UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐
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
(State or other jurisdiction of
incorporation or organization)
100 Domain Drive
Exeter, NH
(Address of principal executive offices)
46-2259298
(I.R.S. Employer
Identification No.)
03833
(Zip Code)
Registrant’s telephone number, including area code: (603) 658-0011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 per value per share
Trading Symbol(s)
VAPO
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15
U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2020, was
$821,449,356.
The number of shares of registrant’s Common Stock outstanding as of February 18, 2021, was 25,806,506.
Portions of the registrant’s Definitive Proxy Statement relating to the Annual Meeting of Stockholders, scheduled to occur on June 22, 2021, are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibit and Financial Statement Schedules
Form 10-K Summary
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16
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We use “Vapotherm,” “High Velocity Therapy,” “HVT,” “Precision Flow,” “Hi-VNI,” “OAM,” “HGE,” “Solus Medical,” and other marks as
trademarks in the United States and/or in other countries. This Annual Report on Form 10-K 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 Annual Report on Form 10-K, including logos, artwork and other
visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent
under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’
trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.
Unless otherwise indicated, information contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Part I, “Item 1A. Risk
Factors.” 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains or incorporates by reference 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 Annual Report on Form 10-K 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 and the use of future dates. Forward-looking statements include, but are not limited to, statements
concerning:
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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, our Oxygen Assist Module, HGE Digital Health application, and any
future products we may seek to commercialize;
competitive companies and technologies in our industry;
our ability to enhance our High Velocity Therapy technology, our Oxygen Assist Module, 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;
the impact of the current COVID-19 pandemic on our business and operating results;
our ability to accurately forecast customer demand for our products, adjust our production capacity if necessary and manage our inventory,
particularly in light of the ongoing COVID-19 pandemic;
our ability to expand, manage and maintain our direct sales and marketing organizations in the United States and United Kingdom, and to
market and sell our Precision Flow systems globally and to expand our limited release and eventually to market and sell our Oxygen Assist
Module throughout the United Kingdom, Europe, and the Middle East;
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, maintain, and use our intellectual property to protect for our High Velocity Therapy technology, Precision Flow systems,
our Oxygen Assist Module, and HGE Digital Health application or avoid claims of infringement;
the volatility of the trading price of our common stock; and
our expectations about market trends and their anticipated effect on our business and operating results.
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The forward-looking statements in this Annual Report on Form 10-K 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 Annual Report on Form 10-K and are subject to a number of known and unknown risks, uncertainties and assumptions,
including those described in this Annual Report on Form 10-K in Part I, “Item 1A. Risk Factors” and Part II, “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and in our other filings with the Securities and Exchange Commission, or 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 Annual Report on Form 10-K, 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.
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Item 1. Business.
Overview
PART I
We are a global medical technology company primarily focused on the development and commercialization of our proprietary High Velocity
Therapy products that are used to treat patients of all ages suffering from respiratory distress. Our High Velocity Therapy products deliver non-invasive ventilatory
support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. High Velocity Therapy
is an advanced form of high flow therapy that is differentiated due to its ability to deliver breathing gases, including oxygen, at a high velocity, for the treatment of
spontaneously breathing patient with both Type 1 hypoxic respiratory distress, like that experienced by patients with pneumonia or COVID-19, and Type 2
hypercapnic respiratory distress, like that experienced by patients with chronic obstructive pulmonary disease (“COPD”). Our Precision Flow systems, which use
High Velocity Therapy technology, are clinically validated alternatives to, and address many limitations of, the current standard of care for the treatment of
respiratory distress in a hospital setting. As of December 31, 2020, more than 2.6 million patients have been treated with our Precision Flow systems, and we have
a global installed base of over 28,000 capital units, an increase of 72.8% compared to December 31, 2019.
Our business was significantly transformed during 2020 due to increased demand for our High Velocity Therapy technology for treatment of
COVID-19 patients, as evidenced by year over year revenue growth of 161.4% from 2019 to 2020. The COVID-19 pandemic contributed to this transformation in
at least two primary ways: first, it resulted in increased awareness of high flow therapy, including recognition by the Centers for Disease Control and Prevention
(“CDC”), World Health Organization (“WHO”), National Institutes of Health (“NIH”), Society for Critical Care Medicine, American College of Emergency
Physicians, and the Chinese, German, Italian, and Australian thoracic societies of high flow therapy as an appropriate first line therapy for those suffering from low
oxygen levels. Second, many respiratory distress patients who require ventilatory support are initially treated in a hospital’s emergency department (“ED”) with the
goal of stabilizing these patients with a non-invasive ventilation therapy so their underlying condition can be treated. Our existing focus on hospital emergency
departments as an effective entry point for our products resulted in our systems being in the right place at the right time when the COVID-19 pandemic hit. This
exposed a significant number of new physicians to the efficacy of our High Velocity Therapy technology, especially as they were able to see patients moved out of
the emergency room and into lower acuity settings in the hospital after receiving our High Velocity Therapy. We expect that increased awareness among physicians
of the efficacy of our High Velocity Therapy to treat respiratory distress will result in expanded use of our products to treat all forms of Type 1 and Type 2
respiratory distress in a variety of settings.
Patients with both Type 1 and Type 2 respiratory distress can have severe difficulty breathing and inability to sustain sufficient oxygen levels or
remove retained carbon dioxide in their lungs and airways. These patients often require immediate respiratory support ranging from supplemental oxygen therapy
for mild cases to invasive mechanical ventilators for severe cases. Many of these patients are initially treated in the emergency department. Patients who cannot be
adequately stabilized are often transferred to the intensive care unit, or ICU, a high cost and capacity-constrained setting in the hospital. An independent third-party
study published in the June 2005 issue of Critical Care Medicine determined that the average cost for a typical three day stay in the ICU in the United States was
$13,347. This cost increased by an average of 47% to $19,558 when the patient required mechanical ventilation. To the extent our products are able to reduce the
number of patients requiring transfer to the ICU, these treatment costs can be reduced.
The market for the treatment of respiratory distress is large and growing. Based on industry sources, we estimate that there are over 12 million
patients who suffer from respiratory distress each year in the United States and select international markets that could benefit from our High Velocity Therapy
technology. As a result, we believe the annual total addressable global market for our High Velocity Therapy technology exceeds $1.5 billion. We believe that an
aging population and growing prevalence of heart failure and COPD will lead to an increase in the size of our total addressable market in the future.
Our High Velocity Therapy technology competes with non-invasive positive pressure ventilation, or NiPPV, the traditional standard of care for
respiratory distress. NiPPV uses pressure to drive gas in and out of a patient’s lungs. It is typically administered through the fitting of an air-tight mask over the
patient’s nose and mouth and tightening a strap around the patient’s head to secure the mask in place. NiPPV delivered through a mask is associated with increased
patient discomfort and anxiety and can cause facial skin ulceration and trauma to the lungs. The mask complicates the care required to support a patient because
they cannot talk, eat, drink or take oral medications while wearing the tight-fitting mask, and must time their breaths to be in sync with the bursts of air being
forced into their lungs. NiPPV can also be delivered through a tight-fitting
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mask that only covers the nose or tight-fitting prongs that seal the external opening of each nostril. These alternatives, which usually require a chin strap to limit air
leaks by keeping the patient’s mouth closed, can also cause skin ulceration around the nose and nostrils. Third-party clinical evidence published in the June 2000,
January 2009 and February 2013 issues of Critical Care Medicine suggests that delivering NiPPV through a mask that covers both the nose and mouth is generally
preferred from an effectiveness perspective over a mask that only covers the nose or nasal prongs, particularly in the acute setting.
NiPPV is typically an escalation therapy, which means that practitioners often start at low pressures and increase as tolerated until the patient
stabilizes. Patients treated with NiPPV are often transferred to the ICU because NiPPV usually requires frequent patient monitoring to ensure patient compliance
and safety. Clinical evidence published in the November 2007 issue of Respiratory Care shows that approximately 30% of patients are intolerant of NiPPV masks,
which can cause them to become non-compliant with treatment. Patients who cannot tolerate NiPPV are often sedated and potentially intubated in preparation for
mechanical ventilation. Intubation involves the insertion of a plastic tube into the trachea to maintain an open airway. Mechanical ventilation is a complex, invasive
procedure that is associated with increased costs of care, lengths of stay, incidence of infections, ventilator dependence and mortality.
In contrast to NiPPV, our High Velocity Therapy technology delivers heated, humidified and oxygenated air at a high velocity to patients through a
comfortable small-bore nasal interface to help reduce the work of breathing. Our Precision Flow systems, which use our High Velocity Therapy technology, are
clinically validated alternatives to NiPPV, and we believe they also provide the following primary benefits for the patient, the clinician and the hospital:
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meaningful improvement in patient comfort and compliance;
facilitation of patient admissions to lower intensity, lower cost and less capacity-constrained care settings;
reduced risk of pressure ventilation related side effects; and
clinician workflow benefits, including easier administration and reduced patient monitoring.
A compelling body of clinical data supports the efficacy and benefits of High Velocity Therapy technology for respiratory distress. In 2018, the U.S.
Food and Drug Administration, or FDA, granted our de novo request for an expanded indication for the Precision Flow Hi-VNI system, which incorporates our
High Velocity Therapy technology. The FDA also created a new classification regulation under which this system is currently the only product listed. The
expanded indication currently identifies this system as a high velocity nasal insufflation device that provides ventilatory support to spontaneously breathing patients
suffering from respiratory distress in a hospital setting. We believe this indication validates our clinical differentiation and compelling value proposition,
establishing High Velocity Therapy technology as an attractive alternative to NiPPV.
We currently offer four versions of our Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision
Flow Heliox. In certain countries outside of the United States, we currently offer our Oxygen Assist Module, which launched in the United Kingdom, select
European markets, and Israel in late 2020. The Oxygen Assist Module can be used with all versions of our Precision Flow systems except for the Precision Flow
Heliox. The Oxygen Assist Module helps clinicians maintain a patient’s pulse oxygen saturation, or SpO2, within a target SpO2 range over a greater period of time
while requiring significantly fewer manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce the health risks
associated with dosing too much, or too little, oxygen. In neonates, these risks include visual or developmental impairment or death.
We sell our Precision Flow systems to hospitals through a direct sales organization in the United States and in the United Kingdom and through
distributors in other select countries outside of the United States and the United Kingdom. Our Oxygen Assist Module is sold through a direct sales organization in
the United Kingdom and through distributors in Europe and the Middle East. In addition, we employ field-based clinical educators who focus on medical education
and training in the effective use of our products and help facilitate increased adoption and utilization. We focus on physicians, respiratory therapists and nurses who
work in acute hospital settings, including the ED and adult, pediatric and neonatal ICUs. Our relationship with these clinicians is particularly important, as it
enables our products to follow patients through the care continuum. As of December 31, 2020, we have sold our Precision Flow systems to over 1,600 hospitals
across the United States, where they have been primarily deployed in the ICU setting.
Our revenues are derived principally from sales of Precision Flow units and sales of the single-use disposable vapor transfer cartridges these units
require. Due to demand for our High Velocity Therapy technology during the COVID-19 pandemic, in 2020 we generated revenue primarily from sales of our
Precision Flow systems. However, historically we generated revenue primarily from sales of the disposable products utilized with our proprietary Precision Flow
systems, and in
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the future we believe we will generate revenue primarily from the sales of disposable products utilized with our proprietary Precision Flow systems. Our revenue
grew from $48.1 million for the year ended December 31, 2019 to $125.7 million for the year ended December 31, 2020. Revenue from single-use disposables
represented approximately 72.9% and 45.1% of our total revenue for the years ended December 31, 2019 and December 31, 2020, respectively. During this time,
our international revenue also grew, representing 21.1% of our total revenue in 2019 and 24.0% of our total revenue in 2020. For the years ended December 31,
2019 and 2020, we incurred net losses of $51.1 million and $51.5 million, respectively.
We believe our anticipated growth will be driven by the following strengths: disruptive technology supported by a compelling body of clinical and
economic evidence; expanded FDA indications for use for our Precision Flow Hi-VNI system; new FDA clearances and/or approvals for our product pipeline,
including the second generation Precision Flow product and the Oxygen Assist Module, a recurring revenue model with high visibility on our disposables
utilization; dedicated respiratory sales forces in the United States and the United Kingdom and experienced international distributors; comprehensive approach to
market development with an established clinical team and digital marketing initiatives; robust and growing intellectual property portfolio; and an experienced
senior management team and board members with deep industry practice.
On November 13, 2020, we acquired HGE Health Care Solutions, LLC (“HGE” or “HGE Digital Health”) a “software as a service” platform for
ongoing management of chronic respiratory disease. HGE developed a clinical services platform designed to help providers improve the quality of life of their
COPD patients by remotely monitoring their daily condition and responding early to changes that could signal an impending worsening of their COPD systems
(known as an “exacerbation”). HGE’s platform was built upon clinical protocols and supported by 12 years of research focused on finding a better way to provide
care for a geographically and socio-economically diverse COPD patient population.
Unlike other disease management solutions, HGE effectively engages both patients and providers on a daily basis. A patient’s symptoms are
typically logged daily via a mobile application, quickly establishing a baseline. From there, HGE’s intelligent platform enables clinicians to triage and respond to
patients in need with same-day treatment plans that address current symptoms and seek to prevent future exacerbations.
HGE currently offers customers COPD remote patient monitoring services through multiple business models, including value-based arrangements
with payors and service-based arrangements with providers. We believe the market opportunity for HGE’s COPD services is large and growing. WHO estimates
that COPD is the third leading cause of death worldwide in 2019, and the National Heart, Lung and Blood Institute estimates 16 million Americans suffer from the
disease resulting in approximately $50 billion dollars in medical cost burden each year. Additionally, we believe HGE’s platform could be adapted to provide value
to providers who care for patients suffering from other respiratory conditions.
Our goal is for our High Velocity Therapy products to become the standard of care for the treatment of respiratory distress in the hospital and in the
home, and we believe HGE’s remote patient monitoring services may help us achieve that goal. Our strategy includes: attracting new customers while driving
penetration within our existing customer base, with a specific focus on educating those customers who first utilized our technology to treat the Type 1 respiratory
distress experienced by COVID-19 patients on the efficacy of our High Velocity Therapy technology at treating Type 2 respiratory distress as well; continuing to
build the preeminent respiratory sales team to facilitate further adoption; increasing awareness of our therapy through social media, digital marketing, and medical
education programs; continuing to drive manufacturing cost efficiencies and leveraging our infrastructure to expand margins; leveraging our innovation capabilities
to expand our High Velocity Therapy technology and Oxygen Assist Module market penetration and opportunity; scaling HGE’s current service offerings and
expanding the range of respiratory conditions for which HGE’s platform can be of value to our customers.
Respiratory Distress Market Overview
Overview of Respiratory Distress
Respiratory distress is caused by a wide range of serious underlying conditions, including pneumonia, COPD, asthma, heart failure, and most
recently COVID-19. WHO estimates that COPD and lower respiratory infections (pneumonia) were the third and fourth leading causes of death world-wide,
respectively, in 2016. Further, WHO expects total deaths due to COPD to increase 30% in the next 10 years. Patients with respiratory distress can have severe
difficulty breathing, resulting in an increased respiratory rate and work of breathing. The inability to breathe is one of the most distressing conditions a patient may
experience and is almost always associated with anxiety and discomfort. These patients often require immediate respiratory support ranging from supplemental
oxygen therapy for mild cases to more invasive mechanical ventilators that perform the work of breathing for severe cases. Many of these patients are initially
treated in the ED. Patients who cannot be adequately stabilized are often transferred to the ICU, a high cost and capacity-constrained setting in the hospital. An
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independent third-party study published in the June 2005 issue of Critical Care Medicine determined the average cost for a typical three day stay in the ICU in the
United States was $13,347. The cost increased by an average of 47% to $19,558 when the patient required mechanical ventilation. To the extent our products are
able to reduce the number of patients requiring transfer to the ICU, these treatment costs can be reduced.
Conventional Methods of Treating Respiratory Distress and Their Limitations
Under normal breathing conditions, approximately 30% of the air that is inhaled fills anatomical dead spaces in the respiratory system such as the
nasal cavities, sinuses and mouth. These dead spaces constitute air passages that do not have the ability to enrich the blood with oxygen or rid the blood of carbon
dioxide. Upon exhaling, these spaces fill with air from previous breaths and, as a result, this air contains lower levels of oxygen and higher levels of carbon dioxide
than normal air. For most patients, this rebreathing of dead space gas does not have adverse effects as their respiratory capacity is sufficient to manage these higher
levels of carbon dioxide. However, in patients with respiratory distress, rebreathing dead space gas adds to an already strained respiratory process, further
increasing the work of breathing. Patients in respiratory distress often have rapid, shallow breathing, significant anxiety and discomfort.
Conventional non-pharmaceutical therapies used to provide respiratory support include the delivery of oxygen through a standard nasal interface,
otherwise known as a cannula, or a non-rebreather mask which is a mask that covers the nose and mouth and is attached to a bag, which in turn is connected to an
oxygen source. Patients who require oxygenation can also be treated with conventional heated humidified high flow oxygen devices which deliver breathing gases
using large-bore cannulas. However, to our knowledge, none of these devices have been shown to deliver breathing gases at a sufficient velocity to rapidly flush the
dead space in the limited time between breaths when respiratory rates are elevated. As such, we do not believe oxygen cannulas, non-rebreather masks, or
conventional heated humidified high flow oxygen devices can provide adequate ventilatory support to patients in higher acuity respiratory distress who have
elevated carbon dioxide levels.
NiPPV, a 35 year old technology, is the traditional standard of care for patients in respiratory distress, including those with elevated carbon dioxide
levels. NiPPV uses pressure to drive gas in and out of a patient’s lungs. It is typically administered by fitting an air-tight mask over the patient’s nose and mouth
and tightening a strap around the patient’s head to secure the mask in place. NiPPV delivered through a mask is associated with increased patient discomfort and
anxiety and can cause facial skin ulceration and trauma to the lungs. The masks complicate the care required to support the patients because they cannot talk, eat,
drink or take oral medications while wearing the tight-fitting mask, and must time their breaths to be in sync with the bursts of air being forced into their lungs.
NiPPV can also be delivered through a tight-fitting mask that only covers the nose or tight-fitting prongs that seal the external opening of each nostril. These
alternatives, which usually require a chin strap to limit air leaks by keeping the patient’s mouth closed, can also cause skin ulceration around the nose and nostrils.
Third-party clinical evidence published in the June 2000, January 2009 and February 2013 issues of Critical Care Medicine, suggests that delivering
NiPPV through a mask that covers both the nose and mouth is generally preferred from an effectiveness perspective over a mask that only covers the nose or nasal
prongs, particularly in the acute setting.
Patients treated with NiPPV are often transferred to the ICU because NiPPV usually requires intensive monitoring to ensure patient compliance and
safety. Clinical evidence shows that approximately 30% of patients are intolerant of NiPPV masks. Such intolerance is caused by a variety of reasons including:
discomfort, claustrophobia and the inability of patients to time their breaths to be in sync with the bursts of air provided by the device.
Patients who cannot tolerate NiPPV are often sedated and potentially intubated as the first step before mechanical ventilation. Intubation involves
the insertion of a plastic tube into the trachea to maintain an open airway. Mechanical ventilation is a complex, invasive procedure that is associated with increased
costs of care, lengths of stay, incidence of infections, ventilator dependence and mortality. For example, during the initial months of the COVID-19 pandemic in
2020, before high flow therapy became a recognized first line therapy, patients who were intubated for mechanical ventilation upon presentation had a mortality
rate as high as 88% in a study published by the Journal of American Medical Association.
Patients on mechanical ventilators can become dependent on the ventilator to breathe. As a result, patients who have become ventilator-dependent
must be gradually weaned off of the ventilator until the patient is able to breathe on his or her own. Discontinuing mechanical ventilation continues to be one of the
most challenging events in ICU management. Approximately 40% of time spent on the mechanical ventilator is dedicated to slowly transitioning patients back to
breathing on their own. Reducing the number of patients that require mechanical ventilation would be expected to both decrease the number of patients who require
ICU care and shorten their stay in the ICU leading to overall cost savings to the healthcare system and increasing ICU throughput.
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Conventional approaches to respiratory distress and their limitations
Product Description Limitations Oxygen Based Therapies Includes standard nasal cannula, non-rebreather masks and conventional humidified HFO devices Increases oxygen concentration in breathing gas and improves alveolar gas exchange Highly passive system Oxygen delivery only --- does not adequately remove carbon dioxide to treat all causes of respiratory distress NiPPV Delivered by a tight-fitting mask or nasal prongs Forces gas in and out to augment respiration and improves alveolar gas exchange 30% of patients do not tolerate therapy Requires high intensity of care Risks of skin breakdown, lung injury and other adverse events Mechanical Ventilation Delivered by a tube placed down the throat (intubation) Forces gas in and out of the lungs to augment respiration and improves alveolar gas exchange Requires sedation Increases clinical risk and cost of care Risk of long-term difficulty weaning patients off ventilation Increasing Level of Respiratory Distress
Conventional Method for Titrating FiO2 and its Limitations
Another challenge faced by clinicians when treating patients experiencing respiratory distress is maintaining SpO2 within a tight target range,
particularly neonates, where a range between 90% and 95% is typically desired. Hyperoxia, or too much oxygen, is associated with a higher risk of retinopathy of
prematurity and lung damage. Hypoxemia, or too little oxygen, is associated with a higher risk of death and neurodevelopmental impairment. The current standard
of care is manual control, whereby clinicians respond to alarms indicating the SpO2 is outside of the target range by manually titrating the fraction of inspired
oxygen in the air or FiO2 in the breathing gases being delivered to the patient. A recent third-party study found that while training can improve the effectiveness of
manual control, maintaining SpO2 between 90% and 95% in neonates may be achieved less than 50% of the time.
Our Solutions
Overview of High Velocity Therapy Technology
High Velocity Therapy technology delivers heated, humidified and oxygenated air at a high velocity through a small-bore nasal interface to treat
patients of all ages suffering from respiratory distress. Our Precision Flow systems, which use High Velocity Therapy technology, can treat nearly all patients in
respiratory distress who would not otherwise require mechanical ventilation, regardless of whether they are in need of an oxygen-based therapy or NiPPV. There is
a subset of patients who will require NiPPV that we might otherwise have been able to treat, but for their absence of a respiratory drive, or the inability to breathe
on their own.
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Patient groups that can be treated with High Velocity Therapy. These include patients suffering from a wide range of respiratory distress acuity levels,
including most of those traditionally treated by NiPPV.
Instead of a mask, High Velocity Therapy technology delivers temperature-controlled humidified gas to the patient at a high velocity through a
small-bore nasal interface. High Velocity Therapy is typically a de-escalation therapy, which means it is appropriate to start at higher flows. Breathing while on
High Velocity Therapy technology helps patients ventilate and return to their normal breathing pattern. In comparison to NiPPV, we believe that our technology
improves patient comfort and compliance due to the delivery of breathing gases through a small-bore nasal interface that does not completely cover the patient’s
nose and mouth. While using our High Velocity Therapy products, patients can eat and drink, talk with their caregivers and loved ones, and in some cases where
important to the patient’s rehabilitation, remain ambulatory. For parents with infants in the neonatal intensive care unit, or NICU, our products allow more direct
skin-to-skin contact between parents and their babies which has been shown to improve cardiorespiratory and temperature stability, sleep organization and duration
of quiet sleep, neurodevelopmental outcomes, breastfeeding and modulation of pain responses in published clinical literature.
High Velocity Therapy
NiPPV
6
High Velocity Therapy Mechanism of Action
The key to High Velocity Therapy technology is the ability to deliver conditioned breathing gases to patients in respiratory distress at a sufficient
velocity to flush out the anatomical dead space between breaths when the patient’s respiratory rate is elevated. As patients inhale this properly humidified, oxygen
rich and carbon dioxide depleted medical gas, the work of breathing is reduced. Similar to the effect seen with water flowing from a garden hose, narrowing of the
opening leads to dramatic increases in water velocity and turbulent kinetic energy exiting the hose or, in the case of High Velocity Therapy technology, air exiting
the cannula. The graph below depicts the calculated flow-velocity relationship for gas moving through different sized cannula openings. The Precision Flow
systems’ high-velocity delivery of breathing gases through a small-bore adult cannula results in an approximately four-fold increase in velocity as compared to the
same flow from the large-bore adult cannula of conventional heated humidified high flow oxygen devices. This increased velocity promotes turbulent flush of the
airway, even for patients breathing very rapidly.
At all air flow rates, High Velocity Therapy (“Small bore NC”) delivers higher velocity air than conventional
heated humidified high flow oxygen devices (“Large bore NC”).
The high velocity breathing gases delivered by Precision Flow systems both actively push the air out of the anatomical dead space through the
mouth and nose and also replace air containing carbon dioxide from the lungs with freshly oxygenated air.
Diagram depicting the ability of high velocity air to displace dead air in the nasal cavities and the back of the throat.
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Increasing the flow rate of untreated air would typically present challenges to the upper airway structures which are responsible for both heating and
humidifying the inhaled gas prior to reaching the lungs. The increased air flow has the potential to cause drying and damage to the mucosa, which in turn could
lead to complications such as increased infection rates. Breathing gases provided by our High Velocity Therapy products are temperature controlled and humidified
both for patient comfort as well as to protect the integrity of the airway. This is accomplished by a proprietary vapor transfer cartridge, or VTC, containing water-
vapor-permeable hollow fibers that provide a high surface area allowing air to become saturated with water vapor at body temperature. The result is a very fine,
molecular water vapor that is energetically stable.
An important factor in providing temperature-controlled humidified air to patients is ensuring that the intended temperature and humidity are
maintained as the air travels from the device to the patient. Our High Velocity Therapy products accomplish this by using a proprietary triple-lumen water-jacketed
delivery tube which maintains the air at a constant temperature throughout the length of the delivery tube. This design, coupled with the very fine, molecular water
vapor generated by our proprietary VTC, is designed to prevent water from condensing in the delivery tube and to eliminate the risk of having liquid water
introduced into the patient’s airway. Other conventional humidified high flow oxygen delivery device manufacturers create humidified breathing gases by heating a
bulk volume of water to create steam, which is then transferred to patients through electrically heated concentric wires. This results in the breathing gases passing
through areas of uneven heating, including areas of excess heat which could be dangerous to the patient as well as cooler areas where condensation, or rainout,
occurs. Delivery of liquid water rainout into the nose of the patient is both uncomfortable and potentially harmful. The Precision Flow systems’ triple-lumen
delivery tube has been shown in a study we sponsored to provide excellent control of rainout of condensation as compared to the humidified breathing gas systems
with the heated wire.
The oxygen content of the air and its flow rate can be precisely regulated by the Precision Flow systems using a simple, intuitive single-dial
interface. Connections to air and oxygen are through standard wall connectors or via standard oxygen and air tanks typically available in hospitals. The Precision
Flow systems make use of industry-standard, user-replaceable oxygen sensors to measure oxygen concentrations.
Benefits of High Velocity Therapy
We believe our High Velocity Therapy technology addresses the key limitations of existing respiratory distress treatment options and provides the
following principal benefits to hospitals, patients and providers:
•
•
•
Meaningful improvement in patient comfort and compliance. Our proprietary High Velocity Therapy technology is an innovative solution
that provides non-invasive ventilatory support and enhances patient comfort and compliance when compared to NiPPV. According to a third-
party clinical study published in the November 2007 issue of Respiratory Care, approximately 30% of patients are intolerant of NiPPV masks.
The tight-fitting and difficult to seal masks can cause patient discomfort, anxiety and complicate the care required to support patients. In a
Company-sponsored, randomized clinical trial, physicians reported a higher median score for High Velocity Therapy technology than NiPPV
for patient comfort, ease of use, clinical response and need for monitoring, which we believe is due to properly conditioned medical gases
being delivered through a small-bore nasal interface that does not completely cover the patient’s nose and mouth. While using our products,
patients can eat and drink, talk with their caregivers and loved ones, take oral medications and may remain ambulatory. For parents with
infants in the NICU, our product allows more direct skin-to-skin contact between the parents and their babies.
Reduced risk of pressure ventilation related side effects. In addition to improving overall patient comfort and ability to communicate, we
believe our Precision Flow systems address other negative side effects caused by pressure ventilation and tight-fitting masks. These potential
side effects include facial skin pressure ulcers, lung injury, claustrophobia, patient anxiety and risk of vomiting and aspiration.
Facilitation of patient admissions to lower intensity, lower cost and less capacity-constrained care settings. As we believe our Precision
Flow systems are more easily tolerated by patients, the monitoring requirements may be lower, which may increase the likelihood that a
patient can be admitted to a general care floor, step-down unit or discharged home from the ED. Patients who are placed on NiPPV in an ED
are often admitted to an ICU. In comparison, in a multicenter utilization study we sponsored that included 128 patients with respiratory
distress treated in emergency rooms with High Velocity Therapy technology, the physicians’ perception was that 54% of the patients could be
transferred to general care floors as opposed to being admitted to the ICU. An independent third-party study published in the June 2005 issue
of Critical Care Medicine determined the average cost for a typical three day stay in the ICU in the United States was $13,347. The cost
increased by an average of 47% to $19,558 when the patient required mechanical ventilation. To the extent our products are able to reduce the
number of patients requiring transfer to the ICU, these treatment costs can be reduced.
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•
Clinician workflow benefits, including easier administration and reduced patient monitoring. As the patient monitoring requirements may
be lower than NiPPV, our Precision Flow systems may improve clinician and hospital workflow. Additionally, unlike conventional humidified
high flow oxygen delivery devices, our Precision Flow systems can be connected directly to standard nurse call systems found in most
hospitals. Connecting to the nurse call systems allows the nursing staff to be immediately alerted to alarms indicating that the patient may not
be obtaining optimal therapy. Our Precision Flow Hi-VNI and Precision Flow Plus systems can also be connected to an electronic medical
record, or EMR, system to record the delivered flow rate, temperature, and percent oxygen. These accessories help reduce the time clinicians
need to spend with a single patient and enable them to have more time to see other patients.
We believe we can replace NiPPV as the standard of care for treating respiratory distress patients who require non-invasive ventilatory support and
who are capable of spontaneously breathing. The table below highlights the key advantages of High Velocity Therapy technology over NiPPV.
Patients
Clinicians
Hospitals
Advantages of High Velocity Therapy over NiPPV
• Potential opportunity for reduced patient monitoring
• Mask-free
• Facilitates ability to eat, drink, talk, participate in care and take oral medications
• Enhanced patient comfort
• Facilitates skin-to-skin care (“kangaroo care” for infants)
• Fewer adverse side effects
• Improved workflow
• Potential opportunity for reduced patient monitoring
• Potential to reduce ICU admission rate
• Improved workflow
• Lower capital investment
Overview and Benefits of our Oxygen Assist Module
Our Oxygen Assist Module is a module designed for use with most versions of our Precision Flow systems and designed to help clinicians maintain
oxygen levels within a tight SpO2 range. The Oxygen Assist Module adjusts delivered FiO2 in response to SpO2 readings captured by a standard pulse oximetry
probe. We launched our Oxygen Assist Module in the United Kingdom, select European markets, and Israel in late 2020 and are presently seeking FDA approval of
this technology in the United States.
We believe our Oxygen Assist Module has the potential to address the key limitations of utilizing manual control to maintain oxygen levels,
particularly neonates, within a tight SpO2 range, and provides the following principal benefits to hospitals, patients and providers:
•
•
•
•
•
Allows reliable realization of SpO2 target;
Assists staff in maintaining targeted SpO2 range, including during stress, movement and, with neonates, feeding;
May allow nurses to spend more time with patients and parents and less time changing settings;
Allows for further evaluation of consequences of selected SpO2 targeted range, including clinical indications, outcomes, and workflow
improvement; and
Allows for the use of the Precision Flow system to provide respiratory support and its attendant benefits, including facilitation of cuddling and
kangaroo care with neonates.
The Oxygen Assist Module is not an SpO2 monitor and does not eliminate the need for separate and independent patient monitoring.
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In February 2021, we upgraded the software on approximately 45 Oxygen Assist Module units outside of the United States from software version
2.2.0 to software version 2.5.0. Subsequently, a bug in software version 2.5.0 was discovered by one of our employees. Although there have been no reports of
patient injury associated with this bug and we believe risk of patient injury is unlikely, out of an abundance of caution, we immediately notified our users and
undertook a field action to remove software version 2.5.0 from all upgraded units and downgrade these units to software version 2.2.0 until the issue is resolved.
All software downgrades have been completed.
Our Market Opportunity
Based on our internal estimates, worldwide there are over 12 million patients per year who experience respiratory distress that could benefit from
our High Velocity Therapy technology. According to U.S. Department of Health & Human Services data, in the United States, there were over four million patients
treated for respiratory distress in 2014 and we estimate there are over eight million patients per year treated for respiratory distress in select international markets
including, but not limited to, the United Kingdom, Germany, Brazil, Mexico, Spain, Italy and Japan. We believe that our total addressable market for High Velocity
Therapy technology is $1.5 billion per year.
We calculated our total addressable market for High Velocity Therapy technology based on (i) the 12 million patients per year who experience
respiratory distress between the United States and select international markets, (ii) our average selling price of the Precision Flow systems capital units and single-
use disposables and (iii) a five-year replacement cycle for the capital units. We expect our total addressable market to increase in the future due to an aging
population, and a growing prevalence of heart failure and COPD. The prevalence of heart failure is expected to grow 46% from 2012 to 2030, while WHO expects
the number of deaths from COPD to increase 30% in the next 10 years. Our products support neonatal, pediatric, and adult patients in EDs, ICUs, general care
floors and long-term acute care hospitals.
Hospitals: Emergency Departments
EDs are the gateway to the hospital in the United States. Over 50% of hospital admissions enter the hospital through the ED. Patients in the ED may
not have a clearly defined diagnosis until later in their hospital stay and the goal is to treat the symptoms of respiratory distress, rapidly stabilize patients, and move
them out of the ED for treatment of their underlying condition. EDs place value on efficient workflow, minimizing patient wait time, and enabling the best clinical
and economic post-ED outcome. Patient satisfaction around ED visits can impact reimbursement rates, hospital ratings, and community reputation and therefore
patient choice. Technologies that can address patients’ clinical needs without requiring admission to the ICU may be viewed favorably by patients and may help
hospitals manage the overall flow of patients. High Velocity Therapy technology is currently available in over 800 of the approximately 5,000 EDs in the United
States.
Hospitals: Intensive Care Unit and General Care Floor
ICUs are often specialized for neonatal, pediatric, medical, and post-surgical patients. However, in all of these ICU areas there are patients requiring
respiratory support. The goal of the ICU is to treat acute symptoms and stabilize patients, allowing them to be treated on a less expensive and less capacity-
constrained general care floor or step-down unit. Reimbursement for many diagnoses is generally capped by admission diagnosis, so it is in a hospital’s best
interest to minimize the amount of time a patient spends in the expensive ICU setting, and thus, reduce the cost of care. While some hospitals allow patients on
NiPPV support to be treated on a general care floor or step-down unit, most still require the higher intensity ICU environment.
Hospitals: Neonatal Care Unit
The neonatal ICU, or NICU, is the location for babies born prematurely or with medical issues that require intensive monitoring and support. Since
the lungs develop late in gestation, the most significantly premature babies require extended pulmonary support. NICUs are classified as Level I, Level II or Level
III, with Level III NICUs serving as referral centers that care for the sickest and most premature babies. Clinical outcome is paramount in NICUs, and significant
emphasis is also placed on decreasing length of stay and overall patient and family satisfaction.
The traditional mode of NiPPV respiratory support in the NICU is nasal continuous positive airway pressure, or nCPAP. nCPAP is an effective tool
for treating respiratory distress but carries an increased risk of pressure ulcers, formation of air pockets outside of the lungs and gastric distention. nCPAP typically
requires a mask and large bore tubes that blocks the face of the patient and severely limits the ability of parents to hold or bond with their child. The American
Academy of Pediatrics recommends that Level II NICUs only provide assisted ventilation on an interim basis until the infant’s condition either soon improves or
the infant can be transferred to a higher-level facility better suited to handling increasingly complex
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cases, in part due to the availability of pediatric medical subspecialists, pediatric surgical respiratory support, and physiologic monitoring equipment. This can
result in newborn babies spending their entire hospitalization far away from home, increasing the cost to the medical system and creating economic and emotional
challenges to patients and families. High Velocity Therapy technology is currently available in over 420 of the approximately 1,500 NICUs in the United States.
Long-Term Acute Care Hospitals
Long-term acute care hospitals, or LTACHs, serve patients with complex needs requiring longer hospital stays and highly specialized care.
LTACHs are designed for patients who need intense, extended care for more than 25 days. Many patients admitted to LTACHs arrive directly from the ICU of
traditional hospitals and require ventilator support. Similar to the ICU setting, reimbursement in LTACHs and in the acute space in general is capped by admission
diagnosis. As LTACHs are focused on maintaining or lowering their overall costs per treated patient, a therapeutic approach that could keep patients from going on
mechanical ventilation or that could allow patients to be weaned off mechanical ventilation more quickly and efficiently may be viewed favorably by LTACH
administrators in charge of managing the business. High Velocity Therapy technology is currently available in over 190 of the approximately 400 LTACHs in the
United States.
Our Product Portfolio
Precision Flow Systems Family
We currently offer four versions of our Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision
Flow Heliox. Our Precision Flow systems include a capital unit, a single-use disposable and a nasal interface. The capital unit contains all the electronic
components and the input gas controls that enable the delivery of breathing gas at a precise level of oxygenation at flow rates, controlled by the operator, ranging
from 1 to 40 liters per minute. All of our Precision Flow versions are integrated systems that provide precise user control of temperature, air flow and percentage
oxygen through a simple one-button interface. Setup time, including warm-up time, for all of our Precision Flow versions is less than five minutes and alarms are
incorporated into the system to alert the operator to disruption of respiratory support. All four versions are also mounted on a roll stand pole for easy transfer, use
and visualization of the displayed settings. All four versions are easy to set up and require little support to operate beyond changing sterile inhalation water bags as
needed.
The Precision Flow Hi-VNI system was fully launched in February 2019. When compared to the Precision Flow Plus, which was launched in April
2017, the Precision Flow Hi-VNI system includes incremental hardware and software updates to improve the reliability and ease of manufacture and to comply
with the Electromagnetic Compatibility or EMC 4th Edition requirements for medical devices. The primary change was to limit the maximum temperature to 39
degrees Celsius. As with the Precision Flow Plus, the Precision Flow Hi-VNI system offers connectivity to a hospital’s nurse call system to alert the staff to
disruption of the patient’s respiratory support and/or to most hospitals’ EMR systems to record the user selected and current delivered flow rate, temperature,
percent oxygen, and the status of the supply gas connections and water supply as well as any fault codes.
The Precision Flow Heliox also includes the same High Velocity Therapy technology as the other Precision Flow versions and is also able to
precisely deliver heliox gas.
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The single-use, disposable component of our Precision Flow systems has two parts: (1) the disposable patient circuit, or DPC, which includes all of
the components that generate the temperature-controlled humidified breathing gas, including the VTC and (2) the triple-lumen delivery tube which ensures the
heated, humidified gas is delivered from the DPC to the patient at constant temperature and humidification level. We also sell a series of small-bore nasal interfaces
and adapters. The interfaces we offer come in a variety of sizes, ranging from premature infants to adults, allowing clinicians to select an interface that blocks less
than half of the external opening of each nostril, thereby maximizing the technology’s ability to flush the anatomical dead space.
Components of the Precision Flow System
Capital Unit
Disposable Patient Circuit
Disposable Patient Circuit Components
Vapor Transfer Cartridge
Delivery Tube
Companion Products and Enhancements
We sell companion products that facilitate clinical use and enable rapidly growing market acceptance and expansion. These products include (i) the
Vapotherm Transfer Unit 2.0, which allows patients to be transferred between care areas within the hospital or ambulate while on therapy, (ii) the Q50 compressor,
which provides a compact, relatively low noise, low cost source of compressed air necessary to run the Precision Flow systems in areas of the hospital without
access to a wall gas source, (iii) the aerosol aeroneb adaptor, which is designed to facilitate delivery of ultrasonic aerosolized medication, (iv) an aerosol disposable
patient circuit that is designed to streamline both continuous and intermittent delivery of aerosol medication for patients on High Velocity Therapy, and (v) a
tracheostomy adaptor that simplifies the connection of the Precision Flow systems to a tracheostomy collar used to wean patients off mechanical ventilation.
Specialized disposable products also enable the delivery of specialized nitric oxide and heliox breathing gases. We also sell a new lightweight ProSoft cannula that
is designed to provide gentle contact with the skin.
In addition, we have product enhancement projects ongoing at any point in time. These enhancements incorporate customer feedback with the goal of
improving the patient and caregiver experience.
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Market Expanding Products
We are in the process of seeking FDA approval of our Oxygen Assist Module and are working with FDA to obtain an investigational device
exemption for pediatric evaluation of the Oxygen Assist Module. On April 2, 2020, the Oxygen Assist Module was granted Breakthrough Device Designation by
the FDA for on-demand titration of oxygen into warm humidified breathing gases delivered to spontaneously breathing patients based on continuous non-invasive
monitoring of pulse oxygen saturation. FDA’s Breakthrough Device Program is intended to help patients and healthcare providers receive more timely access to
breakthrough technologies that may have the potential to provide more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or
conditions. The program is designed to expedite the development, assessment and FDA review of breakthrough technologies.
We are also in the process of seeking FDA clearance for our High Velocity Therapy 2.0 (“HVT 2.0”) as the next generation of our Precision Flow
system. Subject to receipt of FDA clearance, the HVT 2.0 is targeted to be released in the United States in the second half of 2021. The HVT 2.0 represents the next
generation of High Velocity Therapy. The system retains the core competencies of the current Precision Flow platform and, with an internal blower, is designed to
eliminate the need for wall air. With a variable oxygen connection (tank, wall or concentrator) the HVT 2.0 system is designed to support patients wherever they
need respiratory support, including outside of the hospital in a home or future use in a field transport setting. A large intuitive display with touchscreen operation,
on screen troubleshooting guidance, and a fully assembled disposable are intended to minimize clinician time spent on operating the equipment so they can focus
on their patient.
Despite not yet having received 510(k) clearance from the FDA, on February 12, 2021, the FDA notified us that, under FDA Emergency Use
Authorization (“EUA”) issued on March 24, 2020, the HVT 2.0 was authorized for emergency use in healthcare settings to treat patients during the COVID-19
pandemic, subject to the conditions set forth in the EUA.
Clinical Results and Studies and Economic Data
We have a compelling body of clinical studies and economic data that supports the use of the Precision Flow system, which uses High Velocity
Therapy technology, for treating respiratory distress and providing non-invasive ventilatory support. Maintaining an ongoing cadence of clinical study and
economic data publications is an important component of our strategy, including both Vapotherm-sponsored research and providing grants for investigator-initiated
research.
High Velocity Therapy Compared to NiPPV
A significant body of clinical studies across multiple spontaneously-breathing patient populations has validated High Velocity Therapy technology
as a safe and effective alternative to NiPPV. Additionally, High Velocity Therapy affects ventilatory support through a process called high-velocity nasal
insufflation. In the adult population, we sponsored a 204 patient (100 NiPPV patients and 104 High Velocity Therapy technology patients), multisite randomized
controlled trial in the ED, which was published in the July 2018 issue of Annals of Emergency Medicine. Patients in respiratory distress were recruited with the
need for non-invasive ventilatory support in the ED. Of the patients who were enrolled in the study, 65 were suffering from respiratory failure due to COPD
including hypercapnia, the inability to effectively clear carbon dioxide from the body. The primary outcome measure was therapy failure requiring intubation, the
insertion of a plastic tube into the trachea to maintain an open airway for mechanical ventilation, within 72 hours of initiation or a clinical decision to cross-over to
the alternative therapy. This study concluded that high velocity nasal insufflation delivered with High Velocity Therapy technology is non-inferior to NiPPV in
preventing patients from being intubated and receiving mechanical ventilation.
Patients were recruited with the need for non-invasive ventilatory support and followed for 72 hours. The primary outcome measure was respiratory
failure requiring intubation within 72 hours of initiation or clinical decision to cross-over to the alternative therapy. The outcome showed High Velocity Therapy
technology was non-inferior to NiPPV. The following chart conveys the rates of failure resulting in intubation for those randomized to High Velocity Therapy
technology and NiPPV. There was no statistically significant difference between the two.
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Rate of intubation in a 204-patient, multicenter randomized clinical trial of ED patients with respiratory distress.
Rate of Intubation
*High Velocity Therapy does not provide the total ventilatory requirements of patients.
Secondary outcomes included monitoring of vital signs, oxygen and carbon dioxide in the blood, and patient reports of their perception of shortness
of breath were monitored during the first four hours of therapy, and High Velocity Therapy technology performed as well as NiPPV during this period. The
important measure of the effect of the therapy on providing ventilatory support is blood carbon dioxide and how that changes over time. Elevated blood carbon
dioxide levels will generally decline over time when a patient receives adequate ventilatory support. Use of both High Velocity Therapy technology and NiPPV led
to similar decreases in carbon dioxide levels within the blood.
The chart below demonstrates the changes observed in blood gas values for both High Velocity Therapy technology and NiPPV therapy. Both begin
at baseline with elevated carbon dioxide values, and both drop at a similar rate over time, at one hour and four hours of therapy.
Blood carbon dioxide levels over time
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The clinicians involved in the trial were asked for their perception of the various therapies. The clinicians reported a higher median score for High
Velocity Therapy technology than NiPPV for patient comfort, ease of use, clinical response and need for monitoring. The clinicians reported the same median score
for High Velocity Therapy technology and NiPPV for technical/clinical complexity. The authors also concluded that patients treated with High Velocity Therapy
technology can more easily communicate, receive oral medications, and eat without interruption of therapy, which are limitations of NiPPV.
