentations or works of the Company, collaboration obtained…;

De plus, lorsque le classement implique le droit d’attribution prévu par la loi (l’article L. 611-7-2° précité relatif aux « inventions hors mission attribuables »), le Salarié s’engage à donner à la Société une description complète de l’invention en cause dans sa déclaration d’invention exposant:		In addition, should the classification implies the attribution right provided for by law (as defined in the aforesaid article L. 611-7-2° relating to “Non-assignment but Attributable Inventions”), the Employee shall provide the Company with a complete description of the invention concerned in his declaration of invention detailing:
– Le problème posé compte tenu de l’état de la technique, à savoir l’ensemble des informations accessibles antérieurement au public, sous quelque forme que ce soit;	– The problem raised taking into account the state of the prior art, that is to say all information, in any form, previously available to the public;
– La solution apportée au problème;	– The solution found to such problem;
– Au moins un exemple de réalisation de l’invention, accompagné éventuellement de dessins.	– At least one copy of the creation together with drawings if possible.

-14 -


Dans tous les cas, le Salarié s’engage à effectuer toutes les formalités requises et à communiquer toutes les informations nécessaires afin de permettre à la Société, le cas échéant, de déposer les demandes de brevet couvrant les inventions concernées au nom de la Société.				In all cases, the Employee commits to perform all required formalities and to communicate all necessary information in order to allow the Company, as the case may be, to file the patent applications covering concerned inventions in the name of the Company.

Les deux Parties s’engagent à ne pas divulguer l’invention tant qu’il n’aura pas été statué définitivement sur son classement ou selon le cas tant que la demande de brevet n’aura pas été déposée ou que l’autorisation de divulgation n’aura pas été accordée par la Défense nationale.				The Parties shall not disclose the invention until it has been definitively decided of the classification of the invention or as the case may be until the patent application has been filed or that the disclosure authorization has been granted by the National Defense.

11.5 Complément de rémunération				11.5 Extra compensation

Il est rappelé que la rémunération supplémentaire au titre des inventions est due uniquement aux salariés qui font partie de l’effectif de ¡’entreprise à la date de conception de l’invention. Il est entendu que sauf stipulations spécifiques au sein de la déclaration de classement de l’invention, en cas de pluralité d’inventeurs pour une même invention, leur contribution sera considérée comme égalitaire.				As a reminder, additional remuneration in respect of inventions is due only to employees part of the Company at the time of creation of the invention, Except otherwise stated in the invention classification declaration form and in case of multiplicity of inventors for the same invention, their contribution is deemed equal.

La rétribution du salarié sera déterminée selon les dispositions de la convention collective applicable.				Additional remuneration will be determined according to the dispositions of the applicable collective bargaining agreement.

11.6 Inventions réalisées antérieurement au contrat de travail				11.6 Inventions made previously to the employment contract

En outre, le Salarié fournira à la Société une liste décrivant toutes les inventions lui appartenant et réalisées par lui précédemment au présent contrat de travail qu’il souhaite soustraire à celte clause. A défaut d’une telle liste, le Salarié reconnaît qu’il ne possède à ce jour aucun droit sur une quelconque invention.				Furthermore, the Employee will provide the Company with a list describing all inventions belonging to him and made by him prior to his employment with the Company that he wishes to have excluded from this clause. If no such list is communicated, the Employee acknowledges that he is entitled to no invention rights to date.

-15 -


Article 12 - Droits d’Auteur				Article 12- Copyrights

12.1 Sans préjudice des dispositions des articles L. 113-2 et L. 113-5 du Code de la propriété intellectuelle français relatives aux oeuvres collectives et des dispositions de l’article 113-9 du même Code afférentes aux logiciels et à leur documentation, le Salarié cède, de manière automatique et à titre exclusif, à la Société tous ses droits d’auteur sur les créations réalisées par lui en exécution du présent contrat (ci-après « les Créations »).				12.1 Notwithstanding the provisions of article L. 113-2 and L. 113-5 of the French Intellectual Property Code relating to collective creations (‘‘oeuvres collectives”) and those of article 113-9 of the aforementioned Code regarding software and their documentation, the Employee undertakes to assign automatically and on an exclusive basis to the Company all intellectual property rights relating to the creations made by him within the framework of this contract (hereinafter “the Creations”).

