The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(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 public offerings of its common stock, private placements of its convertible preferred stock, sales of its Precision Flow systems and amounts borrowed under its credit facilities. The Company has 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 15 “Business Combinations” to these condensed consolidated financial statements for details of this transaction.
In August 2019, the Company completed a public offering of 3,570,750 shares of common stock, which included the full exercise by the underwriters of their option to purchase 465,750 shares of common stock, at a price of $14.50 per share, which raised net proceeds of $48.3 million after deducting the underwriting discount of $3.1 million and offering expenses of $0.4 million.
2. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements but does not include all disclosures required by U.S. GAAP.
10
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
Principles of Consolidation
These condensed consolidated financial statements include the financial statements of 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 condensed consolidated financial statements in conformity with U.S. GAAP requires the Company to make judgments, assumptions, and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. The Company evaluates its estimates on an ongoing basis. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates relied upon in preparing these condensed consolidated financial statements include calculation of stock-based compensation, valuation of warrants, fair values of acquired assets and liabilities, including goodwill and intangibles assets, realizability of inventories, allowance for bad debt, accrued expenses and the valuation allowances against deferred income tax assets. Actual results may differ from these estimates.
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit) and of cash flows for the three and nine months ended September 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2019 and the results of its operations and its cash flows for the three and nine months ended September 30, 2019 and 2018. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, 2019 and 2018 are also unaudited. The results of operations for the three and nine months ended September 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 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 statements of cash flows. The Company adopted the new standard in the first quarter of fiscal 2019, under the retrospective adoption method, and the prior year restricted cash presentation has been reclassified to conform to current year presentation.
11
VAPOTHERM, INC.
Notes to Condensed 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 Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers. 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 condensed 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 to interim and annual periods beginning after December 15, 2020. The Company is currently evaluating the period in which it intends to adopt the new standard. 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. In July 2019, the FASB issued a proposed ASU that would defer the effective date for ASU 2016-02 to interim and annual periods beginning after December 15, 2022. 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 loss, 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 15 “Business Combinations” to these condensed consolidated financial statements for details of the Solus acquisition. The functional currency for this entity is its local currency, Pound Sterling (GBP).
12
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
Realized foreign currency gains or losses arising from transactions denominated in foreign currencies, are recorded in other (expense) income in the condensed consolidated statements of comprehensive loss. Unrealized foreign currency gains or losses arising from transactions denominated in foreign currencies are recorded in accumulated other comprehensive loss.
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 condensed 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 14 “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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2019
|
|
|
|
US
|
|
|
International
|
|
|
Total
|
|
|
US
|
|
|
International
|
|
|
Total
|
|
Net revenue by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
$
|
1,408
|
|
|
$
|
647
|
|
|
$
|
2,055
|
|
|
$
|
4,517
|
|
|
$
|
2,198
|
|
|
$
|
6,715