Median clinicians’ perception of High Velocity Therapy to NiPPV on a scale of 1 to 5 where 5 represents the best score
In February 2018, the NEJM Journal Watch, which reviews and summarizes medical research studies across 12 specialties, concluded after
reviewing our Company-sponsored ED study described above that High Velocity Therapy technology is easier to set up than NiPPV. Further, the NEJM Journal
Watch noted that High Velocity Therapy technology has the potential to replace NiPPV in EDs, ICUs and ambulances.
A subgroup analysis of these data was published in Heart and Lung in April 2020 looking at the effectiveness of High Velocity Therapy technology
specifically in the 65 patients among the 204 in this study that were diagnosed with significant hypercapnia. The ability of High Velocity Therapy technology to
adequately provide ventilatory support is particularly important in this population. This subgroup analysis showed that 6% of the High Velocity Therapy
technology patients and 16% of the NiPPV patients required intubation within the first 72 hours of care after admission, with comparable ability to reduce carbon
dioxide levels over time. The subgroup analysis concluded that High Velocity Therapy technology provided ventilatory support similar to NiPPV in patients
presenting with hypercapnic respiratory distress. Another sub-group analysis of these data was published in the American Journal of Emergency Medicine in April
2020 looking at the effectiveness of High Velocity Therapy technology specifically in the 42 patients from the primary ED study who presented with
decompensated heart failure. This subgroup analysis demonstrated comparable results between High Velocity Therapy technology and NiPPV. The results from
these subgroup analyses may be valued by ED physicians who need to make treatment decisions before knowing the patient diagnosis.
High Velocity Therapy technology was also observed in a third-party study published in the May 2013 issue of the Journal of Pediatrics to have
similar efficacy when compared to nCPAP in a randomized controlled trial of premature infants who were receiving non-invasive ventilatory support after being
removed from intubation, or extubation. nCPAP is the standard non-invasive therapy for management of respiratory distress in neonates in the NICU. nCPAP is
administered using a tight-fitting nasal plugging cannula and delivers pressure to the lungs. It is efficacious, but it is also associated with trauma to the face of the
baby, pressure and volume-related complications to the chest, and limitation of access to both parents and caregivers to maintain close contact with the newborns.
High Velocity Therapy technology produced similar rates of extubation failure as the standard of care nCPAP, and significantly reduced nasal trauma.
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Additionally, High Velocity Therapy technology was observed in a third-party study published in the May 2016 issue of JAMA Pediatrics to be
non-inferior to NiPPV as a primary respiratory support therapy in a randomized controlled clinical trial of premature newborn infants with respiratory distress
syndrome. In this trial, 316 infants were randomized to High Velocity Therapy technology or NiPPV. The primary outcome of the trial was the number of patients
who required intubation and mechanical ventilation within 72 hours, and there was no significant difference seen between High Velocity Therapy technology and
NiPPV. No significant differences in other measures such as the length of time on respiratory therapy, infection rates or other prematurity-associated complications
such as bronchopulmonary dysplasia, a disease in newborns caused by destruction of lung tissue, were reported.
The results from an independent clinical trial of High Velocity Therapy technology versus NiPPV in 76 preterm infants published in the May 2015
issue of Pediatric Pulmonology similarly suggest that High Velocity Therapy technology is non-inferior to NiPPV. These trials support the use of High Velocity
Therapy technology as an alternative to nCPAP and NiPPV for primary and post-extubation support of neonates in respiratory distress.
Economic Cost Savings Data
An independent third-party study published in the June 2005 issue of Critical Care Medicine determined the average cost for a typical three day stay
in the ICU in the United States is $13,347. The cost increased by an average of 47% to $19,558 when the patient required mechanical ventilation. To the extent our
products are able to reduce the number of patients requiring transfer to the ICU, these treatment costs can be reduced. Treatment of patients with High Velocity
Therapy technology can impact admission and placement of patients due to the lower complexity of High Velocity Therapy technology as compared to NiPPV.
This is dependent on the individual sites, which often require admission to the high cost and resource-constrained ICUs if NiPPV is initiated on the patient. In a
multicenter utilization study we sponsored, published in the Winter 2015 issue of Respiratory Therapy, of the 128 patients with respiratory distress treated in
emergency rooms with High Velocity Therapy technology, treating physicians perceived that 54% of patients could be admitted to the general care floor, as
opposed to the ICU. This finding is exemplified by a single-patient case study report from Athens Regional Medical Center. In this report, a patient with end-stage
COPD who was well-known to that facility had recently been discharged from the hospital following a three day stay in the ICU where the patient was intubated
and mechanically ventilated. Upon a subsequent arrival in the ED with severe difficulty breathing, this patient was treated using High Velocity Therapy technology
and within 44 minutes her respiratory rate had decreased from 36 to 20 breaths per minute. Blood measurements later confirmed a normalization of pH, reduction
in carbon dioxide, and maintenance of oxygenated levels of hemoglobin. The patient was kept overnight and discharged the following day. We believe the less
intensive nature of the High Velocity Therapy technology permitted the physician to direct the patient to the general care floor, rather than the ICU, in this situation
resulting in a savings of an estimated $3,750 for this hospital (estimated $4,500 cost for a three day stay in the ICU versus an estimated $750 cost for a one day stay
on the general care floor).
Additionally, patients who are intolerant of NiPPV devices are often sedated and potentially intubated and escalated to mechanical ventilation, an
invasive procedure that often results in increased care costs, increased lengths of stay, ventilator dependence, and increased morbidity and mortality. Because
patients who are placed on High Velocity Therapy technology are no more likely to fail to intubation than NiPPV patients and High Velocity Therapy technology
may be more easily tolerated, its utilization has the ability to reduce the number of NiPPV intolerant patients who otherwise would have been intubated. Therefore,
in addition to increased patient benefits due to potentially avoiding intubation for patients who are intolerant of the masks associated with NiPPV, there may be
substantial savings to the healthcare system for each patient that can be successfully treated with High Velocity Therapy technology.
Studies have shown that reducing the duration of mechanical ventilation days is an important element in reducing the potential for ventilator-
associated consequences, including pneumonia, a life-threatening complication associated with mechanical ventilation. One role LTACHs play is to help wean
patients from their dependence on mechanical ventilation. Gaylord Hospital, a LTACH, presented at the 2017 National Association of Long Term Hospital
conference that their adoption of High Velocity Therapy technology helped them achieve an average reduction of four days of mechanical ventilation per patient,
yielding an annual average cost savings for that facility of $394,000 between 2012 and 2015.
Oxygen Assist Module Prototype Study
Our Oxygen Assist Module helps clinicians maintain oxygen levels within a target range by simplifying and automating adjustments to most
versions of our Precision Flow systems’ delivery of oxygenated breathing gases. The adjustments are based on the module’s continuous readings of a patient’s
oxygen from a standard pulse oximetry probe. In November 2018, the Archives of Disease in Childhood: Fetal & Neonatal edition published the results of our
sponsored prospective, two-center, order-randomized cross-over study performed at two NICUs in the United Kingdom, designed to evaluate the performance of a
prototype of our Oxygen Assist Module technology as a module to our Precision Flow Plus system. The Oxygen Assist Module is referred to in the study as the
IntellO2.
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The target SpO2 range set in this study was 90-95% in preterm babies being supported by High Velocity Therapy technology. Babies were
randomized to receive 24 hours of either manual control or automatic control using the Oxygen Assist Module. After the first 24 hours, the babies were crossed
over to the alternative therapy for another 24 hours. The primary outcome measure was percent of time spent within the target SpO2 range. Secondary outcomes
included the overall proportion and durations of SpO2 within specified hyperoxemic and hypoxemic ranges, and the characteristics of the times within and outside
SpO2 target range. Data were analyzed from 30 preterm infants with median gestation at birth of 26 (24–27) weeks, age during the study of 29 (18–53) days and
study weight 1080 (959–1443) g.
When using the Oxygen Assist Module, clinician performance in maintaining SpO2 within the target SpO2 range was significantly greater
proportion of the time than during manual control alone, while at the same time requiring significantly fewer manual adjustments to the equipment. The median
target SpO2 range was achieved 80% of the time on automated (Oxygen Assist Module) control compared with 49% under manual control. In addition to the
greater proportion of time in the target range, there were also fewer episodes of transient severe hypoxemia (defined as SpO2 below 80% lasting at least 60
seconds) under automated control compared with manual control. There were no differences in the number of episodes per hour of SpO2 above 98% between the
study arms, but the average episode duration and the total percentage of time spent above the SpO2 target range was significantly lower under Oxygen Assist
Module automated control as compared to manual control.
The chart below depicts a composite SpO2 histogram of all patient data (n=30) with paired bars as automated control (white) and manual control
(black). The frequency of SpO2 values denotes the proportion of total time (%) spent at each SpO2, with aggregated SpO2 values <80%. The target SpO2 range for
babies receiving oxygen (90%–95%) is illustrated in the blue outlines. The chart is based on graphic found in the aforementioned November 2018 edition of the
Archives of Disease in Childhood: Fetal & Neonatal edition.
Sales and Marketing
As of December 31, 2020, our sales organization consisted of 121 full time employees serving our U.S. market across 60 sales territories and 27 full
time employees serving international markets, 11 of whom serve our U.K. market. In 2020, 78.9% of our revenue was derived in the United States and 21.1% was
derived outside the United States. No single customer accounted for more than 10% of our revenue.
Commercial Activities Within the United States
We work to grow the sales of our disposable products by increasing the installed base of our Precision Flow systems. We utilize a direct sales
organization in the United States that leverages numerous call points within the hospital, including physicians, respiratory therapists and nurses. Our sales team is
focused on building relationships with clinicians across care settings, including EDs and adult, pediatric and neonatal ICUs, enabling our products to follow
patients through the care continuum. We offer different options to our hospital customers for acquiring Precision Flow capital units, ranging from the purchase of
the Precision Flow capital units with payment in full at the time of purchase, to financed purchases of the Precision Flow capital units, to bundled discounts
involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of
disposable products.
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We have structured our sales and clinical support team with specialized roles to sell our Precision Flow systems and single-use disposables, while
delivering customer support and medical education on an ongoing basis. Our field sales representatives are responsible for identifying key customer prospects,
educating them on the value of our High Velocity Therapy technology, gaining their commitment for acquiring our capital units and introducing our clinical
educators.
Our clinical educators enhance the experience for customers and help facilitate adoption. We established a medical education department that
develops and delivers physician-to-physician, Company-sponsored education events, and sponsors continuing medical education programs focused on addressing
respiratory distress.
Our customer service and technical support team is responsible for addressing maintenance, repairs and general product and technical questions to
help ensure uninterrupted patient treatments. We also use an inbound digital marketing campaign to drive leads and accelerate sales. We leverage the internet,
social media, and email channels to increase brand awareness and educate customers. For example, during 2020 we were able to utilize our online Vapotherm
Academy to train more than 23,000 caregivers on High Velocity Therapy technology, which proved critical during the COVID-19 pandemic when we were not
able to directly access many hospitals in the United States, United Kingdom, and around the world. Data and analytics drive our decision making and help us hone
our messaging and strategies. Educated and interested potential customers convert to sales prospects on our website and all leads integrate with our CRM system.
Commercial Activities Outside of the United States
We conduct our international business in the United Kingdom through a direct sales organization operated by our wholly owned subsidiary, Solus
Medical Limited (“Solus Medical”). We conduct our remaining international business through a distributor model, partnering with 47 distributors in 51 countries
around the world. We focus our efforts on our most established and fastest growing markets, including the United Kingdom, Germany, Brazil, Mexico, Spain, Italy
and Japan. We have directly employed or retained through professional employment organizations 16 individuals to support our distributors in several of these key
markets. Additionally, in the United Kingdom, our subsidiary Solus Medical now has 11 full time commercial employees. As in the United States, our direct sales
team in the United Kingdom and our distributors around the world work to grow the sales of our disposable products by increasing the installed base of our
Precision Flow Systems. Our direct sales team in the United Kingdom and our distributors around the world work to offer different options to our customers for
acquiring Precision Flow capital units as appropriate on a country by country basis, ranging from the purchase of the Precision Flow capital units with payment in
full at the time of purchase, to financed purchases of the Precision Flow capital units, to bundled discounts involving the placement of Precision Flow capital units
for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. We leverage our digital marketing
platform abroad to educate our international clinicians, focusing primarily in the United Kingdom. We continue to evaluate market opportunities outside of the
United States for business expansion.
Reimbursement
Payment for patient care in the United States is generally made by third-party payors, including private insurers and government healthcare programs.
The reimbursement from third-party payors for patients that require High Velocity Therapy technology is typically intended to cover the overall cost of treatment,
including the cost of our devices used during the procedure as well as the overhead cost associated with the facility where the procedure is performed. We do not
directly bill any third-party payors and receive payment from the hospital or providers for our devices.
Reimbursement for hospital services, including the cost of our devices, during an inpatient stay generally is made to the healthcare provider under a
prospective payment system that is determined by a classification system known as Diagnosis Related Groups, or DRGs. A DRG is a statistical system of
classifying any inpatient stay into groups for the purposes of payment using a number of factors including, among other things, the principal diagnosis, major
procedures, discharge status, patient age and complicating secondary diagnoses. DRGs are used in both acute and chronic care settings and employed by both
private insurers and government payors. Rather than paying the hospital or provider for what it spent caring for a patient, payors pay a fixed amount based on the
patient’s DRG. Similar reimbursement methodologies that bundle the cost of our devices into a provider’s payment also exist for services provided to patients in
the ED and out-patient settings.
Research and Development
As of December 31, 2020, our research and development team consisted of 24 individuals, including mechanical, electrical, software, biomedical, and
plastic engineers. For the years ended December 31, 2019 and 2020, we incurred research and development expenses of $13.4 million and $17.0 million,
respectively.
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Maintaining a strong cadence of new product introductions is an integral part of our strategy. We launched our Oxygen Assist Module in the United
Kingdom, select European markets, and Israel in late 2020 and are presently seeking FDA approval of this technology in the United States. We previously entered
into an agreement with a third party for a perpetual, exclusive, world-wide license to certain intellectual property related to the Oxygen Assist Module for the
delivery of non-invasive ventilatory support. Pursuant to the agreement, we began paying a royalty starting on the date of the first commercial sale of the Oxygen
Assist Module, and continuing for a ten year term equal to 10% of the first $3.0 million of Oxygen Assist Module revenue, 5% of the next $6.0 million of Oxygen
Assist Module revenue, and 2% of any additional Oxygen Assist Module revenue until the end of the ten year term. We also license the pulse oximetry technology
utilized with the Oxygen Assist Module from other manufacturers. Finally, HGE has a license agreement with Temple University under which HGE is required to
pay a 1% royalty on all HGE commercial sales of HGE service offerings relating to the clinical management of and data regarding patients with COPD. The license
agreement will remain in effect until the last to occur of the following (i) August 1, 2022, (ii) the expiration of the life of the last to expire of the licensed patents,
and (iii) a complete cessation of reasonable efforts on the part of HGE to sell, service, or otherwise derive revenue from any licensed product.
In addition, we have sought and continue to seek to expand the FDA-cleared indications for High Velocity Therapy technology. For instance, in
April 2018, the FDA granted our de novo request for an expanded indication to use with the Precision Flow Hi-VNI system, which incorporates High Velocity
Therapy technology. The expanded indication for use builds on the existing indication for delivering heated, humidified and oxygenated breathing gases by
recognizing a mechanism of action, high velocity nasal insufflation, as well as adding an intended use, which currently states that the device provides ventilatory
support to spontaneously breathing patients suffering from respiratory distress in a hospital setting. Further, the expanded indication states this system does not
provide the total ventilatory requirements for patients. The FDA also created a new classification regulation under which this system is currently the only product.
The indications of our product are similar to NiPPV, but the therapy has a different mechanism of action, using velocity instead of pressure to provide ventilatory
support for patients in respiratory distress.
Competition
The medical device industry is subject to rapid change from the introduction of new products and technologies and other activities of industry
participants. We compete as a clinically validated alternative to NiPPV for treatment of patients who are suffering from respiratory distress.
As our products are capable of treating respiratory distress, including those suffering from low oxygen levels, as well as those who have historically
required NiPPV because they were unable to flush retained carbon dioxide from their respiratory system, we consider our primary competition to be NiPPV
manufacturers, including Philips Respironics. We also compete on a secondary basis with manufacturers of conventional heated humidified high flow oxygen
delivery products, such as Fisher & Paykel Healthcare.
We believe that the primary competitive factors in the respiratory distress market are:
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product efficacy and ability to prevent intubation;
product safety, reliability and durability;
product ease of use and patient comfort;
quality and volume of clinical evidence;
product support and service;
pricing and revenue strategies;
technological innovation;
effective marketing to and education of clinicians;
sales force experience and access; and
Company, product and brand recognition.
Other companies that offer treatments for respiratory distress against which we compete are larger businesses that have greater resources than we do.
NiPPV is an established proven therapy and is currently better known to physicians, nurses and respiratory therapists, and it is currently considered the standard of
care for treating patients with respiratory distress. However, we believe clinician awareness of High Velocity Therapy technology is increasing, particularly as a
result of increased awareness of high flow therapy during the COVID-19 pandemic, including recognition by the CDC, WHO, NIH, Society for Critical Care
Medicine, American College of Emergency Physicians, and the Chinese, German, Italian, and
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Australian thoracic societies of high flow therapy as an appropriate first line therapy for those suffering from low oxygen levels in connection with COVID-19.
HGE competes in the technology enabled services and digital health industries, where some of its competitors include Livongo Health Inc., Vivify Health Inc.,
Propeller Health Inc., Conversa and Spire Health Inc.
Intellectual Property Portfolio
As of December 31, 2020, we held more than 129 issued patents and more than 91 patent applications, totaling an active patent portfolio of over
219 filings granted or pending, with expiration dates ranging from February 2021 through August 2038. These filings can be organized into four main
categories representing our patent portfolio: Precision Flow, next generation system filings, Flow Rest, and various accessory technologies. In the
United States, we hold 11 issued patents for the Precision Flow family, seven for the Flow Rest family (a legacy device), eight for the accessories
(including the Oxygen Assist Module), and four for our next generation technology. The Precision Flow patents are expected to expire between
February 2021 and March 2033, the Flow Rest patents are expected to expire between November 2026 and January 2033, and the accessories patents
are expected to expire between December 2031 and August 2038, with the next generation patents expected to expire between November 2033 and
October 2037. Additionally, we have nine pending U.S. patent applications directed to our next generation technologies, four pending U.S. patent
applications directed to our Precision Flow systems technology, five pending U.S. patent application directed to our Flow Rest technology and 14
pending U.S. patent applications directed to accessories for the aforementioned technologies (including the Oxygen Assist Module). We maintain a
strategic international patent portfolio primarily in the European Union, Australia, Japan and China, with other counties pursued in select circumstances.
Since 2016, we have maintained and executed on deliberate innovation areas designed to sustain the continued growth of our patent portfolio to protect
our proprietary technology from competitor use.
As of December 31, 2020, we have at least 11 trademark registrations with the U.S. Patent and Trademark Office, at least 4 trademarks applications
pending with the U.S. Patent and Trademark Office, at least 18 trademarks with common law rights, and a wide range of international protection of its trademarks
with a focus of increasing brand awareness and market penetration globally.
Manufacturing and Supply
We manage all aspects of product supply through our operations team based in Exeter, New Hampshire. We manufacture certain components of our
Precision Flow systems in-house, but primarily rely on third-party suppliers to manufacture the majority of our Precision Flow systems’ components. We outsource
all of the manufacturing of our Oxygen Assist Module. Outsourcing manufacturing of both components or finished goods, as applicable, reduces our need for
capital investment and provides expertise and the capacity necessary to meet demand for our Precision Flow systems and Oxygen Assist Module. We assess,
qualify and select our suppliers with a view towards ensuring that our Precision Flow systems and Oxygen Assist Module, and their components are safe and
effective, adhere to all applicable regulations, are of the highest quality, and meet our supply needs. Our quality assurance process monitors and maintains supplier
performance through qualification and periodic supplier reviews and audits against the requirements of the FDA, the International Organization for Standardization
and our own policies and procedures.
Certain components used in our Precision Flow systems, and in the case of our Oxygen Assist Module, the finished good itself, are supplied by single
source suppliers. Our suppliers manufacture the components they produce for us and test our components and devices to our specifications. We intend to maintain
sufficient levels of inventory to enable us to continue our operations while we obtain another supplier if one or more of our single source suppliers were to
encounter a delay in supply or end supply.
Government Regulation
Our products and our operations are subject to extensive regulation by the FDA and other federal and state authorities in the United States, as well as
comparable authorities in the EEA (which is comprised of the 28 Member States of the European Union plus Norway, Liechtenstein and Iceland). Our products are
subject to regulation as medical devices under the Federal Food, Drug, and Cosmetic Act, or FDCA, as implemented and enforced by the FDA. The FDA regulates
the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping,
premarket clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical
devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
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In addition to U.S. regulations, we are subject to a variety of regulations in the EEA governing clinical trials and the commercial sales and distribution
of our products. Whether or not we have or are required to obtain FDA clearance or approval for a product, we will be required to obtain authorization before
commencing clinical trials and to obtain marketing authorization or approval of our products under the comparable regulatory authorities of countries outside of the
United States before we can commence clinical trials or commercialize our products in those countries. The approval process varies from country to country and
the time may be longer or shorter than that required for FDA clearance or approval.
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device commercially distributed in the United States requires FDA clearance of a 510(k) premarket
notification, granting of a de novo request, or approval of an application for premarket approval, or PMA. Under the FDCA, medical devices are classified into one
of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of regulatory controls needed to
ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by
adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the Quality System Regulation, or QSR,
facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling. Class II devices are subject to the FDA’s
General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include
performance standards, post-market surveillance, patient registries and FDA guidance documents. While most Class I devices are exempt from the 510(k)
premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the
FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket
notification is generally known as 510(k) clearance.
The 510(k) Process
Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification demonstrating that the device is “substantially
equivalent” to either a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted, and for
which a PMA is not required, a device that has been reclassified from Class III to Class II or Class I, or another commercially available device that was cleared
through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the
same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness
than the predicate device. Clinical data is sometimes required to support substantial equivalence.
After a 510(k) premarket notification is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information
for substantive review, the FDA will refuse to accept the 510(k) notification. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is
required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and
clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including
clinical data, to make a determination regarding substantial equivalence, which may significantly prolong the review process.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to
commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically
designated under the FDCA as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification
determination for the device in accordance with the de novo process, which is a route to market for novel medical devices that are low to moderate risk and are not
substantially equivalent to a predicate device.
After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute
a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, a de novo grant or PMA
approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) (or a PMA) in the first instance, but the
FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications today are accomplished by a manufacturer
documenting the change in an internal letter-to-file. The FDA can review these letters to file during an inspection. If the FDA disagrees with a manufacturer’s
determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) clearance, de novo grant or
PMA approval is obtained. In these circumstances, we may be subject to significant regulatory fines or penalties.
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De Novo Classification
Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified under the FDCA into Class III
regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a route to market for low to moderate risk
medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III
Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request
down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and
approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012, or FDASIA, a medical device
could be eligible for de novo classification only if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that
the device was not substantially equivalent to a legally marketed predicate device. FDASIA streamlined the de novo classification pathway by permitting
manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially
equivalent determination. Under FDASIA, the FDA is required to classify the device within 120 days following receipt of the de novo application. If the
manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable
assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the request if it identifies a legally marketed predicate device that
would be appropriate for a 510(k) notification, determines that the device is not low to moderate risk, or that general controls would be inadequate to control the
risks and special controls cannot be developed. After a device receives de novo classification, any modification that could significantly affect its safety or efficacy,
or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, another de novo
petition or even PMA approval.
Clinical Trials
Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations of
investigational devices to determine safety and effectiveness must be conducted in accordance with the FDA’s IDE regulations which govern investigational device
labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and
study investigators. If the device presents a “significant risk” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE
application to the FDA, which must become effective prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious
risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing,
mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE
application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing
protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the
investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may
permit a clinical trial to proceed under a conditional approval.
In addition, the study must be approved by, and conducted under the oversight of, an Institutional Review Board, or IRB. The IRB is responsible for
the initial and continuing review of the study and may pose additional requirements for the conduct of the study. If an IDE application is allowed to go into effect
by the FDA and the study approved by the reviewing IRB(s), human clinical trials may begin at a specific number of investigational sites with a specific number of
subjects as set forth in the study protocol. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval
for the trial by one or more IRBs without separate review from the FDA, but must still follow abbreviated IDE requirements, such as monitoring the investigation,
ensuring that the investigators obtain informed consent, and labeling and record-keeping requirements. Acceptance of an IDE application for review does not
guarantee that the FDA will allow the IDE to become effective and, if it does become effective, the FDA may or may not determine that the data derived from the
trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and allowed to go
into effect by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the
rights, safety or welfare of human subjects.
During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical
investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of
investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA regulations and
must obtain patient informed consent, follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all
reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for
various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.
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Post-market Regulation
After a device is cleared or approved for marketing, numerous and extensive regulatory requirements may continue to apply. These include but are
not limited to:
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annual and updated establishment registration and device listing with the FDA;
QSR requirements, which require manufacturers to follow stringent design, testing, control, documentation, complaint handling and other
quality assurance procedures during all aspects of the design and manufacturing process;
advertising and promotion requirements;
restrictions on sale, distribution or use of a device;
labeling and marketing regulations, which require that promotion is truthful, not misleading, and provides adequate directions for use and that
all claims are substantiated, and also prohibit the promotion of products for unapproved or “off-label” uses and impose other restrictions on
labeling;
the federal Physician Sunshine Act and various state and foreign laws on reporting remunerative relationships with health care customers;
the federal Anti-Kickback Statute (and similar state laws) prohibiting, among other things, soliciting, receiving, offering or providing
remuneration intended to induce the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as
Medicare or Medicaid. A person or entity does not have to have actual knowledge of this statute or specific intent to violate it to have committed
a violation;
the federal False Claims Act (and similar state laws) prohibiting, among other things, knowingly presenting, or causing to be presented, claims
for payment or approval to the federal government that are false or fraudulent, knowingly making a false statement material to an obligation to
pay or transmit money or property to the federal government or knowingly concealing, or knowingly and improperly avoiding or decreasing, an
obligation to pay or transmit money to the federal government. The government may assert that a claim that includes items or services resulting
from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statute;
clearance or approval of product modifications to legally marketed devices that could significantly affect safety or effectiveness or that would
constitute a major change in intended use;
medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed
to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a
death or serious injury, if the malfunction were to recur;
correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or
removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;
complying with the federal law and regulations requiring Unique Device Identifiers on devices and also requiring the submission of certain
information about each device to the FDA’s Global Unique Device Identification Database;
the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of
governing laws and regulations if there is a reasonable probability that the use of the device would cause a serious, adverse health consequence
or death; and
post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to
provide additional safety and effectiveness data for the device.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory
requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:
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warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
recalls, withdrawals, or administrative detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
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refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
withdrawing 510(k) clearances or PMA approvals that have already been granted;
refusal to grant export or import approvals for our products; or
criminal prosecution.
Regulation of Medical Devices in the EEA
There is currently no premarket government review of medical devices in the EEA. However, all medical devices placed on the market in the EEA
must meet the relevant essential requirements laid down in Annex I of Directive 93/42/EEC concerning medical devices, or the Medical Devices Directive. The
most fundamental essential requirement is that a medical device must be designed and manufactured in such a way that it will not compromise the clinical
condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performances intended by the manufacturer and
be designed, manufactured and packaged in a suitable manner. The European Commission has adopted various standards applicable to medical devices. These
include standards governing common requirements, such as sterilization and safety of medical electrical equipment, and product standards for certain types of
medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory, compliance with these standards is viewed as the
easiest way to satisfy the essential requirements as a practical matter. Compliance with a standard developed to implement an essential requirement also creates a
rebuttable presumption that the device satisfies that essential requirement.
To demonstrate compliance with the essential requirements laid down in Annex I to the Medical Devices Directive, medical device manufacturers
must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Conformity assessment procedures
require an assessment of available clinical evidence, literature data for the product and post-market experience in respect of similar products already marketed.
Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can self-declare the conformity of its products with the
essential requirements (except for any parts which relate to sterility or metrology), a conformity assessment procedure requires the intervention of a Notified Body.
Notified bodies are often separate entities and are authorized or licensed to perform such assessments by government authorities. The notified body would typically
audit and examine a product’s technical dossiers and the manufacturers’ quality system. If satisfied that the relevant product conforms to the relevant essential
requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer
may then apply the CE Mark to the device, which allows the device to be placed on the market throughout the EEA. Once the product has been placed on the
market in the EEA, the manufacturer must comply with requirements for reporting incidents and field safety corrective actions associated with the medical device.
In order to demonstrate safety and efficacy for their medical devices, manufacturers must conduct clinical investigations in accordance with the
requirements of Annex X to the Medical Devices Directive, and applicable European and International Organization for Standardization standards, as implemented
or adopted in the EEA member states. Clinical trials for medical devices usually require the approval of an ethics review board and approval by or notification to
the national regulatory authorities. Both regulators and ethics committees also require the submission of serious adverse event reports during a study and may
request a copy of the final study report.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU
Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA member States, the regulations would be directly
applicable, i.e., without the need for adoption of EEA member State laws implementing them, in all EEA member States and are intended to eliminate current
differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among other things, is intended to establish a
uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while
supporting innovation.
The Medical Devices Regulation will take effect on May 26, 2021. Once applicable, the new regulations will among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the
market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
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set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in
the European Union; and
strengthen rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts
before they are placed on the market.
We are subject to regulations and product registration requirements in many foreign countries in which we may sell our products, including in the
areas of:
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design, development, manufacturing and testing;
product standards;
product safety;
product safety reporting;
marketing, sales and distribution;
packaging and storage requirements;
labeling requirements;
content and language of instructions for use;
clinical trials;
record keeping procedures;
advertising and promotion;
recalls and field corrective actions;
post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or
serious injury;
import and export restrictions;
tariff regulations, duties and tax requirements;
registration for reimbursement; and
necessity of testing performed in country by distributors for licensees.
The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements
for licensing a product in a foreign country may differ significantly from FDA requirements.
Regulation of Medical Devices in China
Depending on the product risk level, each imported medical device commercially marketed and distributed in China requires a notification to or a
registration with China’s National Medical Products Administration (“NMPA”, formerly known as CFDA). Under the current Chinese Medical Device Regulation
(State Council Order. #680, effective since 2017), medical devices are classified into one of three classes—Class I, Class II or Class III. Class I includes devices
with lowest risks to patients, whose safety and effectiveness can be assured by general risk control mechanisms. Class I devices can be marketed in China through a
notification to the NMPA. Class II includes devices with medium risks to patients and are under special control of the NMPA. Class III devices are those with high
risks to patients, such as life-sustaining, life-supporting or implantable devices, and are under the most stringent regulatory control. Both Class II and Class III
devices require a registration with the NMPA.
We plan to initiate a product registration process in China for our Precision Flow systems, VTU and nasal interfaces in 2021. Our Precision Flow
systems, VTU and nasal interfaces, which provide ventilatory support to neonatal and pediatric patients, as well as patients in EDs, ICUs, general care floors and
LTACHs, are likely to be classified as Class II or Class III device in China, subject to the NMPA’s classification designation.
Before registering an imported Class II or Class III medical device with the NMPA, manufacturers are required to prepare the Product Technical
Requirements (PTRs) that consist of performance specifications and testing methods specific to their products and in compliance with applicable Chinese device
standards. Manufacturers must engage a NMPA-accredited laboratory to conduct an in-country type testing against the PTRs and applicable Chinese device
standards. A type testing
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process typically takes 3-6 months or longer. Under the current medical device regulations, imported medical devices must first be approved for marketing in their
country of origin. Manufacturers are obligated to provide the appropriate documents (e.g. CE Mark, 510(k) letter, approved Premarket Approval Application)
showing that the device has been approved for marketing in a country where the manufacturer is incorporated or the manufacturing site resides.
All of imported Class II and III devices are required to conduct local clinical trials in China unless (i) they are exempted from clinical trials under
the Clinical Trial Exemption List published by the NMPA from time to time, (ii) manufacturers can demonstrate “substantial equivalence” to a predicate device
currently on the market, or (iii) if there are overseas clinical study data or real world evidence that can prove product safety and effectiveness in Chinese patient
populations. Clinical trials for some particular high risk devices are mandatory and need approval from the NMPA in advance. Clinical trials for other devices
require a pre-notification to the NMPA. All registration trials must be approved by and conducted under the oversight of an Institutional Review Board, or Ethics
Committee.
The NMPA, after receiving an application for registration, will have the Center for Medical Device Evaluation (“CMDE”) review the application
dossier and notify the applicant whether the application for registration is approved. The CMDE may require applicants to submit supplemental information
(including clinical data and technical data) for its review. Applicants will be given 1 year to prepare and submit the required information. The CMDE’s statutory
time limit for technical review is 60 working days for Class II devices and 90 working days for Class III devices. Subject to specifics of a product, an approval
process could take longer, and clearance is never guaranteed. Fast track or priority review pathways can be available for devices that are innovative, address urgent
unmet clinical needs, or have significant clinical value.
After a device is approved by the NMPA for marketing, numerous and extensive regulatory requirements will apply post marketing authorization.
These include but are not limited to:
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Completion of any post-approval studies that may be required by the NMPA upon its conditional approval; Renewal of the registration with the
NMPA every 5 years since the initial registration;
GMP compliance requirements, which require foreign manufacturers to follow stringent design, testing, control, documentation, complaint
handling and other quality assurance procedures during all stages of the manufacturing process;
Labeling, advertising and promotion requirements, which require that claims are truthful, non-misleading, and substantiated. Instructions for use
should be clear to guide correct use of the products, and manufacturers are prohibited from unapproved or “off-label” uses;
Medical device adverse event monitoring, reporting and re-evaluation obligations, which require a manufacturer to report to the NMPA if a
device it markets may have caused or contributed to death or serious injury, would be likely to cause or contribute to death or serious injury, if
malfunction were to recur; and
Medical device recall obligations, which require that manufacturers to report to the NMPA any field corrections and product removals that are
undertaken to reduce an unreasonable risk to health posed by the device or to remediate a violation of any applicable Chinese device standards,
PTRs, or any applicable regulatory requirements that may present an unreasonable risk; the NMPA also has the authority to order a
manufacturer to recall its product.
We will be subject to regular or fly-in inspections and market surveillance by the NMPA and its local counterparts to ensure continuous compliance
with regulatory requirements. If the NMPA determines that we fail to comply with applicable regulatory requirements, it can take enforcement actions, which may
result in any of the following sanctions:
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warning letters, corrective actions, fines;
recalls, detention or seizure of our products, confiscation of illegal revenues;
import alerts and bans;
refusing to accept any future applications within a specific period of time;
withdrawing any NMPA approvals that have already been granted; and
Debarment of responsible persons from engaging in medical device-related business activities within a specific period of time.
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The Chinese government is in the process of amending the current Medical Device Regulation, which is believed to be close to the final shape. The
most recent draft amendment to the Medical Device Regulation echoes various regulatory reform initiatives unveiled by the NMPA in recent years with an aim to
create a regulatory system that is conducive to device innovation. It reinforces post-approval compliance obligations and expects medical device marketing
authorization holders to take primary responsibility for pre- and post-approval compliance. It significantly increases penalties for all kinds of illegal actions, and
introduces a dual penalty system, subjecting both companies and individual responsible persons to sanctions. This legislative development may result in the
acceleration or delay of certain regulatory clearance or approval for our products in China.
Pricing, Contracting and Reimbursement
We believe our products are priced consistent with their value. In order to obtain or maintain business in the competitive respiratory therapy market,
however, we have historically had to offer various discounts directly to purchasers or indirectly to purchasers through group purchasing organizations (“GPOs”) or
integrated delivery networks (“IDNs”), in accordance with applicable law. We have recently expanded the use of product discount offerings related to placed
capital arrangements for our Precision Flow systems. Such bundled discount offerings involve the placement of capital equipment for use by the customer at no
upfront charge in connection with the customer’s ongoing purchase of disposable products. In addition, consistent with an increasing emphasis in the medical
device and broader healthcare industry on payment based on value (so-called value-based pricing), we may enter into contracts with customers that guarantee
performance of our Precision Flow systems by refunding costs of disposables (or providing replacement disposables) used on patients if treatment does not achieve
specific patient outcomes. In response to pressure from competition or customers, we may have to offer enhanced discounts or enter into additional value-based
contracting arrangements, which may adversely affect our revenue.
Health insurance coverage and adequate reimbursement of our products (or services provided using our products) is critical to the success of our
business. Sales of our products will depend, in part, on the extent to which our products (or services provided using our products) will be covered and adequately
reimbursed by third-party payors, such as government-sponsored health programs and private health plans.
Our products are used in providing services and are often reimbursed by third-party payors as part of a global payment that covers all costs associated
with providing that service. Healthcare providers that use our products may therefore be responsible for costs incurred in providing the service that exceed
reimbursement. If our products are priced higher than competitor products, including products used to provide alternative treatments, and we are unable to
demonstrate that our products are nonetheless cost-effective, we may encounter obstacles in obtaining or maintaining business.
Third-party payors are increasingly reducing reimbursements for clinical products and services. Within the United States and abroad, the containment
of healthcare costs has become a priority of federal and state governments. Limits on reimbursement available from governmental or private third-party payors may
reduce the demand for, or negatively affect the price of those products, and could significantly harm our business, results of operations, financial condition and cash
flows.
Federal, State and Foreign Fraud and Abuse and Physician Payment Transparency Laws
In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws restrict our business practices. These
laws include, without limitation, U.S. and foreign laws intended to prohibit or otherwise regulate activities that might result in fraud and abuse.
U.S. federal healthcare fraud and abuse laws generally apply to our activities because our products are covered under federal healthcare programs
such as Medicare and Medicaid or, in some instances, private insurance. The principal U.S. federal healthcare fraud and abuse laws applicable to us and our
activities include: (1) the Anti-Kickback Statute, which prohibits the knowing and willful offer, solicitation, payment or receipt of anything of value for patient
referrals or the generation of business reimbursable by a federal health care program; (2) the False Claims Act, which prohibits the submission of false or otherwise
improper claims for payment to a federally-funded healthcare program, including claims resulting from a violation of the Anti-Kickback Statute; and (3) healthcare
fraud statutes that prohibit false statements and improper claims to any third-party payor. There are also similar state anti-kickback and false claims laws that apply
to activities involving state-funded Medicaid and other healthcare programs as well as private third-party payors.
The Anti-Kickback Statute is particularly relevant because of its broad applicability. Specifically, the Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving, or providing anything of value, directly or indirectly, in exchange for, or to induce, either the referral of an
individual, or the furnishing, arranging for or recommending a good or service for which payment may be made in whole or part under federal healthcare programs,
such as the Medicare and Medicaid programs. Courts have interpreted the law to provide that a financial arrangement may violate this
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law if any one of the purposes of an arrangement is to encourage patient referrals or other federal healthcare program business, regardless of whether there are other
legitimate purposes for the arrangement. Statutory exceptions and regulatory safe harbors protect certain interactions if specific requirements are met. Failure to
satisfy an exception or safe harbor does not necessarily mean that the Anti-Kickback Statute is violated; rather, the government will consider relevant facts and
circumstances to determine whether the requisite intent for a violation is present and whether there is a low risk of fraud, waste, or abuse. Many interactions in
which we commonly engage, such as the provision of business meals to healthcare practitioners, could implicate the Anti-Kickback Statute and are not protected by
an exception or safe harbor. If the government determines that these activities are abusive, we could be subject to enforcement action. Penalties for Anti-Kickback
Statute violations may include both criminal penalties such as imprisonment and civil sanctions such as fines and possible exclusion from Medicare, Medicaid, and
other federal health care programs. Exclusion would mean that our products were no longer eligible for reimbursement under federal healthcare programs.
Laws and regulations have also been enacted by the federal government and various states to regulate the sales and marketing practices of medical
device and pharmaceutical manufacturers. The laws and regulations generally limit and monitor financial interactions between manufacturers and healthcare
providers; require pharmaceutical and medical device companies to comply with voluntary compliance standards issued by industry associations and the relevant
compliance guidance promulgated by the U.S. federal government; and/or require disclosure to the government and/or public of financial interactions (so-called
“sunshine laws”).
The healthcare laws and regulations applicable to us, including those described above, contain ambiguous requirements and are subject to evolving
interpretations and enforcement discretion. Manufacturers must adopt reasonable interpretations of requirements if there is ambiguity and those interpretations
could be challenged. If a governmental authority were to conclude that we are not in compliance with applicable laws and regulations, we and our officers and
employees could be subject to severe criminal and civil financial penalties, including, for example, exclusion from participation as a supplier of product to
beneficiaries covered by government payors. Any failure to comply with laws and regulations relating to reimbursement and healthcare goods and services could
adversely affect our reputation, business, financial condition and cash flows.
To help ensure compliance with healthcare laws and regulations applicable to us, we have implemented a comprehensive compliance program based
on the HHS Office of Inspector General’s Seven Fundamental Elements of an Effective Compliance Program. We adhere to, and the compliance program
incorporates, standards consistent with voluntary compliance code standards adopted by the medical device industry to promote compliance with the federal Anti-
Kickback Statute. Despite our compliance program, we cannot be certain that we have always operated in full compliance with all applicable healthcare laws.
Many foreign countries have similar laws relating to healthcare fraud and abuse. Foreign laws and regulations may vary greatly from country to
country. For example, the advertising and promotion of our products is subject to EU Directives concerning misleading and comparative advertising and unfair
commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may limit or restrict
the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.
Data Privacy and Security Laws
We are, or in the future may, become subject to various U.S. federal and state as well as foreign laws that protect the confidentiality of certain patient
health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers.
Within the United States, our operations may be affected by the Health Insurance Portability and Accountability Act of 1996 as amended by the
Health Information Technology for Economic and Clinical Health Act and its implementing regulations, collectively, HIPAA, which impose obligations on certain
“covered entities” (healthcare providers, health plans and healthcare clearinghouses) and certain of their “business associate” contractors with respect to
safeguarding the privacy, security and transmission of individually identifiable health information (referred to as “Protected Health Information” or “PHI”). We are
a business associate of HIPAA covered entities under some of our lines of business. In our business associate relationships, we must comply with applicable
HIPAA requirements and the contractual terms of our business associate agreements with HIPAA covered entities. In addition, HIPAA may affect our interactions
with customers who are covered entities or their business associates because HIPAA affects the ability of these entities to disclose PHI to us. Various states also
have laws that regulate the privacy and security of personal information and so may affect our business operations. Most notably, in 2018, California passed into
law the California Consumer Privacy Act (CCPA), which took effect on January 1,
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2020 and imposed many requirements on businesses that process the personal information of California residents. Many of the CCPA’s requirements are similar to
those found in the European Union’s General Data Protection Regulation (2016/679), or GDPR, including requiring businesses to provide notice to data subjects
regarding the information collected about them and how such information is used and shared, and providing data subjects the right to request access to such
personal information and, in certain cases, request the erasure of such personal information. The CCPA also affords California residents the right to opt-out of
“sales” of their personal information. The CCPA contains significant penalties for companies that violate its requirements. It also provides California residents a
private right of action, including the ability to seek statutory damages, in the event of a data breach involving their data. In addition to California, many states have
laws that impose fines on entities that experience a data breach involving certain types of personal data or that permit consumers to bring private actions against
parties that experience a breach involving their data.
European Data Privacy and Data Security
In the European Union, we may be subject to laws relating to our collection, control, processing and other use of personal data (i.e. data relating to an
identified or identifiable individual) because we process personal data of our employees, customers, vendors and other third parties based in the European Union in
relation to the operation of our business.
In the European Union, the data privacy regime applicable to us includes the GDPR and the E-Privacy Directive 2002/58/EC (“EPD”). We depend on
a number of third parties to provide our services, a number of which process personal data on our behalf and are therefore considered our processors under the
GDPR. With each such provider we enter into contractual arrangements to ensure that they only process personal data according to our instructions, and that they
have sufficient technical and organizational measures in place to safeguard the data. Where we transfer personal data outside the EEA, we do so in compliance with
the relevant data export requirements. We take our data protection obligations seriously as any improper disclosure, particularly with regard to our customers’
sensitive personal data, could negatively impact our business and/or our reputation.
GDPR
The GDPR became applicable on May 25, 2018 and replaced the previous data protection regime which consisted of separate laws issued by each EU
Member State, based on the EU Data Protection Directive. Unlike the Directive (which needed to be transposed at a national level), the GDPR is directly applicable
in each EU Member State, resulting in a more uniform application of data privacy laws across the European Union. However, the GDPR does allow each Member
State to implement laws which supplement the GDPR, causing some variation between EU Member States (for example, in connection with processing employee
personal data and processing personal data for scientific purposes). The GDPR also provides that EU Member States may separately introduce further conditions,
including limitations, to the processing of genetic, biometric or health data, which could limit our ability to collect, use and share personal data, or could cause our
compliance costs to increase, ultimately having an adverse impact on our business. We need to ensure compliance with the supplemental laws in each jurisdiction
where we operate, either through having an establishment or through offering goods or services to, or monitoring the behavior of, data subjects located in such
jurisdiction.
The GDPR imposes accountability obligations requiring controllers and processors to maintain a record of their data processing and policies. It
requires us, as a controller of personal data, to be transparent and to disclose to data subjects (being the individuals to whom the personal data relates), in a concise,
intelligible and easily accessible form, how their personal information is used by us. It also imposes limitations on our retention of information, introduces
requirements to pseudonymize (i.e., key-code) data, introduces mandatory data breach notification requirements and sets certain standards for controllers to
demonstrate that they have obtained valid consent for certain data processing activities.