12.2 Tous les droits de propriété intellectuelle qui résulteraient de l’exécution du présent contrat ou trouveraient leur source au cours de celle-ci, sont la propriété exclusive de la Société qui sera seule habilitée à en assurer, le cas échéant, la protection ou la défense.				12.2 All intellectual property rights arising out from or during performance of this contract shall be the exclusive property of Company which shall be solely entitled to protect and defend the intellectual property rights on the Creations.

Les projets, textes, ébauches, illustrations, dessins, supports des Créations, sont cédés à la Société en même temps que lui seront transmis les droits de propriété intellectuelle dont ces documents sont les supports.				Thus, all projects, texts, drawings and all elements as well as any media thereof of the Creations shall be assigned to the Company along with all intellectual property rights.

Le Salarié s’engage à transmettre, à première demande de la Société, l’ensemble des documents en sa possession.				The Employee shall deliver, upon first request of the Company, all the documents he holds.

Le Salarié s’engage à ne pas reproduire ou représenter et plus généralement utiliser, directement ou indirectement, les Créations, en tout ou en partie, ou des copies ou oeuvres dérivées des Créations, sans l’accord préalable et écrit de la Société. A ce titre, le Salarié s’engage à ne pas contester, de quelque manière que ce soit et à quelque titre que ce soit, les droits précités.				The Employee shall not be entitled to reproduce, directly or indirectly, the Creations, or to use the Creations or copies or derivative creations thereof, in whole or part, without prior and written consent of the Company, In this respect, the Employee undertakes not to carry out any steps whatsoever which might challenge the aforementioned rights.

12.3 La Société aura ainsi un droit exclusif d’exploitation, d’adaptation et de traduction				12.3 The Company shall therefore have an exclusive right to exploit, adapt, use and

-16 -


des Créations, sans contestation possible par le Salarié.				translate the Creations, the Employee being not entitled to challenge such rights,
La présente cession est consentie sur une base exclusive, pour le monde entier et pour la durée maximale légale de protection des droits d’auteur et en contrepartie du montant forfaitaire inclus dans son salaire.				The foregoing assignment is made on an exclusive basis, worldwide, and for the maximum legal duration provided for the protection of intellectual property rights and in consideration of the fixed amount included in his salary.

Cette cession a pour objet:				The assignment includes:

➢ le droit de reproduction; droit de reproduire tout ou partie des Créations sur tout support présent ou à venir, notamment papier, numérique, informatique ou en ligne et ce, pour toute destination ou exploitation, notamment à. titre d’information ou commercial,				➢ the right of reproduction: the right to reproduce the Creations, in whole or part, on any existing or future media notably on paper, digital, computer or on line, for any destination or operation notably for information or commercial purposes;

➢ le droit d’adaptation: le droit d’adapter tout ou partie des Créations sous toutes formes graphiques et/ou sous tout environnement, notamment en ligne et ce, pour toute destination ou exploitation, notamment à titre d’information ou commercial,				➢ the right of adaptation: the right to adapt the Creations, in whole or part, under any graphic form and/or environment, notably on line, for any destination or operation notably for information or commercial purposes;

➢ le droit de traduction: le droit de traduire tout ou partie des Créations en toute langue et ce, pour toute destination ou exploitation, notamment à titre d’information ou commercial,				➢ the right of translation: the right to translate the Creations, in whole or part, into any language, for any destination or operation notably for information or commercial purposes;

➢ le droit de représentation: le droit de représenter tout ou partie des Créations par tout support de communication présent ou à venir, notamment papier, informatique, en ligne, par voie hertzienne, câble ou satellite et ce, pour toute destination ou exploitation, notamment à titre d’information ou commercial.				➢ the right to represent the Creations, in whole or part, by any existing or future means of communication, notably on paper, digital, on line, hertzian, cable or satellite media, for any destination or operation notably for information or commercial purposes.

-17 -


Article 13 - Non-sollicitation				Article 13 - Non-solicitation

Le Salarié s’interdit pendant la durée de son emploi au sein de la Société et pendant une période de douze mois à compter de la date de son départ effectif de la Société, de solliciter tout salarié de la Société, en vue de l’embaucher ou de le faire embaucher par un tiers avec lequel il est en relation d’affaires ou d’inciter tout salarié de la Société à accepter un autre emploi ou à quitter la Société.				The Employee shall refrain, during the term of his work within the Company and for a period of twelve months as from the date of his leaving the Company from soliciting any employee of the Company, in order to hire him or have him hire by any third party with which he is in a business relationship, or encouraging any employee of the Company to accept another position or to leave the Company.