|
|
Disposable
|
|
|
5,962
|
|
|
|
1,865
|
|
|
|
7,827
|
|
|
|
20,023
|
|
|
|
5,353
|
|
|
|
25,376
|
|
Subtotal Product Revenue
|
|
|
7,370
|
|
|
|
2,512
|
|
|
|
9,882
|
|
|
|
24,540
|
|
|
|
7,551
|
|
|
|
32,091
|
|
Lease Revenue
|
|
|
463
|
|
|
|
-
|
|
|
|
463
|
|
|
|
1,410
|
|
|
|
-
|
|
|
|
1,410
|
|
Service and Other Revenue
|
|
|
202
|
|
|
|
262
|
|
|
|
464
|
|
|
|
812
|
|
|
|
781
|
|
|
|
1,593
|
|
Total Revenue
|
|
$
|
8,035
|
|
|
$
|
2,774
|
|
|
$
|
10,809
|
|
|
$
|
26,762
|
|
|
$
|
8,332
|
|
|
$
|
35,094
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
US
|
|
|
International
|
|
|
Total
|
|
|
US
|
|
|
International
|
|
|
Total
|
|
Net revenue by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
$
|
1,809
|
|
|
$
|
570
|
|
|
$
|
2,379
|
|
|
$
|
5,317
|
|
|
$
|
2,551
|
|
|
$
|
7,868
|
|
Disposable
|
|
|
5,130
|
|
|
|
1,167
|
|
|
|
6,297
|
|
|
|
16,673
|
|
|
|
3,808
|
|
|
|
20,481
|
|
Subtotal Product Revenue
|
|
|
6,939
|
|
|
|
1,737
|
|
|
|
8,676
|
|
|
|
21,990
|
|
|
|
6,359
|
|
|
|
28,349
|
|
Lease Revenue
|
|
|
328
|
|
|
|
-
|
|
|
|
328
|
|
|
|
992
|
|
|
|
-
|
|
|
|
992
|
|
Service and Other Revenue
|
|
|
270
|
|
|
|
115
|
|
|
|
385
|
|
|
|
996
|
|
|
|
354
|
|
|
|
1,350
|
|
Total Revenue
|
|
$
|
7,537
|
|
|
$
|
1,852
|
|
|
$
|
9,389
|
|
|
$
|
23,978
|
|
|
$
|
6,713
|
|
|
$
|
30,691
|
|
13
VAPOTHERM, INC.
Notes to Condensed 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 revenue 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 as of September 30, 2019.
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 condensed 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.
14
VAPOTHERM, INC.
Notes to Condensed 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 property and equipment. This review during fiscal year 2019 indicated that the estimated useful life of all property and equipment 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 September 30, 2019, $0.3 million of our $85.4 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 condensed consolidated statements of cash flows:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Cash and cash equivalents
|
|
$
|
83,522
|
|
|
$
|
58,223
|
|
Restricted cash
|
|
|
1,852
|
|
|
|
1,799
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
85,374
|
|
|
$
|
60,022
|
|
3. Accounts Receivable
Accounts receivable owed to the Company by its customers and distributors consists of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
United States
|
|
$
|
4,743
|
|
|
$
|
4,948
|
|
International
|
|
|
2,364
|
|
|
|
2,493
|
|
Total accounts receivable
|
|
|
7,107
|
|
|
|
7,441
|
|
Less: Allowance for doubtful accounts
|
|
|
(259
|
)
|
|
|
(334
|
)
|
Accounts receivable, net of allowance for doubtful
accounts
|
|
$
|
6,848
|
|
|
$
|
7,107
|
|
15
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
No individual customer accounted for 10% or more of revenue for the three or nine months ended September 30, 2019 or September 30, 2018. No individual customers accounted for 10% or more of total accounts receivable at either September 30, 2019 or December 31, 2018.
4. Financial Instruments
As of September 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. The Company’s cash equivalents primarily consist of money market deposits which total approximately $80.6 million at September 30, 2019 and are valued based on Level 1 of the fair value hierarchy. As described in Note 12 “Warrants”, during 2019, the Company granted warrants to purchase 19,790 shares of common stock in connection with an amendment to its financing arrangement described in Note 6 “Debt”. These equity-classified warrants were valued using the Black-Scholes pricing model, which falls within Level 3 of the fair value hierarchy.
The assumptions used in the Black-Scholes pricing model were as follows at the date of grant:
Expected dividend yield
|
|
0.0
|
%
|
Risk free interest rate
|
|
2.4
|
%
|
Expected stock price volatility
|
|
60.9
|
%
|
Expected term (years)
|
|
10.0
|
|
5. Inventories
Inventories as of September 30, 2019 and December 31, 2018 consist of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Component parts
|
|
$
|
5,838
|
|
|
$
|
5,601
|
|
Finished goods
|
|
|
5,006
|
|
|
|
8,109
|
|
Total inventory
|
|
$
|
10,844
|
|
|
$
|
13,710
|
|
6. 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 September 30, 2019, the interest rate was 6.75%. The outstanding balance under the Amended Revolver Agreement was $2.9 million at September 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. As of September 30, 2019, the Company was in compliance with all covenants.