The requirements also state that personal data may only be collected for specified, explicit and legitimate purposes which have a legal basis set out in
the GDPR and may only be processed in a manner consistent with those purposes. Personal data must also be adequate, relevant, and not excessive in relation to the
purposes for which it is collected and protected using appropriate technical and organizational measures. In addition, personal data must not be transferred outside
of the EEA unless certain steps are taken to ensure an adequate level of protection. The GDPR also requires that the data not be kept for longer than necessary to
achieve the purposes for which it was collected. To the extent that we process, control or otherwise use sensitive data relating to individuals (for example,
individuals’ health or medical information, race or ethnicity), more stringent rules apply, limiting the circumstances and the manner in which we are legally
permitted to process that data and transfer that data outside of the EEA. In particular, in order to process such data, an additional legal permission is required, such
as explicit consent of the data subject to the processing.
Fines for non-compliance with the GDPR have the potential to be significant—the greater of EUR 20 million or 4% of our global annual revenue in
the previous financial year.
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EPD
The requirements laid down by the EPD have been transposed into the national laws of each EEA Member State since 2003. The requirements are
particularly relevant when we send electronic direct marketing to individuals in the EEA or when we use cookies or similar technologies on our websites with
respect to individuals located in the EEA and will usually require us to obtain consent from such recipients to carry out these activities. Although all EEA Member
State national laws stem from the EPD, the laws differ by jurisdiction, sometimes significantly. We need to ensure compliance with the laws in each jurisdiction
where we operate.
The European Union is in the process of replacing the EPD with an E-Privacy Regulation which, unlike the EPD which needed to be transposed into
the national law of EEA Member States, will be directly applicable in each EEA Member State. The text of the new Regulation has not yet been finalized nor has
an implementation date been set. We will continue to monitor the progress of the new Regulation and make necessary modifications to our practices as and when
required.
Healthcare Reform
The United States and some foreign jurisdictions are considering, or have enacted, a number of legislative and regulatory proposals to change the
healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is
significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. Current
and future legislative proposals to further reform healthcare or reduce healthcare costs may limit coverage of or lower reimbursement for the procedures associated
with the use of our products. The cost containment measures that payors and providers are instituting and the effect of any healthcare reform initiative implemented
in the future could impact our revenue from the sale of our products.
For example, the Patient Protection an Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010, or
collectively, the Healthcare Reform Act, substantially changed the way in which healthcare is financed by both governmental and private insurers and affected
medical device manufacturers significantly. The Healthcare Reform Act also provides incentives to programs that increase the federal government’s comparative
effectiveness research and implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and
other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models. Additionally, the Healthcare
Reform Act provided additional federal funding to state Medicaid programs that expanded eligibility for Medicaid programs and required individuals to obtain
health insurance or pay a tax penalty.
There have been administrative, judicial and Congressional challenges to certain aspects of the Healthcare Reform Act, and we expect additional
challenges and amendments in the future.
With respect to Congressional action, tax legislation enacted at the end of 2017 removed penalties for not complying with the individual mandate to
carry health insurance effective in 2019. The Trump Administration also took executive actions to undermine or delay implementation of the Healthcare Reform
Act. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the Healthcare Reform Act
to waive, defer, grant exemptions from, or delay the implementation of any provision of the Healthcare Reform Act that would impose a fiscal or regulatory burden
on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. It remains to be seen whether and how quickly
the Biden administration may take executive action to accelerate the Healthcare Reform Act’s implementation. In December 2018, a federal district court found the
Healthcare Reform Act unconstitutional in its entirety because, once Congress repealed the individual mandate provision, there was no longer a basis to rely on
Congressional taxing authority to support enactment of the law. On appeal, a federal appeals court held in December 2019 that the individual mandate portion of
the Healthcare Reform Act was unconstitutional and left open the question whether the remaining provisions of the Healthcare Reform Act would be valid without
the individual mandate. On November 10, 2020, the Supreme Court heard oral arguments in this case, but it is unknown when the Supreme Court will issue a
decision. It is uncertain the extent to which any such changes may impact our business or financial condition. We expect additional state and federal healthcare
reform measures to be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services,
which could result in reduced demand for our products (or the services provided using our products) or additional pricing pressure. Future healthcare legislation
could also have a significant impact on our business. Due to the uncertainties regarding the outcome of future healthcare reform initiatives and their enactment and
implementation, however, we cannot predict which, if any, of the future reform proposals will be adopted or the effect such adoption may have on us.
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In addition, other legislative changes have been proposed and adopted since the Healthcare Reform Act was enacted. For example, the Budget Control
Act of 2011, among other things, included reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to
subsequent legislative amendments to the statute, will remain in effect through 2029 unless additional Congressional action is taken.
Laws Relating to Foreign Trade
We are subject to various federal and foreign laws that govern our international business practices. These laws include the U.S. Foreign Corrupt
Practices Act, or FCPA, which prohibits U.S. companies and their representatives from paying, offering to pay, promising, or authorizing the payment of anything
of value to any foreign government official, government staff member, political party, or political candidate for the purposes of obtaining or retaining business, or
to otherwise obtain favorable treatment or influence a person working in an official capacity. In many countries, the healthcare professionals we regularly interact
with may meet the FCPA’s definition of a foreign government official. Additionally, interactions with or on the part of our vendors or other agents may also
implicate the FCPA. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect their transactions and to
devise and maintain an adequate system of internal accounting controls. Compliance with the FCPA is expensive and difficult, particularly in countries in which
corruption is a recognized problem. In addition, the FCPA presents unique challenges in the medical device industry, because, in many countries, hospitals are
operated by the government, and doctors and other hospital employees are considered foreign officials.
Our international operations could also be subject to compliance with national laws of other countries, such as the United Kingdom Bribery Act of
2010, or the U.K. Bribery Act. The U.K. Bribery Act applies to any company “carrying on business” in the United Kingdom, irrespective of where the offending
conduct occurs. The U.K. Bribery Act applies to bribery activities both in the public and private sector and prohibits the provision of an “advantage” intended to
induce or reward “improper performance” of the recipient’s function. The failure by a company to prevent third parties from providing a bribe on its behalf could
also constitute an offense. Penalties under the U.K. Bribery Act include potentially unlimited fines for companies and criminal sanctions for corporate officers
under certain circumstances.
There are also trade laws within the United States and in other regions that regulate the sale, purchase, import, export, re-export, transfer and shipment
of goods, currency, products, materials, services and technology. Violations of these laws can lead to serious consequences, including substantial fines.
Other Regulations
We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such
laws and regulations now or in the future.
Facilities
Our principal office is located at 100 Domain Drive, Exeter, New Hampshire 03833, where we lease approximately 95,320 square feet of office,
manufacturing, research & development and warehouse space. We lease this space under a lease that expires on January 28, 2025. We intend to lease additional
space as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our
operations. Solus Medical leases approximately 453 square meters of office and warehouse space at 2 Dryden Loan, Bilston Glen Industrial Estate, Loanhead,
United Kingdom. Solus leases this space under a lease that expires on February 15, 2022. HGE leases approximately 22,524 square feet of office space at 1301
Virginia Drive, Suite 100, Fort Washington, Pennsylvania 19034. HGE leases this space under a lease that expires on July 31, 2025.
Segment Information
We globally manage our business within one reporting segment. Segment information is consistent with how management reviews our business,
makes investing and resource allocation decisions and assesses our operating performance.
Seasonality
Although we did not experience seasonality this year due to demand for our High Velocity Therapy technology during the COVID-19 pandemic,
historically we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. We have experienced and may in the future
experience higher sales in the fourth quarter as a result of
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increased sales from hospitals nearing their fiscal year-end that have not fully utilized the funds allocated to purchases of our Precision Flow systems. In the first
quarter of each year we have experienced and may in the future experience higher sales in direct correlation with the number of patients presenting with respiratory
distress due to the severity of the flu season, especially in the Northern Hemisphere.
Information about our Executive Officers
The following table sets forth the name, age, and position of each of our executive officers as of February 24, 2021.
Name
Joseph Army
John Landry
Gregoire Ramade
Age
57
48
51
Title
President, Chief Executive Officer, and Director
Senior Vice President, Chief Financial Officer, and Treasurer
Senior Vice President and Chief Commercial Officer
Joseph Army has served as President, Chief Executive Officer and as a member of our board of directors since June 2012. Prior to joining
Vapotherm, Mr. Army served as President and Chief Executive Officer of Salient Surgical Technologies, Inc. (formerly TissueLink Medical, Inc.), or Salient, since
2007. He first joined Salient in 1999 as Chief Financial Officer and Vice President of Finance. Prior to his time at Salient, he held various positions including Vice
President of Finance and Supply Chain Operations for Westaim Biomedical from 1998 to 1999 and strategy consultant for Coopers & Lybrand LLP from 1991 to
1997. Mr. Army holds an MBA in finance from The Wharton School and a BA in history from the University of Rhode Island. He is certified in production and
inventory management and is a certified public accountant (inactive status).
John Landry has served as Senior Vice President, Chief Financial Officer, and Treasurer since July 2020 and served previously as Vice President,
Chief Financial Officer, Secretary and Treasurer since August 2012. Prior to joining Vapotherm, he held a number of leadership roles at Salient from 2004 to 2011,
including VP Accounting & Controller and VP Global Business Development. Mr. Landry also served as Director of International Marketing at Medtronic
Advanced Energy from 2011 to 2012, which acquired Salient in August 2011. Prior to his time at Salient, he served in various financial leadership roles at
Bottomline Technologies from 2000 to 2004, Hussey Seating Company from 1997 to 2000 and Coopers & Lybrand LLP from 1994 to 1997. Mr. Landry graduated
summa cum laude from Bentley College with a BS in Accountancy and is a certified public accountant (inactive status).
Gregoire Ramade has served as Senior Vice President and Chief Commercial Officer since October 2020 and previously as Vice President,
International Sales and Worldwide marketing since May 2016. Before joining Vapotherm, Mr. Ramade worked at Becton Dickinson Medical-Pharmaceutical
Systems as Vice President of Global Marketing and Business Development from January 2013 to May 2016. He also held the positions of Senior Marketing
Director Home Healthcare Solution at Philips Healthcare from 2010 to 2012, Marketing Director EMEA at Philips Respironics from 2005 to 2009 and Product
Manager of Consumable Masks and Accessories at Philips Respironics from 2004 to 2005. Mr. Ramade holds a bachelor’s degree in International Business with a
minor in Economics from the American University of Paris and an MBA in International Business and Marketing from the Ecole Nationale des Ponts et Chausses
School of International Management.
Employees
As of December 31, 2020, we had approximately 404 employees and contractors, consisting of approximately 397 full-time employees and
contractors and approximately seven part-time contractors. Of these employees, 19 and 39 are in our wholly owned subsidiaries, Solus Medical and HGE,
respectively. None of our domestic employees is subject to a collective bargaining agreement or represented by a trade or labor union. As of December 31, 2020,
two of our international team members were subject to a collective bargaining agreement, comprised of two individuals retained through professional employment
organizations. We believe our relationship with our employees to be good.
Corporate Information
We were originally incorporated in Maryland in 1999 and in 2013 we reincorporated in Delaware. Our principal executive offices are located at 100
Domain Drive, Exeter, NH 03833. Our telephone number is (603) 658-0011.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. Our SEC filings are also available under the Investor Relations section of our website
at www.vapotherm.com. Our website and the information contained on or connected to that site are not incorporated into this Annual Report on Form 10-K.
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Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with
all of the other information contained in this Annual Report on Form 10-K, including our financial statements and related notes herein, before deciding to invest in
our common stock. If any of the events or developments described below were to occur, our business, prospects, operating results and financial condition could
suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely
affect our business.
Summary Risk Factors
The following is a summary of the material risks that could adversely affect our business, operations, and financial results.
Risks Related to Our Business
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We have incurred losses in the past and may not generate sufficient revenue to achieve or sustain profitability.
Our future disposable product revenue is dependent on growing our installed base.
If clinicians are not willing to adopt our products, our business will be adversely affected.
Our long-term growth depends on our ability to compete effectively and develop new products.
We face intense competition and may be unable to compete successfully.
We have limited experience in marketing and selling our products.
We depend upon successful clinical results to drive adoption of our products.
Manufacturing a portion of the components of our products in-house involves risk.
The COVID-19 pandemic has and may in the future adversely affect our business.
We may be subject to product liability damages that could exceed our insurance coverage.
Our sales volumes, operating results and business are subject to seasonal and quarterly fluctuations.
We bear the risk of warranty claims on our products.
Because we are no longer an “emerging growth company” we will likely incur significant additional costs.
Our effective tax rate may fluctuate and we may incur tax obligations in certain jurisdictions.
Our ability to use our net operating loss carryforwards may be limited.
If the quality of our products is unacceptable, our brand and reputation could suffer.
Growth through acquisitions or investments in new businesses, products or technologies is risky.
We may be unable to manage our anticipated growth effectively.
RPM support services provided by HGE present unique business and regulatory risks.
Risks Related to Our Dependence on Others
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We rely on third-party distributors to market and distribute our products in certain jurisdictions.
We rely on single source suppliers in certain case and do not have long-term supply contracts, which is risky.
Our high inventory levels consume resources, reduce our cash flows and may lead to impairment charges.
We rely on shipping carriers to deliver our products on a timely and cost efficient basis.
We rely on our senior management team and our ability to attract and retain highly skilled employees.
Risks Related to Government Regulation
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We are subject to extensive government regulation, with which the failure to comply could harm our business.
We may not receive the necessary authorizations to market our future products.
If product modifications require 510(k) clearance or other authorizations, we may need to recall those products.
The misuse or off-label use of our products could harm our reputation, business and operating results.
Disruptions at the FDA and other government agencies could harm our business.
The failure of our products to be manufactured per governmental regulations would harm our business.
The failure of our products to work as intended would harm our reputation, business and operating results.
The sale of our products depends on adequate governmental or third-party payor reimbursement.
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We face significant uncertainty in the industry due to government healthcare reform and other legislative action.
Industry or customer consolidation could harm our business.
U.S. or international legislative or regulatory reforms could harm our business.
Our failure to comply with fraud and abuse, transparency, licensure and other laws could subject us to penalties.
Risks Related to Our International Operations
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Our international operations subject us to certain operating risks.
Our use of foreign contract manufacturers involves risks.
Significant tariffs and other restrictions with doing business in China could harm our business.
Our international business may be affected by trade agreements, tax provisions, tariffs and economic sanctions.
Our UK and EU operations may be adversely affected by Brexit.
Our results may be impacted by changes in foreign currency exchange rates.
We could be adversely affected by violations of the Foreign Corrupt Practices Act and similar anti-bribery laws.
Risks Related to Our Intellectual Property
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Intellectual property protection for our products is important to our competitive position.
Our business and competitive position are dependent on maintaining the confidentiality of our trade secrets.
Our brand name recognition is dependent on trademark and trade name protection.
Intellectual property disputes, which are common in our industry, could harm our business.
Our failure to comply with personal information laws could result in penalties and reputational damage.
Patent law changes could diminish the value of our patents.
Our competitive position is dependent on obtaining and maintaining patent protection, which is limited.
Patent terms may be inadequate to protect our competitive position on our products for an adequate amount of time.
We may not be able to adequately protect our intellectual property rights throughout the world.
We may be subject to damages from trade secret or breach of non-competition/non-solicitation agreements.
Risks Related to Our Indebtedness and Need for Additional Capital
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Our substantial current and future indebtedness involves risk.
We may be unable to service, repay or refinance our debt when due.
Our failure to comply with loan agreement covenants could harm our financial condition.
The loan agreement restricts our operations and ability to respond to changes or to take certain actions.
We may need to raise additional capital, which may not be available on reasonable terms or at all.
Risks Related to Our Common Stock
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The price of our common stock may be volatile and fluctuate substantially.
Our public company status is expensive and time-consuming.
We may be subject to securities litigation, which is expensive and could divert our management’s attention.
Our key stockholders and management could exercise influence over matters subject to stockholder approval.
A significant portion of our outstanding shares may be freely sold into the public market.
We do not anticipate paying any cash dividends on our common stock.
If analysts do not publish research, or publish inaccurate or unfavorable research, our stock price could decline.
Anti-takeover provisions in charter, bylaws and Delaware law may discourage an acquisition of us.
Our charter has an exclusive forum provision, which could limit stockholder litigation.
General Risk Factors
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Our operations, and those of our suppliers and customers, are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other
events beyond our control.
Disruptions in our information technology systems could harm our business.
We have in the past and may in the future be subject to various litigation claims and legal proceedings.
Employment litigation and unfavorable publicity could negatively affect our future business.
Our insurance policies are expensive and protect us only from certain risks.
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Risks Related to Our Business
We have incurred losses in the past and may be unable to achieve or sustain profitability in the future.
We have incurred net losses since our inception. We incurred net losses of $51.1 million and $51.5 million for the years ended December 31, 2019
and 2020, respectively. As a result of ongoing losses, as of December 31, 2020, we had an accumulated deficit of $316.9 million. We expect to continue to incur
significant product development, regulatory, sales and marketing and other expenses. The net losses we incur may fluctuate significantly from quarter to quarter.
Since 2008, our revenue has been derived primarily from sales of our Precision Flow systems and associated disposable products. Going forward,
we anticipate that our revenue will be primarily derived from a combination of our Precision Flow products, our Oxygen Assist Module, their associated disposable
products, and HGE. Our Oxygen Assist Module launched in the United Kingdom, select European markets, and Israel in late 2020. In addition, demand for our
Precision Flow systems and Oxygen Assist Module may decline or may not increase as quickly as we expect. Our ability to generate revenue from sales of our
Precision Flow systems and their associated disposable products, including those designed for use with our Oxygen Assist Module, or from any products we may
develop in the future, may not be sufficient to enable us to transition to profitability and generate positive cash flows.
We expect that our operating expenses will continue to increase as we continue to expand our sales and marketing organization, develop, enhance
and commercialize new products and incur additional operational costs associated with being a public company. As a result, we expect to continue to incur
operating losses for the foreseeable future and may never achieve profitability. Furthermore, even if we do achieve profitability, we may not be able to sustain or
increase profitability on an ongoing basis. If we do not achieve or sustain profitability, it will be more difficult for us to finance our business and accomplish our
strategic objectives, either of which would have a material adverse effect on our business, financial condition and results of operations and cause the market price
of our common stock to decline. In addition, failure of our Precision Flow systems or our Oxygen Assist Module, to significantly penetrate existing or new markets
would negatively affect our business, financial condition and results of operations.
Historically, our revenue is primarily generated from sales of the disposable products utilized with our Precision Flow systems, and we are therefore highly
dependent on growing the installed base of those system for our success.
We began selling our High Velocity Therapy technology and our Precision Flow Plus systems in the United States and in select international
markets in 2018 and 2017, respectively. Sales of our Precision Flow systems and associated disposable products accounted for substantially all of our revenue for
the years ended December 31, 2019 and 2020. We expect that sales of our Precision Flow systems, our Oxygen Assist Module, and their associated disposable
products will account for the majority of our revenue going forward. Our ability to execute our growth strategy and become profitable will therefore depend upon
the adoption by clinicians and customers, among others, of our Precision Flow systems to treat both type I and type II respiratory distress and our Oxygen Assist
Module to help maintain the pulse oxygen saturation, or SpO2, within the target SpO2 range over a significantly greater proportion of time while requiring
significantly fewer manual adjustments to the equipment. Some clinicians may not adopt our Precision Flow systems because they have prior history with or a
preference for other treatment options that are more established, such as NiPPV, or may be reluctant to alter their practice patterns and undergo the training
required to enable them to treat patients with our Precision Flow systems. Some customers may decide to not purchase our Precision Flow systems if, among other
potential reasons, they believe our pricing is too high or that alternative devices to manage respiratory therapy are either more clinically efficacious or cost effective
than our product. For example, our Precision Flow systems are significantly more expensive than conventional heated humidified oxygen delivery devices.
If clinicians are not willing to change current practices to adopt our Precision Flow systems to treat respiratory distress and our Oxygen Assist Module to help
maintain oxygen levels within a targeted range, our Precision Flow systems, and our Oxygen Assist Module may fail to gain increased market acceptance, and
our business will be adversely affected.
Our primary strategy to grow our revenue is to drive an increase in the adoption of our Precision Flow systems to treat spontaneously breathing
patients of all ages suffering from respiratory distress in the hospital setting and our Oxygen Assist Module to help clinicians maintain oxygen levels within a
targeted range. While the number of clinicians adopting our
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Precision Flow systems has increased in recent years, there is a significant subset of clinicians who have not yet adopted our Precision Flow systems, and may
never choose to adopt our Precision Flow systems for a number of reasons, including:
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our inability to convince key opinion leaders to provide recommendations regarding our Precision Flow systems, or to convince physicians,
nurses, and respiratory therapists that our Precision Flow systems are attractive alternatives to other treatment options for both type I and type II
respiratory distress;
our inability to convince current customers to purchase additional equipment;
perceived inadequacy of evidence supporting clinical benefits or cost-effectiveness of our Precision Flow systems over existing alternatives;
liability risks generally associated with the use of new products and procedures;
the training required to use new products;
inadequate product quality; and
perceived high cost.
Few clinicians have adopted our Oxygen Assist Module for use with our Precision Flow systems, in part because we only launched our Oxygen Assist
Module in the United Kingdom, select European markets, and Israel in late 2020 and are presently seeking FDA approval of this technology in the United States.
Clinicians may choose not to adopt our Oxygen Assist Module for similar reasons that clinicians may not adopt Precision Flow systems.
Clinicians, including physicians and other medical professionals such as nurses and respiratory therapists, historically utilize NiPPV to treat patients in
respiratory distress and manual control to maintain oxygen levels within a targeted range. We believe that educating clinicians about the clinical and economic
merits and patient benefits of our High Velocity Therapy technology as a viable alternative treatment for both type I and type II respiratory distress and our Oxygen
Assist Module to help clinicians maintain oxygen levels within a targeted range are key elements for increasing the adoption of our Precision Flow systems and
Oxygen Assist Module. If additional clinicians do not adopt, or existing customers cease using our Precision Flow systems or Oxygen Assist Module for any
reason, including those listed above, or if we are unable to expand the use of our systems to treat both type I and type II respiratory distress, our ability to execute
our growth strategy will be impaired, and our business may be adversely affected.
We may be unable to generate sufficient revenue from the commercialization of our products to achieve and sustain profitability.
At present, we rely solely on the commercialization of our products to generate revenue, and we expect to generate substantially all of our revenue
in the foreseeable future from sales of these products, primarily our Precision Flow systems, our Oxygen Assist Module, and their associated disposable products.
We will need to generate significant additional revenue to achieve and sustain profitability, and even if we achieve profitability, we cannot be sure that we will
remain profitable for any period of time. Our failure to achieve or maintain profitability could negatively impact the value of our common stock. In order to
successfully commercialize our products, we will need to continue to expand our marketing efforts to develop new relationships and expand existing relationships
with customers, to obtain authorization to market our products in additional countries, to achieve and maintain compliance with all applicable regulatory
requirements and to develop and commercialize our products with new features or for additional indications, as well as acquire or develop and commercialize new
products. If we fail to successfully commercialize our products, we may never receive a return on the substantial investments we have made in product
development, sales and marketing, regulatory compliance, manufacturing and quality assurance, as well as further investments we intend to make, which may cause
us to fail to generate revenue and gain economies of scale from such investments.
In addition, potential customers may decide not to purchase our products, or our customers may decide to cancel orders due to changes in available
care offerings, adverse clinical outcomes, inadequate reimbursement or productivity credits for procedures using our products, complications with manufacturing or
the utilization of technology developed by other parties, all of which are circumstances outside of our control.
Further, demand for our products may not increase as quickly as we predict, and we may be unable to increase our revenue to the level that we
currently expect. Even if we succeed in increasing adoption of our products by physicians, hospitals and other healthcare providers, maintaining and creating
relationships with our existing and new customers and developing and commercializing new features or indications for these systems, we may be unable to
generate sufficient revenue to achieve or sustain profitability.
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Our long-term growth depends on our ability to compete effectively in the respiratory market by commercializing our products currently in development as well
as developing and commercializing additional new products through our research and development efforts.
Given the competitiveness of our industry, our future business prospects depend in part on our ability to develop and commercialize new products
and product candidates, such as HGE, and new applications for products that offer improved performance and cost-effectiveness. New technologies, techniques or
products could emerge from competitors that might offer better combinations of price and performance than our products. It is important that we anticipate changes
in technology and market demand, as well as physician, hospital and healthcare provider preferences and practices, in order to successfully commercialize new
technologies to meet our prospective customers’ needs on a timely and cost-effective basis.
We might be unable to successfully commercialize our marketed products, including HGE, or obtain authorization to market new products. The
success of any new product offering or enhancement to an existing product will depend on numerous factors, including our ability to:
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properly identify and anticipate clinician and patient needs;
identify, retain, and manage third-party design and development firms where appropriate to accelerate development;
develop and introduce new products or product enhancements in a timely manner;
adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;
obtain and retain third-party licenses required for the development, commercialization, and/or utilization of new products;
demonstrate the safety and efficacy of new products;
obtain the necessary regulatory authorizations to market new products or product enhancements; and
deliver products at a price point that is both profitable and acceptable to the market.
If we do not develop and obtain regulatory authorization to market new products or product enhancements in time to meet market demand, or if there is
insufficient demand for these products or enhancements, our results of operations will suffer. Our internal research and development efforts and our outsourced
third-party design and development initiatives may require a substantial investment of time and resources before we are adequately able to determine the
commercial viability of a new product, technology, material or other innovation. In addition, even if we are able to develop enhancements or new generations of
our products successfully, these enhancements or new generations of products may not produce sales in excess of the costs of development and they may be quickly
rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.
Additionally, we must carefully manage our introduction of new products. If potential customers believe such products will offer enhanced features or
be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory as we transition to
new products, and we have limited experience in managing product transitions.
We face intense international, national, regional and local competition and, if we are unable to compete successfully with such competition, our revenue,
market share and financial results could be adversely affected.
The medical device industry generally and the respiratory market specifically, are characterized by intense competition and evolving industry standards.
We compete with a number of manufacturers of non-invasive ventilation products for the treatment of respiratory distress, and on a secondary basis, with
conventional heated humidified high flow oxygen devices that facilitate high flow oxygen delivery for hypoxemic patients, and to a far lesser extent, providers of
other respiratory support solutions to enhance oxygen delivery such as non-rebreather masks and oxygen cannulas.
Our most significant NiPPV manufacturing competitor is Philips Respironics. Conventional heated humidified high flow oxygen device manufacturers,
such as Fisher & Paykel Healthcare and Masimo Corporation, are also potential competitors. In addition, some NiPPV and ventilator companies, including Philips
Respironics, offer high flow oxygen delivery options on their NiPPV and mechanical ventilator systems. We expect that the market will become increasingly
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competitive in the future. Manufacturing companies compete for sales to providers primarily on the basis of product features, service and price.
HGE competes in the technology enabled services and digital health industries, where some of its competitors include Livongo Health Inc., Vivify
Health Inc., Propeller Health Inc., Conversa and Spire Health Inc.
Some of our competitors are large, well-capitalized companies with greater resources than we have and more products and longer history in the
respiratory market. Other competitors are smaller companies who have or in the future may benefit from a strategic investment or acquisition by one of our larger
competitors. As a consequence, these competitors are able to spend more aggressively on product development, marketing, sales and other product initiatives than
we can. Some of these competitors have:
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significantly greater name recognition;
established relationships with healthcare professionals and customers including group purchasing organizations and integrated delivery
networks;
established distribution networks;
additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive
advantage;
greater history in conducting research and development, manufacturing, marketing and obtaining regulatory approval for respiratory support
products; and
greater financial and human resources for product development, sales and marketing, patent litigation and customer financing.
Our competitors have significant development and clinical resources and can rapidly follow any innovations we bring to the marketplace. For example,
our competitors could seek to obtain 510(k) clearance for expanded labeling of their products using our current or future High Velocity Therapy technology
products as predicate devices. Even if our technology and business strategy is more effective than the technology and business strategy of our competitors, current
or potential customers might accept competitor products and services in lieu of purchasing our products. We anticipate that we will face increased competition in
the future as existing companies and competitors develop new or improved products and business strategies and as new companies enter the market with new
technologies and business strategies. We may not be able to compete effectively against these organizations. Increased competition in the future could adversely
affect our revenue, market share and financial results.
We have limited experience in directly marketing and selling our products, and if we are unable to successfully expand our sales infrastructure and adequately
address our customers’ needs, it could negatively impact sales and market acceptance of our products and we may never generate sufficient revenue to achieve
or sustain profitability.
We have limited experience in directly marketing and selling our products in the United States. We transitioned to a direct sales organization in the
United States on January 1, 2015, at which time our domestic sales organization consisted of approximately 17 sales and clinical personnel. As of December 31,
2020, our domestic sales organization has grown to approximately 118 representatives, consisting of both sales and clinical personnel. In parallel, we have grown
the size of our marketing department and we launched a digital marketing campaign in March 2017. Our operating results are dependent upon our sales and
marketing efforts. If we fail to adequately promote and market our products, our sales could significantly decrease.
We have limited experience directly marketing and selling our products in the United Kingdom, where we acquired our former distributor, Solus
Medical Limited, on February 28, 2019, and we have no experience directly marketing and selling our products in other international countries. As in the United
States, our operating results in the United Kingdom and other international countries are dependent upon our sales and marketing efforts in those countries, and if
we fail to adequately promote and market our products, our sales in those countries could significantly decrease.
We have limited experience directly marketing and selling HGE’s Software as a Service chronic respiratory disease management platform, and no prior
experience selling services that potentially are directly reimbursable by payors or selling value-based arrangement to payors.
In addition, our future sales will largely depend on our ability to increase our sales and marketing efforts to adequately address our customers’ needs.
We believe it is necessary to utilize a sales force that incorporates a specialized group consisting
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of former respiratory therapists who have experience with our High Velocity Therapy products to support our customers’ needs. Competition for sales
representatives and marketing employees is intense and we may be unable to attract and retain sufficient personnel to maintain an effective sales and marketing
force. If we are unable to adequately address our customers’ needs, it could negatively impact sales and market acceptance of our products, and we may not
generate sufficient revenue to achieve or sustain profitability.
As we launch new products and increase our marketing efforts with respect to our Precision Flow systems and our Oxygen Assist Module, we have
and potentially will continue to need to expand and restructure our marketing and sales networks, as well as modify and improve our sales program offerings, such
as our provision of bundled discounts involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the
customer’s ongoing purchase of disposable products. If the percentage of customers who acquire our technology in this manner increases relative to the percentage
of customers who purchase our Precision Flow capital units through an upfront or financed payment, the percentage of our revenue derived from Precision Flow
capital units may decrease. Our future success will depend largely on our ability to continue to hire, train, retain and motivate skilled sales representatives and
clinical educators, and ensuring our sales program offerings satisfy the needs of our customers. New hires require training and take time to achieve full
productivity. If we fail to train new hires adequately, if we experience high turnover in our sales force in the future, or if our sales program offerings do not satisfy
the needs of our customers, new hires may not become as productive as may be necessary to maintain or increase our sales. In addition, since we have a limited
history with a direct sales organization, we may not be as effective or efficient in utilizing our sales representatives as other companies with longer histories
utilizing a direct sales organization. As a result, we may be required to restructure our sales organization, which would be costly, may divert attention from
management, and lead to both planned and unplanned turnover. If we are unable to expand our sales and marketing capabilities and our educational initiatives
domestically and internationally, we may be unable to effectively commercialize our products.
We conduct a range of nonclinical, as well as clinical trials, comparative effectiveness, economic and other studies of our products. Unfavorable results from
these trials or studies or from similar trials or studies conducted by others may negatively affect the use or adoption of our products by physicians and
hospitals, which could have a negative impact on the market acceptance of these products and their profitability.
We expect to continue to expand our marketing programs in the United States and internationally, and to fund research and development activities,
including additional investment in sponsored and investigator initiated clinical and nonclinical trials and studies. The purpose of these nonclinical and clinical trials
and studies is to obtain clinical efficacy, economic, and comparative effectiveness information about our products in an effort to generate comprehensive clinical
and real-world outcome and cost effectiveness data in order to obtain product approval and drive further penetration in the markets we serve. In the event that these
trials and studies, or similar trials and studies conducted by others, yield unfavorable results, particularly those in which we target severely hypercapnic patients,
those results could negatively affect the use or adoption of our products by physicians, hospitals and payors, thereby compromising market acceptance and
profitability.
We currently, and in the future may, manufacture a portion of the components of our products in-house and the inability to produce the components we
manufacture in-house could cause significant production delays, an inability to meet customer demand and a substantial loss in revenue.
We currently, and in the future may, manufacture our products or a portion of the components of our products in-house. As a result, we are
dependent upon the uninterrupted and efficient operation of our manufacturing facility in Exeter, New Hampshire. The operations at this facility may be disrupted
by a number of factors, including:
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delivery problems;
financial condition or results of operations;
internal inefficiencies;
manufacturing equipment failure;
severe weather;
fire;
nature or man-made disasters;
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work stoppages;
component shortages; and
FDA compliance or other quality-related issues.
There can be no assurance that the occurrence of these or any other operational problems at our facility would not cause significant production delays,
an inability to meet customer demand and a substantial loss in revenue.
Several of our components are sole source from either our own internal processes or outside suppliers. These sole source components have no
immediate alternate supply channels. If we were to encounter a disruption in supply, we may not be able to find an alternate supplier or enter into a new
manufacturing and supply agreement. A failure to find an alternate supplier or enter into a new manufacturing and supply agreement could result in an inability to
manufacture our products and cause substantial loss in revenue.
A pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, has and may in the future adversely affect our business.
If a pandemic, epidemic or outbreak of an infectious disease occurs, our business may be adversely affected. Such events may result in a period of
business, manufacturing, and other disruption or, as in the case of the COVID-19 pandemic, in an inability to scale our production to meet increased demand in a
cost-effective manner or at all, any of which could materially affect our business, financial condition and results of operations. For example, the COVID-19
pandemic has resulted in certain disruptions to our business during 2020 and may in the future result in additional disruptions to our business. Examples of such
disruptions include without limitation the following:
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The health and wellbeing of our employees, including our operations and production teams, our sales representatives and clinical educators who may
visit our hospital customers, as well as that of our distributors and suppliers, are at risk – if a critical threshold of our personnel, or the personnel of our
distributors or suppliers, were to be diagnosed with COVID-19, placed in quarantine due to potential exposure to COVID-19, or need to care for family
members diagnosed with COVID-19, such developments may result in significant business, manufacturing, or distribution disruption.
As we scaled production to meet increased demand, we have asked, and will likely continue to ask, employees and suppliers to work extended and
unusual hours and we and many of our suppliers have onboarded, and may in the future onboard, a significant number of new personnel. While we
require these personnel to complete all required training and education before they begin working, and we believe our suppliers, to the extent applicable,
do as well, many of the new personnel do not have prior experience with the specific production skills they are being hired to perform and/or otherwise
do not have prior experience manufacturing medical devices, and while we have not seen a negative impact to our quality management system or
product quality to date, any of the foregoing may result in a negative impact on our quality management system and product quality in the future.
As we scaled production to meet increased demand, our employees or suppliers have in the past and may in the future change production processes or
fail to document such changes to keep up with our production needs. While we have not seen a negative impact to our quality management system and
product quality to date, these changes and/or failure to document such changes may have a negative impact on our quality management system and
product quality in the future.
Demand for our products and services has been dynamic since March 2020, with extended periods of intense demand resulting in the rapid hiring of
temporary employees and scaling up of production and inventory, followed by periods of reduced demand resulting in the reduction of temporary
employees and scaling back of production and inventory. The result of these fluctuations in demand has and in the future may continue to drive
unevenness in our operations and supply chain and we have experienced and may continue to experience unevenness and volatility in our hiring,
production, and inventory levels, any of which can have a negative impact on our business and results of operations.
Demand for our products has previously increased at the same time that we began to experience limitations in our supply chain, which has resulted, and
may in the future result, in a shortage of supply, increased costs of products, materials, and components and delays in the timely delivery thereof, which
has required, and may in the future
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require, that we pass through expenses or otherwise increase our pricing in certain instances for our customers and distributors. Some of our customers
and distributors have rejected, and others in the future may reject, these pricing increases, negatively impacting our business. Similarly, the demand we
placed on our suppliers at the same time their sub-suppliers began to face limitations led to our suppliers seeking to pass through expenses or otherwise
increase pricing for products, materials, and components we required to meet our production needs, and this may occur again in the future.
Some of our suppliers have been, and may in the future be, partially or, at times, wholly precluded from delivering to us products, materials, and
components in the quantities needed on a timely basis, for a variety of reasons, including, without limitation, an evolving understanding of how
international, federal, and/or state authorities define “essential business”, their inability to remain open due to lost business in other parts of their
portfolios, or because of international, federal, and/or state prioritization orders requiring our suppliers to produce for governmental entities and/or other
manufacturers before they produce for us.
We have had to develop alternative sources of supply for certain products, materials, and components as a result of the partial or, at times, complete
inability of some of some of our suppliers to meet our production needs. Although we have successfully been able to develop and validate these
alternate sources of supply to date, doing so is time-consuming, difficult, and costly, and if we need to develop and validate alternative sources of
supply in the future for any reason, including if any of our suppliers were to cease operations altogether, discontinue production of our key products,
materials, and/or components, or go into extended backorder, we may not be able to do so in a timeframe acceptable to meet customer demand.
Additionally, we have had to go to secondary broker markets for some of our alternative sourcing needs, which represent a greater risk for counterfeit
products, materials and/or components. Although we were able to validate the products, materials and/or components we purchased from secondary
broker markets to date, we may not be able to do so in the future which may result in a negative impact on our quality management system and product
quality.
Customer demand has necessitated weekly and, in some cases, daily shipments of certain products, materials, and/or components from our suppliers to
meet our production targets, and customer demand in the future may necessitate similar delivery frequencies. We have had to and may in the future
have to shut down production temporarily if there are delays in the shipments of those products, materials and/or components.
Federal authorities may restrict our ability to export products outside the United States, which could negatively impact our business, operations, and
relationships with our international distributors and customers in a significant and long-term way that we may not be able to rebuild for an extended
period of time, or at all.
While we have priority shipping status with our carriers, we have experienced shipping delays throughout the United States and internationally, and as a
result, there have been and may continue to be delays in our ability to ship our product to customers and distributors in a timely manner, potentially
resulting in returned product, and we have faced and may in the future face extraordinary freight fees, including air freight fees and expedition fees for
all modes of transportation.
Travel restrictions have impeded, and may in the future continue to impede, our ability to qualify and retain new suppliers or audit our existing
suppliers, which may have a negative impact on our quality management system and our product quality in the future.
Travel restrictions and hospital limitations or denials of access for non-patients have impacted, and may in the future continue to impact, the ability of
our direct sales team and clinical educators in the United States and United Kingdom and our distributors and suppliers in many other countries to
access physicians and clinicians in order to train them on our products at a time when we are onboarding many new customers who have no prior
experience using our products. We have been training our customers and distributors on our products through online training modules. We are not
certain that these alternative means will be as effective as our standard training methods, particularly over the long term in terms of using our products
on the full range of patients experiencing respiratory distress, including hypercapnia, or even using our products at all, and while we have not seen a
negative impact to our complaint rates to date, we may see higher complaint rates in the future, particularly from new customers who are less familiar
with our products.
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Travel restrictions have prevented, and may in the future continue to prevent, physicians and other caregivers from traveling to attend our training
programs, which has resulted, and may in the future continue to result, in fewer physicians trained in person on high velocity therapy, and in the United
Kingdom and in Europe, on our Oxygen Assist Module.
Travel restrictions have impeded, and may in the future continue to impede, our ability to meet with distributors, negatively impacting our business in a
number of ways, including without limitation our ability to train our existing distributors on new products such as the Oxygen Assist Module and HGE.
Some of our hospital customers in the United States may in the future be unable to continue with business operations as usual or at all due to lost
business in other parts of their operations, which may negatively impact or eliminate our business with these customers. Similarly, some of our
distributors may in the future be unable to continue with business operations as usual or at all due to lost business in other parts of their portfolios,
which may negatively impact or eliminate our business with these distributors and their customers in the countries they serve.
We have asked most employees who are not directly involved in our production, shipping, quality, regulatory, and product development efforts to work
from home and, while we have not seen a negative impact so far, this could impact our ability to effectively plan, execute, communicate and maintain
our corporate culture. The increase in working remotely could also increase our cyber security risk, create data accessibility concerns, and make us more
susceptible to communication disruptions, any of which could adversely impact our business operations.
Stay at home orders implemented in March, April, and May of 2020 significantly restricted individuals from traveling outside the home, which limited
our ability to hire new employees or backfill terminated employees; if additional stay at home orders are issued in the future, our ability to hire new
employees or backfill terminated employees may be further impacted. Additionally, the federal unemployment compensation subsidy passed into law in
connection with the COVID-19 pandemic created incentives for certain individuals to stay home rather than seek to enter the job market, which also
limited our ability to hire new employees and backfill terminated employees. The federal unemployment compensation subsidy initially expired on July
31, 2020, then was extended in September at a lower rate, and is currently set to expire on or before March 14, 2021. Any further extension of the
federal unemployment compensation subsidy may continue to limit our ability to hire new employees and backfill terminated employees in the future.
Our competitors, potentially including companies that we have not previously considered competitors due to their historical operations outside of the
respiratory space or even outside of the medical device space entirely, may in the future secure significant purchase agreements from the federal
government or various states before we are able to do so, may be selected instead of us, or may be added to these agreements after initially being
excluded, and any of the foregoing could limit our access to or preclude us altogether from those commercial opportunities.
The U.S. federal government has cancelled, and the U.S. federal government and/or state or international governments may in the future cancel
contracts they have entered into with suppliers to procure competitive respiratory support technologies, thereby leaving those suppliers with significant
inventory of components and/or finished goods and creating motivation for those suppliers to enter markets around the world with those devices at
extremely competitive pricing; to the extent those suppliers and their products would compete with us, our existing business in markets where we
already are established and/or our ability to enter into new markets may be negatively impacted.
The transmission risk of different respiratory support modalities for COVID-19 has not been studied extensively. Our assessment of the issue suggests
that the Precision Flow, its disposable patient circuits, and its accessories, including the Vapotherm Transfer Unit, the Q50 compressor, and, in the
United Kingdom and Europe, the Oxygen Assist Module, do not represent a heightened risk, particularly when (1) used in COVID-19 cohorts or when
adequately disinfected between patients, and (2) a simple surgical mask is placed over the patient’s nose and mouth while delivering high velocity nasal
insufflation; however, this assessment could prove to be incorrect upon further analysis or new third party information.
The FDA or any foreign regulatory body may disagree with our interpretation that our promotional materials, sales practices, and training related to the
use of our products on patients in respiratory distress who are suffering from COVID-19 are on label and they could request we modify our promotional
materials, sales practices, or training or subject us to regulatory or enforcement actions, including the issuance of an untitled letter, warning letter,
injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state, or foreign enforcement authorities might take action under
other regulatory authority, such as false claims laws, if they consider our business activities to
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constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative
penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.
A significant disruption to our business resulting in an inability to build and ship product to customers for an extended period of time may impair our
ability to maintain compliance with our debt covenants.
Equity and debt markets in general and Vapotherm securities in particular have experienced significant volatility since the spread of COVID-19 into the
United States for a variety of reasons, including, without limitation, media coverage of COVID-19, its impacts, and specific COVID-19 related
technologies such as invasive mechanical ventilators and high flow nasal cannula in general and Vapotherm’s Precision Flow, an advanced form of high
flow nasal cannula capable of delivering high velocity therapy, in particular. Should significant volatility continue or should the markets in general or
Vapotherm securities in particular experience declines due to the economic impact of the COVID-19 pandemic, we may not be able to raise capital or
seek other sources of financing at a reasonable valuation or at all.
In addition, the increases in demand we have experienced since the onset of the COVID-19 pandemic are correlated with the number of patients
suffering from COVID-19 who are being treated for respiratory distress; these increases in demand may not continue after the COVID-19 pandemic subsides.
Moreover, the increases in demand we have experienced to date may result in decreased demand for our products after the COVID-19 pandemic subsides as
hospitals may have a large surplus of ventilators and other respiratory support equipment, including high flow nasal cannula devices, potentially including
Vapotherm’s Precision Flow systems. Additionally, we were awarded a blanket purchase agreement from the Department of Defense and may in the future be
compelled to or otherwise enter into other blanket purchase agreements or supply agreements with domestic or foreign governmental entities, and orders may not
materialize thereunder for a variety of reasons, including without limitation, the COVID-19 pandemic subsiding or any decision by the relevant domestic or foreign
governmental entity to otherwise cancel or alter their purchase order or supply agreement. Even if any such agreement is ultimately fulfilled, the domestic or
foreign governmental entity might fail to adequately distribute and install our technology in hospitals where the potential exists for it to generate an ongoing
disposable revenue stream. As a result, any present increase or potential future increase in our capital or disposable revenue may not be sustained and our revenue
may significantly decrease after the COVID-19 pandemic subsides, which could have an adverse effect on our business. Any sudden and significant decrease in
demand may result in a substantial inventory position, which could also have an adverse effect on our business.
The full extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot
be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to treat or contain COVID-19 or to
otherwise limit its impact, the availability and effectiveness of vaccines among others. Additionally, strategies relating to limiting the impact of COVID-19 have
become highly politicized around the world. To the extent the COVID-19 pandemic, whether on its own or in connection with any political, economic, and civil
instability adversely affects our business and financial results, our distributors’ and suppliers’ business and financial results, or our customers’ business and
financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including without limitation those
relating to our ability to generate revenue and improve on or hold our current gross margin, the price of our common stock, our susceptibility to securities or other
types of litigation, our significant amount of indebtedness, our need to generate sufficient cash flows to service our substantial indebtedness, and our ability to
comply with the covenants contained in the agreements that govern our indebtedness.