Article 14 - Non-concurrence				Article 14 - Non-competition

Compte tenu de la nature de ses fonctions, le Salarié s’interdit:				Considering the nature of his duties, the Employee shall refrain:

– d’entrer au service d’une entreprise concevant, fabriquant ou commercialisant les produits et services pouvant concurrencer ceux de la Société;				– From working for another company that makes or markets products and services likely to compete with the Company’s;

– de s’intéresser directement ou indirectement et sous quelque forme que ce soit à une entreprise de cet ordre				– From taking any direct or indirect interest in any form in any such company.

Cette interdiction s’appliquera en cas de cessation du présent contrat, quelle qu’en soit la cause. Elle est limitée à une période de douze (12) mois à compter du jour de la cessation effective du contrat. Elle couvre les territoires de la France Métropolitaine et de l’Allemagne				This clause shall also apply after termination of this contract, whatever the reason therefor. It shall be limited to a period of twelve (12) months as from the day of the effective termination of the contract. It shall apply to the territories of Continental France and Germany.

En contrepartie de l’obligation de non-concurrence prévue ci-dessus, et conformément aux dispositions de la convention collective applicable, le Salarié percevra après la cessation effective de son contrat et pendant toute la durée de cette interdiction, une indemnité mensuelle égale à cinq dixièmes de la moyenne mensuelle des appointements ainsi que des avantages et gratifications contractuels dont le Salarié a bénéficié au cours de ses douze derniers mois de présence dans la Société. En cas de				In consideration for the non competition duty specified above, and in accordance with the dispositions of the applicable collective bargaining agreement, the Employee shall receive after the effective termination of his contract and throughout the whole duration of such non competition, a monthly indemnity equal to five tenths of the average of the monthly salary and contractual benefits and bonuses which the Employee will have received during the twelve last months of presence in the Company. In the event of

-18 -


licenciement du Salarié, cette indemnité sera portée à six dixièmes de celte moyenne tant que le Salarié n’a pas retrouvé un nouvel emploi et dans la limite de la durée de non concurrence.				termination of the contract by the Company, this indemnity will be equal to six tenths of this average for as long as the Employee is without employment and limited to the duration of the non competition duty.
La Société pourra cependant libérer le Salarié de l’interdiction de concurrence, et par là même se dégager du paiement de l’indemnité prévue en contrepartie, soit à tout moment au cours de l’exécution du contrat, soit à l’occasion de sa cessation.				The Company may however exempt the Employee from the non competition clause and thereby exempt itself from the payment of the specified indemnity in exchange thereof, either at any time during the performance of the contract or upon the termination thereof.
Dans ce dernier cas, la Société s’engage à notifier au Salarié sa décision par écrit, au plus tard dans les huit jours suivant la notification de la rupture du contrat de travail.				In the latter case, the Company agrees to notify its decision to the Employee in writing, at the latest within 8 days of notification of termination of the employment contract.
Si le Salarié viole son obligation de non concurrence, la Société ne sera plus tenue de payer la contrepartie financière au Salarié et celui-ci devra rembourser à la Société tout montant qu’il aurait reçu à ce titre.				If the Employee breaches the non-competition obligation, the Company will no longer be required to pay the gross monthly indemnity to him and the Employee will be required to reimburse the Company for any amount that he may have been granted in this respect.
L’attribution de cette somme à la Société ne préjudiciera pas du droit que celle-ci se réserve de demander réparation du préjudice financier et moral qu’elle aura subi et de demander aux tribunaux compétents de faire ordonner sous astreinte la cessation de la concurrence faite en violation des dispositions ci-dessus.				This payment shall not impinge upon the rights of the Company to seek reparation from for the financial and moral prejudices suffered and to request the relevant court to grant an injunction to enforce the Employee to cease the competing activity.
Article 15 - Cotisés payés				Article 15 - Paid vacation
Le Salarié aura droit aux congés payés prévus par la loi et la Convention Collective applicable. Le Salarié s’engage à informer la Société de ses souhaits de congés au moins quatre semaines à l’avance pour des congés d’une semaine ou plus, et au moins quinze jours à l’avance pour des congés de un à quatre jours consécutifs.				The Employee shall be entitled to paid vacation provided for by the law and by the applicable Collective Bargaining Agreement. The Employee agrees to inform the Company of his holiday wishes at least four weeks in advance for vacation of one week or more and at least two weeks in advance for vacation of one to 4 consecutive days.