16
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
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 $5.0 million tranches in each of January 2017 and March 2017. The Company pledged all assets as collateral with a double negative pledge on intellectual property.
On April 6, 2018, the Company entered into a Credit Agreement and Guaranty (the “Credit Agreement and Guaranty”) with Perceptive Credit Holdings II, LP (“Perceptive”). Pursuant to the Credit Agreement and Guaranty, a total of $42.5 million was available in three tranches. The first tranche was drawn down in the amount of $20.0 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 warrants to purchase shares of common stock at the time of the initial public offering. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire in April 2028.
On July 20, 2018, pursuant to the Credit Agreement and Guaranty, the Company drew down the second tranche of $10.0 million. In connection with this draw down, the Company granted Perceptive warrants to purchase 18,846 shares of Series D preferred stock which were converted into warrants to purchase shares of common stock at the time of the initial public offering. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, exercisable at the option of the holder, in whole or in part, and expire in July 2028.
On September 27, 2018, the Company entered into the first amendment to the Credit Agreement and Guaranty (the “Amendment”, together with the Credit Agreement and Guaranty, the “Amended Credit Agreement and Guaranty”) with Perceptive. Pursuant to the Amended Credit Agreement and Guaranty, the Company was permitted to draw the final $12.5 million of availability at any time through March 31, 2019 and the minimum 2018 revenue requirement of $43.2 million that was required to draw down the final tranche was eliminated. Concurrently with the closing of the Amendment, the Company drew down $2.0 million of the remaining $12.5 million available. In connection with this draw down, the Company granted to Perceptive warrants to purchase 3,769 shares of its Series D preferred stock which were converted into warrants to purchase shares of common stock at the time of the initial public offering. The warrants have an exercise price of $15.92 per share, were fully vested upon issuance, are exercisable at the option of the holder, in whole or in part, and expire in September 2028.
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, are exercisable at the option of the holder, in whole or in part, and expire in March 2029.
On March 22, 2019, the Company entered into a second amendment to the Amended Credit Agreement and Guaranty increasing the allowable permitted indebtedness in connection with the Company’s credit card program from $0.3 million to $0.5 million.
Pursuant to the Amended Credit Agreement and Guaranty, the outstanding principal amount accrues interest at an annual rate equal to 9.06% plus the greater of (a) one-month LIBOR and (b) 1.75% per year. At September 30, 2019, the interest rate was 11.19%. The outstanding balance, including accretion of the additional final payment due upon maturity and described below, was $42.6 million at September 30, 2019 and there was no remaining availability.
On the maturity date, in addition to the payment of principal and accrued interest, the Company will be required to make a payment of 0.5% of the total amount borrowed under the Amended Credit and Guaranty Agreement unless the Company has already made such a payment in connection with an acceleration or prepayment of borrowings under the agreement. 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 September 30, 2019, the Company was in compliance with all covenants.
17
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
The annual principal maturities of the Amended Credit Agreement and Guaranty as of September 30, 2019 are as follows:
2019
|
|
$
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
2023
|
|
|
42,560
|
|
Less: Discount on loans payable
|
|
|
(844
|
)
|
Long-term loans payable
|
|
$
|
41,716
|
|
7. Commitments and Contingencies
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 the Company 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 its operations or financial condition.
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.
8. Income Taxes
There is no provision for income taxes for the three or nine months ended September 30, 2019 or September 30, 2018 because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets.
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 all outstanding equity securities of Solus. For the period from March 1, 2019 to September 30, 2019, Solus had a book loss of $0.5 million, resulting from revenue of $1.7 million. Due to the short period of ownership, and related book loss, the tax provision for Solus is immaterial.
9. Stock-Based Compensation
On January 23, 2019, the Company established a French Qualifying Subplan 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 Stock Incentive Plan.
18
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
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.