If product liability lawsuits are brought against us, our business may be harmed, and we may be required to pay damages that exceed our insurance coverage.
Our business exposes us to potential product liability claims that are inherent in the testing, manufacture and sale of medical devices for respiratory
support. Furthermore, if our customers are not sufficiently trained in the use of our products, they may misuse or ineffectively use our products, which may result in
unsatisfactory patient outcomes or patient injury. We could become the subject of product liability lawsuits alleging that component failures, malfunctions,
manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information resulted in an unsafe condition or injury to
patients.
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Regardless of the merit or eventual outcome, product liability claims may result in:
decreased demand for our products;
injury to our reputation;
significant litigation costs;
substantial monetary awards to or costly settlements with patients;
product recalls;
material defense costs;
loss of revenue;
the inability to commercialize new products; and
diversion of management attention from pursuing our business strategy.
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Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur. If a product liability claim or
series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, our business could suffer. Any product liability claim brought
against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. In addition, a
recall of some of our products, whether or not the result of a product liability claim, could result in significant costs and loss of customers.
In addition, we may be unable to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect us against losses. Any claims against
us, regardless of their merit, could severely harm our financial condition, strain our management and other resources and adversely affect or eliminate the prospects
for commercialization or sales of a product that is the subject of any such claim.
Our sales volumes and our results of operations may fluctuate within each quarter and over the course of the year.
We have experienced and continue to experience meaningful variability in our sales and gross profit among quarters, as well as within each quarter,
as a result of a number of factors, which may include, among other things:
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the number of products sold in the quarter;
the unpredictability of sales of capital equipment to our domestic hospital customers and our international distributors;
timing of our customers’ capital budgeting cycle; and
fluctuation and foreign currency exchange rates.
The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our results of operations. In addition, a
significant amount of our operating expenses are relatively fixed due to our manufacturing, research and development and sales and general administrative efforts.
Any failure to adjust spending quickly enough to compensate for a revenue shortfall could magnify the adverse impact of such revenue shortfall on our results of
operations. Our results of operations may not meet the expectations of research analysts or investors, in which case the price of our common stock could decrease
significantly.
Historically, our business has been, and likely again in the future will be, subject to seasonal fluctuations.
Although we did not experience seasonality this year due to demand for our High Velocity Therapy technology during the COVID-19 pandemic,
historically, our business has been, and likely again in the future will be, subject to seasonal fluctuations in that our revenue is typically higher in our first and
fourth quarters, driven primarily by an increase in patients with flu-like symptoms and COPD exacerbations. Sales volume can be affected by the severity of the flu
season and variations in the rates of respiratory disease in any given time period. In the event we had product shortages or had to institute a recall of our products
during the flu season, our financial results would have an even more detrimental effect. As a result, our financial results for any single quarter or for periods of less
than a year are not necessarily indicative of the results that may be achieved for a full fiscal year.
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We bear the risk of warranty claims on our products.
We provide customers with a one-year warranty on our Precision Flow systems’ capital purchases, with limited exceptions. For the years ended
December 31, 2019 and 2020, we incurred warranty expense of $0.1 million and $0.6 million, respectively. We bear the risk of warranty claims on the products we
supply. We may not be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful
warranty claim against us by a customer or any recovery from such vendor or supplier may not be sufficient to cover our losses. In addition, warranty claims
brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expires, which
could result in our inability to recover any costs incurred by us.
We no longer qualify as an “emerging growth company” as of December 31, 2020 and as a result, we have and will continue to incur significant additional
costs.
As of December 31, 2020, we no longer qualified as an “emerging growth company,” and the reduced disclosure requirements applicable to emerging
growth companies no longer applied to us. As a result, we are no longer permitted to take advantage of the reduced regulatory and reporting requirements afforded
to emerging growth companies. Accordingly, we will likely incur additional expenses and devote substantial management effort toward ensuring compliance with
those additional requirements, including the auditor attestation requirements for internal controls. Compliance with these additional laws, rules and regulations will
likely increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and
resources. In addition, management’s attention may be diverted from other business concerns and our costs and expenses will increase, which could harm our
business and operating results. We may also need to hire more employees in the future or engage additional outside consultants to comply with these requirements,
which would increase our costs and expenses.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions.
We are subject to taxation in numerous U.S. states, the United Kingdom and certain other territories. As a result, our effective tax rate is derived from a
combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become
payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including changes in tax
laws, changes in the mix of our profitability from state to state or jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, our inability to
secure or sustain acceptable agreements with tax authorities, and changes in accounting for income taxes. Any of these factors could cause us to experience an
effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our
financial statements.
If we become profitable, our ability to use our net operating loss carryforwards to offset future taxable income may be subject to limitations.
We have incurred net losses since our inception, and expect to continue to incur significant product development, clinical and regulatory, sales and
marketing and other expenses as well as increased administrative expenses. If we become profitable in the future, our ability to use our net operating loss
carryforwards, or NOLs, tax credit carryforwards and other tax attributes to offset future taxable income or reduce taxes may be subject to limitations. In general,
under Section 382 of the Internal Revenue Code of 1986, as amended, or Code, a corporation that undergoes an “ownership change” is subject to an annual
limitation on its ability to use its pre-change NOLs and other tax attributes. We have not performed an analysis to determine whether our past issuances of stock
and other changes in our stock ownership may have resulted in one or more ownership changes within the meaning of Section 382 of the Code. In addition, future
changes in our stock ownership, some of which are outside of our control, could result in one or more ownership changes under Section 382 of the Code. If an
ownership change has occurred in the past or occurs in the future, our ability to use our pre-change NOLs and other tax attributes may be subject to limitation under
Section 382 of the Code. If we determine that we have not undergone an ownership change, the Internal Revenue Service could challenge our analysis, and
determine that our ability to use our NOLs, tax credit carryforwards or other tax attributes to offset taxable income are limited by Section 382 of the Code. For
these and other reasons, we may not be able to use a material portion of the NOLs, even if we attain profitability. A full valuation allowance has been provided for
the entire amount of our NOLs.
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If the quality of our products does not meet the expectations of our customers or their patients, then our brand and reputation could suffer, and our business
could be adversely impacted.
In the course of conducting our business, we must adequately address quality issues that may arise with our products, as well as defects in third-party
components included in our products. Although we have established internal procedures to minimize risks that may arise from quality issues, we may be unable to
eliminate or mitigate occurrences of these issues and associated liabilities. For example, in February 2021, we upgraded the software on approximately 45 Oxygen
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units outside of the United States from software version 2.2.0 to software version 2.5.0. Subsequently, a bug in software
version 2.5.0 was discovered by one of our employees. Although there have been no reports of patient injury associated with
this bug and we believe risk of patient injury is unlikely, out of an abundance of caution, we immediately notified our users and
undertook a field action to remove software version 2.5.0 from all upgraded units and downgrade these units to software
version 2.2.0 until the issue is resolved. All software downgrades have been completed. Despite the low risk we believe this
software bug engendered, and the absence of evidence of patient injury as a result of this software bug, there is a risk this field action could undermine confidence
in the product and negatively impact adoption.
Additionally, if our products are involved in an instance of patient harm, even if it is through misuse of our products, it could result in an interruption of
business and damage to our reputation.
We may seek to grow our business through acquisitions or investments in new or complementary businesses, products or technologies, through the licensing of
products or technologies from third parties or other strategic alliances. The failure to effectively manage acquisitions, investments, licenses or other strategic
alliances, or the failure to integrate them with our existing business, could have a material adverse effect on our operating results, dilute our stockholders’
ownership, increase our debt or cause us to incur significant expense.
Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive
pressures, technologies and market pressures. Accordingly, from time to time we may consider opportunities to acquire, make investments in or license other
technologies, products and businesses that may enhance our capabilities, complement our current products or expand the breadth of our markets or customer base.
For example, on February 28, 2019, we acquired our former distributor in the United Kingdom, Solus Medical, providing us with a U.K.-based wholly owned
subsidiary and direct sales organization. As another example, on November 13, 2020 we acquired HGE, a software as a service platform for ongoing management
of chronic respiratory disease. Potential and completed acquisitions, strategic investments, licenses and other alliances involve numerous risks, including:
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failure to realize some or all of the anticipated benefits, financial or otherwise, of the transaction resulting from issues with acquired products or
technology, introduction of competitive products or technology with attributes superior to the acquired products or technology, the failure to
achieve market acceptance of the products or technology, or a delay or failure to drive sales of the acquired products or technology to
anticipated levels;
delays or other difficulty assimilating or integrating acquired or licensed technologies, products or business operations;
failure of the target entity to satisfy post-closing obligations;
issues maintaining uniform standards, procedures, controls and policies;
failure of pre-acquisition due diligence such that issues that negatively affect the value or cost structure of the acquired enterprise are not
uncovered;
unanticipated costs, including the assumption of unknown or contingent liabilities and the incurrence of debt or future write-offs of significant
amounts of intangible assets, goodwill, and/or long-lived assets;
impacts related to contingent consideration payments;
impacts as a result of purchase accounting adjustments, incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring
charges, or other potential financial accounting or reporting impacts;
inaccurate assessment of additional post-acquisition or business venture investments, undisclosed contingent or other liabilities or problems, or
unanticipated costs associated with the acquired entity;
inability to successfully integrate or develop a distribution channel for acquired product lines;
diversion of management’s attention from our core business and disruption of ongoing operations;
inability to effectively manage our expanded operations;
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disruption to our existing operations and plans;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering new markets in which we have limited or no experience;
potential losses related to investments in other companies;
loss of existing third-party license agreements or the ability to enter into new third-party license agreements for any reason, including without
limitation a difference or change in one party’s strategic direction;
lack of or inadequate formal intellectual property protection mechanisms in place at an acquired business;
infringement by acquired business or other business ventures on valid intellectual property rights of others;
potential loss of key employees of acquired businesses; and
increased legal and accounting compliance costs.
We do not know if we will be able to identify acquisitions or strategic relationships we deem suitable, whether we will be able to successfully
complete any such transactions on favorable terms, or at all, or whether we will be able to successfully integrate any acquired business, product or technology into
our business or retain any key personnel, suppliers or distributors. Our ability to successfully grow through strategic transactions depends upon our ability to
identify, negotiate, complete and integrate suitable target businesses, technologies or products and, as necessary, to obtain any necessary financing. These efforts
could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations.
Additionally, we have and may seek to make additional foreign acquisitions, investments or strategic alliances which involve other unique risks,
including those related to integration of operations across different cultures, languages and legal and regulatory environments, currency risks and the particular
economic, political and regulatory risks associated with specific countries.
To finance any acquisitions, investments or strategic alliances, we may choose to issue shares of our common stock as consideration, which could
dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low
or volatile, we may be unable to consummate any acquisitions, investments or strategic alliances using our stock as consideration.
We may be unable to manage our growth effectively, which could make it difficult to execute our business strategy.
We have been growing significantly over the past two years. Our revenue grew from $48.1 million for the year ended December 31, 2019 to $125.7
million for the year ended December 31, 2020. We intend to continue to grow our business operations and may experience periods of rapid growth and expansion.
This growth could create a strain on our organizational, administrative and operational infrastructure, including our supply chain operations, quality control,
technical support and customer service, sales force management and general and financial administration. We may be unable to maintain the quality, or delivery
timelines, of our products or customer service or satisfy customer demand if our business grows too rapidly, including into markets or countries in which we have
limited or no prior operating and commercial experience. Our ability to manage our growth properly will require us to continue to improve our operational,
financial and management controls, and our reporting systems and procedures. We may implement new systems in a number of areas affecting a broad range of
business processes and functional areas. The time and resources required to implement these new systems is uncertain and failure to complete this in a timely and
efficient manner could harm our business.
As our world-wide commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for our supply chain,
customer service, training and education personnel, invoicing, reporting and expand our internal quality assurance program, among other things. Because our
products require us to devote significant resources to training our customers on the use and educating our customers on the benefits of our products, we will be
required to expand these personnel as we increase our sales efforts. We may not successfully implement these increases in scale or the expansion of our personnel,
which could harm our business.
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Remote Physiologic Monitoring support services provided by HGE present unique business and regulatory risks.
Health care providers pay HGE to provide RPM support services to help them remotely monitor the health and well-being of patients with certain chronic
healthcare conditions. There are unique business and regulatory risks associated with these services, including, among others:
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Patient Enrollment/Attrition: The business viability of HGE’s RPM support services is dependent on HGE’s ability to work with healthcare providers to
identify a target patient population and engage with them on an ongoing basis. If we are unable to continue to engage these patients and give providers
information regarding their patients’ health and well-being, providers may be less willing to pay for HGE’s RPM support services.
Therapeutic Adherence: The ability of HGE’s RPM support services to help providers improve the health of a target patient population is dependent on
patients adhering to their prescribed therapy and submitting certain measurements and information to our RPM platform. Patients’ failure to adhere to
therapy could undermine the utility of HGE’s RPM support services and negatively impact our business model.
Changing Coverage and Reimbursement Landscape: Our sales of RPM devices are affected by the ability of our customers to receive government
and/or commercial reimbursement for use of the RPM devices. Coverage and reimbursement for RPM devices is evolving. While there appears to be
growing awareness of the efficacy and utility of RPM devices, not all payors at this time provide coverage and reimbursement for such devices or the
services provided in connection with RPM devices. Reimbursement requirements also are evolving. Changes in payor coverage and reimbursement that
limit available RPM reimbursement for providers may materially impact our sales of HGE’s RPM devices.
Inability to show savings in value-based arrangements: Under some RPM support services arrangements, HGE receives bonus payments from its health
care provider customers tied to the providers’ abilities to improve quality or reduce costs. If our HGE RPM services do not assist providers in meeting
certain quality or cost metrics, our payments associated with such RPM devices may be reduced or we may not realize the potential financial gain
associated with those RPM devices.
Compliance with Health Care Laws: As discussed in greater detail throughout these risk factors, we conduct business in a heavily regulated and closely
scrutinized industry. Comprehensive statutes and regulations govern the payments for our RPM devices and further regulate the manner in which we
interact with payors, providers, and patients. With respect to HGE, laws and regulations that govern providers’ eligibility for reimbursement from
federal healthcare programs for RPM services supported by HGE may have a significant effect on HGE’s commercial success and may also pose a risk
of liability for HGE if its provider customers submit claims for payment to federal healthcare programs in connection with HGE’s services that do not
meet applicable coverage and reimbursement requirements. In addition, HGE is subject to HIPAA by virtue of the services it provides as a business
associate of health care provider customers that are HIPAA covered entities. While we make every effort to comply with all applicable laws and
regulations, if we fail to do so, we could incur civil, criminal, or contractual penalties, be required to make significant changes to our operations, or
experience adverse publicity. Any of these outcomes could have a material adverse effect on our business, financial condition and operating results.
Risks Related to Our Dependence on Others
Except for in the United Kingdom, we rely on a network of third-party distributors to market and distribute our products internationally, and if we are unable to
maintain and expand this network, we may be unable to generate anticipated sales.
Except for in the United Kingdom where we now have a direct sales organization after the acquisition of our former distributor, Solus Medical, on
February 28, 2019, we rely on our network of third-party distributors to market and distribute our products internationally and, to a lesser extent, in the United
States. Internationally, we sell our products through a network of 47 independent distributors. Through these distributors, we sell our products in 51 countries
outside of the United States, and we expect a significant amount of our revenue to come from international sales for the foreseeable future. In the past, we have
experienced issues collecting payments from certain of our independent distributors and we may again experience such issues in the future. In the United States, a
limited number of our customers purchase the disposable components of our Precision Flow systems through independent distributors who are able to better satisfy
their just in time inventory requirements.
We face significant challenges and risks in managing our geographically dispersed distribution network and retaining the companies who make up
that network. Broadly, if we fail to comply with export control laws or successfully
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develop our relationships with international distributors, our sales could fail to grow or could decline, and our ability to grow our business could be adversely
affected. We also cannot control the efforts and resources our third-party distributors will devote to marketing our products. Our distributors may be unable or
unwilling to successfully market and sell our products and may not devote sufficient time and resources to support the marketing and selling efforts that enable the
products to develop, achieve or sustain market acceptance in their respective jurisdictions. Additionally, in some international jurisdictions, we rely on our
distributors to manage the regulatory process, while complying with all applicable rules and regulations, and we are dependent on their ability to do so effectively.
If we are unable to attract or retain additional international distributors, our international revenue may not grow.
If any of our international distributors were to cease to do business with us, our sales could be adversely affected. Some of our distributors have
historically accounted for a material portion of our sales volume. If any such agency or distributor were to have its business operations impacted as a result of a
third-party acquisition or cease to sell and market our products altogether, our sales could be adversely affected. In addition, if a dispute arises with a distributor or
a distributor is terminated by us or goes out of business, it may take time to locate an alternative distributor or to begin selling directly into that market, to seek
appropriate regulatory approvals or to train new personnel to market our products, and our ability to sell those systems in the region formerly serviced by such
terminated distributor could be harmed. Any of our distributors could become insolvent or otherwise become unable to pay amounts owed to us when due. Any of
these factors could reduce our revenue from affected markets, increase our costs in those markets or damage our reputation. If a distributor were to depart or be
retained by one of our competitors and begin selling a competitive product, we may be unable to prevent them from helping competitors or themselves solicit
business from our existing customers, which could further adversely affect our sales.
In any situation in which we lose the services of a distributor, we may need to seek alternative sales agencies or distributors, or to begin selling
directly ourselves, and our sales may be adversely affected. Because of the intense competition for their services, we may be unable to recruit or retain additional
qualified distributors to work with us. We may be unable to enter into agreements with them on a timely basis or on favorable or commercially reasonable terms, if
at all. Failure to hire or retain qualified distributors would prevent us from expanding our business and generating sales.
As a result of our reliance on third-party sales distributors, we may be subject to disruptions and increased costs due to factors beyond our control,
including labor strikes, third-party error and other issues. If the services of any of these third-party distributors become unsatisfactory, we may experience delays in
meeting our customers’ product demands and we may be unable to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure
to deliver products in a timely manner may damage our reputation and could cause us to lose current or potential customers.
We obtain some of the components and subassemblies included in our Precision Flow systems from single source suppliers and the partial or complete loss of
one or more of these suppliers could cause significant production delays, an inability to meet customer demand and a substantial loss in revenue.
We utilize single source suppliers for some of the critical components and subassemblies we use in our Precision Flow systems. Disputes (including
litigation) could arise with suppliers over a wide range of business and legal issues in our supply agreements, and there may be delays in switching to alternative
suppliers if the current supply source expires or terminates. Our dependence on single source suppliers of components may expose us to several risks, including,
among other things:
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our suppliers may encounter financial hardships as a result of unfavorable economic and market conditions unrelated to our demand for
components, which could inhibit their ability to fulfill our orders and meet our requirements;
our suppliers may fail to comply with regulatory requirements, be subject to lengthy compliance, validation or qualification periods or make
errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in supplying of our
products to our customers;
newly identified suppliers may not qualify under the stringent regulatory standards to which our business is subject;
heightened risk of commercial disputes (including litigation) if we or our suppliers seek to negotiate changes to the terms of our supply
agreements;
we or our suppliers may not be able to respond to unanticipated changes in customer orders, and if orders do not match forecasts, we or our
suppliers may have excess or inadequate inventory of materials and components;
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we may experience delays in delivery by our suppliers due to changes in demand from us or their other customers;
we or our suppliers may lose access to critical manufacturing equipment, services, and components, resulting in an interruption in the
manufacture, assembly and shipment of our systems and in higher cost to us;
our suppliers may be subject to allegations by other parties of misappropriation of proprietary information in connection with their supply of
products to us, which could inhibit their ability to fulfill our orders and meet our requirements;
fluctuations in demand for products that our suppliers manufacture for others may affect their ability or willingness to deliver components to us
in a timely manner;
we may fail to effectively manage our relationships with our suppliers;
our suppliers may increase the price of the components we purchase above the then-current market prices;
our suppliers may wish to discontinue supplying components or services to us; and
we may not be able to find new or alternative components or reconfigure our system and manufacturing processes in a timely manner if the
necessary components become unavailable for any reason, including manufacturing equipment failure.
In addition, we may be deemed to manufacture or contract to manufacture products that contain certain minerals that have been designated as
“conflict minerals” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, we are required to diligence the origin of such minerals
and disclose and report for the first time in 2021 whether or not such minerals originated in the Democratic Republic of the Congo or adjoining countries. The
implementation of these new requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of our products. In
addition, we may incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant
minerals and metals used in our products.
If any of these risks materialize, costs could significantly increase and our ability to meet demand for our products could be impacted.
If we are unable to satisfy commercial demand for our Precision Flow systems in a timely manner, our ability to generate revenue would be
impaired, market acceptance of our products could be adversely affected and customers may instead purchase or use alternative products. In addition, we could be
forced to secure new or alternative components and subassemblies through a replacement supplier. Finding alternative sources for these components and
subassemblies could be difficult in certain cases and may entail a significant amount of time, disruption and increased cost. In some cases, we would need to
change the components or subassemblies if we sourced them from an alternative supplier. This, in turn, could require a redesign of our Precision Flow systems or
our Oxygen Assist Module, and, potentially, require additional FDA, or in the case of the Oxygen Assist Module, certain international clearance or approval before
we could use any redesigned product with new components or subassemblies, thereby causing further costs and delays that could adversely affect our business,
financial condition and operating results.
We do not have long-term supply contracts with all our third-party suppliers.
We purchase components and subassemblies from third-party suppliers, including some of our single source suppliers, through purchase orders and
do not have long-term supply contracts with some of these third-party suppliers. These third-party suppliers, therefore, are not obligated to perform services or
supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. For certain
of these suppliers, we do not maintain large volumes of inventory. If we inaccurately forecast demand for components or subassemblies, our ability to manufacture
and commercialize our Precision Flow systems could be delayed and our competitive position and reputation could be harmed.
We often maintain high levels of inventory from our single source suppliers, which could consume a significant amount of our resources, reduce our cash
flows and lead to inventory impairment charges.
Our Precision Flow systems consist of a substantial number of components. In order to market or sell our Precision Flow systems effectively, we
often must maintain high levels of inventory of the product and its components from our single source suppliers. The manufacturing process requires lengthy lead
time during which components of our Precision Flow
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systems may become obsolete, and we may over- or under-estimate the amount needed of a given component, in which case we may expend extra resources or be
constrained in the amount of end product that we produce.
Similarly, in order to market or sell our Oxygen Assist Module effectively, we often must maintain high levels of finished goods inventory from a
single source supplier. The manufacturing process requires lengthy lead times during which components of our Oxygen Assist module may become obsolete, and
we may over- or under-estimate the number of finished goods required, in which case we may expend extra resources or be constrained in the amount of Oxygen
Assist Modules that we procure.
Performance issues, service interruptions or price increases by our shipping carriers could adversely affect our business and harm our reputation and ability to
provide our products on a timely basis.
Expedited, reliable shipping is essential to our operations. We rely heavily on providers of transport services for reliable and secure point-to-point
transport of our products to our customers and for tracking of these shipments. Should a carrier encounter delivery performance issues such as loss, damage or
destruction of Precision Flow systems, or Oxygen Assist Modules, it would be costly to replace such systems in a timely manner and such occurrences may damage
our reputation and lead to decreased demand for our products and increased cost and expense to our business. In addition, any significant increase in shipping rates
could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather, natural disasters or other service interruptions affecting
delivery services we use would adversely affect our ability to process orders for our products on a timely basis.
The loss of our senior management or our inability to attract and retain highly skilled employees could negatively impact our business.
Our success depends on the skills, experience and performance of the members of our executive management team, particularly Joseph Army, our
Chief Executive Officer. The loss of the services of any of these persons for any reason whatsoever, could impede the achievement of our research, development
and commercialization objectives. Also, each of these persons may terminate their employment with us at any time. We do not maintain “key person” insurance for
any of our executives or other employees.
Additionally, our business and operations depend on our ability to attract and retain highly skilled employees. We may be unable to attract or retain
qualified employees in the future for many reasons, including low regional, domestic, and international unemployment rates, the competition for qualified
personnel among medical device businesses, or the cost of hiring qualified employees may exceed industry standards. Recruiting and retention difficulties could
limit our ability to support our commercial, supply chain and research and development programs. Any of our employees may terminate his or her employment at
any time and for any reason. The loss of key employees, the failure of any key employee to perform, our inability to attract and retain skilled employees, as needed,
or an inability to effectively plan for and implement a succession plan for key employees could harm our business.
Risks Related to Government Regulation
Our products and operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with
applicable requirements could harm our business.
We and our products are subject to extensive regulation in the United States and elsewhere, including by the Food and Drug Administration, or the
FDA, and its foreign counterparts. The FDA regulates the design, development, manufacturing, labeling, storage, non-clinical and clinical research, safety, efficacy,
packaging, installation, servicing, marketing and distribution, premarket clearance or approval, recordkeeping, advertising, promotion, recalls and field safety
corrective actions, adverse event reporting, post-market approval studies, and product import and export to ensure that medical devices distributed domestically are
safe and effective for their intended uses and meet other applicable requirements of the Federal Food, Drug, and Cosmetic Act, or the FDCA.
The regulations to which we are subject are complex. Additional regulatory changes could result in restrictions on our ability to carry on or expand
our operations, higher than anticipated costs or lower than anticipated sales. The FDA enforces these regulatory requirements through, among other methods of
oversight, periodic unannounced inspections. We do not know whether we will pass any future FDA inspections. Failure to comply with applicable regulations
could jeopardize our ability to sell our products and result in enforcement actions such as: warning letters; fines; injunctions; civil penalties; termination of
distribution; recalls or seizures of products; delays in the introduction of products into the market; total or partial
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suspension of production; refusal to grant future clearances or approvals; withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on
sales of our products; and in the most serious cases, criminal penalties.
We may not receive the necessary authorizations to market our future products, and failure to timely obtain such authorizations for our future products would
adversely affect our ability to grow our business.
An element of our business strategy is to continue to develop new products and add new features and expand clearance or approval of our current
products to new indications. In the United States, in general, before we can market a new medical device, or a new use of, new claim for or significant modification
to a legally marketed device, we must first receive either clearance under Section 510(k) of the FDCA or the grant of a de novo request under section 513(f)(2) of
the FDCA or a premarket approval application, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, before a device may be
marketed, the FDA must determine that a proposed device is “substantially equivalent” to a legally-marketed “predicate” device. To be “substantially equivalent,”
the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have
different technological characteristics, not raise different questions of safety or effectiveness than the predicate device and be as safe and as effective as the
predicate device. Clinical data are sometimes required to support a substantial equivalence determination. In the de novo process, a manufacturer whose novel
device under the FDCA would otherwise be automatically classified as Class III and require the submission and approval of a PMA prior to marketing is able to
request down-classification of the device to Class I or Class II on the basis that the device presents a low or moderate risk. If the FDA grants the de novo petition,
the applicant will receive authorization to market the device. This device type may be used subsequently as a predicate device for 510(k) submissions. In the PMA
process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to,
technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk,
such as life-sustaining, life-supporting or implantable devices.
The PMA approval, the 510(k) clearance and the de novo processes can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance and de
novo processes can take from three to 12 months but may last significantly longer. The process of obtaining a PMA is much more costly and uncertain than the
510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, a PMA
generally requires the performance of one or more clinical trials. Clinical data may also be required in connection with an application for 510(k) clearance or a de
novo request. Despite the time, effort and cost, a device may not be approved, reclassified or cleared by the FDA. Any delay or failure to obtain necessary
regulatory clearances or approvals could harm our business. Furthermore, even if we are granted regulatory clearances or approvals, they may include significant
limitations on the indications for use or intended uses of the device, which may limit the market for the device.
In the United States, we obtained 510(k) premarket clearances from the FDA to market each of our products requiring such clearance. We also
obtained a de novo grant for an expanded indication for our Precision Flow Hi-VNI system. Any modifications to these existing products may require new 510(k)
clearance; however, future modifications may be subject to the substantially more costly, time-consuming and uncertain de novo process or PMA process. If the
FDA requires us to go through a lengthier, more rigorous premarket review process for future products or modifications to existing products than we had expected,
such as with our Oxygen Assist Module, product introductions or modifications could be delayed or canceled, which could cause our sales to decline.
The FDA can delay, limit or deny 510(k) clearance, request for de novo classification, or pre-market approval of a device for many reasons,
including:
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we may be unable to demonstrate to the FDA’s satisfaction that the products or modifications are substantially equivalent to a proposed
predicate device or safe and effective for their intended uses;
FDA or the applicable foreign regulatory body may disagree with the design, conduct or implementation of our clinical trials or the analyses or
interpretation of data from pre-clinical studies or clinical trials;
participants in our clinical trials may experience serious adverse effects;
the data from our pre-clinical studies and clinical trials may be insufficient to support clearance, de novo classification, or approval, where
required;
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we may be unable to demonstrate that the clinical and other benefits of the device outweigh the risks;
an advisory committee, if convened by the applicable regulatory authority, may recommend against authorization for marketing or may
recommend that the applicable regulatory authority require, as a condition of marketing authorization, additional preclinical studies or clinical
trials, limitations on labeling or distribution and use restrictions, or even if an advisory committee, if convened, makes a favorable
recommendation, the respective regulatory authority may still not authorize the product for marketing;
the applicable regulatory authority may identify deficiencies in our submissions or in the facilities or processes of our third-party contract
manufacturers;
the policies or regulations of the FDA or applicable foreign regulatory bodies may change significantly in a manner rendering our clinical data
or regulatory filings insufficient for clearance, de novo classification, or approval; and
the FDA or foreign regulatory authorities may audit our clinical trial data and conclude that the data is not sufficiently reliable to support a
submission for marketing authorization.
In addition, the FDA may change its policies, adopt additional regulations or revise existing regulations, or take other actions, or Congress may enact
different or additional statutory requirements, which may prevent or delay approval, de novo classification, or clearance of our future products under development
or impact our ability to modify our currently marketed products on a timely basis. Such policy, statutory or regulatory changes could impose additional
requirements upon us that could delay our ability to obtain new 510(k) clearances, de novo classifications, or PMA approvals, increase the costs of compliance or
restrict our ability to maintain our current marketing authorizations.
In order to sell our products in member countries of the European Economic Area (the 27 member states of the European Union plus Iceland,
Liechtenstein and Norway), or the EEA, our products must comply with the essential requirements of the EU Medical Devices Directive (Council Directive
93/42/EEC), or the MDD. Compliance with these requirements is a prerequisite to be able to affix the CE Mark to our products, without which they cannot be sold
or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according
to the type of medical device and its classification. Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can
issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the MDD, a conformity
assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, or a Notified Body.
Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the
manufacture, design and final inspection of our devices. The Notified Body issues a certificate of conformity following successful completion of a conformity
assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This certificate entitles
the manufacturer to affix the CE Mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.
As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other
things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must
demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are
minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device
are supported by suitable evidence. If we fail to remain in compliance with applicable European laws and directives, we would be unable to continue to affix the
CE Mark to our devices, which would prevent us from selling them within the EEA.
On May 26, 2020 the new EU Medical Devices Regulation (Regulation (EU) 2017/745 of the European Parliament and of the Council), or the MDR,
replaced the EU MDD in the European Economic Area. In regard to the UK, because the MDR was codified into UK law at the time of Brexit, the same MDR
requirements will apply to our commercial activity in the UK, at least during the post-Brexit transition period.
The new MDR imposes more strict requirements on medical device manufacturers and the Notified Bodies whom they must involve in the conformity
assessment procedure (other than self-declaration Class I non-sterile, non-measuring devices and (new) non-reusable surgical instruments). The MDR adds new
requirements, such as a reclassification of certain devices, a Unique Device Identification (UDI) system, a wider scope of the Quality Management System
including clinical evaluation and post-marketing clinical follow-up, a clinical evaluation procedure for some Class IIb and Class III devices by an
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independent expert panel, among others. New medical devices introduced after May 26, 2020 must comply with the MDR rules. That means we will need to
undergo the applicable conformity assessment procedure according to MDR, through representation by a Notified Body, for all new devices we introduce after that
date. The new devices will have to be CE marked pursuant to MDR.
To avoid market disruption and allow a smooth transition from the EU MDD to the EU MDR several transitional provisions are in place (although the
transitional processes and the status of the MDR in the UK are uncertain after the post-Brexit transition through the end of 2020 or afterward if extended). Although
from May 26, 2021, all new certificates will have to be delivered according to MDR, devices lawfully placed on the market pursuant to the MDD prior to May 26,
2021 may continue to be made available until May 26, 2025.
The sale and marketing of imported medical device products in China are subject to notifications (for Class I devices) or registrations (for Class II and
III devices) with the NMPA. The Center for Medical Device Evaluation (“CMDE”) of the NMPA will need to conduct technical review of product safety and
effectiveness with respect to imported Class 2 and Class 3 devices. The statutory time limit for such technical review is 60 working days for Class 2 devices and 90
working days for Class 3 devices. Additional time can be required for the response to the CMDE’s deficiency notices and the GMP compliance inspections
conducted by the Center for Food and Drug Institute (“CFDI”) of the NMPA. Furthermore, manufacturers are likely to be required to conduct local clinical trials in
China if their devices are not on the NMPA Clinical Trial Exemption List, are not substantially equivalent to a predicate device on the market, or do not have any
overseas clinical study data or real world evidence to prove safety and effectiveness in Chinese patient population. Additionally, pre-submission in-country type
testing by the NMPA-designated testing centers can further prolong the approval process, especially when applicable Chinese device standards are not harmonized
with corresponding international standards. The whole process for obtaining regulatory clearances or approvals in China can be lengthy and expensive, and the
results are unpredictable. In addition, uncertain regulatory or political environment changes and healthcare system reforms in China may result in the delay of
certain regulatory clearance or approval for some of our products.
We or our distributors will also need to obtain regulatory approval in other foreign jurisdictions in which we plan to market and sell our products. The
time required to obtain registrations or approvals, if required by other countries, may be longer than that required for FDA clearance, and requirements for such
registrations, clearances or approvals may significantly differ from FDA requirements. If we modify our products, we or our distributors may need to apply for
additional regulatory approvals before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards
required to maintain the authorizations that we or our distributors have received. If we or our distributors are unable to maintain our authorizations in a particular
country, we will no longer be able to sell the applicable product in that country.
Marketing authorization by the FDA does not ensure clearance or approval by regulatory authorities in other countries, and clearance or approval by one
or more foreign regulatory authorities does not ensure marketing authorization by regulatory authorities in other foreign countries or by the FDA. However, a
failure or delay in obtaining regulatory clearance or approval or other marketing authorization in one country may have a negative effect on the regulatory process
in others.
Certain modifications to our products may require new 510(k) clearance or other marketing authorizations and may require us to recall or cease marketing our
products.
Once a medical device is permitted to be legally marketed in the United States pursuant to a 510(k) clearance, de novo classification, or a PMA, a
manufacturer may be required to notify the FDA of certain modifications to the device. Manufacturers determine in the first instance whether a change to a product
requires a new premarket submission, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new
clearances or approvals are necessary. We have made modifications to our products in the past and have determined based on our review of the applicable FDA
regulations and guidance that in certain instances new 510(k) clearances or other premarket submissions were not required. We may make similar modifications or
add additional features in the future that we believe do not require a new 510(k) clearance, de novo classification, or approval of a PMA or PMA amendments or
supplements. If the FDA disagrees with our determinations and requires us to submit new 510(k) notifications, requests for de novo classification, or PMAs (or
PMA supplements or amendments) for modifications to our previously cleared or reclassified products for which we have concluded that new clearances or
approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to
significant regulatory fines or penalties.
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The misuse or off-label use of our products may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly
investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our
business.
Our products have been cleared by the FDA for specific indications. The FDA and European regulatory authorities strictly regulate the indications
for use and associated promotional safety and effectiveness claims, including comparative and superiority claims vis a vis competitors’ products, that may be made
about legally marketed products. In particular, a medical device may not be promoted in a way that constitutes adulteration or misbranding under the FDCA. We
train our marketing personnel and sales representatives and distributors to promote our products consistent with applicable laws and published clinical data.
However, a physician, in his or her medical judgment, can prescribe a course of treatment that is outside the product’s labeling. There may be increased risk of
injury to patients if physicians attempt to use our products in this manner. Furthermore, the use of our products for indications other than those authorized by the
FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians
and patients.
If the FDA or any foreign regulatory body determines that our promotional materials, sales practices or training constitute improper promotion of an
off-label use, including as a result of their disagreement with our interpretation of published clinical data or the FDA’s recent grant of our de novo request and
corresponding expanded indications for use, they could request that we modify our training, sales practices or promotional materials or subject us to regulatory or
enforcement actions, including the issuance or imposition of an untitled letter, warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible
that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our
business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and
administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our
operations. Additionally, the FDA might fail to take action against competitors whose promotional materials, sales practices or training mirror our own but who
have not yet achieved the expanded indications for use we received in connection with the FDA’s recent grant of our de novo request. These types of enforcement
actions, or enforcement omissions, could have a material adverse impact on our business, product sales and financial results.
Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or
deploy key leadership and other personnel, expeditiously and effectively evaluate product complaints and promotional matters, or otherwise prevent new or
modified products and indications from being developed, cleared or approved, or commercialized in a timely manner or at all, which could negatively impact
our business.
The ability of the FDA to hire, retain, or deploy key leadership and other personnel, expeditiously and effectively evaluate product complaints and
promotional matters, or otherwise review and clear or approve new or modified products and indications can be affected by a variety of factors, including
government budget and funding levels, statutory, regulatory, and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user
fees, a dramatic increase in Emergency Use Authorizations or other regulatory submissions, a dramatic increase in the issuance of guidance documents, and other
events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In
addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently
fluid and unpredictable. Disruptions at the FDA and other agencies may impede the FDA’s ability to expeditiously evaluate product complaints and promotional
matters, and may also slow the time necessary for new medical devices or modifications to cleared or approved medical devices or indications to be reviewed
and/or approved by necessary government agencies, which would adversely affect our business.
For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times
and certain regulatory agencies, such as the FDA, have had to furlough critical employees and stop critical activities. As another example, following the FDA’s
issuance of certain Emergency Use Authorization communications in March 2020 that identified the product code that includes our Precision Flow Hi-VNI system,
QAV, on a list of ventilators and/or ventilatory support devices, we prepared a letter-to-file to modify the indications for use of the Precision Flow Hi-VNI system.
We believe these modifications are consistent with the FDA’s recent communication and our clinical data. However, to the extent we market the Precision Flow
Hi-VNI system using the modified labeling, the possibility exists that the FDA may not agree with the decision that a new clearance or approval was unnecessary
for this label revision for any number of reasons, including, without limitation, that we used an inappropriate intended use statement, and as a result may require us
to submit a new 510(k) notification, request for de novo classification, premarket approval (PMA) (or PMA supplements or amendments) or subject us to other
consequences. In addition, on April 29, 2020 the FDA reached out with an informal inquiry regarding our marketing of the Precision Flow Hi-VNI system. We
responded to
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that inquiry in a timely manner, but the FDA may ultimately determine that our website or other promotional materials, sales practices, or training constitute the
improper promotion of a medical device.
Additionally, in response to the global pandemic of COVID-19, on March 10, 2020, the FDA announced its intention to postpone most foreign
inspections of manufacturing facilities and products through April 2020, and subsequently, on March 18, 2020, the FDA announced its intention to temporarily
postpone routine surveillance inspections of domestic manufacturing facilities. Regulatory authorities outside the United States may adopt similar restrictions or
other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the
FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the
FDA or other regulatory authorities to timely review and process our marketing applications, clinical trial authorizations, emergency use applications, or other
regulatory submissions, which could have a material adverse effect on our business.
Our products must be manufactured in accordance with federal, state and international regulations, and we could be forced to recall our installed devices or
terminate production if we fail to comply with these regulations.
The methods used in, and the facilities used for, the manufacture of our products must comply with the FDA’s Quality System Regulation, or QSR,
which is a complex regulatory scheme that covers the procedure and documentation of, among other requirements, the design, testing, validation, verification,
complaint handling, production, process controls, quality assurance, labeling, supplier evaluation, packaging, handling, storage, distribution, installation, servicing
and shipping of medical devices. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our
quality standards and applicable regulatory requirements. The FDA enforces the QSR through, among other oversight methods, periodic announced or
unannounced inspections of medical device manufacturing facilities, which may include the facilities of subcontractors, suppliers, or contract manufacturing
organizations. Our products are also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing. For
example, certain of our electrical components in our products are audited pursuant to International Electrotechnical Transmission standard 60601, a widely
accepted benchmark for medical electrical equipment compliance that has become a requirement for the commercialization of electrical medical equipment in
many countries. We are routinely audited under this standard and negative findings from an audit could prevent us from marketing our products in certain
countries.
Our third-party manufacturers may not take the necessary steps to comply with applicable regulations or our specifications, which could cause
delays in the delivery of our products. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with our
products or manufacturing processes could result in, among other things: warning letters or untitled letters; customer notifications or repair, replacement, refunds,
recall, detention or seizure of our products; fines, injunctions or civil penalties; suspension or withdrawal of approvals or clearances; seizures or recalls of our
products; total or partial suspension of production or distribution; administrative or judicially imposed sanctions; the FDA’s refusal to grant pending or future
clearances or approvals for our products; clinical holds; refusal to permit the import or export of our products; and criminal prosecution of us or our employees.
Any of these actions could significantly and negatively impact supply of our products. If any of these events occurs, our reputation could be harmed,
we could be exposed to product liability claims and we could lose customers and suffer reduced revenue and increased costs.
Our products may cause or contribute to adverse medical events that we are required to report to the FDA and other governmental authorities, and if we fail to
do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety
issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative
impact on us.
Our products are subject to extensive regulation by the FDA in the United States and by regulatory agencies in other countries where we do
business. We will be required to timely file various reports with the FDA, including reports required by the medical device reporting regulations, or MDRs, which
require us to report to the FDA when we receive or become aware of information that reasonably suggests that one or more of our products may have caused or
contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur to the device or a similar device that we market, could cause
or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature
of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become
aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from
the use of the product. If we fail to comply with our reporting obligations, the FDA or other governmental authorities
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could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our
device clearance, seizure of our products or delay in clearance of future products.
The FDA and certain foreign regulatory bodies have the authority to require the recall of commercialized products under certain circumstances. The
FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death.
A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions,
manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. We have in the
past conducted voluntary recalls of devices with lot-specific quality issues. For example, in September 2014, we initiated a voluntary recall of various lots of the
disposable patient circuit due to the device allowing water to leak into the center gas lumen. This recall was terminated in October 2015. Additionally, we received
a small number of complaints involving a defect in the disposable patient circuit that allowed water to leak where the delivery tube is connected to the disposable
water path. In response, we initiated a voluntary recall of the four affected lots that began on May 4, 2016 and terminated on August 17, 2016. Product defects or
other errors resulting in recalls may occur in the future.
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA or other governmental bodies may require, or we
may decide, that we will need to obtain new marketing authorizations for the device before we may market or distribute the corrected device. Seeking such
marketing authorizations may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated
with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties or
civil or criminal proceedings.
Companies are required to maintain certain records of recalls, removals and corrections, even if they are not reportable to the FDA. We may initiate
voluntary withdrawals, removals or corrections for our products in the future that we determine do not require notification of the FDA. If the FDA disagrees with
our determinations, it could require us to report those actions and we may be subject to enforcement action. A future recall announcement could harm our
reputation with customers, potentially lead to product liability claims against us and negatively affect our sales. Any corrective action, including product recall, will
require the dedication of our time and capital and could harm our reputation and financial results.
In addition, the FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could
prevent, limit or delay regulatory approval of our product candidates. For example, in December 2016, the 21st Century Cures Act, or Cures Act, was signed into
law. The Cures Act, among other things, is intended to modernize the regulation of medical devices and spur innovation. If we are slow or unable to adapt to
changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any
marketing approval that we may have obtained and we may not achieve or sustain profitability, which would adversely affect our business, prospects, financial
condition and results of operations.
We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive
action, either in the United States or abroad. The Biden Administration may enact certain policies that may impact our business and industry. It is difficult to
predict how potential executive actions affect the FDA’s ability to exercise its regulatory authority. If potential executive actions impose constraints on FDA’s
ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted.
Certain of our customers are highly dependent on payments from third-party payors, including government sponsored programs, in the U.S. and other
countries in which we operate, and reductions in third-party coverage and reimbursement rates for our products (or services provided with our products) could
adversely affect our business and results of operations.
A substantial portion of our revenue depends, in part, on the extent to which the costs of our products purchased by our customers are reimbursed by
third-party payors, including Medicare, Medicaid, other U.S. government sponsored programs, non-U.S. governmental payors and private payors. Our customers’
ability to obtain appropriate coverage and reimbursement for products and services from these third-party payors affects the selection of products they purchase and
the prices they are willing to pay. Many of our products are used in services that are often reimbursed by third-party payors as part of a global payment that covers
all costs associated with providing that service. This means that healthcare providers incur costs purchasing these products but do not receive separate or additional
reimbursement in connection with their use. As a result, certain healthcare providers may be reluctant to adopt our products. Similarly, our customers may not
adopt our products if they are more costly than competitor products, including products used to provide alternative treatments. If we
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lower the prices for our products to obtain or maintain customers’ business, we may be adversely affected financially. Similarly, our customers’ ability to obtain
appropriate productivity credit from their applicable internal administrations affects the selection of products they purchase and the prices they are willing to pay.
For some of our products, such as HGE’s remote physiologic monitoring (“RPM”) products, our customers may receive additional reimbursement
associated with those products. To the extent that third-party payors modify or eliminate coverage for the RPM products or reduce their reimbursement to our
customers for their use of those products, our business may be adversely affected.
We face significant uncertainty in the industry due to government healthcare reform and other legislative action.