-19 -


Article 16 - Absence, maladie, accident durant le télétravail				Article 16 - Leave, sickness, accident during telecommuting
16.1 Le Salarié s’engage à informer immédiatement la Société de tout empêchement d’exercer ses fonctions, en indiquant les motifs et la durée prévoie de cette absence et à produire dans les 48 heures en cas d’arrêt de travail prescrit par un médecin, le certificat médical qui lui aura été délivré.				16.1 The Employee agrees to inform the Company immediately of any prevention from performing his duties, indicating the reasons and duration of his leave, and to provide in the event of sick leave a doctor’s certificate within 48 hours.
En cas de prolongation d’un arrêt de travail initial, le Salarié s’engage à informer immédiatement la Société de l’existence et de la durée de cette prolongation et à produire l’arrêt de prolongation dans les 48 heures.				In the event of an extension of an initial sick leave, the Employee agrees to inform the Company immediately of the existence and duration of the extension and to provide a doctor’s certificate within 48 hours.
16.2 En cas d’accident à son domicile durant les jours de travail, le Salarié doit en informer la Société dans les 48 heures et transmettre à la Société, le cas échéant, un certificat médical.				16.2 In the case of an accident at his home during the telecommuting, the Employee must inform the Company within 48 hours and communicate to the Company a medical certificate if necessary.
Article 17 - Régimes de retraite - Prévoyance - Mutuelle				Article 17- Pension schemes - Contingency - Insurance
Par son embauche, le Salarié adhérera aux régimes de retraite, et autres régimes de prévoyance ou mutuelle collectifs obligatoires, en vigueur ou à venir dans la Société en France.				In being hired, the Employee shall become a member of any applicable or future mandatory collective pension schemes and other mandatory collective insurance or contingency schemes of the Company in France.
Article 18- Protection des Données Personnelles				Article 18 - Data Protection
Pour les besoins de la gestion de ses ressources humaines et de l’exécution du présent Contrat de travail, le Salarié accepte que la Société, ainsi que toute personne qu’elle mandate à ces fins, procède à la mise en œuvre de traitements automatisés des données personnelles le concernant.				For the needs of human resources management and for the execution of the current Employment contract, the Employee accepts that the Company and any person mandated for this purpose proceed to the automatized treatment of personal data related to him.
Le Salarié accepte que ses données personnelles soient communiquées aux services de la Société intéressés par la gestion				The Employee accepts his personal data to be communicated to the departments of the Company interested by human resources

-20 -


des ressources humaines et à toute personne qu’elle mandate à cette fin.				management and any other person mandated for this purpose.
Le Salarié accepte également, pour les finalités précitées, que ses données personnelles fassent l’objet d’un transfert en dehors de l’Union européenne de la part de la Société et à destination de toute entité du groupe auquel elle apparlient, ainsi que de la part de toute personne mandatée par l’une ou l’autre d’entre elles.				The Employee also agrees, for the foresaid purposes, to the transfer of his personal data outside of the European Union from the Company to the destination of any entity of the group which it belongs, and from any person mandated by one or the other of them.
Conformément aux dispositions de la loi n° 78-17 modifiée du 6 janvier 1978, le Salarié dispose d’un droit d’accès, d’opposition, sous réserve d’un motif légitime, de rectification et de suppression des données personnelles le concernant, auprès du service en charge de la gestion des ressources humaines ou de toute personne mandatée par la Société à cet effet. Ce service, ou, le cas échéant, la personne mandatée par la Société, est également compétent pour répondre aux questions concernant les traitements automatisés mis en œuvre au sein de la Société à partir des données personnelles concernant le Salarié.				In accordance with the dispositions of the law n° 78-17 modified of January 6th 1978, the Employee has a right of access, opposition subject to a legitimate reason, rectification, and removal of personal data related to him, with the department in charge of human resources management or any person mandated by the Company for this purpose. This department, or as the case may be, the person mandated by the Company, is also competent to answer to questions regarding the automatized treatment implemented within the Company from the personal data related to the Employee.
Article 19- Dispositions diverses				Article 19 - Various provisions
19.1 Le Salarié s’engage à faire connaître à la Société toute modification dans sa situation personnelle pouvant avoir des conséquences dans la gestion de son dossier social (adresse, situation familiale, etc).				19.1 The Employee agrees to inform the Company of any change in his personal situation that could have consequences on the handling of his employee file (address, marital or family status, etc.).
19.2 Le Salarié reconnaît expressément que le présent contrat annule et remplace toute offre d’emploi ou contrat de travail ou autre document contractuel signé antérieurement avec la Société, sa société mère ou Lune quelconque de ses sociétés affiliées.				19.2 The Employee formally recognises that this contract supersedes any offer of employment, employment contract or other contractual document previously signed with the Company, its parent company or any other affiliated company.
19.3 Dans le cas où une disposition du présent contrat de travail serait jugée illégale, invalide ou inopposable, ceci n’affecterait pas les autres dispositions dudit contrat.				19.3 Should any provisions of this employment contract be held by a court of law to be illegal, invalid or unenforceable, this would not affect the remaining provisions of this employment contract.