The weighted average assumptions used in the Black-Scholes options pricing model are as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk free interest rate
|
|
|
2.1
|
%
|
|
|
2.6
|
%
|
Expected stock price volatility
|
|
|
63.5
|
%
|
|
|
58.9
|
%
|
Expected term (years)
|
|
|
6.2
|
|
|
|
5.8
|
|
Stock-based compensation expense was allocated based on the employees’ and non-employees’ functions as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of goods sold
|
|
$
|
9
|
|
|
$
|
5
|
|
|
$
|
147
|
|
|
$
|
23
|
|
Research and development
|
|
|
11
|
|
|
|
11
|
|
|
|
266
|
|
|
|
39
|
|
Sales and marketing
|
|
|
(102
|
)
|
|
|
60
|
|
|
|
657
|
|
|
|
134
|
|
General and administrative
|
|
|
222
|
|
|
|
57
|
|
|
|
1,685
|
|
|
|
171
|
|
Total
|
|
$
|
140
|
|
|
$
|
133
|
|
|
$
|
2,755
|
|
|
$
|
367
|
|
Stock Options
The Company granted options to purchase 871,346 shares of common stock at exercise prices ranging from $13.35 to $19.40 per share, with a weighted average exercise price of $17.36 per share, during the nine months ended September 30, 2019. The Company granted options to purchase 345,948 shares of common stock at exercise prices ranging from $1.68 to $3.78 per share, with a weighted average exercise price of $2.27 per share, during the nine months ended September 30, 2018. The weighted average fair value of stock options granted during the nine months ended September 30, 2019 and 2018 was $10.88 and $1.27, respectively.
Restricted Stock
A summary of restricted stock activity for the nine months ended September 30, 2019 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at December 31, 2018
|
|
|
399,485
|
|
|
$
|
1.68
|
|
Granted/purchased
|
|
|
78,476
|
|
|
|
17.54
|
|
Vested
|
|
|
(210,395
|
)
|
|
|
3.31
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Unvested at September 30, 2019
|
|
|
267,566
|
|
|
$
|
4.02
|
|
19
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
10. Earnings Per Share
Net Loss per Share
The Company excluded the following potential common shares, based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common stock
|
|
|
1,407,448
|
|
|
|
757,635
|
|
Warrants to purchase redeemable convertible preferred stock
(as converted to common stock)
|
|
|
182,076
|
|
|
|
230,296
|
|
Unvested restricted stock
|
|
|
267,566
|
|
|
|
604,455
|
|
Redeemable convertible preferred stock (as converted to
common stock)
|
|
|
-
|
|
|
|
11,143,571
|
|
|
|
|
1,857,090
|
|
|
|
12,735,957
|
|
11. 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 November 16, 2018 was $33.2 million. In connection with our initial public offering in November 2018, all outstanding redeemable convertible preferred stock converted to common stock on a one-to-one basis.
The Company has two stockholders that are vendors of the Company. The total amount billed from these vendors during both the three months ended September 30, 2019 and 2018 was less than $0.1 million. The total amount billed from these vendors during the nine months ended September 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 both September 30, 2019 and December 31, 2018.
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 September 30, 2019 and 2018 was $0.3 million and $0.5 million, respectively. The total amount billed to this customer during the nine months ended September 30, 2019 and 2018 was $1.0 million and $1.6 million, respectively. The accounts receivable balance for this customer was $0.1 million as of September 30, 2019 and December 31, 2018, respectively. All transactions are at arms’ length and occur at published list prices.
12. Warrants
|
|
|
|
|
|
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 September 30, 2019
|
|
|
182,076
|
|
|
$
|
14.84
|
|
20
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
On March 22, 2019, in connection with an amendment to the Credit Agreement and Guaranty as further described in Note 6 “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, are 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 approximately $0.3 million, and is recorded as a discount against the principal owed on the related debt, and is being amortized over the contractual term of the debt instrument.
During 2019, warrants to purchase 68,009 shares of common stock were net exercised, which resulted in the issuance of 12,164 shares of common stock.
13. Stockholders’ Equity
Preferred Stock
As of September 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 September 30, 2019 and December 31, 2018, there were no shares of preferred stock outstanding.