There have been and continue to be laws enacted by the federal government, state governments, regulators and third-party payors to control
healthcare costs, and generally, to reform the healthcare system in the United States. For example, the Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Reconciliation Act, or collectively, the Healthcare Reform Act, substantially changed the way healthcare is delivered and financed
by both governmental and private insurers. These changes included the creation of demonstration programs and other value-based purchasing initiatives that
provide financial incentives for physicians and hospitals to reduce costs.
Under the Trump Administration, there were ongoing efforts to modify or repeal all or part of the Healthcare Reform Act. For example, tax
legislation enacted at the end of 2017 includes provisions that eliminated the tax penalty for individuals who do not maintain sufficient health insurance coverage
beginning in 2019 (the so-called “individual mandate”). The Healthcare Reform Act also has been subject to judicial challenge. In December 2018, a federal
district court found the Healthcare Reform Act unconstitutional in its entirety because, once Congress repealed the individual mandate provision, there was no
longer a basis to rely on Congressional taxing authority to support enactment of the law. On appeal, a federal appeals court held in December 2019 that the
individual mandate portion of the Healthcare Reform Act was unconstitutional and left open the question whether the remaining provisions of the Healthcare
Reform Act would be valid without the individual mandate. On November 10, 2020, the Supreme Court heard oral arguments in this case, but it is unknown when
the Supreme Court will issue a decision. We expect healthcare reform efforts to continue throughout the Biden administration and that there will be additional
reform proposals at federal and state levels. We cannot predict whether additional reform proposals will be adopted, when they will be adopted, or what impact
they may have on us, but any such proposals could have a negative impact on our business and provide incentives for hospitals and physicians to not use our
products and services.
General legislative action also may affect our business. The Budget Control Act of 2011 includes provisions to reduce the federal deficit. The
Budget Control Act, as amended, resulted in the imposition of 2% reductions in Medicare payments to providers which began in April 2013 and will remain in
effect through 2029 unless additional congressional action is taken.
Consolidation in the healthcare industry, group purchasing organizations or integrated distributor networks could lead to demands for price concessions,
which may affect our ability to sell our products at prices necessary to support our current business strategies.
Healthcare costs have risen significantly over the past decade, which has resulted in or led to numerous cost reform initiatives by legislators,
regulators and third-party payors. Cost reform has triggered a consolidation trend in the healthcare industry to aggregate purchasing power, which may create more
requests for pricing concessions in the future. Failure to meet these concessions may result in our exclusion from these contracts. Additionally, group purchasing
organizations, independent delivery networks and large single accounts may continue to use their market power to consolidate purchasing decisions for hospitals by
limiting the number of products available under various purchasing categories. We expect that market demand, government regulation, third-party coverage and
reimbursement policies and societal pressures will continue to change the healthcare industry world-wide, resulting in further business consolidations and alliances
among our customers, which may exert further downward pressure on the prices of our products.
As the healthcare system consolidates the number of health systems and group purchasing organizations controlling the buying process has also
constricted. In order to sell to hospitals that belong to these organizations we must be on contract. Not being on contract with these organizations, or choices of
these organizations to standardize on a competitive product option or otherwise decline to renew our contract, or the failure of these organizations to differentiate
our new Precision Flow Hi-VNI system, which we fully launched in 2019 and is our first product to have the de novo expanded indication for use statement, from
conventional heated humidified high flow oxygen devices could substantially reduce our revenue opportunity.
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Legislative or regulatory reforms in the United States or other jurisdictions in which we market our products may make it more difficult and costly for us to
obtain regulatory clearances or approvals for our products or to manufacture, market or distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation
of medical devices. In addition, FDA and other regulatory authorities’ regulations and guidance may be revised or reinterpreted in ways that may significantly
affect our business and our products. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen
review times of any future products or make it more difficult to obtain clearance or approval for, manufacture, market or distribute our products. We cannot
determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the
future. Such changes could, among other things, require: additional testing prior to obtaining clearance or approval; changes to manufacturing methods; recall,
replacement or discontinuance of our products; or additional record keeping.
On April 5, 2017, the European Parliament passed the Medical Devices Regulation (Regulation 2017/745), which repeals and replaces the EU
Medical Devices Directive and the Active Implantable Medical Devices Directive. Unlike directives, which must be implemented into the national laws of the EEA
member states, the regulations would be directly applicable, i.e., without the need for adoption of EEA member state laws implementing them, in all EEA member
states and are intended to eliminate current differences in the regulation of medical devices among EEA member States. The Medical Devices Regulation, among
other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high
level of safety and health while supporting innovation.
The Medical Devices Regulation will fully apply on May 26, 2021. Once applicable, the new regulations will among other things:
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strengthen the rules on placing devices on the market and reinforce surveillance once they are available;
establish explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the
market;
improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;
set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in
the European Union; and
strengthened rules for the assessment of certain high-risk devices, such as implants, which may have to undergo an additional check by experts
before they are placed on the market.
These modifications may have an effect on the way we conduct our business in the EEA.
We are subject to certain federal, state and foreign fraud and abuse laws, transparency laws and state licensure or permit laws which, if violated, could subject
us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to
respond to, and thus could harm our business.
There are numerous U.S. federal and state, as well as foreign, laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and
transparency laws. Our business practices and interactions with physicians, hospitals and other healthcare providers are subject to scrutiny under these laws. The
significant U.S. healthcare laws and regulations that may affect our ability to operate include:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or
arranging for a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and
Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation.
Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute
constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Violations of the federal Anti-Kickback Statute may
result in substantial civil or criminal penalties and exclusion from participation in government healthcare programs, including Medicare and
Medicaid;
the federal civil and criminal false claims laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or
entities from knowingly presenting, or causing to be presented, claims for
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payment from Medicare, Medicaid or other federal healthcare programs that are false or fraudulent. Private individuals can bring False Claims
Act “qui tam” actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by
the entity to the government in fines or settlement. When an entity is determined to have violated the federal civil False Claims Act, the
government may impose substantial penalties plus three times the amount of damages which the government sustains because of the submission
of a false claim, and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;
the Federal Physician Payments Sunshine Act or Open Payments which requires certain manufacturers of drugs, devices, biologics and medical
supplies for which payment is available under certain federal healthcare programs such as Medicare and Medicaid to report annually to the
DHHS Centers for Medicare & Medicaid Services, or CMS, information related to payments and other transfers of value to teaching hospitals
and physicians, which term is defined broadly to include practitioners such as podiatrists and dentists, (and, beginning with transfers of value in
2021, to additional non-physician practitioners) as well as to report annually ownership and investment interests held by physicians and their
immediate family members. Manufacturers are required to submit annual reports to CMS and failure to submit required information may result
in substantial civil monetary penalties, and may result in liability under other federal laws or regulations;
the HIPPA fraud and abuse provisions, which may impose criminal penalties for defrauding any healthcare benefit program, including public
and private payors, or making any false statements relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity
does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to
items or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require device companies to
comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or
that otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device
companies to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing
expenditures; and
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state laws that require medical device companies to obtain wholesale distribution or pharmacy permits and other state licensing laws.
More generally, these laws and regulations constrain our promotional and other business activities by limiting the kinds of financial interactions,
including discount and other commercial transactions, we may have with individuals or entities that use, order, purchase or recommend our products such as
patients and healthcare providers. We have a variety of arrangements with our customers that could implicate these laws and regulations. For example, like many
medical device companies that have related capital and consumable products, we periodically permit customers that purchase the disposable component of our
Precision Flow systems to use the capital component at no upfront cost as part of a bundled discount sale. A small percentage of our company is owned by
healthcare professionals, and we also have also entered into consulting agreements with physicians, including some who influence the ordering of or use our
products in procedures they perform. To facilitate product discussions, we also provide meals to healthcare practitioners who might use or order services using our
products. We arrange for continuing education programs for healthcare practitioners to provide education about our products and the conditions our products are
approved to treat. As another example, with federal RPM coverage requirements evolving, our customers may submit claims to federal payors for services
furnished in connection with our RPM support services, which could result in some services not eligible for reimbursement being nonetheless billed to Medicare or
Medicaid and therefore triggering False Claims Act liability. We could be adversely affected if regulatory agencies determine our financial interactions to be in
violation of applicable laws. Due to the breadth of these laws, the narrowness of exceptions and/or safe harbors available, and the range of interpretations to which
the laws are subject, it is possible that some of our current or future practices might be challenged under one or more of these laws.
To enforce compliance with the healthcare regulatory laws, certain enforcement bodies have recently increased their scrutiny of interactions between
healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry.
Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Additionally, as a result of these
investigations, healthcare companies or healthcare providers may have to agree to additional compliance and reporting requirements as part of a consent decree or
corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business. Even an
unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond to.
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If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply
to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare
programs, such as Medicare and Medicaid, imprisonment, contractual damages, reputational harm, disgorgement and the curtailment or restructuring of our
operations.
Risks Related to Our International Operations
Our international operations subject us to certain operating risks, which could adversely impact our results of operations and financial condition.
We focus our international commercial efforts in the United Kingdom, Germany, Brazil, Mexico, Spain, Italy, Japan and other international
markets. Economic or political instability in any of these markets could have a significant impact on our operations. Additionally, the sale and shipment of our
products across international borders, as well as the purchase of components from international sources, subjects us to U.S. and foreign governmental trade, import
and export, and customs regulations and laws.
Compliance with these regulations and laws is costly and exposes us to penalties for non-compliance. Other laws and regulations that can
significantly impact us include various anti-bribery laws, including the United Kingdom Bribery Act of 2010 and the U.S. Foreign Corrupt Practices Act, as well as
sanctions and export controls laws. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are
not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure
of shipments, restrictions on certain business activities and exclusion or debarment from government contracting.
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Our international operations expose us and our distributors to risks inherent in operating in foreign jurisdictions. These risks include:
difficulties in enforcing our intellectual property rights and in defending against third-party threats and intellectual property enforcement actions
against us, our distributors or any of our third-party suppliers;
reduced or varied protection for intellectual property rights in some countries;
pricing pressure that we may experience internationally;
a shortage of high-quality salespeople, clinical educators and distributors;
third-party reimbursement policies that may require some of the patients who receive our products to directly absorb medical costs or that may
necessitate the reduction of the selling prices of our products;
competitive disadvantage to competition with established business and customer relationships;
the imposition of additional U.S. and foreign governmental controls or regulations;
political or economic instability;
changes in duties and tariffs, license obligations and other non-tariff barriers to trade;
the imposition of restrictions on the activities of foreign agents, representatives and distributors;
scrutiny by foreign tax authorities, which could result in significant fines, penalties and additional taxes being imposed on us;
laws and business practices favoring local companies;
longer payment cycles;
difficulties in maintaining consistency with our internal guidelines;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
the imposition of costly and lengthy new export licensing requirements;
the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or
prohibit continued business with the sanctioned country, company, person or entity; and
the imposition of new trade restrictions.
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If we experience any of these risks, our sales in non-U.S. jurisdictions may be harmed and our results of operations would suffer.
Because we plan to continue using foreign contract manufacturers, our operating results could be harmed by economic, political, regulatory and other factors
in foreign countries.
We currently use foreign contract manufacturers and plan to continue to use foreign contract manufacturers to manufacture current and future products,
where appropriate. These international operations are subject to inherent risks, which may adversely affect us, including, but not limited to:
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political and economic instability;
high levels of inflation, historically the case in a number of countries in Asia;
burdens and costs of compliance with a variety of foreign laws, regulations and sanctions;
foreign taxes and duties;
changes in tariff rates or other trade, tax or monetary policies; and
changes or volatility in current exchange rates and interest rates.
If significant tariffs or other restrictions are placed on Chinese imports or any related counter-measures are taken by China, our revenue and results of
operations may be materially harmed.
We contract with several Chinese suppliers for certain components of our Precision Flow systems. If significant tariffs or other restrictions are placed on
Chinese imports or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed. Recently, political discourse
in the United States has increasingly focused on ways to discourage U.S. competitors from outsourcing manufacturing and production activities to foreign
corporations and curb what are considered unfair trade practices. In January 2020, the United States and China entered into Phase One of the Economic and Trade
Agreement between the United States of America and the People's Republic of China (the “Phase One Trade Agreement”). The Phase One Trade Agreement takes
steps to ease certain trade tensions between the United States and China. Although the Phase One Trade Agreement is an encouraging sign of progress in the trade
negotiations between the United States and China. However, according to the Peterson Institute for International Economics, through October 2020 China has only
purchased 56% of its year-to-date purchase commitment under the Phase One Trade Agreement. No further agreements have been reached and the impact of the
Phase One Trade Agreement and any forthcoming trade deal cannot be determined at this time. If tariffs are imposed on the components used in our Precision Flow
systems, we may be required to raise our prices, which may result in the loss of customers and harm our operating performance. Alternatively, we may seek to shift
production outside of China, resulting in significant costs and disruption to our operations.
Efforts to withdraw from or materially modify the USMCA or other international trade agreements, to change tax provisions related to global manufacturing
and sales or to impose new tariffs, economic sanctions or related legislation, any of which could adversely affect our financial condition and results of
operations.
Our business benefits from free trade agreements, such as the United States-Mexico-Canada Agreement, or USMCA, and we also rely on various
U.S. corporate tax provisions related to international commerce, as we develop, market and sell our products and services globally.
Any modification in these areas, any shift in the enforcement or scope of existing regulations or any change in the countries, governments, persons
or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing
or potential end-customers with international operations and could result in increased costs. Any decreased use of our products or limitation on our ability to export
or sell our products would likely adversely affect our business, financial condition and results of operations.
The exit of the United Kingdom from membership in the European Union could adversely affect our financial results and our operations in the United
Kingdom and the European Union.
The United Kingdom formally left the European Union on January 31, 2020, which is commonly known as “Brexit”. A transition period through
December 31, 2020 was established to allow the United Kingdom and European Union to negotiate the terms of the United Kingdom’s withdrawal. However, there
is continued uncertainty surrounding the future relationship between the United Kingdom and the European Union, including trade agreements between the United
Kingdom
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and the European Union. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which (if
any) European Union laws to replace or replicate, including determining whether to adopt the European Union law that governs the regulatory approval of medical
devices such as the Precision Flow systems or related future product offerings we may seek to bring to market in the United Kingdom. The measures could
potentially disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits or liabilities in these or other jurisdictions
and may cause us to lose customers and employees or increase the cost of doing business in the United Kingdom. In addition, as a result of Brexit, other European
countries may seek to conduct referenda with respect to their continuing membership with the European Union. Given these possibilities and others we may not
anticipate, as well as the absence of comparable precedent, it is unclear what financial, regulatory and legal implications the withdrawal of the United Kingdom
from the European Union will have and how such withdrawal will affect our Company, including our United Kingdom subsidiary Solus Medical, and the full extent
to which our business could be adversely affected. Furthermore, we translate sales and other results denominated in foreign currency into U.S. dollars for our
financial statements. Volatility in stock or currency markets, as well as the strengthening of the U.S. dollar relative to other currencies each could adversely affect
our financial results.
Our results may be impacted by changes in foreign currency exchange rates.
We have international operations, including a direct sales organization in the United Kingdom, and, as a result, an increase in the value of the U.S.
dollar relative to foreign currencies could require us to reduce our selling price or risk making our products less competitive in international markets, or our costs
could increase. Also, if our international sales increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could expose us
to increased foreign currency risks, including currency fluctuations and exchange rate risks. For example, following the acquisition of our former distributor, Solus
Medical, on February 28, 2019, we began invoicing our United Kingdom customers directly in Great British Pounds. We do not currently engage in any hedging
transactions. If we are unable to address these risks and challenges effectively, our international operations may not be successful, and our business could be
harmed.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and similar world-wide anti-bribery laws.
The U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act of 2010 and similar anti-bribery laws in other jurisdictions generally
prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Our policies mandate compliance
with these anti-bribery laws, including the requirements to maintain accurate information and internal controls. We operate in many parts of the world that have
experienced governmental corruption to some degree and in certain circumstances; strict compliance with anti-bribery laws may conflict with local customs and
practices. There is no assurance that our internal control policies and procedures will protect us from acts committed by our employees or agents. If we are found to
be liable for FCPA or other violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others), we could suffer from civil and
criminal penalties or other sanctions, including contract cancellations or debarment, and loss of reputation, any of which could have a material adverse impact on
our business, financial condition, and results of operations.
Risks Related to Our Intellectual Property
If we are unable to secure and maintain patent or other intellectual property protection for our products, we may lose a significant competitive advantage.
Our commercial success depends, in part, on obtaining, maintaining and defending patent and other intellectual property protection for the
technologies used in our products. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving
legal and factual questions. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or
desirable patent applications at a reasonable cost or in a timely manner. We may choose not to seek patent protection for certain innovations or products and may
choose not to pursue patent protection for certain products in certain jurisdictions or at all, and under the laws of certain jurisdictions, patents or other intellectual
property rights may be unavailable or limited in scope and, in any event, any patent protection we obtain may be limited. As a result, some of our products are not,
and in the future may not be, protected by patents. This may mean we may be unable to:
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prevent our competitors from duplicating our products;
prevent our competitors from gaining access to our proprietary information and technology; or
gain or maintain a competitive advantage.
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We intend to seek additional patents, but our pending and future patent applications may not result in issued patents or be granted on a timely basis. In
addition, issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any
competitive advantage, including exclusivity in a particular product area. The scope of our patent claims also may vary between countries, as individual countries
have distinctive patent laws. We may be subject to challenges by third parties regarding our intellectual property, including, among others, claims regarding
validity, enforceability, scope and effective term. Patent prosecution, related proceedings, and litigation in the U.S. and in other countries may be expensive, time
consuming and ultimately unsuccessful. In addition, patents issued by foreign countries may afford less protection than is available under U.S. patent law and may
not adequately protect our proprietary information. Our competitors may independently develop proprietary technologies and processes that are the same as or
substantially equivalent to ours or design around our patents. The technologies we have patented, licensed or developed. Moreover, the expiration of patents on
which we rely for protection of key products could diminish our competitive advantage and adversely affect our business and our prospects. Consequently,
competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to
compete.
Even if our patents are determined by the U.S. Patent and Trademark Office, USPTO, foreign patent office, or a court to be valid and enforceable, they
may not be drafted or interpreted sufficiently broadly enough in scope to prevent others from marketing products and services similar to ours or designing around
our patents. For example, third parties may be able to develop therapies, or make systems or devices, that are similar to ours but that are not covered by the claims
of our patents. Third parties may assert that we or our licensors were not the first to make the inventions covered by our issued patents or pending patent
applications. The claims of our issued patents or patent applications when issued may not cover our commercial technology or the future products and services that
we develop. We may not have freedom to operate unimpeded by the patent rights of others. Third parties may have dominating, blocking or other patents relevant
to our technology of which we are not aware. Because an originally filed patent application can be refiled to obtain continuation patents with new claims based on
the priority date of the original application, we cannot be certain that our competitors will not file and obtain new continuation patents in an attempt to cover our
commercial technology notwithstanding it having been available in the market for over 10 years. In addition, because patent applications in the United States and
many foreign jurisdictions are typically not published until 18 months after the filing of certain priority documents (or, in some cases, are not published until they
issue as patents) and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent
applications for our technology or our next generation contemplated technology. Any such patent applications may have priority over our patent applications or
issued patents, which could further require us to obtain rights from third parties to issued patents or pending patent applications covering such technologies to allow
us to commercialize our technology. If another party has filed a U.S. patent application on inventions similar to ours, depending on when the timing of the filing
date falls under certain patent laws, we may have to participate in a priority contest (such as an interference proceeding) declared by the USPTO to determine
priority of invention in the United States. There may be prior public disclosures of which we are not aware that could invalidate our patents or one or more claims
of our patents. Further, we may not develop additional proprietary technologies and, even if we do, they may not be patentable.
Moreover, in the United States and in foreign jurisdictions, proceedings to enforce our patent rights could result in substantial costs and divert our
efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk
of not issuing. Additionally, such proceedings could provoke third parties to assert claims against us, or they may assert such claims on their own. We may not
prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful, or we may be required to pay
damages and legal fees of our adversaries. Thus, we may not be able to stop a competitor from marketing and selling products that are the same as or similar to our
products, and our competitive position would be harmed.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position may be harmed.
In addition to patent and trademark protection, we also rely on trade secrets, including unpatented manufacturing know-how, technology and other
proprietary information, to maintain our competitive position. We seek to protect our trade secrets, in part, by entering into non-disclosure and confidentiality
agreements with parties who have access to them, such as our consultants and vendors, or our former or current employees. We also enter into confidentiality and
invention or patent assignment agreements with our employees and consultants. Despite these efforts, however, any of these parties may breach the agreements and
disclose our trade secrets and other unpatented or unregistered proprietary information, and once disclosed, we are likely to lose trade secret protection. Monitoring
unauthorized uses and disclosures of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our intellectual property
will be effective. In addition, we may not be able to obtain adequate remedies for any such breaches. Enforcing a claim that a party illegally disclosed or
misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United
States are less willing or unwilling to enforce trade secret protection.
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Further, our competitors may independently acquire or develop know-how or other technology that is similar, equivalent, or superior to our
proprietary technology. Competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our
development efforts, willfully infringe our intellectual property rights, design around our protected technology, or develop their own competitive technologies that
fall outside of our intellectual property rights. In addition, our key employees, consultants, suppliers or other individuals with access to our proprietary technology
may incorporate that technology into projects and inventions developed independently or with third parties. As a result, disputes may arise regarding the ownership
of the proprietary rights to such technology, and any such dispute may not be resolved in our favor. If any of our trade secrets were to be lawfully obtained or
independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, from using that technology to compete
with us and our competitive position could be adversely affected. If our intellectual property is not adequately protected so as to protect our market against
competitors’ products and methods, our competitive position could be adversely affected, as could our business.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business
may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be
infringing on other marks. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with
potential partners or customers in our markets of interest. In addition, third parties have registered trademarks similar and identical to our trademarks in both the
United States and in foreign jurisdictions and may in the future file for registration of such trademarks. If they succeed in registering or developing common law
rights in such trademarks, and if we were not successful in challenging such third-party rights, we may not be able to use these trademarks to market our products
in those countries. In any case, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete
effectively and our business may be adversely affected.
We may in the future become involved in lawsuits to defend ourselves against intellectual property disputes, which could be expensive and time consuming, and
ultimately unsuccessful, and could result in the diversion of significant resources, and hinder our ability to commercialize our existing or future products.
Our success depends in part on not infringing the patents or violating other proprietary rights of others. Intellectual property disputes can be very
costly to defend or affirmatively pursue, distract leadership, require financing, and may cause our business, operating results and financial condition to suffer.
Significant litigation regarding patent rights occurs frequently in the medical device industry, and we intend to engage as necessary to defend our rights. Whether
merited or not, it is possible that U.S. and foreign patents and pending patent applications controlled by third parties may be alleged to cover our products. We may
also face allegations that our employees have misappropriated the intellectual property rights of their former employers or other third parties. Our competitors in
both the United States and abroad, many of which have substantially greater resources and have made substantial investments in patent portfolios and competing
technologies, may have applied for or obtained or may in the future apply for and obtain, patents that will prevent, limit, or otherwise interfere with our ability to
commercialize our products. These competitors may have one or more patents for which they can threaten and/or initiate patent infringement actions against us, and
we may have one or more patents for which we can threaten and/or initiate patent infringement actions against them. Our ability to defend ourselves or to
affirmatively pursue such actions may be limited by our financial and human resources, the availability of reasonable defenses and claims, and the ultimate
acceptance of our defenses and claims by the courts or juries. Further, if such patents are successfully asserted against us, this may result in an adverse impact on
our business, including injunctions, damages, and/or attorneys’ fees. From time to time and in the ordinary course of business, we may develop noninfringement
and/or invalidity positions with respect to third-party patents, which may or may not be ultimately adjudicated as successful by a judge or jury if such patents were
asserted against us.
We have and may receive in the future, particularly as a public company, communications from patent holders, including non-practicing entities,
alleging infringement of patents, infringement of other intellectual property rights including misappropriation of trade secrets, offering licenses to such intellectual
property, or challenging our intellectual property. For example in 2018 Stamford Devices Limited opposed our European patent—EP2806926 before the parties
reached a settlement in 2019. Any claims that we assert against perceived infringers could also provoke these parties to assert counterclaims against us alleging that
we infringe their intellectual property rights. At any given time, we may be involved as either a plaintiff or a defendant in a number of patent infringement actions,
the outcomes of which may not be known for prolonged periods of time.
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The large number of patents, the rapid rate of new patent applications and issuances, the complexities of the technologies involved and the
uncertainty of litigation significantly increase the risks and the costs related to any patent litigation. Any potential intellectual property litigation also could force us
to do one or more of the following:
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stop selling, making, using, or exporting products that use the disputed intellectual property;
obtain a license from the intellectual property owner to continue selling, making, exporting, or using products, which license may require
substantial payments and may not be available on reasonable terms, or at all;
incur significant legal expenses;
pay substantial damages or royalties to the party whose intellectual property rights we may be found to be infringing, potentially including treble
damages if the court finds that the infringement was willful;
if a license is available from a third-party, we may have to pay substantial royalties, upfront fees or grant cross-licenses to intellectual property
rights for our products and services;
pay the attorney fees and costs of litigation to the party whose intellectual property rights we may be found to be infringing;
find non-infringing substitute products, which could be costly and create significant delay due to the need for FDA regulatory clearance;
pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology;
lose the opportunity to opportunity to successfully protect our intellectual property and assert it against others;
find alternative supplies for infringing products or processes, which could be costly and create significant delay due to the need for FDA
regulatory clearance; or
redesign those products or processes that infringe any third-party intellectual property, which could be costly, disruptive, and/or infeasible.
From time to time, we may affirmatively engage in or be subjected to legal proceedings and claims in the ordinary course of business with respect to
intellectual property. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant
expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the
results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have
a material adverse effect on the price of our common stock. Finally, any uncertainties resulting from the initiation and continuation of any litigation could have a
material adverse effect on our ability to raise the funds necessary to continue our operations.
If any of the foregoing occurs, we may have to withdraw existing products from the market or may be unable to commercialize one or more of our
products, all of which could have a material adverse effect on our business, results of operations and financial condition.
In addition, we may indemnify our customers, suppliers and international distributors against claims relating to the infringement of the intellectual
property rights of third parties relating to our products, methods, and/or manufacturing processes. Third parties may assert infringement claims against our
customers, suppliers, or distributors. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, suppliers or
distributors, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers, suppliers, or
distributors or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our
customers may be forced to stop using our products, or our suppliers may be forced to stop providing us with products.
Similarly, interference or derivation proceedings provoked by third parties or brought by the USPTO or any foreign patent authority may be necessary
to determine the priority of inventions or other matters of inventorship with respect to our patents or patent applications. We may also become involved in other
contested proceedings, such as re-examination, inter parties review, or opposition proceedings, before the USPTO or its foreign counterparts relating to our
intellectual property or the intellectual property rights of others. An unfavorable outcome in any such proceedings could require us to cease using the related
technology or to attempt to license rights to it from the prevailing party or could cause us to lose valuable intellectual property rights. Our business could be harmed
if the prevailing party does not offer us a license on commercially reasonable
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terms, if any license is offered at all. Litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management
and other employees.
We are subject to various laws protecting the confidentiality and security of certain personal information, and our failure to comply could result in penalties
and reputational damage.
Our Company is subject to various laws and regulations protecting the confidentiality and security of certain patient health information, and our failure
to comply with such laws and regulations could result in penalties and reputational damage.
Within the United States, numerous federal and state laws, including, without limitation, HIPAA, state data privacy laws (for example, the CPPA), state
data breach notification laws, state health information privacy laws, and federal and state consumer protection laws, govern the collection, use, disclosure and
storage of personal information. Compliance with HIPAA and state data privacy law equivalents is particularly relevant for HGE. HGE is a business associate of its
HIPAA covered entity customers by virtue of receiving individually identifiable health information (referred to as “Protected Health Information” or “PHI”) from
these customers. In its business associate relationships, HGE must comply with applicable HIPAA requirements, state data privacy and security requirements, and
the contractual terms of our business associate agreements that govern its permitted uses and disclosures of PHI received from the covered entity counterparty.
Outside the United States, numerous countries in which we operate, manufacture and sell our products have, or are developing, laws protecting data
privacy and the confidentiality of certain personal data. For example, the European Union (EU) General Data Protection Regulation (GDPR), which became
effective on May 25, 2018, introduced new data protection requirements in the EEA, and substantial fines for violations of the data protection rules. The GDPR
expanded significantly the jurisdictional reach of EEA data protection law by extending the law’s application to not only entities that are established in the EEA,
but also to entities that process personal data in connection with the offering of goods or services to data subjects located in the EEA or process personal data in
connection with monitoring the behavior of data subjects located in the EEA. The GDPR imposes strict obligations and restrictions on controllers and processors of
personal data including, for example, expanded disclosures about how personal data is to be used, increased requirements pertaining to health data and
pseudonymised (e.g., key-coded) data, mandatory data breach notification requirements, appointment of a data protection officer when sensitive personal data (e.g.,
health data) are processed on a large scale, requirement to enter into certain types of contracts with service providers processing personal data, implementation of
appropriate privacy governance measures, and expanded rights for individuals over their personal data. This could affect our ability to collect, analyze and transfer
personal data, including health data from clinical trials and adverse event reporting, or could cause our costs to increase, potentially leading to harm to our business
and financial condition.
While the GDPR, as a directly effective regulation, was designed to harmonize data protection laws across the EEA, it does permit member states to
legislate in many areas (particularly with regard to the processing of genetic, biometric or health data), meaning that inconsistencies between different member
states will still arise. EEA member states have their own regimes on medical confidentiality and national and EEA-level guidance on implementation and
compliance practices is often updated or otherwise revised, which adds to the complexity of processing personal data in the EEA.
Failure to comply with the requirements of the GDPR and the related national data protection laws of the EEA Member States, which may deviate from
the GDPR, may result in substantial fines, and in addition to such fines, we may be the subject of litigation initiated by data subjects and/or adverse publicity,
which could have a material adverse effect on our reputation and business. As a result of the implementation of the GDPR, we are required to put in place
additional mechanisms to ensure compliance with the new data protection rules. For example, the GDPR requires us to make more detailed disclosures to data
subjects, requires disclosure of the legal basis on which we can process personal data, may make it harder for us to obtain valid consent for processing, will require
the appointment of a data protection officer where sensitive personal data (e.g., health data or data concerning race or ethnicity) is processed on a large scale,
introduces mandatory data breach notification requirements throughout the EEA, imposes additional obligations on us when we are contracting with service
providers and requires us to adopt appropriate privacy governance including policies, procedures, and training.
European data protection law generally prohibits the transfer of personal data to countries outside of the EEA that are not considered by the European
Commission to provide an adequate level of data protection, unless there are specific frameworks or mechanisms in place to safeguard the data, such as the EU-
U.S. Privacy Shield or the European Commission-approved standard contractual clauses, or very narrow legal exceptions (such as explicit consent of the data
subject) apply. There is currently litigation challenging the EU-U.S. Privacy Shield and the standard contractual clauses, and it is uncertain whether these data
transfer mechanisms will be invalidated by the European courts. We could be impacted by changes in law as a result of a future review of these transfer
mechanisms by European regulators under the GDPR, as well as current challenges to these mechanisms in the European courts.
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Outside of the EEA, the legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing focus
on privacy and data protection issues that may affect our business. There is a degree of uncertainty associated with the legal and regulatory environment around
privacy and data protection laws, which continue to develop in ways we cannot predict, including with respect to evolving technologies, such as cloud computing.
Privacy and data protection laws may be interpreted and applied inconsistently from country to country and impose inconsistent or conflicting requirements.
Varying jurisdictional requirements could increase the costs and complexity of compliance or require us to change our business practices in a manner adverse to
our business. A determination that we have violated privacy or data protection laws could result in significant damage awards, fines and other penalties that could,
individually or in the aggregate, materially harm our business and reputation.
Changes in patent law could diminish the value of patents in general, thereby impairing our ability to protect our existing and future products.
Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or
defense of our issued patents. On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act
includes a number of significant changes to U.S. patent law. These include, among other things, provisions that affect the way patent applications are prosecuted,
redefine prior art, establish specific venues and procedures for litigating patent validity, and switched the United States patent system from a “first-to-invent”
system to a “first-to-file” system. The Leahy-Smith Act and its interpretation and implementation are still evolving and could increase the uncertainties and costs
surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on
our business and financial condition.
In addition, patent reform legislation may pass in the future that could lead to additional uncertainties and increased costs surrounding the prosecution,
enforcement and defense of our patents and applications. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit have made,
and may continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign courts have made, and may continue to make,
changes in how the patent laws in their respective jurisdictions are interpreted. We cannot predict future changes in the interpretation of patent laws or changes to
patent laws that might be enacted into law by United States and foreign legislative bodies. Those changes may materially affect our patents or patent applications
and our ability to obtain additional patent protection in the future.
Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment, and other
similar provisions during the patent application process. In addition, periodic maintenance fees on issued patents often must be paid to the USPTO and foreign
patent agencies over the lifetime of the patent. While an unintentional lapse can in many cases be cured by payment of a late fee or by other means in accordance
with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or
complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include,
but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal
documents. If we fail to maintain the patents and patent applications covering our products or procedures, we may not be able to stop a competitor from marketing
products that are the same as or similar to our own, which would have a material adverse effect on our business.
Patent terms may be inadequate to protect our competitive position on our products for an adequate amount of time.
Patents have a limited lifespan, and the protection any patent affords is limited. In the United States, if all maintenance fees are timely paid, the natural
expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. For any patents we have that cover our products (or new patents we
obtain), once the patent life has expired we may be open to competition from competitive devices and services. As a result, our patent portfolio may not provide us
with sufficient rights to exclude others from commercializing devices or services that compete with ours.
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We may not be able to adequately protect our intellectual property rights throughout the world.
Currently, our intellectual property portfolio includes numerous issued patents and pending patent applications that relate to our platform technology.
Filing, prosecuting and defending patents on our products in all countries throughout the world would be prohibitively expensive. The requirements for
patentability differ in certain countries, particularly developing countries, and the breadth of patent claims allowed can be inconsistent. In addition, the laws of
some foreign countries may not protect our intellectual property rights to the same extent as laws in the United States. Consequently, we may not be able to prevent
third parties from practicing our inventions in all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not
obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories in which we have no have patent
protection or our protection is insufficient to terminate infringing activities.
We may not have patent rights in certain foreign countries in which a market may exist. Moreover, in jurisdictions where we do have patent rights,
proceedings to enforce such rights could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at
risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. Additionally, such proceedings could provoke third parties to
assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially
meaningful. Thus, we may not be able to stop a competitor from marketing and selling products that are the same as or similar to our products, and our competitive
position in the international market would be harmed.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of our competitors or are
in breach of non-competition or non-solicitation agreements with our competitors.
We could in the future be subject to claims that we or our employees have inadvertently or otherwise used or disclosed alleged trade secrets or other
proprietary information of former employers or competitors. Although we have procedures in place that seek to prevent our employees and consultants from using
the intellectual property, proprietary information, know-how or trade secrets of others in their work for us, we may in the future be subject to claims that we caused
an employee to breach the terms of his or her non-competition or non-solicitation agreement, or that we or these individuals have, inadvertently or otherwise, used
or disclosed the alleged trade secrets or other proprietary information of a former employer or competitor. Litigation may be necessary to defend against these
claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and could be a distraction to management. If our
defense to those claims fails, in addition to paying monetary damages, a court could prohibit us from using technologies or features that are essential to our
products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An
inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business and may
prevent us from selling our products or from practicing our processes. In addition, we may lose valuable intellectual property rights or personnel. Moreover, any
such litigation or the threat thereof may adversely affect our ability to hire employees or contract with independent sales representatives. A loss of key personnel or
their work product could hamper or prevent our ability to commercialize our products, which could have an adverse effect on our business, results of operations and
financial condition.
Risks Related to Our Indebtedness and Need for Additional Capital
Our substantial indebtedness may have a material adverse effect on our business, results of operations and financial condition.
We have a significant amount of indebtedness. As of December 31, 2020, we had $40.0 million of aggregate principal amount of term loans and
$4.9 million of aggregate amount or revolving loans outstanding under our Loan and Security Agreement with Canadian Imperial Bank of Commerce (the “Loan
and Security Agreement”).
Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our
indebtedness. Our substantial indebtedness could have other important consequences to our debt holders and significant effects on our business. For example, it
could:
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increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
require us to dedicate a substantial portion of our cash flow from operations to making payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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expose us to the risk of increased interest rates as certain of our borrowings are at variable rates, and we may not be able to enter into interest
rate swaps and any swaps we enter into may not fully mitigate our interest rate risk;
restrict us from capitalizing on business opportunities;
make it more difficult to satisfy our financial obligations, including payments on our indebtedness;
place us at a competitive disadvantage compared to our competitors that have less debt; and
limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our
business strategy or other general corporate purposes.
In addition, our indebtedness under the Loan and Security Agreement is secured by substantially all of our assets, including our intellectual property,
and the Loan and Security Agreement contains restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our
failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our indebtedness.
Despite our current level of indebtedness, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our
substantial leverage.
We may be able to incur significant additional indebtedness in the future. Although the Loan and Security Agreement limits our ability and the ability of
our present and future subsidiaries to incur additional indebtedness, the terms of the Loan and Security Agreement permit us to incur significant additional
indebtedness. In addition, the Loan and Security Agreement does not prohibit us from incurring obligations that do not constitute indebtedness as defined therein.
To the extent that we incur additional indebtedness or such other obligations, the risk associated with our substantial indebtedness described above, including our
potential inability to service our debt, will increase.
We will require a significant amount of cash to service our debt, and our ability to generate cash depends on many factors beyond our control, and any failure
to meet our debt service obligations could materially adversely affect our business, results of operations and financial condition.
Our ability to make payments on and to refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend
on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and
other factors that are beyond our control.
If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity
thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our business, results
of operations and financial condition. In addition, we may not be able to affect any of these actions, if necessary, on commercially reasonable terms or at all. Our
ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of
our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The
terms of existing or future debt instruments, including the Loan and Security Agreement, may limit or prevent us from taking any of these actions. In addition, any
failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could
harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt
service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material,
on our business, results of operations and financial condition, as well as on our ability to satisfy our obligations in respect of the Loan and Security Agreement and
our other indebtedness.
Our failure to comply with our Loan and Security Agreement relating to our outstanding indebtedness, including as a result of events beyond our control,
could result in an event of default that could materially adversely affect our business, results of operations and financial condition.
If there were an event of default under our Loan and Security Agreement relating to our outstanding indebtedness, the holders of the defaulted debt
could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot guarantee that our assets or cash flow would be
sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default.
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Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against
the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of
default under one or more of our other debt instruments.
As a result, any default by us on our indebtedness could have a material adverse effect on our business, results of operations and financial condition.
The Loan and Security Agreement restricts our current and future operations, particularly our ability to respond to changes or to take certain actions.
The Loan and Security Agreement provides that all indebtedness thereunder is secured by substantially all of our assets, including our intellectual
property, and imposes significant operating and financial restrictions and limits our ability and our other subsidiaries’ ability to, among other things:
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incur additional indebtedness and guarantee indebtedness;
pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;
enter into any new line of business not reasonably related to our existing business;
pay, prepay, redeem or repurchase certain debt;
make loans and investments;
sell or otherwise dispose of assets or enter into sale and lease-back transactions;
incur liens;
enter into transactions with affiliates;
make capital expenditures;
change our fiscal year or make any significant changes in accounting treatment or reporting practices;
amend, modify or terminate material agreements and organizational documents;
enter into certain inbound and outbound licenses; and
consolidate, merge or sell all or substantially all of our assets.
As a result of these covenants and restrictions, we are and will be limited in how we conduct our business, and we may be unable to raise additional debt
or equity financing to compete effectively or to take advantage of new business opportunities. In addition, our Loan and Securities Agreement requires us to
comply with a minimum liquidity covenant at all times and a minimum revenue covenant measured at the end of each fiscal quarter. The operating and financial
restrictions and covenants in the Loan and Security Agreement, as well as any future financing agreements that we may enter into, may restrict our ability to
finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected
by events beyond our control, and we may not be able to meet those covenants. We cannot guarantee that we will be able to maintain compliance with these
covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Our failure to comply with the restrictive covenants as well as others contained in our future debt instruments from time to time could result in an event
of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these
borrowings on less favorable terms, our business, results of operations and financial condition could be adversely affected.
We may need to raise additional capital to fund our existing commercial operations, develop and commercialize new products and expand our operations.
Based on our current business plan, we believe our current cash, borrowing capacity under our credit facilities and cash receipts from sales of our
products will be sufficient to meet our anticipated cash requirements for at least the next 12 months. If our available cash balances, borrowing capacity, cash
receipts and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of lower demand for our products as a
result of the risks described in this Annual Report on Form 10-K, we may, among other things, seek to sell common or preferred equity, convertible debt securities,
or enter into new or amend existing credit facilities.
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Additionally, we may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of
financing opportunities or for other reasons, including to:
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increase our sales and marketing efforts to increase market adoption of our products and address competitive developments;
provide for supply and inventory costs associated with plans to accommodate potential increases in demand for our products;
fund development and marketing efforts of any future products or additional features to then-current products;
acquire, license or invest in new technologies;
acquire or invest in complementary businesses or assets; and
finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
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our ability to achieve and sustain revenue growth and improve gross margins;
the cost of expanding our operations and offerings, including our sales and marketing efforts;
our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of our products;
the cost of research and development activities;
the effect of competing technological and market developments;
costs related to international expansion; and
the potential cost of and delays in product development as a result of any regulatory oversight applicable to our products.
Additional capital may not be available at such times or in amounts as needed by us. Even if capital is available, it might be available only on
unfavorable terms. Any additional equity or convertible debt financing into which we enter could be dilutive to our existing stockholders. Any future debt financing
into which we enter will be senior in bankruptcy to our common stock and may impose covenants upon us that restrict our operations, including limitations on our
ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale
transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to our stockholders or us. If we raise additional funds
through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products or grant
licenses on terms that are not favorable to us. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we
may be required to cease operations, curtail one or more product development or commercialization programs, or we may be required to significantly reduce
expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate all our assets.
Risks Related to Our Common Stock
The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock.
The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which
are beyond our control. During 2020, the sales price of our common stock ranged from $6.86 to $54.42. Factors that could cause volatility in the market price of
our common stock include, but are not limited to:
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actual or anticipated changes in our growth rate relative to our competitors;
commercial success and market acceptance of our products;
success of our competitors in developing or commercializing products;
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ability to commercialize or obtain regulatory approvals for our products, or delays in commercializing or obtaining regulatory approvals;
strategic transactions undertaken by us;
additions or departures of key personnel;
product liability claims;
prevailing economic conditions;
disputes concerning our intellectual property or other proprietary rights;
FDA or other U.S. or foreign regulatory actions affecting us or the healthcare industry;
healthcare reform measures in the United States;
sales of our common stock by our officers, directors or significant stockholders;
future sales or issuances of equity or debt securities by us;
international trade disputes;
international political and economic instability, including wars with foreign countries;
domestic political and economic instability;
business disruptions caused by earthquakes, fires or other natural disasters; and
issuance of new or changed securities analysts’ reports or recommendations regarding us.
In addition, the stock market in general, and the market for companies like ours in particular, have from time to time experienced extreme volatility
that has been often unrelated to the operating performance of particular companies. A certain degree of stock price volatility can be attributed to being a newly
public company and could result in time consuming and costly regulatory inquiries. These broad market and industry fluctuations may negatively impact the price
or liquidity of our common stock, regardless of our operating performance. For these reasons, we believe comparisons of our financial results from various
reporting periods are not necessarily meaningful and should not be relied upon as an indication of our future performance.
We have incurred and expect to continue to incur significant costs as a result of operating as a public company and our management expects to devote
substantial time to public company compliance programs.
To comply with the requirements imposed on us as a public company, we have incurred and expect to continue to incur significant legal, insurance,
accounting and other expenses. We have invested and intend to continue to invest resources to comply with evolving laws, regulations and standards, and this
investment will result in increased general and administrative expenses and may divert management’s time and attention from product development activities.
These laws, regulations and standards are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance
matters, enforcement proceedings and higher costs necessitated by ongoing revisions to disclosure and governing practices. The costs associated with maintaining
directors’ and officers’ insurance has risen and may continue to rise in the future, which may require us to accept reduced coverage, increased deductibles or incur
substantially higher costs to obtain coverage. We also expect the rules and regulations associated with being a public company to make it more expensive for us to
maintain directors’ and officers’ insurance. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors,
particularly to serve on our audit committee and compensation committee, and qualified executive officers.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are
continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the
reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that
information required to be disclosed in reports under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our principal
executive and financial officers. Any failure to develop or maintain effective controls could adversely affect the results of our periodic management evaluations or
our ability to obtain attestation reports from our independent registered public accounting
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firm. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as
inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our
common stock could decline. In addition, if we are unable to continue to meet these requirements, our common stock may not be able to remain listed on the
NYSE.
As of December 31, 2020, we no longer qualified as an “emerging growth company,” and the reduced disclosure requirements applicable to
emerging growth companies no longer apply to us. As a result, we expect to incur additional expenses and devote substantial management effort toward ensuring
compliance with those additional requirements applicable to companies that are not emerging growth companies, including the auditor attestation requirements for
internal controls. Compliance with these additional laws, rules and regulations will increase our legal and financial compliance costs, make some activities more
difficult, time consuming or costly and increase demand on our systems and resources. In addition, management’s attention may be diverted from other business
concerns and our costs and expenses will increase, which could harm our business and operating results. We may also need to hire more employees in the future or
engage additional outside consultants to comply with these requirements, which would increase our costs and expenses.