-21 -

-22 -

CONTRAT DE TRAVAIL A DUREE INDETERMINEE

INDEFINITE TERM EMPLOYMENT CONTRACT

Annexe jointe: descriptif de poste / Appendix attached: job description

ANNEXE / APPENDIX

DESCRIPTIF DE POSTE / JOB DESCRIPTION


Le Vice-Président des Ventes Internationales est responsable de la réalisation des objectifs de cliiflxe d’affaires et du développement de marchés internationaux en accord avec la stratégie globale de la Société.				The Vice President of International Sales is responsible for achieving revenue targets and developing international markets in keeping with the Company’s global strategy.

Principales responsabilités:				Primary responsibilities:

– Construire et développer une Equipe de classe mondiale;				– Build and develop a world class Team;

– Diriger par l’exemple en accord avec notre culture d’entreprise;				– Lead by example in relation to our Company Culture;

– Personnaliser et livrer la stratégie de marché international et les objectifs de chaque marché à la fois pour les marchés existants et les marchés à pénétration insuffisante;				– Customize and deliver international market strategy and individual market goals for both existing and under penetrated markets;

– Réaliser le chiffre d’affaires, les ventes de produits, la marge brute et les objectifs OPEX;				– Achieve revenue, product sales, gross margin and OPEX targets;

– Recruter, gérer, mesurer et évaluer tous les distributeurs. Veiller à ce que ces partenaires soient engagés, productifs et réalisent les objectifs trimestriels et annuels afin de développer la présence de la marque et d’accroître la part de marché;				– Recruit, manage, measure and evaluate all distributors. Ensure that these partners are engaged, productive and meeting quarterly and annual goals to grow brand presence and increase market share;

– Promouvoir les meilleures pratiques partagées parmi les partenaires distributeurs et fournir une formation continue régulière ainsi que soutien aux représentants des distributeurs à				– Leverage shared best practices among distributor partners, and provide regular ongoing education and support

-23 -


travers des réunions, des webinaires et des cours en ligne;				for distributor reps through meetings, webinars and online classes;
– Travailler en étroite collaboration avec les équipes R&D, Marketing, Réglementation et Production afin d’assurer que les besoins des clients sont satisfaits en temps opportun.				– Work closely with the R&D, Marketing, Regulatory and Production teams to ensure Customer requirements are met on a timely basis.

Responsabilités supplémentaires:				Additional responsibilities:

– Engagement actif au sein de l’Equipe de Direction;				– Active engagement in Senior Leadership Team;

– Respect des principes directeurs et de la politique qualité de la Société;				– Adherence to Company’s Guiding Principles and Quality Policy;

– Fournir une excellente formation sur les produits et un soutien clinique aux partenaires distributeurs et commerciaux;				– Provide excellent product training and clinical support to distributors and sales partners;

– Attirer une clientèle d’excellence avec les partenaires intermédiaires et les leaders des courants de pensées cliniques;				– Engage in high Customer touch with channel partners and clinical thought leaders;

– Faire des suggestions pour le Développement Produit pour les produits existants et les nouveaux produits.				– Provide input on Product Development for current and new products.