Prior to the Company’s initial public offering in November 2018, the Company had redeemable convertible preferred stock (Series A, B, C and D) outstanding. In connection with the initial public offering, all outstanding redeemable convertible preferred stock converted to common stock on a one-to-one basis.
Common Stock
As of September 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.
14. 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.
21
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
15. Business Combinations
On February 28, 2019, the Company completed the acquisition of all 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 is recognizing an estimated $2.4 million in contingent payments as compensation that is being paid out over the period from the date of acquisition through December 31, 2020. 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
|
)
|
Contract liabilities
|
|
|
(75
|
)
|
Deferred taxes
|
|
|
(97
|
)
|
Total liabilities assumed
|
|
|
(394
|
)
|
Total purchase price
|
|
$
|
2,026
|
|
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed, including income taxes payable and deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Accordingly, the provisional measurements of fair value of the income taxes payable and deferred taxes set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
In determining the purchase price allocation, the Company considered, among other factors, the opportunity provided by a supplier agreement with the National Health Service. The fair value of the intangible assets associated with this agreement were estimated using a discounted cash flow method with the application of the multi-period excess earnings method. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable to only the subject intangible assets after deducting contributory asset charges. An income and expenses forecast was built based upon specific intangible asset revenue and expense estimates.
The rate used to discount the estimated future net cash flows to their present values for each intangible asset was based upon a weighted average cost of capital calculation. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the assets acquired from Solus.
The total weighted average amortization period for the intangible assets is approximately 3.83 years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the economic benefits of the intangible assets 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.
22
VAPOTHERM, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited, continued)
(In thousands, except share and per share amounts)
The Company has included the financial results of Solus in the condensed consolidated financial statements from the date of acquisition. The transaction costs associated with the acquisition were approximately $0.2 million and were recorded in general and administrative expense as incurred.
Pro Forma Financial Information
The following unaudited pro forma information for the three and nine months ended September 30, 2019 and 2018, respectively, presents consolidated information as if the Solus acquisition occurred on January 1, 2018, which is the first day of the Company’s fiscal year 2018:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net revenue
|
|
$
|
10,809
|
|
|
$
|
9,985
|
|
|
$
|
35,331
|
|
|
$
|
32,826
|
|
Net loss
|
|
$
|
(12,765
|
)
|
|
$
|
(9,840
|
)
|
|
$
|
(38,895
|
)
|
|
$
|
(30,416
|
)
|
Net loss per share, basic
|
|
$
|
(0.65
|
)
|
|
$
|
(11.24
|
)
|
|
$
|
(2.18
|
)
|
|
$
|
(36.48
|
)
|
16. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and intangible assets during 2019 are as follows:
|
|
Goodwill
|
|
|
Intangible Assets
|
|
Balance at December 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
Acquired during the period
|
|
584
|
|
|
455
|
|
Amortization
|
|
|
-
|
|
|
|
(69
|
)
|
Foreign currency exchange rate changes
|
|
|
(45
|
)
|
|
|
(35
|
)
|
Balance at September 30, 2019
|
|
$
|
539
|
|
|
$
|
351
|
|
The following table presents a summary of acquired intangible assets:
|
|
As of September 30, 2019
|
|
|
|
Period of
amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Customer agreements
|
|
|
3.83
|
|
|
$
|
420
|
|
|
$
|
69
|
|
Total identifiable intangible assets
|
|
|
|
|
|
$
|
420
|
|
|
$
|
69
|
|
The Company recognized less than $0.1 million of amortization expense within sales and marketing expenses related to the intangible assets during both the three and nine months ended September 30, 2019. The Company did not recognize any amortization expense related to the intangible assets during either the three or nine months ended September 30, 2018 as the assets were acquired as part of the acquisition of Solus in February 2019.
The estimated amortization expense for intangible assets for each of the five succeeding fiscal years is as follows:
|
|
|
|
|
Estimated Amortization Expense:
|
|
|
|
|
Remainder of 2019
|
|
$
|
27
|
|
2020
|
|
|
108
|
|
2021
|
|
|
108
|
|
2022
|
|
|
108
|
|
Total
|
|
$
|
351
|
|
23