Our independent registered public accounting firm has not been required to formally attest to the effectiveness of our internal control over financial
reporting in the past, and now that we are no longer an “emerging growth company,” as defined in the JOBS Act, we cannot assure you that there will not be
material weaknesses in our internal controls in the future.
We may be subject to securities litigation, which is expensive and could divert our management’s attention.
The market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities
have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in
substantial costs and divert our management’s attention from other business concerns.
Our principal stockholders and management own a significant percentage of our stock and are able to exercise significant influence over matters subject to
stockholder approval.
As of December 31, 2020, our executive officers, directors and stockholders who owned more than 5% of our outstanding common stock, together
with their respective affiliates, beneficially owned approximately 59.14% of our common stock, including shares subject to outstanding options, restricted stock
units and warrants that are exercisable within 60 days after such date. Accordingly, these stockholders will be able to exert a significant degree of influence over
our management and affairs and over matters requiring stockholder approval, including the election of our board of directors and approval of significant corporate
transactions. This concentration of ownership could have the effect of entrenching our management or board of directors, delaying or preventing a change in our
control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the fair
market value of our common stock.
A significant portion of our total outstanding shares may be sold into the public market at any time, which could cause the market price of our common stock
to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the market perception that
the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. We have also registered all shares of common
stock that we may issue under our equity compensation plans. These shares can be freely sold in the public market subject to volume limitations applicable to
affiliates. If any of these shares are sold, or if it is perceived that they will be sold, the market price of our common stock could decline.
Moreover, certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements covering their
shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If such holders, by exercising their registration
rights, cause a large number of securities to be registered and sold into the public market, these sales could have an adverse effect on the market price for our
common stock.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future; therefore, capital appreciation, if any, of our common stock
will be the sole source of gain for our stockholders for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to do so in the foreseeable future. We currently intend
to retain all available funds and any future earnings to finance the growth and
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development of our business. In addition, our Loan Agreement contains and the terms of any future credit agreements we enter into may contain, terms prohibiting
or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be the
sole source of gain for our stockholders for the foreseeable future.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading
volume could decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our
business. As a recently public company, we may be slow to attract securities and industry analysts coverage. If no or a limited number of securities or industry
analysts commence coverage of the Company, the price for our common stock could be negatively impacted. In the event securities or industry analysts initiate
coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock
price could decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price could decline. If one or more of these analysts cease
coverage of the Company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading
volume to decline.
Provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law may have anti-takeover effects that
could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to
replace or remove our current management.
Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of
discouraging, delaying or preventing a change in control of us or changes in our management that stockholders may consider favorable, including transactions in
which you might otherwise receive a premium for your shares. Our amended and restated certificate of incorporation and amended and restated bylaws, include
provisions that:
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authorize “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting,
liquidation, dividend and other rights superior to our common stock;
create a classified board of directors whose members serve staggered three-year terms;
specify that special meetings of our stockholders can be called only by our board of directors;
prohibit stockholder action by written consent;
establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to our board of directors;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
provide that our directors may be removed only for cause;
specify that no stockholder is permitted to cumulate votes at any election of directors;
expressly authorized our board of directors to modify, alter or repeal our amended and restated bylaws; and
require supermajority votes of the holders of our common stock to amend specified provisions of our amended and restated certificate of
incorporation and amended and restated bylaws.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. These provisions
could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common
stock.
In addition, because we are incorporated in the State of Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of
the State of Delaware, or the DGCL, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a
period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or
combination is approved in a prescribed manner.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying or
deterring a change in control could limit the opportunity for our stockholders to receive a
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premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation designates exclusive forums for various actions and proceedings that may be initiated by our
stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the state or federal courts within the State of
Delaware will be exclusive forums for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty
owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of
the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws, (4) any action to interpret, apply, enforce or determine the
validity of our amended and restated certificate of incorporation or our amended and restated bylaws, or (5) any other action asserting a claim against us that is
governed by the internal affairs doctrine. Further, our amended and restated certificate of incorporation provides that, subject to limited exceptions, the federal
district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of
1933, as amended.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have
consented to the provisions of our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such
lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of
incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated
with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition. For example, the Court of Chancery of the
State of Delaware recently determined that a provision stating that federal district courts of the United States are the exclusive forum for resolving any complaint
asserting a cause of action under the Securities Act of 1934, as amended, is not enforceable. However, this decision may be reviewed and ultimately overturned by
the Delaware Supreme Court.
General Risk Factors
Our operations, and those of our suppliers and customers, are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other
events beyond our control.
Our principal executive office, U.S. distribution, and manufacturing operations are located in a leased facility located in Exeter, New Hampshire.
We also have access to facilities for Solus personnel and HGE’s personnel as well as facilities for inventory and a manufacturing and distribution site in Tilburg,
Netherlands. These facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require substantial lead-time
to repair or replace in the event of a natural or man-made disaster. A disaster (such as an earthquake, fire, flood, hurricane, a volcanic eruption other severe
weather, or a pandemic or other outbreak) affecting our facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent product
shipment or installation during the time required to repair, rebuild or replace the damaged facilities.
Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our
business. Our customers’ facilities could also be negatively impacted by a disaster, which could delay shipments of our products. Additionally, customers may
delay purchases of our products until their operations return to normal.
In addition, our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs
for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. In addition, concerns
about terrorism, the effects of a terrorist attack, political turmoil or an outbreak of epidemic diseases could have a negative effect on our operations, those of our
suppliers and customers.
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If we experience significant disruptions in our information technology systems, our business may be adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including customer management, accounting, data
storage, compliance, purchasing and inventory management. We do not have redundant systems at this time. While we will attempt to mitigate interruptions, we
may experience difficulties in implementing system upgrades, or experience difficulties in operating our business during the upgrade, either of which could disrupt
our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately
service our customers. In the event we experience significant disruptions as a result of the current implementation of our information technology systems, we may
be unable to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a
material adverse effect on our results of operations and cash flows. Currently we carry business interruption coverage to mitigate any potential losses, but we
cannot be certain that such potential losses will not exceed our policy limits.
We are increasingly dependent on sophisticated information technology for our infrastructure, particularly with respect to HGE. Our information
systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. While we implemented security measures
relating to our operations, consistent with the Health Insurance Portability and Accountability Act (“HIPAA”) as amended by Health Information Technology for
Economic and Clinical Health “HITECH”) Act and their implementing regulations (collectively “HIPAA”), those measures may not always prevent security
breaches that could harm our business. Advances in computer capabilities, inadequate technology or facility security measures or other factors may result in a
compromise or breach of our systems and the data we store and process. Our security measures may be breached as a result of actions by third parties or employee
error or malfeasance. A party who is able to circumvent our security measures or exploit inadequacies in our security measures, could, among other things,
misappropriate proprietary information, including information about third parties, cause the loss or disclosure of some or all of this information, cause interruptions
in our operations or expose third parties to computer viruses or other disruptions or vulnerabilities. Any compromise of our systems or the data we store or process
could result in a loss of confidence in the security of our software, damage our reputation, disrupt our business, lead to legal liability and adversely affect our
results of operations. Moreover, a compromise of our systems could remain undetected for an extended period of time, exacerbating the impact of that compromise.
Actual or perceived vulnerabilities may lead to claims against us by our customers, or other third parties, including the federal and state governments. While our
business agreements typically contain provisions that seek to limit our liability, there is no assurance these provisions will be enforceable and effective under
applicable law. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
We have in the past and may in the future be subject to various litigation claims and legal proceedings.
We have in the past and we, as well as certain of our officers and distributors, may in the future be subject to various litigation or other claims or
lawsuits. The outcomes of legal actions are not within our complete control and may not be known for prolonged periods of time. In some actions, claimants may
seek damages. Future claimants including suppliers, customers, distributors, competitors, officers or shareholders, among others, may also seek other civil or
criminal remedies (including royalties or injunctions barring the sale of products that are subject of the proceeding) in the future. Regardless of the outcome, these
lawsuits may result in significant legal fees and expenses, could divert management’s time and other resources and could cause us reputational harm. If the claims
contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices or
product lines.
Employment litigation and unfavorable publicity could negatively affect our future business.
Employees may, from time to time, bring lawsuits against us regarding injury, creating a hostile workplace, discrimination, wage and hour, sexual
harassment and other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims generally. Coupled with
the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact
on some businesses. Companies that have faced employment or harassment related lawsuits have had to terminate management or other key personnel and have
suffered reputational harm that has negatively impacted their sales. If we were to face any employment related claims, our business could be negatively affected.
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Our insurance policies are expensive and protect us only from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general
liability, foreign liability, employee benefits liability, property, umbrella, workers’ compensation, products liability and directors’ and officers’ insurance. We do
not know, however, if these policies will provide us with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts,
which would adversely affect our cash position and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal office is located at 100 Domain Drive, Exeter, New Hampshire 03833, where we lease approximately 95,320 square feet of office,
manufacturing, research & development and warehouse space. We lease this space under an agreement that expires on January 28, 2025, with a renewal option for
two additional five-year terms. We intend to lease additional space as we add employees, and we believe that suitable additional or substitute space will be
available as needed to accommodate any such expansion of our operations. Solus Medical leases approximately 453 square meters of office and warehouse space at
2 Dryden Loan, Bilston Glen Industrial Estate, Loanhead, United Kingdom. Solus leases this space under a lease that expires on February 15, 2022 but will
automatically renew for an additional five-year period unless we terminate it by written notice. HGE leases approximately 22,524 square feet of office space at
1301 Virginia Drive, Suite 100, Fort Washington, Pennsylvania 19034. HGE leases this space under a lease that expires on July 31, 2025, with a renewal option for
an additional five-year term.
Item 3. Legal Proceedings.
From time to time we may become involved in various legal proceedings, including those that may arise in the ordinary course of business. There is
no current litigation pending that could have, individually, or in the aggregate, a material adverse effect on our results of operations or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Market Information
Our common stock has been listed on the NYSE under the symbol “VAPO” since November 14, 2018. Prior to that date, there was no established
public trading market for our common stock.
Holders
As of February 18, 2021, there were 139 holders of record of our common stock. The actual number of holders of our common stock is greater than
this number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers or held by other nominees.
This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid any cash dividends on our common stock and do not intend to do so in the foreseeable future. We currently intend to
retain all available funds and any future earnings to finance the growth and development of our business. In addition, our Loan Agreement contains and the terms
of any future credit agreements we enter into may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common
stock.
Issuer Purchases of Equity Securities
None.
Recent Sales of Unregistered Securities
During the fourth quarter of 2020, we issued 22,168 shares of our common stock upon the cashless exercise of a warrant with an exercise price of
$14.00 per share. The issuance of the shares of common stock upon the warrant exercise was made in reliance on an exemption from the registration requirements
of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) of the Securities Act since the issuance did not involve a public
offering, the warrant holder acquired the securities for investment and not resale, and the Company took appropriate measures to restrict transfer of shares of
common stock. No other unregistered equity securities of the Company were sold during the fourth quarter of 2020.
Use of Proceeds
None.
Item 6. Selected Financial Data.
We are reporting as a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and are not required to provide information under this
item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements
and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. 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 Part I., “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We are a global medical technology company primarily focused on the development and commercialization of our proprietary High Velocity
Therapy products that are used to treat patients of all ages suffering from respiratory distress. Our High Velocity Therapy products deliver non-invasive ventilatory
support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. Our Precision Flow
systems, which use High Velocity Therapy technology, are clinically validated alternatives to, and address many limitations of, the current standard of care for the
treatment of respiratory distress in a hospital setting. As of December 31, 2020, more than 2.6 million patients have been treated with our Precision Flow systems,
and we have a global installed base of over 28,000 capital units, an increase of 72.8% compared to December 31, 2019.
The efficacy of our products is supported by a significant body of clinical evidence across multiple patient populations suffering from respiratory
distress. We have developed the only high velocity nasal insufflation device clinically validated as an alternative to NiPPV while addressing many of its limitations,
evidenced in part by our sponsored 204 patient, multisite randomized controlled trial in the ED which was published in the July 2018 issue of Annals of Emergency
Medicine. Additionally, in April 2020 Heart and Lung, the Journal of Cardiopulmonary and Acute Care, published a subgroup analysis from this ED study that
showed High Velocity Therapy may provide ventilatory support similar to NiPPV in patients presenting with acute hypercapnic respiratory failure.
Our business was significantly transformed during 2020 due to increased demand for our High Velocity Therapy technology for treatment of
COVID-19 patients, as evidenced by year over year revenue growth of 161.4% from 2019 to 2020. The COVID-19 pandemic contributed to this transformation in
at least two primary ways: First, it resulted in increased awareness of high flow therapy, including recognition by the CDC, WHO, NIH, Society for Critical Care
Medicine, American College of Emergency Physicians, and the Chinese, German, Italian, and Australian thoracic societies of high flow therapy as an appropriate
first line therapy for those suffering from low oxygen levels. Second, many respiratory distress patients who require ventilatory support are initially treated in a
hospital’s ED with the goal of stabilizing these patients with a non-invasive ventilation therapy so their underlying condition can be treated. Our existing focus on
hospital emergency departments as an effective entry point for our products resulted in our systems being in the right place at the right time when the COVID-19
pandemic hit. This exposed a significant number of new physicians to the efficacy of our High Velocity Therapy technology, especially as they were able to see
patients moved out of the emergency room and into lower acuity settings in the hospital after receiving our High Velocity Therapy. We expect that increased
awareness among physicians of the efficacy of our High Velocity Therapy to treat respiratory distress will result in expanded use of our products to treat all forms
of Type 1 and Type 2 respiratory distress in a variety of settings.
We currently offer four versions of our Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision
Flow Heliox. In certain countries outside of the United States we currently offer our Oxygen Assist Module, which was fully launched in the United Kingdom,
select European markets, and Israel in late 2020. The Oxygen Assist Module can be used with all versions of our Precision Flow systems except for the Precision
Flow Heliox. The Oxygen Assist Module is designed to help clinicians maintain a patient’s pulse oxygen saturation (“SpO2”) within a target SpO2 range over a
greater period of time while requiring significantly fewer manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce
the health risks associated with dosing too much, or too little, oxygen. In neonates, these risks include visual or developmental impairment or death.
In February 2021, we upgraded the software on approximately 45 Oxygen Assist Module units outside of the United States from software version 2.2.0
to software version 2.5.0. Subsequently, a bug in software version 2.5.0 was discovered by one of our employees. Although there have been no reports of patient
injury associated with this bug and we believe risk of patient injury is unlikely, out of an abundance of caution, we immediately notified our users and undertook a
field action to remove software version 2.5.0 from all upgraded units and downgrade these units to software version 2.2.0 until the issue is resolved. All software
downgrades have been completed.
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We are in the process of seeking FDA approval of our Oxygen Assist Module and are working with FDA to obtain an investigational device
exemption for pediatric evaluation of the Oxygen Assist Module in the United States. The Oxygen Assist Module was granted Breakthrough Device Designation by
the FDA on April 2, 2020 for the following indication: Oxygen Assist Module is an optional module used only with the Vapotherm Precision Flow and is indicated
for on-demand titration of oxygen into warm humidified breathing gases delivered to spontaneously breathing patients based on continuous non-invasive
monitoring of pulse oxygen saturation. Oxygen Assist Module is intended to treat pediatric patients (neonates and infants ≥1000g) in monitored clinical
environments (e.g., the NICU).
We are also in the process of seeking FDA clearance for our High Velocity Therapy 2.0 (“HVT 2.0”) as the next generation of our Precision Flow
system. Subject to receipt of FDA clearance, the HVT 2.0 is targeted to be released in the United States in the second half of 2021. The HVT 2.0 represents the next
generation of High Velocity Therapy. The system retains the core competencies of the current Precision Flow platform and, with an internal blower, is designed to
eliminate the need for wall air. With a variable oxygen connection (tank, wall or concentrator) the HVT 2.0 system is designed to support patients wherever they
need respiratory support, including outside of the hospital in a home or future use in a field transport setting. A large intuitive display with touchscreen operation,
on screen troubleshooting guidance, and a fully assembled disposable are designed to minimize clinician time spent on operating the equipment so they can focus
on their patient. Despite not yet having received 510(k) clearance from the FDA, on February 12, 2021, the FDA notified us that, under FDA Emergency Use
Authorization (“EUA”) issued on March 24, 2020, the HVT 2.0 was authorized for emergency use in healthcare settings to treat patients during the COVID-19
pandemic, subject to the conditions set forth in the EUA.
Historically, we have generated revenue primarily from sales of the disposable products utilized with our proprietary Precision Flow systems and our
Oxygen Assist Module, and to a lesser extent, from the sale or lease of the capital units themselves. However, due to demand for our High Velocity Therapy
technology during the COVID-19 pandemic, we generated revenue primarily from sales of our Precision Flow systems in 2020, which although put pressure on our
margins also resulted in a 72.8% increase in our installed base, which we expect will drive future recurring disposable revenue. The extent to which the COVID-19
pandemic will impact our business during 2021 and beyond will depend on future developments, which are highly uncertain and cannot be predicted, including new
information which may emerge concerning the severity of COVID-19 and variants of the virus, and the actions taken to treat or contain COVID-19 or to otherwise
limit its impact, the availability and effectiveness of vaccines, among other factors. For example, as COVID-19 hospitalizations continue to decrease and
vaccinations continue to increase, we expect our product mix to normalize back to historical levels and the overall demand for our products may be negatively
impacted. Also, worldwide precautionary measures taken to reduce the spread of COVID-19 infections, have impacted, and may continue to impact, flu and flu-
related illnesses, which could negatively impact our future revenue.
We sell our Precision Flow systems to hospitals through a direct sales organization in the United States and in the United Kingdom and we sell our
Precision Flow systems through distributors in other select countries outside of the United States and the United Kingdom. Our Oxygen Assist Module is sold
through a direct sales organization in the United Kingdom and through distributors in Europe and the Middle East. We intend to expand the commercial launch of
our Oxygen Assist Module throughout the United Kingdom, Europe, and the Middle East in the first quarter of 2021 through a direct sales organization in the
United Kingdom and through distributors in other select countries in Europe and the Middle East. In addition, we employ field-based clinical educators who focus
on medical education and training in the effective use of our products and help facilitate increased adoption and utilization. We focus on physicians, respiratory
therapists and nurses who work in acute hospital settings, including the ED and adult, pediatric and neonatal ICUs. Our relationship with these clinicians is
particularly important, as it enables our products to follow patients through the care continuum. As of December 31, 2020, we have sold our Precision Flow
systems to over 1,600 hospitals across the United States, where they have been primarily deployed in the ICU setting.
We assemble our Precision Flow systems in our facility in New Hampshire and we rely on third-party suppliers for a majority of the components of
our products, including many single source suppliers. Historically we maintained, and as of the present date we maintain, higher levels of inventory to protect
ourselves from supply interruptions, and, as a result, we have been and are currently subject to the risk of inventory obsolescence and expiration, which could lead
to inventory impairment charges. At times during the past nine months, however, as we sought to fulfill increased demand in connection with the COVID-19
pandemic, there were times when we were not able to carry higher levels of inventory, and as a result, we experienced and potentially in the future may again
experience supply interruptions. As a result of increased product demand in 2020, we significantly increased our production capacity. As a result, if demand for our
products declines in future periods, we may have excess production capacity which may negatively impact our gross margin. We currently ship our Precision Flow
systems from our facility in New Hampshire directly to our United States customers and many of our international distributors on a purchase order basis.
Warehousing and shipping operations for some of our international distributors are handled by a
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third-party vendor with facilities located in the Netherlands. While our customers have the right to return purchased products subject to a restocking fee, our
historical return experience has been immaterial. However, although we have priority shipping status with our carriers, as a result of the COVID-19 pandemic, we
have experienced, and may in the future experience, shipping delays throughout the United States and internationally, and as a result, there have been and may in
the future be delays in our ability to ship our product to customers and distributors in a timely manner, which may potentially result in a greater percentage of
returned product than we have historically experienced.
Since inception, we have financed our operations primarily through sales of our equity securities, including most recently a public offering in April
2020, sales of our Precision Flow systems and their associated disposables, and amounts borrowed under our credit facilities, which we amended in 2020. We have
devoted the majority of our resources to research and development activities related to our Precision Flow systems and our Oxygen Assist Module, 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 High Velocity Therapy products and expanded our digital marketing
initiatives and medical education programs, including our Vapotherm Academy which was instrumental during the pandemic and used to train more than 23,000
caregivers during 2020.
We intend to continue to make significant investments in our sales and marketing organization by increasing the number of U.S. sales
representatives, expanding the number of clinical educators internationally along with our international marketing programs and expanding worldwide direct to
clinician digital marketing efforts to help facilitate further adoption among existing hospital accounts as well as broaden awareness of our products to new
hospitals. We also expect to continue to make investments in research and development, regulatory affairs and clinical studies to develop future generations of our
High Velocity Therapy products, support regulatory submissions and demonstrate the clinical efficacy of our new products. In addition, as we seek to maintain our
current increased production capacity, we expect to continue to make investments in our production capabilities related to future generations of High Velocity
Therapy products. Because of these and other factors, we expect to continue to incur net losses for the next several years and we expect to require additional
funding, which may include future equity and debt financings.
On November 13, 2020, we acquired HGE Health Care Solutions LLC. We undertook the acquisition to expand our capabilities by providing a
remote monitoring platform designed to empower respiratory patients with chronic obstructive pulmonary disease and providers to manage day-to-day symptoms,
prevent exacerbations, lower costs and improve patient quality of life. The purchase price, net of cash acquired, of $21.6 million was funded with an initial cash
payment of $8.4 million and $13.2 million of contingent consideration. We have included the financial results of HGE in the consolidated financial statements from
the date of acquisition. Net revenue and net loss related of HGE since the date of acquisition totaled $0.4 million and $0.4 million, respectively.
Components of Our Results of Operations
Net Revenue
Our net revenue consists primarily of the sale of products, leases and services.
Product Revenue
We primarily derive our revenue from the sale of our products to hospitals in the United States and United Kingdom and through distributors in select
countries outside of the United States. Product sales consist of the following:
•
Capital Revenue - Our capital revenue is derived from the sale of our capital equipment, which consists of the Precision Flow High Velocity
technology, Precision Flow Plus, Precision Flow Classic, Precision Flow Heliox and Q50 compressor. Capital equipment sales include a one-year
warranty. We offer different options to our hospital customers for acquiring Precision Flow capital units, ranging from the purchase of the Precision
Flow capital units with payment in full at the time of purchase, to financed purchases of the Precision Flow capital units, to bundled
82
discounts involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s
ongoing purchase of disposable products.
•
Disposable Revenue - Our disposable revenue is derived from the sale of single-use disposables, nasal interfaces, or cannulas, and adaptors used in
conjunction with the Precision Flow capital units.
Lease Revenue
We enter into agreements to lease our capital equipment. We assess and classify these transactions as sales-type or operating leases based on whether
the lease transfers ownership of the equipment to the lessee. Equipment included in arrangements which provide for the transfer of title at, or shortly after, the end
of the lease term are accounted for as a sales-type lease. We record the present value of future lease payments as a component of prepaid expenses and other current
assets in our consolidated balance sheets and recognize the present value of the lease payments due over the lease term as revenue at the inception of the lease.
Equipment included in arrangements that do not transfer title are accounted for as operating leases and we recognize revenue on a straight-line basis over the lease
term.
Service Revenue
This revenue consists of service, component part and freight revenue offset by rebates and fees payable to GPOs, IDNs and distributor partners.
Service revenue consists of fees associated with routine service of capital units and the sale of extended service contracts and preventative maintenance plans. In
addition, we sell small quantities of component parts in the United States, United Kingdom, and to third-party international service centers who service Precision
Flow capital units outside of the United States and United Kingdom. Freight revenue is based upon actual freight costs plus a percentage markup of these costs
associated with the shipment of products domestically, and to a lesser extent, internationally.
Recent revenue growth has been driven by, and we expect continued growth as a result of, increasing revenue from product sales due to our growing
installed base of Precision Flow systems and related disposables sales. Our revenue has fluctuated, and we expect our revenue to continue to fluctuate, from quarter
to quarter due to a variety of factors including seasonality. We have historically experienced seasonality in our first quarter due to the impact of the flu season in the
Northern Hemisphere and in our fourth quarter, which coincides with our customers’ fiscal year-end and often drives higher purchases of capital equipment as
previously approved but unspent capital budgets typically expire at year-end. However, decreased U.S. flu hospitalizations being experienced thus far this year
could adversely affect our future revenues. We also expect our future revenue to be dependent upon other factors, such as continued market awareness and
acceptance of our High Velocity Therapy technology, favorable clinical data and outcomes using our products, introduction of new products, and continued
international expansion. In addition, we have expanded our sales and marketing infrastructure to help us drive and support revenue growth and we intend to
continue this expansion.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of costs incurred in the production process, including costs of component materials, assembly labor and overhead,
warranty, provisions for slow-moving and obsolete inventory, facilities-related expenses, depreciation and freight costs for items sold. Within the overhead costs
we include personnel-related expenses, including salaries, bonuses, benefits and stock-based compensation for our procurement, quality control and operations
personnel. We provide a one-year warranty on capital equipment, and we establish a reserve for warranty repairs based on historical warranty repair costs incurred.
Provisions for warranty obligations, which are included in cost of revenue, are provided for at the time of shipment. Cost of revenue in absolute dollars will
increase as our sales volume increases.
We calculate gross margin as gross profit divided by revenue. Our gross margin has been, and we expect it will continue to be, affected by a variety of
factors, including manufacturing costs, the average selling prices of our products, the implementation of disposable cost-reduction initiatives, sales volume and
inventory obsolescence costs. Sales mix also impacts our gross margins as our average selling price in the United States is typically higher than for our
international sales given our distribution model. In addition, sales of our single-use disposables carry a higher margin than that of our capital equipment sales. Our
gross margin may increase over the long-term to the extent our production volumes increase, we launch new products and we continue to experience cost savings
derived from supply chain and manufacturing efficiencies. However, our gross margin may fluctuate from quarter to quarter due to seasonality.
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Operating Expenses
Research and Development
Research and development expenses consist primarily of product development, engineering, regulatory expenses, testing, laboratory supplies,
consulting services and other costs associated with future generations of products using our High Velocity Therapy technology. These expenses include personnel-
related expenses, including salaries, bonuses, benefits and stock-based compensation for employees in our research and development, regulatory, quality assurance
and innovation functions. We expect research and development expenses to increase in the future as we develop future generations of products using our High
Velocity Therapy technology and companion products. We expect research and development expenses as a percentage of revenue to vary over time depending on
the level and timing of new product development initiatives.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related expenses, including salaries, commissions and bonuses, travel expenses,
benefits and stock-based compensation for employees in our sales and marketing, customer service and medical education functions. Other sales and marketing
expenses include consulting services, education, training, tradeshows, digital marketing, medical education and clinical studies. We expect sales and marketing
expenses to continue to increase in absolute dollars as we continue to expand our sales and marketing organization to both drive and support our planned growth in
revenue. Over time, we expect sales and marketing expenses to continue to decrease as a percentage of revenue primarily as, and to the extent, our revenue grows.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including salaries, bonuses, benefits, and stock-based
compensation, for employees in our finance, administration, human resources, information technology, and legal functions. Other general and administrative
expenses include professional services fees, audit fees, travel expenses, insurance costs and general corporate expenses including facilities-related expenses. We
expect our general and administrative expenses will increase in absolute dollars as we expand our headcount to support our anticipated future growth and
operations as a public company, upgrade our director and officer insurance coverage to be commensurate with other publicly listed companies and incur additional
expenses related to audit, legal, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, especially in light of
the loss of our emerging growth company status. Over time, we expect general and administrative expenses to decrease as a percentage of revenue primarily as, and
to the extent, our revenue grows.
Other Expense, Net
Other expense, net consists primarily of interest expense related to our credit facilities offset by interest income driven by the interest accruing on
cash and cash equivalents. Other expense, net also includes the gain on litigation settlement, loss on the extinguishment of debt, and foreign currency gains or
losses arising from transactions denominated in foreign currencies.
Benefit for Income Taxes
The benefit for income taxes represents a benefit for net deferred income tax assets deemed more likely than not to be realized by our foreign
subsidiary. We have not recorded any federal or state income tax benefits related to domestic operating losses due to uncertainty about future taxable income.
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Results of Operations
Net revenue
Cost of revenue
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expense, net
Net loss before income taxes
Benefit for income taxes
Net loss
Fiscal Years Ended December 31, 2020 and 2019
Net Revenue
Year Ended December 31,
2019
2020
(in thousands)
$
$
125,733
62,687
63,046
16,956
65,065
24,039
106,060
(43,014)
(8,488)
(51,502)
-
$
(51,502) $
48,104
26,793
21,311
13,376
37,689
18,410
69,475
(48,164)
(3,041)
(51,205)
(146)
(51,059)
Product Revenue
Capital Equipment
Disposable
Subtotal Product Revenue
Lease Revenue
Capital Equipment
Other
Service and Other Revenue
Net Revenue
Year Ended December 31,
2020
2019
(in thousands, except percentages)
Change
Amount
% of Revenue
Amount
% of Revenue
$
%
$
$
58,183
56,711
114,894
5,770
2,011
3,058
125,733
46.3% $
45.1%
91.4%
4.6%
1.6%
2.4%
100.0% $
9,324
35,055
44,379
1,721
-
2,004
48,104
19.4% $
72.9%
92.3%
3.5%
-
4.2%
100.0% $
48,859
21,656
70,515
4,049
2,011
1,054
77,629
524.0%
61.8%
158.9%
235.3%
100.0%
52.6%
161.4%
Revenue increased $77.6 million, or 161.4%, to $125.7 million for the year ended December 31, 2020 compared to $48.1 million for the year ended
December 31, 2019. The increase in revenue was primarily attributable to a $48.9 million and $21.7 million increase in capital equipment and disposable revenue,
respectively. Capital equipment revenue increased 524.0% during the year ended 2020 due to increased sales of our Precision Flow units as a result of increased
demand related to the COVID-19 pandemic and increased average selling prices in the United States. Disposable revenue increased 61.8% during the year ended
2020 primarily driven by an increase in the worldwide installed base of Precision Flow units and higher utilization due to the COVID-19 pandemic. Lease revenue
also increased primarily due to a higher volume of leases of our Precision Flow units and, to a lesser extent, due to higher utilization of disposables for Precision
Flow units under placement arrangements.
Revenue information by geography is summarized as follows:
United States
International
Net Revenue
Year Ended December 31,
2020
2019
(in thousands, except percentages)
Change
Amount
% of Revenue
Amount
% of Revenue
$
$
99,161
26,572
125,733
78.9% $
21.1%
100.0% $
36,583
11,521
48,104
76.0% $
24.0%
100.0% $
$
62,578
15,051
77,629
%
171.1%
130.6%
161.4%
85
Revenue generated in the United States increased $62.6 million, or 171.1%, to $99.2 million for the year ended December 31, 2020, compared to
$36.6 million for the year ended December 31, 2019. Revenue generated in our International markets increased $15.1 million, or 130.6%, to $26.6 million for the
year ended December 31, 2020, compared to $11.5 million for the year ended December 31, 2019. Both United States and International revenue growth was
primarily driven by an increase in the number of Precision Flow units sold year over year due to the COVID-19 pandemic as well as an increase in single-use
disposable sales due to higher installed bases of Precision Flow units and higher disposable utilization.
Cost of Revenue and Gross Margin
Cost of revenue increased $35.9 million, or 134.0%, to $62.7 million in fiscal year 2020 compared to $26.8 million in fiscal year 2019. The increase
was primarily due to higher material and labor costs due to a rapid increase in sales volumes of our Precision Flow units and disposables in order to meet demand
related to the COVID-19 pandemic.
Gross margin increased to 50.1% in fiscal year 2020 compared to 44.3% in fiscal year 2019. Gross profit was positively impacted by improved
overhead absorption due to higher production volumes, partially offset by higher labor costs, increased supplier freight and expediting fees to meet the rapid
increase in production capacity, and a higher mix of Precision Flow system sales. Gross profit was also positively impacted by higher average selling prices of
capital equipment in the United States, partially offset by lower average selling prices of disposables in International markets.
Research and Development Expenses
Research and development expenses increased $3.6 million, or 26.8%, to $17.0 million in fiscal year 2020 compared to $13.4 million in fiscal year
2019. As a percentage of revenue, research and development expenses decreased to 13.5% in fiscal year 2020 compared to 27.8% in fiscal year 2019. The increase
in research and development expenses was due to increased product development, prototype, and patent-related costs associated with the development of our future
generation High Velocity systems and increased employee-related expenses and stock-based compensation.
Sales and Marketing Expenses
Sales and marketing expenses increased $27.4 million, or 72.6%, to $65.1 million in fiscal year 2020 compared to $37.7 million in fiscal year 2019.
As a percentage of revenue, sales and marketing expenses decreased to 51.7% in fiscal year 2020 compared to 78.3% in fiscal year 2019. The increase in sales and
marketing expenses was primarily due to increased sales commissions as a result of increased revenue due to the COVID-19 pandemic along with increases in the
size of the sales and marketing organization and increased stock-based compensation, partially offset by a reduction in travel and marketing initiatives, such as
trade shows and training costs, due to the COVID-19 pandemic.
General and Administrative Expenses
General and administrative expenses increased $5.6 million, or 30.6%, to $24.0 million in fiscal year 2020 compared to $18.4 million in fiscal year
2019. As a percentage of revenue, general and administrative expenses decreased to 19.1% in fiscal year 2020 compared to 38.3% in fiscal year 2019. The increase
in general and administrative expenses was primarily due to increases in employee-related expenses, stock-based compensation, audit and compliance related costs,
insurance, increased bank services charges, legal costs and rent, partially offset by a reduction in travel expenses due to the COVID-19 pandemic.
Other Expense, Net
Other expense, net increased by $5.4 million, or 179.1%, to $8.5 million in fiscal year 2020 compared to $3.0 million in fiscal year 2019. The increase
in other expense, net was primarily due to one-time items recorded in each fiscal year. Other expense, net, in fiscal year 2020 included a $4.2 million loss on
extinguishment of debt. Other expense, net, in fiscal year 2019 included a $1.2 million gain on litigation settlement.
Benefit for Income Taxes
The benefit for income taxes for the year ended December 31, 2019 totaled $0.1 million and related to a benefit for net deferred income tax assets
deemed more likely than not to be realized by our foreign subsidiary. There was no such benefit recorded in 2020 by our foreign subsidiary. We have not recorded
any federal or state income tax benefits related to domestic operating losses due to uncertainty about future taxable income.
86
Seasonality
Historically, we have experienced seasonality in our first and fourth quarters, and we expect this trend to continue. We have experienced and may in
the future experience higher sales in the fourth quarter as a result of increased sales from hospitals nearing their fiscal year-end that have not fully utilized the funds
allocated to purchases of our Precision Flow systems. In the first quarter of each year we have experienced and may in the future experience higher sales in direct
correlation with the number of patients presenting with respiratory distress due to the severity of the flu season, especially in the Northern Hemisphere.
Liquidity and Capital Resources
As of December 31, 2020, we had cash, cash equivalents and restricted cash of $115.5 million and an accumulated deficit of $316.9 million. Our
primary sources of capital to date have been from sales of our equity securities, sales of our Precision Flow systems and their associated disposables and amounts
borrowed under credit facilities. Since inception, we have raised a total of $162.6 million in net proceeds from sales of our equity securities.
On December 20, 2019, we entered into an Open Market Sales Agreement (the “ATM Agreement”) with Jefferies LLC (“Jefferies”) under which we
may offer and sell its common stock having aggregate sales proceeds of up to $50.0 million from time to time through Jefferies as its sales agents. During April
2020, we sold 511,648 shares of common stock pursuant to the ATM Agreement for gross proceeds of $10.2 million, or $9.8 million net of commissions and
offering expenses. As of December 31, 2020, there was approximately $39.8 million in remaining capacity under this program.
In May 2020, we completed a public offering of 3,852,500 shares of common stock, which included the full exercise by the underwriters of their
option to purchase 502,500 shares of common stock, at a price of $26.00 per share, which raised net proceeds of $93.8 million after deducting the underwriting
discount of $6.0 million and offering expenses of $0.3 million.
On October 21, 2020, we entered into the Loan and Security Agreement which provides for a revolving loan facility of $12.0 million (the “Revolving
Facility”) and a term loan facility of $40.0 million (the “Term Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the Facilities
were used to repay our existing revolving loan facility and term loan facility. As of December 31, 2020, we had $4.9 million of outstanding borrowings and $7.1
million of availability under our Revolving Facility. As of December 31, 2020, we had $40.0 million of term debt outstanding under our Term Facility.
We believe that our existing cash resources and availability under our Revolving 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 enter
new debt financing arrangements. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Additional debt financing, if
available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain
terms that are not favorable to us or our stockholders. Additional financing may not be available at all or may be available only in amounts or on terms
unacceptable to us. If we are unable to obtain additional financing, we may be required to delay the development, commercialization and marketing of our
Precision Flow systems and Oxygen Assist Module.
Cash Flows
The following table presents a summary of our cash flow for the periods indicated:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash, cash equivalents
and restricted cash
Net increase in cash, cash equivalents, and restricted cash
87
Year Ended December 31,
2020
2019
(in thousands)
$
(39,468) $
(18,169)
99,676
(39,662)
(6,307)
59,449
(10)
42,029 $
5
13,485
$
Operating Activities
The net cash used in operating activities was $39.5 million in 2020 and consisted primarily of a net loss of $51.5 million and an increase of
$4.7 million in net operating assets, partially offset by $16.7 million in non-cash charges. Non-cash charges consisted primarily of stock-based compensation
expense, depreciation and amortization, loss on extinguishment of debt and non-cash lease expense.
The net cash used in operating activities was $39.7 million in 2019 and consisted primarily of a net loss of $51.1 million, partially offset by a decrease
of $5.5 million in net operating assets and $5.9 million in non-cash charges. Non-cash charges consisted primarily of stock-based compensation expense and
depreciation and amortization.
Investing Activities
Net cash used in investing activities for 2020 and 2019 consisted of purchases of property and equipment of $9.8 million and $4.7 million,
respectively. Net cash used in investing activities in 2020 also included $8.4 million to acquire HGE. In addition, net cash used in investing activities in 2019 also
included $1.6 million to acquire Solus Medical.
Financing Activities
Net cash provided by financing activities was $99.7 million in 2020 and consisted of proceeds from the issuance of common stock in connection with
public and at-the-market offerings of $94.2 million and $9.9 million, respectively and proceeds from common stock issuances in connection with our Employee
Stock Purchase Plan and stock option exercises of $0.8 million and $0.6 million, respectively, partially offset by payments of debt extinguishment costs of $3.8
million, net repayments of $1.4 million under our credit facilities, debt issuance costs of $0.5 million and common stock offering costs of $0.5 million.
Net cash provided by financing activities was $59.4 million in 2019 and consisted of proceeds from the issuance of common stock in connection with
a public offering of $48.7 million, net proceeds from borrowings of $10.8 million under our credit facilities, and proceeds from common stock issuances in
connection with stock option exercises and purchases of restricted stock awards of $0.4 million, partially offset by common stock offering costs of $0.4 million.
Indebtedness
Revolving Lines of Credit
On November 16, 2016, we entered a Business Financing Agreement (the “Revolver Agreement”) with Western Alliance Bank, an Arizona
Corporation, which replaced our 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 was 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. We refinanced the Revolver Agreement in April
2018, increasing the credit line to $7.5 million and extending the maturity date to September 30, 2020. We entered into an amendment to the Revolver Agreement
on September 30, 2020, extending the maturity date to April 6, 2023. The principal was due upon maturity. At December 31, 2019, the outstanding balance under
the Amended Revolver Agreement was $3.5 million.
On October 21, 2020 (the “Closing Date”), we entered into the Loan and Security Agreement with Canadian Imperial Bank of Commerce Innovation
Banking (“CIBC”) which provides for a revolving loan facility of $12.0 million (the “Revolving Facility”) and a term loan facility of $40.0 million (the “Term
Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the Facilities were used to repay our existing revolving loan facility and term
loan facility.
The Revolving Facility will mature on October 21, 2022 and may be renewed on an annual basis thereafter by mutual agreement of us and CIBC. The
Revolving Facility bears interest at a floating rate per annum equal to the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and is subject to a floor of 3.25%. At
December 31, 2020, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $4.9 million at December 31, 2020 and the remaining
availability based on eligible receivables was $7.1 million.
Term Loans
On April 6, 2018, we 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,
88
which paid off our prior financing arrangement in full. In connection with this draw down, we 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 had an exercise price
of $15.92 per share, were fully vested upon issuance, were 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, we drew down the second tranche of $10.0 million. In connection with this draw
down, we 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 had an exercise price of $15.92 per share, were fully vested upon issuance, were exercisable at the
option of the holder, in whole or in part, and expire in July 2028.
On September 27, 2018, we 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, we were
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, we drew down $2.0 million of the remaining
$12.5 million available. In connection with this draw down, we 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 had an exercise price of $15.92 per share, were
fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and expire in September 2028.
On March 22, 2019, we drew the remaining $10.5 million. In connection with this draw down, we granted Perceptive warrants to purchase
19,790 shares of common stock. The warrants had an exercise price of $15.92 per share, were fully vested upon issuance, were 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, 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. On June 10, 2020, Perceptive exercised all of
its outstanding warrants.
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 or (b) 1.75% per year. At December 31, 2019, the interest rate was 10.81%. The outstanding balance, including accretion of the
additional final payment due upon maturity and described below, was $42.6 million at December 31, 2019 and there was no remaining availability.
The Amended Credit Agreement and Guaranty, which was scheduled to mature in 2023, required that upon maturity, in addition to the payment of
principal and accrued interest, we make a payment of 0.5% of the total amount borrowed under the Amended Credit Agreement and Guaranty unless we had
already made such a payment in connection with an acceleration or prepayment of borrowings under the agreement. In the event we prepaid all or part of this term
loan facility prior to the maturity date, we were subject to additional prepayment fees which decreased as the time to maturity decreased.
On October 21, 2020, we refinanced our debt with CIBC and used $40 million of the Term Facility, approximately $4.9 million of the Revolving
Facility and approximately $6.3 million of cash on hand to pay off all obligations owing under, and to terminate, both the Amended Credit Agreement and
Guaranty and the Revolver Agreement, which included a prepayment penalty and exit fees of $3.7 million. As a result of the termination of the Amended Credit
Agreement and Guaranty and the Revolver Agreement, we recorded a loss on extinguishment of debt of $4.2 million, which included the prepayment penalty, exit
fees, write-off of the remaining unamortized deferred financing costs, and legal fees.
The Term Facility will mature on October 21, 2025. Advances under the Term Facility bear interest at a floating rate equal to the WSJ Prime Rate
plus 2.5% and is subject to a floor of 3.25%. At December 31, 2020, the interest rate was 5.75%. The outstanding balance was $40.0 million at December 31, 2020
and there was no remaining availability. The Loan and Security Agreement provides for interest-only payments on the Term Facility for the first thirty-six months
following the Closing Date. Thereafter, amortization payments on the Term Facility will be payable monthly in twenty-four equal installments. The Term Facility
may not be prepaid prior to the first anniversary of the Closing Date without prepaying all of the interest that otherwise would have been payable on the Term
Facility during the period commencing on the Closing Date and ending on the first anniversary of the Closing Date plus a prepayment charge of 2.0%. Thereafter,
the Term Facility may be prepaid in full, subject to a prepayment charge of (i) 2.0%, if such prepayment occurs after the first anniversary of the Closing Date but
on or prior to the second anniversary of the Closing Date, and (ii) 1.0%, if such prepayment occurs after the second anniversary of the Closing Date but on or prior
to the third anniversary of the Closing Date. The Term Facility and Revolving Facility are secured by a lien on substantially all of our assets, including intellectual
property.
The Loan and Security Agreement contains customary covenants and representations, including, without limitation, a minimum revenue covenant
equal to 80% of each year’s annual operating plan (tested on a trailing twelve month basis at the
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end of each fiscal quarter) and other financial covenants, reporting obligations, and limitations on dispositions, changes in business or ownership, mergers or
acquisitions, indebtedness, encumbrances, distributions and investments, transactions with affiliates and capital expenditures.
The events of default under the Loan and Security Agreement include, without limitation, and subject to customary grace periods, (1) our failure to
make any payments of principal or interest under the Loan and Security Agreement or other loan documents, (2) our breach or default in the performance of any
covenant under the Loan and Security Agreement, (3) the occurrence of a material adverse effect or an event that is reasonably likely to result in a material adverse
effect, (4) the existence of an attachment or levy on a material portion of our or our subsidiaries’ funds, (5) our insolvency or bankruptcy, or (6) the occurrence of
certain material defaults with respect to any other of our indebtedness in excess of $500,000. If an event of default occurs, CIBC is entitled to take enforcement
action, including acceleration of amounts due under the Loan and Security Agreement. The Loan and Security Agreement also contains other customary provisions,
such as expense reimbursement and confidentiality. CIBC has indemnification rights and the right to assign the Facilities, subject to customary restrictions.
As of December 31, 2020, we were in compliance with all covenants.
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.
Critical Accounting Policies and Practices
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the audited financial statements and accompanying notes included elsewhere in this Annual
Report on Form 10-K. Management believes that such estimates have been based on reasonable and supportable assumptions and the resulting estimates are
reasonable for use in the preparation of the audited financial statements. Actual results could differ from these estimates.