-24 -

Exhibit 10.2

December 8, 2017

Dear David,

Our team at Vapotherm, Inc. is pleased to invite you to join our organization in the position of VP of Sales effective January 4, 2018 in accordance with the terms outlined in this offer of employment and related Attachments. ¹

The position will be located in Chicago, IL with reporting responsibility to the CEO. Compensation for 2018 and terms of acceptance for the position between Vapotherm “the Company” and David Blouin “the Employee” are outlined herein:

•

Base Salary of Two Hundred Thousand Dollars ($200,000.00) per year.

Vapotherm employees are paid bi-weekly every other Friday, one week in arrears.

•

Annual Performance Incentive for 2018, assuming at Plan performance, is $150,000 equating to a total annual comp of $350,000. Employee is eligible for guaranteed at Plan commission through June 30, 2018. Commission plan and performance objectives will be provided to you during onboarding.

•

Compensation Review

Base compensation and incentive plan will be reviewed annually.

•

Company Stock Option Plan

Employee will be eligible to participate in the Company’s Stock Option Plan. Your initial grant will be 0.50% of the fully diluted equity post Series D financing. Exercise price will be set by the Compensation Committee. Vesting will be over 4 years with 25% vested on your first anniversary and monthly thereafter for an additional 36 months.

•

Paid Time Off

Employee Vacation, Sick and Personal Time are combined into one program which is equivalent to 168 hours per year or 4 weeks and 1 day.

Employees may carry over a maximum of Eighty (80) hours of unused PTO time into any new year.

Nine company holidays are also available as paid time off each year though the hours will not deduct from employees’ PTO balances.

•

Benefits

Employee benefits are standard to all positions. The Company will pay a percentage of the Employee’s Health Insurance Premium.

Available Benefits also include:

Dental Benefits

Vision Benefits

401K

Flexible Spending Account

Life Insurance (in the amount of one times the Employee’s base annual salary- up to $250,000 is paid by the company)

[Please note: The terms of any benefit plan or pay policy as stated in this letter and the enclosed documents take precedence over any oral representation.]

This offer is contingent upon the following:

•

Employee’s signed acceptance acknowledging they are without existing conflicting agreements, restrictive covenants or obligations that would prevent employment with Vapotherm, Inc.

•

Successful completion of our reference and background checking process including drug testing and I-9 verification.

This offer is not to be considered a contract guaranteeing employment for any specific duration. As an at-will employee, both you and the Company have the right to terminate your employment at any time with or without cause. If you do not pass the background check, this offer of employment will be rescinded.

This offer expires if the Employee fails to confirm acceptance by December 11, 2017.

We look forward to welcoming you on board at Vapotherm, David, and will confirm formal acceptance by your signature of this offer letter and the attached Non-Compete and Assignment of Inventions Agreement.

If you should have any special questions regarding any of the items included in your Offer Packet, please let us know.

Sincerely,

___________________________

Joseph F. Army

President & CEO

Vapotherm, Inc.

Offer of Employment Accepted by your Signature:

___________________________

First Name, Initial, Last Name

__12/8/17___________________

On This Date

¹ Attachments, requiring your signature:

•

Confidentiality, Non-Compete and Assignment of Inventions Agreement

•

New Employee Information Sheet

Take the Work out of Breathing

22 Industrial Drive • Exeter, NH 03833 • T 603.658.0011 • F 603.658.0181 • www.vtherm.com

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph Army, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Vapotherm, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

[Omitted];

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ JOSEPH ARMY

Joseph Army

President and Chief Executive Officer

(Principal Executive Officer)

Date: July 29, 2019

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John Landry, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Vapotherm, Inc.;

[omitted];

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/S/ JOHN LANDRY

John Landry

Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

Date: July 29, 2019

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Vapotherm, Inc. (the “Company”) for the quarterly period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Joseph Army, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Report.

/s/ JOSEPH ARMY

Joseph Army

President and Chief Executive Officer

(Principal Executive Officer)

Date: July 29, 2019

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Vapotherm, Inc. (the “Company”) for the quarterly period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, John Landry, Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Report.

/s/ JOHN LANDRY

John Landry

Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

Date: July 29, 2019