Critical accounting policies and practices are a company's accounting policies and practices that are most important to the portrayal of the company's
financial condition and results of operations and include the following:
Revenue Recognition
Our revenue consists primarily of the sale of products, leases and services. Product revenue consists of capital equipment and disposables that are
shipped and billed to customers both domestically and internationally. Our main capital equipment products are the Precision Flow systems, the Vapotherm
Transfer Unit 2.0 and Q50 compressor. Our main disposable products are the single-use disposables and nasal interfaces, or cannulas. Lease revenue consists of
two components which include capital equipment that we lease to our customers and, in certain situations, an allocation from disposable revenue to other lease
revenue upon the sale of disposable products in bundled arrangements involving the placement of Precision Flow capital units for use by the customer at no upfront
charge in connection with the customer’s ongoing purchase of disposable products. Service revenue consists of fees associated with routine service of capital units
and the sale of extended service contracts and preventative maintenance plans, which are purchased by a small portion of our customer base. In addition, we sell
small quantities of component parts in the United States, United Kingdom and to third-party international service centers who provide service on Precision Flow
capital units outside of the United States and United Kingdom. Freight revenue is based upon actual freights costs plus a percentage markup of these costs
associated with the shipment of products domestically, and to a lesser extent, internationally, and is included in service revenue. Rebates and fees consist of
contractually obligated administrative fees and percentage-of-sales rebates paid to GPOs, IDNs and distributor partners and accounted for as a reduction of service
revenue.
Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers
(“ASC 606”), revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect
to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606,
we performed the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance
obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or
services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services
promised within each contract and assess whether each promised good or service is distinct and determine those that
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are performance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or
as) the performance obligation is satisfied. Sales, value-added, and other taxes collected on behalf of third parties are excluded from revenue. Our standard payment
term is generally 30 days from date of sale.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each
performance obligation based on the estimated relative stand-alone selling prices of the promised products or services underlying each performance obligation. We
determined stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not observable
through past transactions, we estimate the stand-alone selling price taking into account available information such as market conditions and internally approved
pricing guidelines related to the performance obligations.
We recognize revenue on product sales and service of capital equipment and product sales of disposables. In each instance, revenue is generally
recognized when the customer obtains control of our product, which generally occurs at a point in time upon shipment based on the contractual shipping terms of a
contract.
Product and service revenue are measured as the amount of consideration we expect to receive in exchange for transferring products or services to a
customer. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the
transaction price utilizing the expected value amount method to which we expect to be entitled. As such, revenue on sales are recorded net of prompt pay discounts
and payments made to GPOs, IDNs and distributors. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant
future reversal of cumulative revenue under the contract will not occur. Determination of whether to include estimated amounts in the transaction price are based
largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. We believe that the
estimates we have established are reasonable based upon current facts and circumstances. Applying different judgments to the same facts and circumstances could
result in the estimated amounts to vary.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or
significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period
between when we perform our obligations under the contract and when the customer pays is one year or less. None of our contracts contained a significant
financing component as of December 31, 2020 or 2019.
Our contracts with our customers have a duration of less than one year. Therefore, we have elected to apply a practical expedient and recognize the
incremental costs of obtaining contracts as an expense. These costs are included in sales and marketing expense in the consolidated statements of comprehensive
loss.
Lease Revenue
We also enter into agreements to lease our capital equipment. For such sales, we account for revenue under ASC 842, Leases (“ASC 842”), and assess
and classify these transactions as sales-type or operating leases based on whether the lease transfers ownership of the equipment to the lessee by the end of the lease
term. This criterion is met in situations in which the lease agreement provides for the transfer of title at, or shortly after, the end of the lease term. Equipment
included in arrangements including the transfer of title are accounted for as sales-type leases and we recognize the present value of the lease payments due over the
lease term as revenue at the inception of the lease. We record the present value of future lease payments in the prepaid expenses and other current assets in our
consolidated balance sheets. Equipment included in arrangements that do not include transfer of title, nor any of the sales-type or direct finance lease criteria, are
accounted for as operating leases and revenue is recognized on a straight-line basis over the term of the lease. Prior to the adoption of ASC 842 effective January 1,
2020, we accounted for such transactions under ASC 840, Leases (“ASC 840”) and there was no change in our accounting for such transactions upon the adoption
of ASC 842.
Stock-Based Compensation
We maintain an equity incentive plan to provide long-term incentives for employees, consultants, and members of the board of directors. The plan
allows for the issuance of non-statutory and incentive stock options to employees and non-statutory stock options to consultants and non-employee directors. We
recognize stock-based compensation expense for awards of equity instruments to employees and non-employees based on the grant date fair value of those awards
in accordance with ASC Topic 718, Stock Compensation (“ASC 718”). ASC 718 requires all equity-based compensation awards, including grants of restricted
shares and stock options, to be recognized as expense in the consolidated statements of comprehensive loss based on their grant date fair values.
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The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value is then amortized on a
straight-line basis over the requisite service period of the awards, which is generally the vesting period. For performance-based awards, the related compensation
cost is amortized over the performance period on an accelerated attribution basis. Compensation cost associated with performance awards is based on fair value on
the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated
targeted payout level that is forecasted will be achieved. Cumulative adjustments are recorded each quarter to reflect estimated outcomes of the performance-
related conditions until the results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected
model inputs, including the expected life (weighted average period of time that the options granted are expected to be outstanding), the volatility of our common
stock and an assumed risk-free interest rate. Expected volatility is calculated based on historical volatility of a group of publicly traded companies that we consider
a peer group. The expected life is estimated using the simplified method for “plain vanilla” options. The risk-free interest rate is based on U.S. Treasury rates with a
remaining term that approximates the expected life assumed at the date of grant. No dividend yield is assumed as we do not pay, and do we expect to pay, dividends
on our common stock. We estimate forfeitures based on historical experience with pre-vested forfeitures. To the extent actual forfeitures differ from the estimate,
the difference is recorded to compensation expense in the period of the forfeiture.
We recognize stock-based expense for shares issued pursuant to our 2018 Employee Stock Purchase Plan (“ESPP”) on a straight-line basis over the
related offering period. We estimate the fair value of shares to be issued under the ESPP based on a combination of options valued using the Black-Scholes option
pricing model. The expected life is determined based on the contractual term. Dividend yield and forfeiture rates are estimated in a manner similar to option grants
described above and expected volatility is based on our historical volatility.
Income Taxes
We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the consolidated financial statements or in our tax returns. Deferred taxes are determined based on
the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are
expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. We assess the likelihood that our deferred tax
assets will be recovered from future taxable income and, to the extent we believe, based upon the weight of available evidence, that it is more likely than not that all
or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of
deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
We account for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by
the taxing authorities. If the tax position is deemed more likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to
recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of
being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are
considered appropriate as well as the related net interest and penalties.
Critical Accounting Estimates
Critical accounting estimates that involve a significant level of uncertainty and have had or are reasonably likely to have a material impact on our
financial condition or results of operations include the following:
Contingent Consideration
Management is responsible for determining the appropriate valuation model and estimated fair value of contingent consideration. To estimate the fair
value, management considers a number of factors, including information provided by a third-party valuation advisor. Contingent consideration liabilities are
reported at their estimated fair values based on probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates.
Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain milestones and discount rates consistent
with the level of risk of achievement. The fair value of the contingent consideration liability is remeasured at each reporting period, with changes in the fair value
included in current operations. The remeasured liability amount could be significantly different from the amount estimated at the acquisition date, resulting in
material charges or credits in future reporting periods.
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Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in Note 2 to our audited financial statements included elsewhere in this Annual Report
on Form 10-K.
JOBS Act and Filing Status
Prior to December 31, 2020, we qualified 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. These provisions include:
•
•
•
not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
reduced disclosure obligations regarding executive compensation in this Annual Report on Form 10-K and in our periodic reports, proxy
statements and registration statements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved.
Effective December 31, 2020, we no longer qualify as an emerging growth company and have transitioned to a large accelerated filer status as a result
of the market value of the common stock held by our non-affiliates as of June 30, 2020. As a result, we will adopt new or revised accounting pronouncements at
dates applicable to public companies. Additionally, as a result of losing emerging growth company status, we are required to have our independent registered public
accounting firm issue an attestation report on the effectiveness of our internal control over financial reporting on an annual basis beginning with the year ended
December 31, 2020. We also lost our “smaller reporting company” status as a result of our public float as of June 30, 2020; although, pursuant to those rules, there
is a transition period that allows us to provide scaled disclosures in this report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are reporting as a smaller reporting company as defined in Item 10(f)(1) of Regulation S-K and are not required to provide information under this
item.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in
Item 15 of Part IV of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures.
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 of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls
and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
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Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes policies and procedures that:
●
●
●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. We continue to review our internal control over financial reporting and may from time to time make changes aimed at
enhancing their effectiveness and to ensure that our systems evolve with our business.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In accordance with guidance issued by the Securities and Exchange
Commission, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in
which the acquisition occurred. Management's evaluation of internal control over financial reporting excluded the internal control activities of HGE, which we
acquired on November 13, 2020, and which represents 10.9% of our total assets and 0.3% of our total net revenues for the year ended December 31, 2020.
Based on this assessment, our senior management has concluded that our internal control over financial reporting was effective as of December 31,
2020.
Grant Thornton LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company’s
internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Vapotherm, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Vapotherm, Inc.(a Delaware corporation) and subsidiaries (the “Company”) as of
December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial
statements of the Company as of and for the year ended December 31, 2020, and our report dated February 24, 2021 expressed an unqualified opinion on those
financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of
HGE Health Care Solutions LLC (“HGE Health”), a wholly-owned subsidiary, whose financial statements reflect total assets and revenues constituting 10.9% and
0.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2020. As indicated in Management’s Report
on Internal Control over Financial Reporting, HGE Health was acquired during 2020. Management’s assertion on the effectiveness of the Company’s internal
control over financial reporting excluded internal control over financial reporting of HGE Health.
Definition and limitations of internal control over financial reporting
A company’s 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 for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
February 24, 2021
Item 9B. Other Information.
None
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Other than the information regarding our executive officers provided in Part I of this report under the heading “Business – Information about our
Executive Officers,” the information required by this Item is incorporated by reference to our definitive proxy statement for our 2021 annual meeting of
stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be
filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be
filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be
filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated by reference to our definitive proxy statement for our 2021 annual meeting of stockholders to be
filed with the SEC within 120 days of the fiscal year ended December 31, 2020.
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Item 15. Exhibit and Financial Statement Schedules.
(1) Financial Statements:
PART IV
The following documents are included on pages F-1 through F-33 attached hereto and are filed as part of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Page
F-2
F-4
F-5
F-6
F-7
F-8
All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial
statements or the notes thereto.
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(3) Exhibits.
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9*
10.1
10.2
10.3
10.4
10.5
Description
Tenth Amended and Restated Certificate of Incorporation of Vapotherm, Inc. (previously filed as Exhibit 3.1 to the Current Report on Form 8-
K filed on November 20, 2018 (File No. 001-38740) and incorporated herein by reference)
Certificate of Amendment to the Tenth Amended and Restated Certificate of Incorporation of Vapotherm, Inc. (previously filed as Exhibit 3.1 to
the Current Report on Form 8-K filed on June 24, 2020 (File No. 001-38740) and incorporated herein by reference)
Amended and Restated Bylaws (previously filed as Exhibit 3.2 to the Current Report on Form 8-K filed on November 20, 2018 (File No. 001-
38740) and incorporated herein by reference)
Form of Certificate of Common Stock (previously filed as Exhibit 4.1 to the Registration Statement on Form S-1 filed on November 5, 2018 (File
No. 333-227897) and incorporated herein by reference)
Tenth Amended and Restated Registration Rights Agreement dated September 27, 2018, among Vapotherm, Inc. and the Investors party thereto
(previously filed as Exhibit 4.2 to the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated
herein by reference)
Form of Warrant to Purchase Series A Preferred Stock, dated March 14, 2012, issued by Vapotherm, Inc. (previously filed as Exhibit 4.4 to the
Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Form of Warrant to Purchase Series A Preferred Stock, dated July 30, 2012, issued by Vapotherm, Inc. (previously filed as Exhibit 4.5 to the
Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Warrant to Purchase Series A Preferred Stock, dated September 7, 2012, issued by Vapotherm, Inc. to Vapotherm Investors, LLC (previously
filed as Exhibit 4.6 to the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by
reference)
Warrant to Purchase Series A Preferred Stock, dated September 27, 2013, issued by Vapotherm, Inc. to Bridge Bank, National Association
(previously filed as Exhibit 4.7 to the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated
herein by reference)
Form of Warrant to Purchase Series B Preferred Stock, issued by Vapotherm, Inc. to Comerica Bank (previously filed as Exhibit 4.8 to the
Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Warrant to Purchase Series C Preferred Stock, dated July 28, 2015, issued by Vapotherm, Inc. to Comerica Bank (previously filed as Exhibit 4.9
to the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Description of Securities of Vapotherm, Inc.
Lease, dated September 30, 2016, between Vapotherm, Inc. and Albany Road – 100 Domain LLC (previously filed as Exhibit 10.1 to the
Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
First Amendment to Lease, dated September 11, 2017, between Vapotherm, Inc. and Albany Road – 100 Domain LLC (previously filed as
Exhibit 10.2 to the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Second Amendment to Lease, dated June 6, 2018, between Vapotherm, Inc. and 100 Domain Drive EI, LLC (previously filed as Exhibit 10.3 to
the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Third Amendment to Lease, dated July 26, 2018, between 100 Domain Drive EI, LLC and Vapotherm, Inc. (previously filed as Exhibit 10.12 to
the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Fourth Amendment to Lease Agreement, dated August 23, 2020, between 100 Domain Drive EI, LLC, as administrator of the tenancy in common
with 100 Domain Drive DD and Vapotherm, Inc. (previously filed as Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2020 (File No. 001-38740) and incorporated herein by reference)
98
Exhibit
Number
Description
10.6
10.7 †
10.8 †
10.9 †
10.10 †
10.11 †
10.12 †
10.13 †
10.14 †
10.15 †
10.16 †
10.17 †
10.18 †
10.19 †
10.20 †
10.21 †
Loan and Security Agreement, dated as of October 21, 2020, between Canadian Imperial Bank of Commerce and Vapotherm, Inc. (previously
filed as Exhibit 10.1 to the Current Report on Form 8-K as filed on October 22, 2020 (File No. 001-38740) and incorporated herein by reference)
Vapotherm, Inc. Amended and Restated 2005 Stock Incentive Plan, as amended (previously filed as Exhibit 10.6 to the Registration Statement on
Form S-1 on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Form of Incentive Stock Option Agreement pursuant to the Vapotherm, Inc. 2005 Stock Incentive Plan (previously filed as Exhibit 10.7 to the
Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Vapotherm, Inc. Amended and Restated 2015 Stock Incentive Plan, as amended (previously filed as Exhibit 10.8 to the Registration Statement on
Form S-1 on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Vapotherm, Inc. 2015 Stock Incentive Plan French Qualifying Subplan (previously filed as Exhibit 10.26 to the Registration Statement on Form
S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Form of Incentive Stock Option Agreement pursuant to the Vapotherm, Inc. 2015 Stock Incentive Plan (previously filed as Exhibit 10.9 to the
Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Vapotherm, Inc. 2018 Employee Stock Purchase Plan (previously filed as Exhibit 10.17 to the Registration Statement on Form S-1 filed on
November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Vapotherm, Inc. 2018 Equity Incentive Plan (previously filed as Exhibit 10.18 to the Registration Statement on Form S-1 filed on November 5,
2018 (File No. 333-227897) and incorporated herein by reference)
Vapotherm, Inc. 2018 Equity Incentive Plan French Qualifying Subplan (previously filed as Exhibit 10.27 to the Annual Report on Form 10-K
filed on March 22, 2019 (File No. 001-38740) and incorporated herein by reference)
Amended and Restated Vapotherm, Inc. 2018 Equity Incentive Plan French Qualifying Subplan, dated August 31, 2020 (previously filed as
Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (File No. 001-38740) and incorporated
herein by reference)
Form of Non-Statutory Employee Stock Option Agreement pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan (previously filed as
Exhibit 10.20 to the Registration Statement on Form S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Form of Non-Statutory Non-Employee Director Stock Option Agreement pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan (previously
filed as Exhibit 10.21 to the Registration Statement on Form S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by
reference)
Form of Incentive Stock Option Agreement pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan (previously filed as Exhibit 10.22 to the
Registration Statement on Form S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Form of Non-Statutory Stock Option Agreement for Consultants pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan (previously filed as
Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (File No. 001-38740) and incorporated
herein by reference)
Form of Restricted Stock Unit Agreement for Employees who are Executive Officers pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan
(previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (File No. 001-38740)
and incorporated herein by reference)
Form of Restricted Stock Unit Agreement for Employees who are not Executive Officers pursuant to the Vapotherm, Inc. 2018 Equity Incentive
Plan (previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (File No. 001-
38740) and incorporated herein by reference)
99
Exhibit
Number
10.22 †
10.23 †
10.24 †
10.25 †
10.26 †
10.27 †
10.28 †
10.30 †
10.31 †
10.32 †
10.33 †
10.34 †
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
Form of Restricted Stock Unit Agreement for Non-Employee Directors pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan (previously
filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (File No. 001-38740) and
incorporated herein by reference)
Description
Form of Restricted Stock Unit Agreement for Consultants pursuant to the Vapotherm, Inc. 2018 Equity Incentive Plan (previously filed as Exhibit
10.4 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (File No. 001-38740) and incorporated herein by
reference)
Vapotherm, Inc. 2018 Cash Incentive Plan (previously filed as Exhibit 10.19 to the Registration Statement on Form S-1 filed November 5, 2018
(File No. 333-227897) and incorporated herein by reference)
Form of Indemnification Agreement between Vapotherm, Inc. and its directors and officers (previously filed as Exhibit 10.11 to the Registration
Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Amended and Restated Employment Agreement dated October 17, 2018, between Vapotherm, Inc. and Joseph Army (previously filed as Exhibit
10.10 to the Registration Statement on Form S-1 filed on October 19, 2018 (File No. 333-227897) and incorporated herein by reference)
Proprietary Rights Agreement, dated July 30, 2012, between Vapotherm, Inc. and Joseph Army (previously filed as Exhibit 10.23 to the
Registration Statement on Form S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Confidentiality and Non-Disclosure Agreement dated January 28, 2014, between Vapotherm, Inc. and John Coolidge (previously filed as Exhibit
10.24 to the Registration Statement on Form S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Form of Confidentiality, Non-Compete and Assignment of Inventions Agreement (previously filed as Exhibit 10.25 to the Registration Statement
on Form S-1 filed on November 5, 2018 (File No. 333-227897) and incorporated herein by reference)
Indefinite Term Employment Contract by and between Vapotherm, Inc. and Gregoire Ramade, dated March 14, 2016 (previously filed as Exhibit
10.1 to the Quarterly Report on Form 10-Q filed on July 29, 2019 (File No. 001-38740) and incorporated herein by reference)
First Amendment, dated September 15, 2020, to Indefinite Term Employment Contract by and between Vapotherm, Inc. and Gregoire Ramade,
dated March 14, 2016 (previously filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q filed on November 4, 2020 (File No. 001-38740)
and incorporated herein by reference)
Letter Agreement by and between Vapotherm, Inc. and David Blouin, dated December 8, 2017 (previously filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q filed on July 29, 2019 (File No. 001-38740) and incorporated herein by reference)
Employment Offer Letter, dated February 19, 2014, between Vapotherm, Inc. and John Coolidge (previously filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (File No. 001-38740) and incorporated herein by reference)
Subsidiaries of Vapotherm, Inc.
Consent of Grant Thornton LLP
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
100
Exhibit
Number
101.INS*
Inline XBRL Instance Document
Description
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
**
†
Filed herewith
Furnished herewith
Indicates management contract or compensatory plan
Item 16. Form 10-K Summary
None.
101
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 24, 2021
Vapotherm, Inc.
/s/ Joseph Army
By:
Name: Joseph Army
Title: President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Name
/s/ Joseph Army
Joseph Army
/s/ John Landry
John Landry
/s/ Anthony Arnerich
Anthony Arnerich
/s/ Lance Berry
Lance Berry
/s/ Marina Hahn
Marina Hahn
/s/ James Liken
James Liken
/s/ Donald Spence
Donald Spence
/s/ Elizabeth Weatherman
Elizabeth Weatherman
Title
Date
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Accounting Officer and Principal Financial Officer)
Director
Director
Director
Director
Director
Director
102
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
February 24, 2021
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
VAPOTHERM, INC.
Index to Financial Statements
F-1
Page
F-2
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Vapotherm, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Vapotherm, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of
December 31, 2020 and 2019, the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the
period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 24, 2021 expressed an unqualified
opinion.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2020 due
to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the
accounts or disclosures to which they relate.
Adoption of ASC 842 (Lease Revenue)
As discussed in Note 2 to the consolidated financial statements, the Company adopted ASC 842 as of January 1, 2020. The adoption of ASC 842 from a
lessor perspective requires the Company to make certain assumptions as it relates to customer contracts whereby the Company provides the use of capital
equipment at no charge (“leased units”). We identified the adoption of ASC 842, from a lessor perspective, as a critical audit matter.
The principal considerations for our determination that the adoption of ASC 842 from a lessor perspective is a critical audit matter include the
complexity of the guidance contained in ASC 842 as it pertains to the terms of the Company’s contracts as lessor and the judgment involved in management’s
evaluation of the classification of the leased units as either
F-2
sales type or operating leases. Accordingly, there is a risk that these lease arrangements are not appropriately classified in accordance with the new accounting
standard. These considerations heightened the complexity surrounding the design and execution of audit procedures to respond to this risk.
Our audit procedures related to the Company’s adoption of ASC 842 from a lessor perspective included the following, among others:
•
•
In consultation with national office resources, we evaluated the reasonableness of management’s assessment of the impact of adopting ASC 842 from a
lessor’s perspective and the appropriateness of resulting changes to management’s accounting policies.
We selected a sample of the leased units and assessed the appropriateness of management’s estimate in determining their economic useful life.
Evaluation of the HGE contingent consideration liability
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company acquired HGE Health Care Solutions, LLC (“HGE”), whose
purchase price included potential future payments that are contingent on the future performance of certain HGE service offerings. The value of the HGE contingent
consideration liability is determined using a Monte Carlo valuation model which includes certain key inputs, such as projected revenues, earnings before interest,
taxes, depreciation and amortization (“EBITDA”) and volatility rates. We identified the contingent consideration resulting from the HGE acquisition as a critical
audit matter.
The principal considerations for our determination that the HGE contingent consideration liability is a critical audit matter include the complexity of the
valuation model utilized by management and the estimation uncertainty surrounding the projections used to determine the value of the contingent consideration
liability. Accordingly, auditing the contingent consideration liability required both extensive audit effort and a high degree of auditor judgment. Further, variations
in the inputs included in the valuation model could have a significant impact on the recorded liability balance.
Our audit procedures related to the HGE contingent consideration liability included the following, among others:
•
•
We assessed the reasonableness of significant assumptions used in the valuation model utilized by management by evaluating the reasonableness of the
revenue and EBITDA projections against historical operating results and third-party industry projections.
With the assistance of valuation specialists, we performed the following: (i) reviewed and tested the process used by management to determine the fair
value of the HGE contingent liability; (ii) developed an independent expectation of the contingent liability in order to corroborate the reasonableness of
management’s estimates; and (iii) performed a sensitivity analysis to evaluate whether management’s concluded values fell within a reasonable range.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2016.
Boston, Massachusetts
February 24, 2021
F-3
VAPOTHERM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Restricted cash
Goodwill
Intangible assets, net
Deferred income tax assets
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
Contract liabilities
Accrued expenses and other liabilities
Short-term line of credit
Total current liabilities
Long-term loans payable, net
Revolving loan facility
Deferred income tax liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' equity
Preferred stock ($.001 par value) 25,000,000 shares authorized; no shares
issued and outstanding as of December 31, 2020 and 2019
Common stock ($.001 par value) 175,000,000 shares authorized as of
December 31, 2020 and 2019; 25,722,984 and 20,851,531 shares issued
and outstanding as of December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders’ equity
December 31,
2020
2019
113,683 $
23,488
19,873
5,041
162,085
20,573
8,260
1,853
16,226
5,694
-
967
215,658 $
4,967 $
459
36,551
-
41,977
39,653
4,888
6
15,229
101,753
71,655
8,243
9,137
4,066
93,101
15,086
-
1,852
588
353
66
844
111,890
3,375
137
9,187
3,491
16,190
41,787
-
-
174
58,151
-
-
26
430,781
41
(316,943)
113,905
215,658 $
21
319,115
44
(265,441)
53,739
111,890
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VAPOTHERM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
Year Ended December 31,
2020
2019
$
125,733 $
62,687
63,046
48,104
26,793
21,311
13,376
37,689
18,410
69,475
(48,164)
44
860
1,151
(5,096)
-
(51,205)
(146)
(51,059)
44
44
(51,015)
16,956
65,065
24,039
106,060
(43,014)
114
257
15
(4,711)
(4,163)
(51,502)
-
(51,502)
(3)
(3)
(51,505) $
Net revenue
Cost of revenue
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other (expense) income
Foreign currency gain
Interest income
Gain on litigation settlement
Interest expense
Loss on extinguishment of debt
Net loss before income taxes
Benefit for income taxes
Net loss
Other comprehensive income (loss)
Foreign currency translation adjustments
Total other comprehensive income (loss)
Total comprehensive loss
Net loss per share - basic and diluted
Weighted-average number of shares used in calculating net loss per share,
basic and diluted
(2.16) $
(2.74)
23,818,447
18,604,707
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VAPOTHERM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Balance at December 31, 2018
16,782,837 $
17 $
265,926 $
Issuance of common stock in connection with public offering, net
Issuance of common stock warrants
Issuance of common stock upon repayment of nonrecourse loans
Issuance of common stock upon exercise of warrants
Issuance of common stock upon exercise of options
Issuance of common stock in connection with restricted stock
awards
Stock-based compensation expense
Foreign currency translation adjustments
Net loss
Balance at December 31, 2019
Issuance of common stock in connection with public offering, net
Issuance of common stock in connection with at-the-market
offering, net
Issuance of common stock upon exercise of options
Issuance of common stock under the Employee Stock Purchase
Plan
Issuance of common stock upon exercise of warrants
Issuance of common stock in connection with restricted stock
units and awards
Issuance of common stock for services
Stock-based compensation expense
Foreign currency translation adjustments
Net loss
Balance at December 31, 2020
3,570,750
-
79,854
12,164
150,176
255,750
-
-
-
20,851,531 $
3,852,500
511,648
223,998
58,140
79,442
126,338
19,387
-
-
-
25,722,984 $
4
-
-
-
-
-
-
-
-
21 $
4
1
-
-
-
-
-
-
-
26 $
48,272
293
144
-
242
402
3,836
-
-
319,115 $
93,823
9,783
593
824
-
213
441
5,989
-
-
430,781 $
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Accumulated
Deficit
(214,382) $
- $
Stockholders'
Equity
-
-
-
-
-
-
-
-
-
-
-
-
44
-
44 $
-
-
-
(51,059)
(265,441) $
-
-
-
-
-
-
-
-
-
-
-
-
-
(3)
-
41 $
-
-
(51,502)
(316,943) $
51,561
48,276
293
144
-
242
402
3,836
44
(51,059)
53,739
93,827
9,784
593
824
-
213
441
5,989
(3)
(51,502)
113,905
VAPOTHERM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation expense
Depreciation and amortization
Loss on extinguishment of debt
Non-cash lease expense
Loss on disposal of property and equipment
Amortization of discount on debt
Provision for bad debts
Deferred income taxes
Provision for inventory valuation
Gain on litigation settlement
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Contract liabilities
Accrued expenses and other liabilities
Operating lease liabilities, current and long-term
Net cash used in operating activities
Cash flows from investing activities
Purchases of property and equipment
Acquisition of business, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of common stock in connection with public offering, net
Proceeds from issuance of common stock in connection with at-the-market offering, net
Proceeds from issuance of common stock under Employee Stock Purchase Plan
Proceeds from exercise of stock options and purchase of restricted stock awards
Common stock offering costs
Proceeds from loans
Repayment of loans
Payments of debt extinguishment costs
Debt issuance costs
Proceeds from short-term line of credit and revolving loan facility
Repayments on short-term line of credit
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents and restricted cash
Beginning of year
End of year
Supplemental disclosures of cash flow information
Interest paid during the period
Property and equipment purchases in accrued expenses
Issuance of common stock upon vesting of restricted stock units and awards
Issuance of warrants in conjunction with debt draw down
Year Ended December 31,
2020
2019
$
(51,502) $
(51,059)
6,430
4,769
4,163
1,140
250
222
72
70
(534)
-
(14,810)
(10,157)
(483)
1,461
322
20,273
(1,154)
(39,468)
(9,797)
(8,372)
(18,169)
94,155
9,927
824
593
(471)
40,000
(42,500)
(3,765)
(475)
5,883
(4,495)
99,676
(10)
42,029
$
$
$
$
$
73,507
115,536 $
4,439 $
145 $
213 $
- $
3,836
3,078
-
-
101
234
104
(147)
(543)
(1,151)
(833)
5,606
(1,218)
720
58
1,552
-
(39,662)
(4,747)
(1,560)
(6,307)
48,669
-
-
386
(393)
10,500
-
-
(29)
7,500
(7,184)
59,449
5
13,485
60,022
73,507
4,793
135
402
293
The accompanying notes are an integral part of these consolidated financial statements.
F-7
VAPOTHERM, INC.
Notes to Consolidated Financial Statements
(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 High Velocity Therapy products that are used to treat patients of all ages
suffering from respiratory distress. The Company’s High Velocity Therapy delivers non-invasive ventilatory support by providing heated, humidified and
oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. The Company’s Precision Flow systems, which use High Velocity
Therapy, are clinically validated alternatives to, and address many limitations of, the current standard of care for the treatment of respiratory distress in a hospital
setting.
The Company offers four versions of its Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision
Flow Heliox. In certain countries outside of the United States, the Company currently offers the Oxygen Assist Module, which was launched in the United
Kingdom, select European markets, and Israel in late 2020. The Company generates revenue from sales of its Precision Flow systems and related disposable
products utilized with its Precision Flow systems. The Company also generates revenue from sales of its Precision Flow system’s companion products, which
include the Vapotherm Transfer Unit 2.0, the Q50 compressor and various adaptors. The Company offers different options to its hospital customers for acquiring
Precision Flow capital units, ranging from the purchase of the Precision Flow capital units with payment in full at the time of purchase, to financed purchases of the
Precision Flow capital units, to bundled discounts involving the placement of Precision Flow capital units for use by the customer at no upfront charge in
connection with the customer’s ongoing purchase of disposable products.
The Company sells Precision Flow systems to hospitals through a direct sales force in the United States and in the United Kingdom and through
distributors in select other countries outside of the United States and United Kingdom. In addition, the Company utilizes clinical educators who are typically
experienced users of high velocity therapy and who focus on medical education efforts to facilitate adoption and increase utilization. The Company is focused on
physicians, respiratory therapists and nurses who work in acute hospital settings, including the emergency department (“ED”) and adult, pediatric and neonatal
intensive care units (the “ICUs”). The Company’s relationship with these clinicians is particularly important, as it enables its products to follow patients through the
care continuum.
In March 2020, the World Health Organization declared a global pandemic related to the novel coronavirus (“COVID-19”). The Company’s high
velocity therapy is a first-line therapy for treating respiratory distress, which is experienced by many COVID-19 patients. The Company’s hospital customers
around the world are using the Company’s technology to support the respiratory distress experienced by many COVID-19 patients so that they can triage their
sickest patients using a limited number of ventilators. As a result, the Company has seen a significant increase in worldwide demand for its products from both new
and existing accounts in 2020. The full extent to which the COVID-19 pandemic impacts the Company’s business will depend on future developments, which are
highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and variants of the virus and the
actions taken to treat or contain COVID-19 or to otherwise limit its impact, the availability and effectiveness of vaccines, among other factors.
On February 28, 2019, the Company acquired Solus Medical Ltd. (“Solus”), its United Kingdom based distributor. See Note 3 “Business
Combinations” to these consolidated financial statements for details of this transaction.
In August 2019, the Company completed a public offering of 3,570,750 shares of common stock, which included the full exercise by the underwriters
of their option to purchase 465,750 shares of common stock, at a price of $14.50 per share, which raised net proceeds of $48.3 million after deducting the
underwriting discount of $3.1 million and offering expenses of $0.4 million.
On December 20, 2019, the Company entered into an Open Market Sales Agreement (the “ATM Agreement”) with Jefferies LLC (“Jefferies”), under
which the Company may offer and sell its common stock having aggregate sales proceeds of up to $50.0 million from time to time through Jefferies as its sales
agents. During April 2020, the Company sold 511,648 shares of common stock pursuant to the ATM Agreement for gross proceeds of $10.2 million, or $9.8
million net of commissions and offering expenses.
F-8
In May 2020, the Company completed a public offering of 3,852,500 shares of common stock, which included the full exercise by the underwriters of
their option to purchase 502,500 shares of common stock, at a price of $26.00 per share, which raised net proceeds of $93.8 million after deducting the
underwriting discount of $6.0 million and offering expenses of $0.3 million.
On November 13, 2020, the Company acquired HGE Health Care Solutions LLC (“HGE”). The Company undertook the acquisition to expand its
capabilities by providing a remote monitoring platform designed to empower respiratory patients with chronic obstructive pulmonary disease (“COPD”) and
providers to manage day-to-day symptoms, prevent exacerbations, lower costs and improve patient quality of life. See Note 3 “Business Combinations” to these
consolidated financial statements for details of this transaction.
2. 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”).
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 and HGE, a wholly owned subsidiary of the Company located in the United States,
which was acquired in the fourth quarter of 2020. All intercompany accounts and transactions have been eliminated upon consolidation.
Segment Information
Operating segments are defined as components of an enterprise for which separate discrete financial information is available and evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company globally manages the business within one
reporting segment, Vapotherm, Inc. and three reporting units, Vapotherm, Solus and HGE. Segment information is consistent with how management reviews the
business, makes investing and resource allocation decisions and assesses operating performance.
The majority of the Company’s long-term assets are located in the United States. Long-term assets located outside the United States total $0.2 million
and $0.1 million at December 31, 2020 and 2019, respectively.
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, valuation of warrants, fair values of acquired assets and liabilities, including goodwill and intangibles assets, realizability of inventories, allowance
for bad debts, accrued expenses, including the fair value of contingent consideration and estimated incurred but not reported insurance obligations, and the
valuation allowances against deferred income tax assets. Actual results may differ from these estimates.
Reclassification
Certain amounts in 2019 have been reclassified to conform to the presentation in 2020. None of the reclassifications had any impact to the Company’s
results of operations.
Financial Instruments and Concentrations of Credit Risk
As of December 31, 2020 and 2019, the Company’s financial instruments were comprised of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable and debt, the carrying amounts of which approximated fair
F-9
value due to the short-term nature or market interest rates. All of the Company’s cash and cash equivalents are maintained at creditworthy financial institutions. At
December 31, 2020 and 2019, deposits exceed the amount of any insurance provided.
The Company extends credit to customers in the normal course of business but typically does not require collateral or any other security to support
amounts due. Management performs ongoing credit evaluations of its customers. An allowance for potentially uncollectible accounts is provided based on history,
economic conditions, and composition of the accounts receivable aging. In some cases, the Company makes allowances for specific customers based on these and
other factors. Provisions for the allowance for doubtful accounts are recorded in general and administrative expenses in the accompanying consolidated statements
of comprehensive loss.
Supplier Risk
The Company obtains some of the components and subassemblies included in its Precision Flow systems and obtain its Oxygen Assist Module from
single source suppliers and the partial or complete loss of one or more of these suppliers could cause significant production delays, an inability to meet customer
demand and a substantial loss in revenue.
Foreign Currency and Foreign Operations
The functional currency of the Company is the currency of the primary economic environment in which the entity operates, which is the U.S. dollar.
For the Company’s non-U.S. 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 its 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.
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 (loss).
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 December 31, 2020, $0.4 million of our $115.5
million of cash, cash equivalents and restricted cash balance was located outside the United States.
The following table presents the components of total cash, cash equivalents, and restricted cash as set forth in the Company’s consolidated statements
of cash flows:
Inventories
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash
December 31,
2020
2019
$
$
113,683
1,853
115,536
$
$
71,655
1,852
73,507
Inventories consist of finished goods and component parts and are valued at the lower of cost or net realizable value, determined by the first-in, first-
out (“FIFO”) method. On a quarterly basis, the Company evaluates the carrying costs of both finished goods and component part items. To the extent that such
costs exceed future demand estimates, exhibit historical turnover at rates less than current inventory levels, or exceed estimated selling prices less costs to sell, the
Company reduces the carrying value of inventories to its net realizable value. The Company only capitalizes pre-launch inventories when purchased for
commercial sale and it deems regulatory approval to be probable.
Public Offering Costs
The Company incurs public offering costs consisting of legal, accounting and other costs directly attributable to the Company’s public offerings and
defers such costs until the closing of the offerings. Upon closing of offerings, such costs are netted against the proceeds received. As of December 31, 2020 and
2019, no amounts were deferred.
F-10
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recognized over the estimated useful lives of the related assets on a straight-line basis.
Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the remaining lease term or the estimated useful lives of the
improvements and is included in depreciation expense. Demonstration equipment represents internally manufactured capital equipment that is used on-site at trade
shows and at customer locations to demonstrate the Precision Flow system. Depreciation expense on demonstration equipment is recorded in sales and marketing
expense in the consolidated statements of comprehensive loss. Placement and evaluation systems represent capital equipment placed at customer locations under
placement or evaluation agreements for which depreciation expense is included in cost of revenue in the accompanying consolidated statements of comprehensive
loss.
When impairment indicators are present, the Company evaluates the recoverability of its long-lived assets. If the assessment indicates an impairment,
the affected assets are written down to fair value. There were no impairments during 2020 or 2019.
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.
The lives used in computing straight-line depreciation are as follows:
Equipment
Furniture
Manufacturing equipment
Software
Demonstration, placements and
evaluation units
Leasehold improvements
Number of Years
3 - 7
5 - 7
3 - 10
3
3 - 5
Lesser of life of lease or 10 years
Intangible Assets
Intangible assets are related to customer relationships, developed technology, customer agreements, trademarks and trade names and 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 for
customer-related intangible assets while amortization of other intangible assets is included within general and administrative expenses in the consolidated
statements of comprehensive loss. Intangible assets are evaluated for impairment whenever events or circumstances indicate an asset may be impaired. There were
no impairments of intangible assets during 2020 or 2019.
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.
The Company compares the fair value of its 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, the Company would record an impairment loss equal to the difference. There was no impairment of goodwill during
2020 or 2019.
Leases
The Company’s operating leases primarily consist of real estate leases for office, manufacturing, research and development, and warehouse space, as
well as certain vehicle and equipment leases. Prior to adopting ASU 2016-02, Leases (Topic 842) (“ASC 842”) effective January 1, 2020, the Company followed
the lease accounting guidance as issued in ASC 840, Leases (“ASC 840”). Under ASC 840, the Company classified its leases as operating or capital leases based on
evaluation of certain criteria of the lease agreement. For leases that contained rent escalations or rent holidays, the Company recorded the
F-11
total rent expense during the lease term on a straight-line basis over the lease term and recorded the difference between the lease payments and the straight-line rent
expense as deferred rent on the balance sheet. Any tenant improvement allowances received from the lessor were recorded as a reduction to rent expense over the
lease term.
ASC 842 requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset, subject to certain permitted
accounting policy elections. Under ASC 842, the Company determines whether a contract is or contains a lease at the inception of the contract. This determination
is based on whether the contract provides the Company the right to control the use of a physically distinct asset and substantially all of the capacity of an
asset. Leases with an initial noncancelable term of twelve months or less that do not include an option to purchase the underlying asset that the Company is
reasonably certain to exercise are classified as short-term leases. The Company has elected as an accounting policy to exclude from the consolidated balance sheets
the right-of-use assets and lease liabilities related to short-term leases. The Company recognizes rent expense for its operating leases on a straight-line basis over
the term of the lease.
Certain of the Company’s leases include options to extend or terminate the lease at its sole discretion. The Company does not consider in the
measurement of right-of-use assets and lease liabilities an option to extend or terminate a lease if the Company is not reasonably certain to exercise the option. As
of December 31, 2020, the Company has not included any options to extend its leases in its measurement of the related right-of-use assets or lease liabilities as the
Company is not reasonably certain it will exercise the options.
Certain of the Company’s leases include covenants that oblige the Company, at its sole expense, to repair and maintain the leased asset periodically
during the lease term. The Company is not a party to any leases that contain residual value guarantees.
Many of the Company’s leases include fixed and variable payments. Among other charges, variable payments related to real estate leases include real
estate taxes, insurance, operating expenses, and common area maintenance, which are usually billed at actual amounts incurred proportionate to the Company’
rented square feet of the building. Variable payments related to vehicle and equipment leases relate to usage of the underlying asset, sales and use tax, and value-
added tax. Variable payments that do not depend on an index or rate are expensed as incurred and are not included in the measurement of the lease liability.
In accordance with the guidance in ASC 842, components of a lease should be split into three categories: lease components (e.g. buildings, vehicles,
etc.), non-lease components (e.g. common area maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.). The fixed and in-
substance fixed contract consideration (including any related to non-components) must be allocated to the lease components and non-lease components based on
their relative fair values. The Company elected the accounting policy to not separate lease and non-lease components for its real estate, vehicle, and equipment
leases. Therefore, each lease component and the related non-lease components and non-components are accounted for together as a single component.
The Company measures its lease liability for each leased asset as the present value of lease payments, as defined in ASC 842, discounted using a
discount rate specific to the terms of the underlying lease. The Company’s right-of-use assets are equal to the related lease liabilities, adjusted for lease incentives
received including tenant improvement allowances, initial direct costs incurred related to the lease, and payments made to the lessor prior to the lease
commencement date. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company estimates its incremental borrowing
rate for each leased asset based on the interest rate the Company would incur to borrow an amount equal to the lease payments on a collateralized basis over a
similar term in a similar economic environment.
F-12
Product Warranty
The Company provides its customers with a standard one-year warranty on its capital equipment sales. Warranty costs are accrued based on actual
historical trends and estimated at time of sale. The warranty liability is included within accrued expenses and other liabilities in the consolidated balance sheets. A
roll-forward of the Company’s warranty liability is as follows:
Balance at December 31, 2018
Provisions for warranty obligations
Settlements
Balance at December 31, 2019
Provisions for warranty obligations
Settlements
Balance at December 31, 2020
Deferred Financing Costs
$
$
329
125
(229)
225
636
(300)
561
Direct financing costs are deferred and amortized as a component of interest expense, over the term of the related debt. The long-term portion of the
balance of unamortized deferred financing costs related to Company’s term loan is presented as a reduction of the related borrowing arrangement liability and totals
$0.3 million and $0.8 million at December 31, 2020 and 2019, respectively. The unamortized deferred financing costs related to the Company’s revolving facility
are recorded in prepaid expenses and other current assets and other long-term assets in the Company’s consolidated balance sheet totaling $0.1 million and less than
$0.1 million, respectively, at December 31, 2020. There were no unamortized deferred financing costs recorded in prepaid expenses and other current assets or
other long-term assets at December 31, 2019.
Insurance
Effective January 1, 2020, the Company became self-insured for certain obligations related to health insurance. The Company also purchases stop-
loss insurance to protect itself from material losses. Judgments and estimates are used in determining the potential value associated with reported claims and for
events that have occurred but have not been reported. The Company’s estimates consider expected claim experience and other factors. Receivables for insurance
recoveries are recorded as assets, on an undiscounted basis. The Company’s liabilities are based on estimates, and, while the Company believes that its accruals are
adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in claims experience, the Company’s ability to settle claims or
other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.
Revenue Recognition
The Company’s revenue is primarily derived from the sale of products, leases and services. Product revenue consists of capital equipment and single-
use disposables that are shipped and billed to customers both domestically and internationally. The Company’s main capital equipment products are the Precision
Flow systems, the Vapotherm Transfer Unit 2.0 and Q50 compressor. The Company’s main disposable products are single-use disposables and nasal interfaces, or
cannulas, and adaptors. Lease revenue consists of two components which include capital equipment that the Company leases to its customers and, in certain
situations, an allocation from disposable revenue to other lease revenue upon the sale of disposable products in bundled arrangements involving the placement of
Precision Flow capital units for use by the customer at no upfront charge in connection with the customer’s ongoing purchase of disposable products. Service
revenue consists of fees associated with routine service of capital units and the sale of extended service contracts and preventative maintenance plans, which are
purchased by a small portion of the Company’s customer base. In addition, the Company sells small quantities of component parts in the United States, United
Kingdom and to third-party international service centers who provide service on Precision Flow capital units outside of the United States and United Kingdom.
Freight revenue is based upon actual freight costs plus a percentage markup of such costs associated with the shipment of products domestically, and to a lesser
extent, internationally, and is included in service revenue. Rebates and fees consist of contractually obligated administrative fees and percentage-of-sales rebates
paid to Group Purchasing Organizations (“GPOs”), Integrated Delivery Networks (“IDNs”) and distributor partners and accounted for as a reduction of service
revenue.
F-13
Under the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codifications (“ASC”) 606, Revenue from Contracts with
Customers (“ASC 606”), revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which
the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within
the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or
as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the
consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within
the scope of ASC 606, the Company assesses the goods or services promised within each contract and assesses whether each promised good or service is distinct
and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the
respective performance obligation when (or as) the performance obligation is satisfied. Sales, value-added, and other taxes collected on behalf of third parties are
excluded from revenue. The Company’s standard payment terms are generally 30 days from the date of sale.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each
performance obligation based on the estimated relative stand-alone selling prices of the promised products or services underlying each performance obligation. The
Company determines stand-alone selling prices based on the price at which the performance obligation is sold separately. If the stand-alone selling price is not
observable through past transactions, the Company estimates the stand-alone selling price taking into account available information such as market conditions and
internally approved pricing guidelines related to the performance obligations. Revenue is generally recognized when the customer obtains control of the Company’s
product, which generally occurs at a point in time upon shipment based on the contractual shipping terms of a contract.
Product and service revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or
services to a customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should
be included in the transaction price utilizing the expected value amount method to which the Company expects to be entitled. As such, revenue on sales is recorded
net of prompt pay discounts and payments made to GPOs, IDNs and distributors. Variable consideration is included in the transaction price if, in the Company’s
judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determination of whether to include estimated
amounts in the transaction price is based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted)
that is reasonably available. The Company believes that the estimates it has established are reasonable based upon current facts and circumstances. Applying
different judgments to the same facts and circumstances could result in different estimates.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or
significantly after performance, resulting in a significant financing component. Applying a practical expedient under ASC 606, the Company does not assess
whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays
is one year or less. None of the Company’s contracts contained a significant financing component during the years ended December 31, 2020 or 2019.
The Company’s contracts with its customers have a duration of less than one year. Therefore, the Company has elected to apply a practical expedient
and recognizes the incremental costs of obtaining contracts as an expense. These costs are included in sales and marketing expense in the accompanying
consolidated statements of comprehensive loss.
Lease Revenue
The Company also enters into agreements to lease its capital equipment. For such sales, the Company accounts for revenue under ASC 842 and
assesses and classifies these transactions as sales-type or operating leases based on whether the lease transfers ownership of the equipment to the lessee by the end
of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term.
Equipment included in arrangements including transfer of title are accounted for as sales-type leases and the Company recognizes the present value of the lease
payments due over the lease term as revenue at the inception of the lease. The Company records the present value of future lease payments in prepaid expenses and
other current assets in the accompanying consolidated balance sheets; these amounts totaled $2.7 million and $0.9 million at December 31, 2020 and 2019,
respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the sales-type or direct financing lease criteria, are accounted
for as operating leases and revenue is recognized on a straight-line basis over the term of the lease. Prior to the adoption of ASC 842 effective January 1, 2020, the
Company accounted for such transactions under ASC 840 and there was no change in the Company’s accounting for such transactions upon the adoption of ASC
842.
The Company also enters into agreements involving the placement of Precision Flow capital units for use by the customer at no upfront charge in
connection with the customer’s ongoing purchase of disposable products. In these bundled arrangements, revenue recognized for the sale of the disposables is
allocated between disposable revenue and other lease revenue based on the estimated relative stand-alone selling prices of the individual performance obligations.
F-14
Shipping and Handling Costs
Amounts billed to customers for shipping and handling are included in service revenue. Shipping and handling costs are included in costs of sales.
The total costs of shipping and handling for the years ended December 31, 2020 and 2019 totaled $2.5 million and $1.0 million, respectively.
Sales and Value-Added Taxes
When required by local jurisdictions, the Company bills its customers for sales tax and value-added tax calculated on each sales invoice and records a
liability for the sales and value-added tax payable, which is included in accrued expenses and other liabilities in the consolidated balance sheets. Sales tax and
value-added tax billed to a customer are not included in the Company’s revenue.
Research and Development Costs
Research and development costs are expensed when incurred and are related primarily to product design, prototype development and testing, the
investigation of possible follow-on product enhancements and new product releases, and investigation of complementary technologies potentially available to
enhance the Company’s offerings in the marketplace.
Stock-Based Compensation
The Company maintains an equity incentive plan to provide long-term incentives for employees, consultants, and members of the board of directors.
The plan allows for the issuance of non-statutory and incentive stock options, restricted stock, unrestricted stock, stock units, including restricted stock units, and
stock appreciation rights to employees, consultants and non-employee directors. The Company recognizes stock-based compensation expense for awards of equity
instruments to employees and non-employees based on the grant date fair value of those awards in accordance with ASC Topic 718, Stock Compensation (“ASC
718”). ASC 718 requires all equity-based compensation awards, including grants of restricted shares and stock options, to be recognized as expense in the
consolidated statements of comprehensive loss based on their grant date fair values.
The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model. The fair value is then amortized on a
straight-line basis over the requisite service period of the awards, which is generally the vesting period. For performance-based awards, the related compensation
cost is amortized over the performance period on an accelerated attribution basis. Compensation cost associated with performance awards is based on fair value on
the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated
targeted payout level that is forecasted will be achieved. Cumulative adjustments are recorded each quarter to reflect estimated outcomes of the performance-
related conditions until the results are determined and settled. Use of a valuation model requires management to make certain assumptions with respect to selected
model inputs, including the expected life (weighted average period of time that the options granted are expected to be outstanding), the volatility of the Company’s
common stock and an assumed risk-free interest rate. Expected volatility is calculated based on historical volatility of a group of publicly traded companies that the
Company considers a peer group. The expected life is estimated using the simplified method for “plain vanilla” options. The risk-free interest rate is based on U.S.
Treasury rates with a remaining term that approximates the expected life assumed at the date of grant. No dividend yield is assumed as the Company does not pay,
and does not expect to pay, dividends on its common stock. The Company estimates forfeitures based on historical experience with pre-vested forfeitures. To the
extent actual forfeitures differ from the estimate, the difference is recorded to compensation expense in the period of the forfeiture.
The Company recognizes stock-based expense for shares of its common stock issued pursuant to its 2018 Employee Stock Purchase Plan (“ESPP”) on
a straight-line basis over the related offering period. The Company estimates the fair value of shares to be issued under the ESPP based on a combination of options
valued using the Black-Scholes option pricing model. The expected life is determined based on the contractual term. Dividend yield and forfeiture rates are
estimated in a manner similar to option grants described above and expected volatility is based on the Company’s historical volatility.
Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for
the period. Diluted net income (loss) per share is computed by dividing the diluted net income (loss) by the weighted average number of common shares
outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding options, unvested restricted common shares,
unissued employee stock purchase plan shares, and warrants are considered potential dilutive common shares. The Company reported a net loss for the years ended
December 31, 2020 and 2019.
F-15
Income Tax
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred taxes
are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the
likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it
is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense.
Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning
strategies.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to
determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external
examination by the taxing authorities. If the tax position is deemed more likely-than-not to be sustained, the tax position is then assessed to determine the amount
of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50%
likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax
benefits, that are considered appropriate as well as the related net interest and penalties.
Recently Issued Accounting Pronouncements
The Jumpstart Our Business Startups Act (the “JOBS Act”) allows an emerging growth company (“EGC”) to delay adoption of new or revised
accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies. Since the Company was an
EGC prior to December 31, 2020, the Company had elected to use the adoption dates applicable to private companies. As a result, the Company’s consolidated
financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting
standards that are applicable to public companies. Since the Company no longer qualifies as an EGC as of December 31, 2020, it will adopt future accounting
pronouncements at dates applicable to public companies.
Leases (Topic 842):
In February 2016, the FASB issued ASC 842, which was amended by subsequent ASUs, to enhance the comparability and usefulness of financial
reporting around leasing activity. The new standard supersedes the existing authoritative literature for lease accounting under ASC 840, with a focus on applying a
“right-of-use model.” The guidance for leases under ASC 842 results in a right-of-use asset and lease liability being reported on the balance sheet for leases with an
original lease term greater than twelve months. The new standard clarifies the definition of a lease and requires a dual approach to lease classification similar to
current lease classifications. ASC 842 was effective for public companies for annual periods beginning after December 31, 2018, and for private companies or
EGCs following private company adoption dates for annual periods beginning after December 15, 2021 and interim periods beginning after December 15, 2022.
The Company adopted the standard as of January 1, 2020 using the alternative modified retrospective transition approach in accordance with ASU 2018-11, Leases
(Topic 842): Targeted Improvements. The Company elected the package of practical expedients permitted under the standard that provides no need to reassess
whether any expired or existing contracts contain a lease, the related lease classification for such expired or expiring leases, and the initial direct costs for existing
leases. The cumulative effect of the transition adjustments was recognized as of the date of adoption.
Under the alternative modified retrospective transition approach, the reported results for 2020 reflect the application of ASC 842 guidance, whereas
comparative periods and their respective disclosures prior to the adoption of ASC 842 are presented using the legacy guidance of ASC 840. As a result of adopting
the new standard, the Company recognized right-of-use assets of $6.4 million and lease liabilities of $6.7 million as of January 1, 2020. The difference between the
amount of right-of-use assets and lease liabilities recognized includes adjustments to prepaid rent and deferred rent. There was no change to net deferred tax
balances as a result of the Company’s adoption of ASC 842. The adoption of ASC 842 did not impact the Company’s results of operations or cash flows.
F-16
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 November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses
(Topic 326), Derivative and Hedging (Topic 815) and Leases (Topic 842), which defers the effective date for ASU 2016-13 to interim and annual periods
beginning after December 15, 2022 for private companies, EGCs following private company adoption dates, or public entities meeting the definition of smaller
reporting companies as of the date of issuance of this update. Since the Company met the definition of an EGC following private company adoption dates at the
time of issuance of this standard, the Company is not required to adopt ASU 2016-13 until January 1, 2023. The Company has not yet determined the effects, if
any, that the adoption of ASU 2016-13 may have on its financial position, results of operations, cash flows, or disclosures.
3. Business Combinations
HGE
On November 13, 2020, the Company completed the acquisition of all outstanding membership interests of HGE, whose principal assets included
intangible assets related to customer relationships, developed technology, trademarks and trade names. The Company undertook the acquisition to expand its
capabilities by providing a remote monitoring platform which is designed to empower respiratory patients with COPD and providers to manage day-to-day
symptoms, prevent exacerbations, lower costs and improve patient quality of life.
The purchase price, net of cash acquired, of $21.6 million was funded with an initial cash payment of $8.4 million and $13.2 million of contingent
consideration. The contingent consideration is payable in cash or common stock, at the sole discretion of the Company, and will be remitted in future milestone
payments, one following calendar year 2021, one following calendar year 2022, and one following calendar year 2023. The final three payments will be adjusted up
or down based on the revenue performance of certain HGE service offerings during those three years. The acquisition has been accounted for as an acquisition of a
business.
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 November 13, 2020:
Cash
Accounts receivable
Inventory
Prepaids and other current assets
Property and equipment
Operating lease right-of-use assets
Goodwill
Intangible assets
Other long-term assets
Total assets acquired
Accounts payable
Accrued expenses and other liabilities
Other long-term liabilities (operating lease liability)
Total liabilities assumed
Total purchase price
$
$
2
518
3
238
225
2,329
15,620
5,520
45
24,500
(32)
(651)
(2,255)
(2,938)
21,562
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 may be subject to change as additional information is received. The Company expects to finalize the purchase
price allocation as soon as practicable, but not later than one year from the acquisition date.
F-17
The fair value of the intangible asset associated with customer relationships was estimated using a discounted cash flow method with the application
of the multi-period excess earnings method. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows
attributable to only the subject intangible assets after deducting contributory asset charges. An income and expense forecast was built based upon specific
intangible asset revenue and expense estimates. The fair value of the intangible asset associated with developed technology, trademarks and trade names were
valued using the relief from royalty method. Under this method, an intangible asset’s fair value is equal to the present value of the estimated after-tax royalty
savings generated over the life of the assets. Royalty rates were selected based on market review of third-party licensing arrangements. The fair value of the
contingent consideration was valued based on a Monte-Carlo simulation of HGE’s estimated future revenue and earnings before interest, taxes, depreciation and
amortization, discounted to its present value.
The rate used to discount the estimated future net cash flows to their present values for each intangible asset was based upon a weighted average cost
of capital calculation. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on
invested capital and the risk associated with achieving forecasted sales related to the assets acquired from HGE.
The amortization period for each of the intangible assets is 10 years. The intangible assets are being amortized on a straight-line basis, which is
consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such
assets. Goodwill associated with the acquisition was primarily attributable to the expansion opportunity of the remote monitoring platform for respiratory patients
and providers. The goodwill is deductible for tax purposes.
The Company has included the financial results of HGE in the consolidated financial statements from the date of acquisition. Net revenue and net loss
related of HGE since the date of acquisition totaled $0.4 million and $0.4 million, respectively. The transaction costs associated with the acquisition were
approximately $0.2 million and were recorded in general and administrative expense as incurred during 2020.
Solus
On February 28, 2019, the Company completed the acquisition of all outstanding equity securities of 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 settlement of a $0.4 million receivable from a
preexisting relationship. Additionally, the Company recognized $1.0 million in contingent consideration as compensation expense during both 2020 and 2019. The
acquisition has been accounted for as an acquisition of a business.
The following table summarizes the purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities
assumed as of February 28, 2019:
Cash
Accounts receivable
Inventory
Prepaids and other assets
Property and equipment
Goodwill
Intangible assets
Total assets acquired
Accounts payable and accrued expenses
Contract liabilities
Deferred taxes
Total liabilities assumed
Total purchase price
$
$
466
411
492
3
1
592
455
2,420
(241)
(75)
(78)
(394)
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.
F-18
In determining the purchase price allocation, the Company considered, among other factors, the opportunity provided by a customer agreement with
the U.K. 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.
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 during 2019.
Pro Forma Financial Information (Unaudited)
The following unaudited pro forma information for the years ended December 31, 2020 and 2019 presents consolidated information as if the HGE and
Solus acquisitions occurred on January 1, 2019, which is the first day of the Company’s fiscal year 2019:
Net revenue
Net loss
Net loss per share, basic
4. Fair Value Measurements
Year Ended December
31,
2020
Year Ended
December 31,
2019
$
$
$
127,373 $
(54,413) $
(2.28) $
49,116
(53,163)
(2.86)
In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company generally defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses a three-
tier fair value hierarchy, which classifies the inputs used in measuring fair values. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are described below:
•
•
•
Level 1 – inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date.
Level 2 – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or
liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 – inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the
measurement date.
F-19
As of December 31, 2020 and 2019, the Company had two items, cash equivalents and contingent consideration, measured at fair value on a recurring
basis. The Company’s cash equivalents primarily consist of money market deposits which total approximately $90.3 million and $70.8 million at December 31,
2020 and 2019, respectively, and are valued based on Level 1 of the fair value hierarchy. The Company’s contingent consideration which totals $13.2 million at
December 31, 2020 relates to the 2020 acquisition of HGE and is valued based on Level 3 of the fair value hierarchy as describe in Note 3 “Business
Combinations.”
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 10 “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
Risk free interest rate
Expected stock price volatility
Expected term (years)
5. Accounts Receivable
Accounts receivable consists of the following:
United States
International
Total accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net of allowance for doubtful accounts
December 31,
2020
2019
$
$
18,893 $
4,967
23,860
(372)
23,488 $
0.0%
2.4%
60.9%
10.0
5,574
2,908
8,482
(239)
8,243
No individual customers accounted for 10% or more of revenue or accounts receivable as of or for the years ended December 31, 2020 or 2019.
6. Inventories
Inventories consist of the following:
Component parts
Finished goods
December 31,
2020
2019
$
$
10,367 $
9,506
19,873 $
4,948
4,189
9,137
F-20
7. Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. A summary of the components of property and equipment
is as follows:
Equipment
Furniture
Manufacturing equipment
Software
Demonstration, placements and evaluation units
Leasehold improvements
Construction in process
Total property and equipment
Less: Accumulated depreciation and amortization
Total property and equipment, net
December 31,
2020
2019
$
$
1,266 $
1,320
10,658
845
16,116
2,482
2,386
35,073
(14,500)
20,573 $
1,050
989
9,394
718
10,215
2,085
612
25,063
(9,977)
15,086
Depreciation of property and equipment was $4.6 million and $3.0 million during the years ended December 31, 2020 and 2019, respectively.
Depreciation expense included in cost of revenue was $3.2 million and $1.9 million during the years ended December 31, 2020 and 2019, respectively.
8. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill and intangible assets during 2019 and 2020 are as follows:
Balance at December 31, 2018
Acquired during the period
Amortization
Foreign currency exchange rate changes
Balance at December 31, 2019
Acquired during the period
Amortization
Foreign currency exchange rate changes
Balance at December 31, 2020
The following table presents a summary of acquired intangible assets:
Customer relationships
Developed technology
Customer agreements
Trade name / marks
Total intangible assets
Goodwill
Intangible
Assets
$
$
$
- $
592
-
(4)
588 $
15,620
-
18
16,226 $
-
455
(95)
(7)
353
5,520
(183)
4
5,694
As of December 31, 2020
Weighted
Average
Amortization
Period
in Years
10.00
10.00
3.83
10.00
9.53
$
$
Gross
Carrying
Amount
Accumulated
Amortization
2,650 $
2,490
452
380
5,972 $
(33)
(31)
(209)
(5)
(278)
The Company recognized $0.1 million of amortization expense within sales and marketing expenses related to the intangible assets during both the
years ended December 31, 2020 and 2019. The Company also recognized less than $0.1 million of amortization expense within general and administrative
expenses related to intangible assets during the year ended December 31, 2020 with no such amounts being recorded within general and administrative expenses
during the year ended December 31, 2019.
F-21
The estimated amortization expense for intangible assets for future years is as follows:
Estimated Amortization Expense:
2021
2022
2023
2024
2025
Thereafter
Total
9. Accrued Expenses and Other Liabilities and Other Long-Term Liabilities
Accrued expenses and other liabilities consist of the following:
Accrued commissions
Accrued bonuses
Contingent consideration, current portion
Deferred revenue
Accrued taxes
Accrued employee-related costs
Operating lease liabilities, current portion
Accrued inventory
Accrued professional fees
Accrued vacation liability
Product warranty reserve
Accrued freight
Accrued rent and restoration costs
Refundable purchase price of unvested stock
Other
Total accrued expenses and other liabilities
Other long-term liabilities consist of the following:
Contingent consideration
Operating lease liabilities
Deferred payroll taxes
Other
674
674
552
552
552
2,690
5,694
1,100
3,071
-
344
984
381
-
210
1,085
490
225
75
208
212
802
9,187
-
-
-
174
174
$
December 31,
2020
2019
11,689 $
6,584
5,322
2,518
1,717
1,579
1,572
1,423
1,156
793
561
283
252
161
941
36,551 $
December 31,
2020
2019
7,865 $
6,779
572
13
15,229 $
$
$
$
$
10. Debt
Revolving Credit Line
On November 16, 2016, the Company entered a Business Financing Agreement (the “Revolver Agreement”) with Western Alliance Bank, 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 was 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 Company entered into an amendment to the Revolver
Agreement on September 30, 2020, extending the maturity date to April 6, 2023. The principal was due upon maturity. At December 31, 2019, the outstanding
balance under the Amended Revolver Agreement was $3.5 million.
F-22
On October 21, 2020 (the “Closing Date”), the Company entered into a loan and security agreement with Canadian Imperial Bank of Commerce
Innovation Banking (“CIBC”) (the “Loan and Security Agreement”). The Loan and Security Agreement provides for a revolving loan facility of $12.0 million (the
“Revolving Facility”) and a term loan facility of $40.0 million (the “Term Facility” and, together with the Revolving Facility, the “Facilities”). The proceeds of the
Facilities were used to repay the Company’s existing revolving loan facility and term loan facility.
The Revolving Facility will mature on October 21, 2022 and may be renewed on an annual basis thereafter by mutual agreement of the Company and
CIBC. The Revolving Facility bears interest at a floating rate per annum equal to the Wall Street Journal (“WSJ”) Prime Rate plus 1.0% and is subject to a floor of
3.25%. At December 31, 2020, the interest rate was 4.25%. The outstanding balance under the Revolving Facility was $4.9 million at December 31, 2020 and the
remaining availability based on eligible receivables was $7.1 million.
Term Loans
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 Company’s prior financing 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 had an exercise price of $15.92 per share, were fully vested upon issuance, were 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 had an exercise price of $15.92 per share, were fully vested upon issuance, were
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 had an exercise price
of $15.92 per share, were fully vested upon issuance, were exercisable at the option of the holder, in whole or in part, and expire in September 2028.
On March 22, 2019, the Company drew the remaining $10.5 million. In connection with this draw down, the Company granted Perceptive warrants to
purchase 19,790 shares of common stock. The warrants had an exercise price of $15.92 per share, were fully vested upon issuance, were 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, 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. On June 10, 2020, Perceptive exercised all of
its outstanding warrants. See Note 13 “Warrants” for further details.
Pursuant to the Amended Credit Agreement and Guaranty, the outstanding principal amount accrued interest at an annual rate equal to 9.06% plus the
greater of (a) one-month LIBOR or (b) 1.75% per year. At December 31, 2019, the interest rate was 10.81%. The outstanding balance, including accretion of the
additional final payment due upon maturity and described below, was $42.6 million at December 31, 2019 and there was no remaining availability.
The Amended Credit Agreement and Guaranty, which was scheduled to mature in 2023, required that upon maturity, in addition to the payment of
principal and accrued interest, the Company make a payment of 0.5% of the total amount borrowed under the Amended Credit Agreement and Guaranty unless the
Company has already made such a payment in connection with an acceleration or prepayment of borrowings under the agreement. In the event the Company
prepaid all or part of this term loan facility prior to the maturity date, the Company would be subject to additional prepayment fees which would decrease as the
time to maturity decreases.
On October 21, 2020, the Company refinanced its debt with CIBC and used $40 million of the Term Facility, approximately $4.9 million of the
Revolving Facility and approximately $6.3 million of cash on hand to pay off all obligations owing under, and to terminate, both the Amended Credit Agreement
and Guaranty and the Revolver Agreement, which included a prepayment penalty and exit fees of $3.7 million. As a result of the termination of the Amended
Credit Agreement
F-23
and Guaranty and the Revolver Agreement, the Company recorded a loss on extinguishment of debt of $4.2 million, which included the prepayment penalty, exit
fees, write-off of the remaining unamortized deferred financing costs, and legal fees.
The Term Facility will mature on October 21, 2025. Advances under the Term Facility bear interest at a floating rate equal to the WSJ Prime Rate
plus 2.5% and is subject to a floor of 3.25%. At December 31, 2020, the interest rate was 5.75%. The outstanding balance was $40.0 million at December 31, 2020
and there was no remaining availability. The Loan and Security Agreement provides for interest-only payments on the Term Facility for the first 36 months
following the Closing Date. Thereafter, amortization payments on the Term Facility will be payable monthly in 24 equal installments. The Term Facility may not
be prepaid prior to the first anniversary of the Closing Date without prepaying all of the interest that otherwise would have been payable on the Term Facility
during the period commencing on the Closing Date and ending on the first anniversary of the Closing Date plus a prepayment charge of 2.0%. Thereafter, the Term
Facility may be prepaid in full, subject to a prepayment charge of (i) 2.0%, if such prepayment occurs after the first anniversary of the Closing Date but on or prior
to the second anniversary of the Closing Date, and (ii) 1.0%, if such prepayment occurs after the second anniversary of the Closing Date but on or prior to the third
anniversary of the Closing Date. The Term Facility and Revolving Facility are secured by a lien on substantially all of the assets of the Company, including
intellectual property.
The Loan and Security Agreement contains customary covenants and representations, including, without limitation, a minimum revenue covenant
equal to 80% of each year’s annual operating plan (tested on a trailing twelve month basis at the end of each fiscal quarter) and other financial covenants, reporting
obligations, and limitations on dispositions, changes in business or ownership, mergers or acquisitions, indebtedness, encumbrances, distributions and investments,
transactions with affiliates and capital expenditures.
The events of default under the Loan and Security Agreement include, without limitation, and subject to customary grace periods, (1) the Company’s
failure to make any payments of principal or interest under the Loan and Security Agreement or other loan documents, (2) the Company’s breach or default in the
performance of any covenant under the Loan and Security Agreement, (3) the occurrence of a material adverse effect or an event that is reasonably likely to result
in a material adverse effect, (4) the existence of an attachment or levy on a material portion of funds of the Company or its subsidiaries, (5) the Company’s
insolvency or bankruptcy, or (6) the occurrence of certain material defaults with respect to any other indebtedness of the Company in excess of $500,000. If an
event of default occurs, CIBC is entitled to take enforcement action, including acceleration of amounts due under the Loan and Security Agreement. The Loan and
Security Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. CIBC has indemnification rights and the right to
assign the Facilities, subject to customary restrictions.
As of December 31, 2020, the Company was in compliance with all covenants.
The annual principal maturities of the Company’s Term Facility as of December 31, 2020 are as follows:
2021
2022
2023
2024
2025
Less: Unamortized deferred financing costs
Long-term loans payable
$
$
-
-
3,200
19,200
17,600
(347)
39,653
11. Commitments and Contingencies
Lease Commitments
In May 2016, the Company entered into a lease agreement for office and storage space at 100 Domain Drive, Exeter New Hampshire and has entered
into several amendments since then to lease additional space. In total, the Company occupies approximately 95,320 square feet of space at this facility and the
lease, as most recently amended, the lease is scheduled to expire on January 28, 2025. The Company has the option to renew the lease for two additional five year
terms by providing written notice twelve months prior to end of the initial or first lease extension term. The Company is not reasonably certain that it will renew the
lease beyond January 2025.
In October 2019, the Company entered into an assignation and variation agreement for a lease of 453 square meters of office and warehouse space at
2 Dryden Loan, Bilston Glen Industrial Estate, Loanhead in the United Kingdom. The lease term expires on February 15, 2022 and will automatically renew for an
additional five-year period unless the Company
F-24
terminates the lease by providing written notice to the to the landlord one month prior to the end of the current lease term. The Company is not reasonably certain
that it will renew the lease beyond February 2022.
In November 2020, in connection with the acquisition of HGE, the Company assumed a real estate lease for 22,524 square feet of office space at 1301
Virginia Drive, Fort Washington, Pennsylvania. The lease term expires on July 31, 2025. The Company has the option to renew the lease for one additional five-
year term by providing written notice six months prior to end of the current lease term. The Company is not reasonably certain that it will renew the lease beyond
July 2025.
The following table presents operating lease cost and information related to operating right-of-use assets and operating lease liabilities for the year
ended December 31, 2020:
Lease cost:
Operating lease cost
Variable lease cost
Total
Operating cash flow impacts:
Cash paid for amounts included in measurement of lease liabilities
Operating right of use assets obtained in exchange for new operating lease liabilities
Weighted average remaining lease term - operating leases
Weighted average discount rate - operating leases
$
$
$
1,717
379
2,096
1,731
2,965
4.2 years
8.0%
As of December 31, 2020, future maturities of lease liabilities under the Company’s noncancelable operating leases are as follows:
Years Ended December 31,
2020
2021
2022
2023
2024
Total payments
Less interest
Total present value of lease payments
Total Due
$
$
2,357
2,342
2,380
2,417
331
9,827
1,476
8,351
ASC-840
Rent expense for the year ended December 31, 2019 was $2.0 million. Deferred rent totaled $0.2 million at December 31, 2019 and is recorded in
accrued expenses and other liabilities in the accompanying consolidated balance sheet.
As of December 31, 2019, future minimum lease payments under the Company’s noncancelable operating leases under ASC 840 were are follows:
Years Ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
F-25
Total Due
$
$
1,621
1,645
1,630
1,652
1,679
140
8,367
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.
During 2019, the Company settled litigation with a former supplier. The parties reached a settlement agreement on December 16, 2019 whereby the supplier agreed
to pay the Company $0.65 million in a series of monthly payments through December 2021, and both the Company and the supplier agreed to release each from
any other outstanding claims, which included $0.5 million of accounts payable the Company had previously recorded. As a result, the Company recorded a gain of
$1.2 million in the consolidated statement of comprehensive loss during the fourth quarter of 2019.
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.
12. Stockholders’ Equity
Preferred Stock
As of December 31, 2020 and 2019, the Company has authorized 25,000,000 shares of preferred stock, at a par value of $0.001. As of December 31,
2020 and 2019, there are no shares of preferred stock outstanding.
Common Stock
As of December 31, 2020 and 2019, the Company has authorized 175,000,000 shares of common stock. The Company has 25,722,984 and
20,851,531 issued and outstanding shares of common stock as of December 31, 2020 and 2019, 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.
13. Warrants
The table below sets forth the Company’s warrant activity for the year ended December 31, 2020:
Outstanding at December 31, 2019
Warrants granted
Warrants exercised
Outstanding at December 31, 2020
Common Stock Warrants
Number of
Shares
182,076 $
-
(148,128)
33,948 $
Weighted
Average
Exercise
Price
14.84
-
15.04
14.00
All of the Company’s warrants outstanding at December 31, 2020 have an exercise price of $14.00 and expire at periods ranging from March 14,
2022 through July 28, 2025.
On June 10, 2020, a warrant to purchase 80,097 shares of common stock was exercised on a net exercise basis. Upon exercise, the exercise price of
$15.92 per share was satisfied through the Company’s withholding of 39,031 of the warrant shares and issuing 41,066 shares of common stock.
On July 10, 2020, a warrant to purchase 20,889 shares of common stock held was exercised on a net exercise basis. Upon exercise, the exercise price
of $14.00 per share was satisfied through the Company’s withholding of 6,902 of the warrant shares and issuing 13,987 shares of common stock to the holder.
On August 7, 2020, a warrant to purchase 4,285 shares of common stock held was exercised on a net exercise basis. Upon exercise, the exercise price
of $14.00 per share was satisfied through the Company’s withholding of 2,064 of the warrant shares and issuing 2,221 shares of common stock to the holder.
F-26
On October 1, 2020, a warrant to purchase 42,857 shares of common stock held was exercised on a net exercise basis. Upon exercise, the exercise
price of $14.00 per share was satisfied through the Company’s withholding of 20,689 of the warrant shares and issuing 22,168 shares of common stock to the
holder.
14. Disaggregated Revenue
The following table shows the Company’s net revenue disaggregated into categories the Company considers meaningful:
For the Year Ended December 31, 2020
International
US
Total
Net revenue by:
Product Revenue
Capital Equipment
Disposable
Subtotal Product Revenue
Lease Revenue
Capital Equipment
Other
Service and Other Revenue
Net Revenue
Net revenue by:
Product Revenue
Capital Equipment
Disposable
Subtotal Product Revenue
Lease Revenue
Service and Other Revenue
Net Revenue
$
$
$
$
$
45,464
44,548
90,012
5,698
1,659
1,792
99,161
$
$
12,719
12,163
24,882
72
352
1,266
26,572
$
$
$
58,183
56,711
114,894
5,770
2,011
3,058
125,733
For the Year Ended December 31, 2019
International
US
Total
6,144
27,753
33,897
1,721
965
36,583
$
$
3,180
7,302
10,482
-
1,039
11,521
$
$
9,324
35,055
44,379
1,721
2,004
48,104
United States and International net revenue is based on the customer location to which the product is shipped. No individual foreign country
represents more than 10% of the Company’s aggregated revenue.
Contract Balances from Contracts with Customers
Contract liabilities consist of deferred revenue and other contract liabilities associated with rebates and fees payable to GPOs, IDNs and distributor
partners. Deferred revenues are included in accrued expenses and other liabilities in the accompanying consolidated balance sheets. The following table presents
changes in contract liabilities during 2020:
Balance at December 31, 2019
Additions
Subtractions
Balance at December 31, 2020
15. Stock Plans and Stock-Based Compensation
Contract
Liabilities
Deferred
Revenue
137 $
459
(137)
459 $
344
3,137
(963)
2,518
$
$
On October 30, 2018, the Company’s Board of Directors adopted, and stockholders approved, the Vapotherm, Inc. 2018 Equity Incentive Plan (the
“2018 SI Plan”) which provides for the grant of stock options, stock appreciation rights, restricted and unrestricted stock and stock units, performance awards, and
other awards that are convertible into or otherwise based on the Company’s common stock. 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, and on August
31, 2020, the Company established a French Qualifying Subplan, which allows for the granting of not
F-27
only stock options to purchase shares of common stock but also restricted stock units for employees and officers who are residents of France, and superseded and
replaced the prior subplan. The options and restricted stock unit awards under the French Qualifying Subplan reside under the umbrella of the 2018 SI Plan.
Subject to customary anti-dilution adjustments, the number of shares of common stock that may be issued in satisfaction of awards under the 2018 SI
Plan was initially 998,900 shares, plus the number of shares (which will not exceed 769,419 shares) underlying awards under the Vapotherm, Inc. 2015 Stock
Incentive Plan (the “2015 SI Plan”), which plan was replaced by the 2018 SI Plan, that, on or after the effectiveness of the 2018 SI Plan, expire or are terminated,
surrendered or cancelled without the delivery of shares, are forfeited to or repurchased by the Company, or otherwise become available again for grant under the
2015 SI Plan. In addition, the number of shares of common stock available for issuance under the 2018 SI Plan is increased on the first day of each calendar year
beginning January 1, 2019 and each year thereafter until 2028 by the lesser of (i) four percent of the number of outstanding shares of common stock as of the close
of business on the immediately preceding December 31 or (ii) the number of shares determined by the Board of Directors on or prior to such date. As of December
31, 2020, 891,469 shares of common stock remain available for issuance under the 2018 SI Plan. To date, stock options, performance awards, restricted stock
awards and restricted stock units have been issued under the 2018 SI Plan.
Stock-based compensation expense was allocated based on the employees’ and non-employees’ functions as follows:
Cost of revenue
Research and development
Sales and marketing
General and administrative
Total
Year Ended
December 31,
2020
2019
$
$
351 $
1,807
1,151
3,121
6,430 $
187
405
782
2,462
3,836
During the years ended December 31, 2020 and 2019, the Company granted 19,387 and 17,644 shares of its common stock, respectively, to members of
its Board of Directors and consultants that were valued at the closing price of the Company’s common stock at the date of grant and were fully vested on the date of
grant.
Stock Options
Under the terms of the 2018 SI Plan, the exercise price of the options is determined by the Board of Directors at the time of grant. Options granted
under the 2018 SI Plan and prior plans, including the 2015 SI Plan, 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.
Stock option activity for the year ended December 31, 2020 is as follows:
Outstanding at December 31, 2019
Options granted
Options exercised
Options canceled
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Number of
Underlying
Common
Shares
1,030,148 $
991,718
(223,998)
(31,531)
1,766,337 $
488,878 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
8.91
13.49
2.65
15.84
12.15
9.07
8.18 $
5,544
8.32 $
6.97 $
26,294
8,725
Vested and unvested expected to vest at December
31, 2020
1,766,337 $
12.15
8.32 $
26,294
The weighted average grant date fair value of options granted during the years ended December 31, 2020 and 2019 was $9.90 and $9.20 per share,
respectively. The aggregate intrinsic value of options exercised during the year ended December 31, 2020 was $6.8 million. As of December 31, 2020, the
Company had unrecognized stock-based compensation expense related to its unvested stock options awards of $7.7 million, which is expected to be recognized
over the remaining weighted average vesting period of 2.8 years.
F-28
Certain members of the Company’s management elected to receive their option grants in the form of restricted stock, which contains vesting
provisions. Upon election of restricted stock, the Company records a liability for the unvested portion of the grant. As the restricted stock vests, the Company
reclassifies the liability into additional paid-in capital. During the first quarter of 2019, the Company modified certain previously granted performance awards
where the performance condition had not been met. The modification resulted in the granting of 68,526 shares of restricted stock for which 25% was immediately
vested with the remaining portion vesting over 36 months.
During 2016, the Company permitted the exercise of 79,865 stock options via nonrecourse notes. There were no exercises of stock options via
nonrecourse notes in 2019 or 2020. The nonrecourse notes were fully paid during 2019 and the related shares were issued.
The weighted average assumptions used in the Black-Scholes options pricing model are as follows:
Expected dividend yield
Risk free interest rate
Expected stock price volatility
Expected term (years)
Year Ended December 31,
2020
2019
0.0%
1.6%
87.6%
6.1
0.0%
1.9%
64.5%
6.2
The Company assumed an average forfeiture rates of 4.17% and 6.73% for the years ended December 31, 2020 and 2019, respectively, based on
historical experience with pre-vested forfeitures.
Restricted Stock Units and Restricted Stock Awards
The Company has granted both restricted stock units and restricted stock awards.
A summary of restricted stock unit activity for the year ended December 31, 2020 is as follows:
Unvested at December 31, 2019
Granted
Vested
Canceled
Unvested at December 31, 2020
A summary of restricted stock award activity for the year ended December 31, 2020 is as follows:
Unvested at December 31, 2019
Granted/purchased
Vested
Canceled
Unvested at December 31, 2020
Employee Stock Purchase Plan
Weighted
Average
Grant Date
Fair Value
-
25.71
23.93
28.21
25.60
Shares
-
238,757
$
(107)
(10,161)
$
228,489
Weighted
Average
Grant Date
Fair Value
1.68
-
1.68
-
1.68
Shares
229,913
-
$
(126,263)
-
103,650
$
On October 30, 2018, the Company’s Board of Directors adopted, and stockholders approved, the Vapotherm, Inc. 2018 Employee Stock Purchase
Plan.
F-29
Subject to customary anti-dilution adjustments, the number of shares of common stock that are available for issuance under the ESPP was initially
166,500 shares. The number of shares of common stock available for issuance under the ESPP is increased on the first day of each calendar year beginning January
1, 2019 and each year thereafter until 2028 by the lesser of (i) 1% of the number of shares of common stock issued and outstanding on the immediately preceding
December 31, or (ii) the number of shares of common stock determined by the Board of Directors up to such an initial maximum of 1,741,300 shares of common
stock. The number of shares of common stock reserved under the plan at December 31, 2020 totals 490,297.
The ESPP provides for successive discrete offering periods of approximately six months or as determined by the plan administrator. The first offering
period began on January 2, 2020 and ended on May 14, 2020. Subsequent offering periods begin on each November 15th and May 15th or the first trading day
thereafter. As of December 31, 2020, 58,140 shares of common stock were purchased by employees under the ESPP at an average price of $14.19 per share,
resulting in cash proceeds of $0.8 million.
The ESPP permits eligible employees to elect to purchase shares of common stock through fixed whole percentage contributions from eligible
compensation during each offering period, not to exceed 10% of the eligible compensation a participant receives during an offering period and not to accrue at a
rate which exceeds $25,000 of the fair value of the stock (determined on the grant date(s)) for each calendar year. A participant may purchase the lower of (a) a
number of shares of common stock determined by dividing such participant’s accumulated payroll deductions on the exercise date by the option price, (b) 5,000
shares, or (c) such other lesser maximum number of shares as shall have been established by the plan administrator.
Amounts deducted and accumulated by the participant will be used to purchase shares of common stock at the end of each offering period. The
purchase price of the shares will be 85% of the lower of the fair value of common stock on the first trading day of each offering period or on the purchase date.
Participants may end their participation during an offering period up to ten days in advance of the exercise date and will be paid their accumulated contributions
that have not been used to purchase shares of common stock. Participation ends automatically upon termination of employment.
The fair value of the purchase right for the ESPP option is estimated on the date of grant using the Black-Scholes pricing model with the following
assumptions during 2020:
Expected dividend yield
Risk free interest rate
Expected stock price volatility
Expected term (years)
16. Income Taxes
Net loss before income taxes is as follows:
United States
United Kingdom
0.0%
0.1% - 1.6%
93.0% - 131.0%
0.4 - 0.5
Year Ended
December 31,
2020
2019
$
$
(51,591) $
89
(51,502) $
(50,343)
(862)
(51,205)
During the year ended December 31, 2020, the Company did not record any income tax expense or benefit. During the year ended December 31,
2019, the Company recorded a tax benefit of approximately $0.1 million, related to foreign net deferred income tax assets deemed more likely than not to be
realized in the United Kingdom. There were no current foreign income taxes due to minimal foreign income for the year ended December 31, 2020, reduced by the
deferred tax asset impact related to the change in the United Kingdom income tax rate from 17% to 19%, and foreign net losses during the year ended December
31, 2019. Because the Company has historically incurred operating losses and maintains a full valuation allowance against its United States net deferred tax assets,
no tax benefit or provision was recorded on its United States results in either the year ended December 31, 2020 or 2019. The reported amount of income tax
benefit for both 2020 and 2019 differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of
changes in the valuation allowance.
F-30
A reconciliation of income tax expense is computed as the statutory federal income tax rate to income taxes as reflected in the financial statement as
follows:
Federal income tax benefit at statutory rate
Permanent differences
Change in valuation allowance
Other
Income tax expense
Significant components of the Company’s net deferred tax assets and liabilities are as follows:
Year Ended
December 31,
2020
2019
(21.0%)
(5.9%)
26.8%
0.1%
0.0%
(21.0%)
(6.7)%
26.9%
0.5%
(0.3%)
December 31,
2020
2019
Deferred Tax Assets
Net operating loss carryforwards
Deduction of research and development costs
Tax credit carryforwards
Accrued expenses
Operating lease liabilities
Stock option expense attributed to non-ISO stock
Accrued bonus and vacation
Inventory valuation reserves
Deferred revenue
Accounts receivable allowance
Accrued warranty
Other temporary differences
Gross deferred tax assets
Less: Valuation allowance
Deferred tax assets after valuation allowance
Deferred Tax Liabilities
Depreciation
Intangible assets
Operating lease right of use assets
Deferred revenue
Other temporary differences
Gross deferred tax liabilities
Net Deferred Tax Assets (Liabilities)
$
$
59,779 $
8,356
5,109
2,997
2,300
1,641
1,693
136
-
100
151
561
82,823
(79,236)
3,587
(1,220)
(28)
(2,300)
(45)
-
(3,593)
(6) $
51,303
5,985
4,109
1,976
-
1,098
703
280
230
63
61
492
66,300
(65,515)
785
(593)
(68)
-
-
(58)
(719)
66
The Company’s major tax jurisdictions are the United States, New Hampshire and the United Kingdom. As of December 31, 2020, the Company had
federal and state net operating loss carryforwards of $254.0 million and $110.3 million, respectively, which begin to expire in 2021. Federal net operating loss
carryforwards generated during or after the year ended December 31, 2018 will carryforward indefinitely. As of December 31, 2020, the Company had federal
research and development tax credits carryforwards of $5.0 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 generated from
our UK subsidiary, which are comprised principally of net operating loss carryforwards. Under the applicable accounting standards management has concluded that
the Company will realize the benefit of the subsidiary’s deferred tax asset.
Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its domestic 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
F-31
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 valuation
allowance of $79.2 million and $65.5 million has been established at December 31, 2020 and 2019, respectively. The valuation allowance increased $13.7 million
during the year ended December 31, 2020, due primarily to net operating losses generated.
Years prior to 2017 are generally closed due to statute of limitations for purposes of taxing jurisdictions assessing additional tax; however, the tax
attributes, including net operating losses and research credits, from such years can still be reviewed and reduced upon audit. Years beginning in 2017 remain open
to examination for both federal and state purposes.
The Company accounts for uncertain tax positions pursuant to ASC 740, Income Taxes, which prescribes a recognition threshold and measurement
process for financial statement recognition of uncertain tax positions taken or expected to be taken in a tax return. If the tax position meets this threshold, the
benefit to be recognized is measured as the tax benefit having the highest likelihood of being realized upon ultimate settlement with the taxing authority. The
Company recognizes interest accrued related to unrecognized tax benefits and penalties in the provision for income taxes. Management is not aware of any
uncertain tax positions. As of December 31, 2020, and 2019, the Company determined that there were no liabilities associated with uncertain tax positions and no
related interest and penalties. The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income taxes, when and
if incurred.
Utilization of the net operating loss and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 and 383 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 tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. The Company has not
currently completed an evaluation of ownership changes through December 31, 2020 or 2019 to assess whether utilization of the Company’s net operating loss and
tax credit carryforwards would be subject to an annual limitation under Section 382 and 383. To the extent an ownership change is determined to have occurred
under Section 382 and 383, the net operating loss and credit carryforwards may be subject to limitation.
17. Net Loss Per Share
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 for the periods indicated because including them would have had an anti-dilutive effect:
Options to purchase common stock
Unvested restricted stock units and awards
Employee stock purchase plan shares
Warrants to purchase common stock
18. Related Party Transactions
Year Ended
December 31,
2020
1,766,337
332,139
43,595
33,948
2,176,019
2019
1,030,148
229,913
-
182,076
1,442,137
See Note 10 “Debt” for a discussion of the Company’s Amended Credit Agreement and Guaranty and related transactions with Perceptive, a holder of
more than 5% of the Company’s common stock.
19. 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 100% of his or her compensation to the 401(k) Plan each year, subject to certain Internal Revenue Service limitations. The Company matches
employee contributions at a rate of 50% of the first 4% of employee contributions. In 2019, the employer match was capped at $1,000 per year for employees with
annual earnings less than $50,000 and $500 per year for employees with annual earnings greater than $50,000. In 2020, the employer match was capped at $1,000
per year for all employees. The Company contributed $0.3 million and $0.1 million during the years ended December 31, 2020 and 2019, respectively.
F-32
20. Selected Quarterly Financial Data (Unaudited)
The following table sets forth our unaudited quarterly operating results for each of the Company’s quarters in the years ended December 31, 2020 and
2019. In the opinion of management, the quarterly financial information reflects all necessary adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this data.
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expense, net
Net loss
Revenue
Cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other expenses, net
Net loss before income taxes
Benefit for income taxes
Net loss
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2020 Quarters
$
19,115
9,898
9,217
3,362
13,317
5,251
21,930
(12,713)
(1,131)
(13,844) $
$
35,152
17,544
17,608
3,895
14,858
5,627
24,380
(6,772)
(1,260)
(8,032) $
$
30,559
15,049
15,510
4,745
15,932
6,047
26,724
(11,214)
(1,228)
(12,442) $
$
40,907
20,196
20,711
4,954
20,958
7,114
33,026
(12,315)
(4,869)
(17,184) $
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2019 Quarters
$
12,299
7,120
5,179
3,273
9,161
4,879
17,313
(12,134)
(830)
(12,964)
-
(12,964) $
$
11,986
6,527
5,459
3,167
9,432
4,532
17,131
(11,672)
(1,208)
(12,880)
-
(12,880) $
$
10,809
5,999
4,810
3,280
9,193
3,978
16,451
(11,641)
(1,124)
(12,765)
-
(12,765) $
$
13,010
7,147
5,863
3,656
9,903
5,021
18,580
(12,717)
121
(12,596)
(146)
(12,450) $
$
$
$
$
2020
Year
125,733
62,687
63,046
16,956
65,065
24,039
106,060
(43,014)
(8,488)
(51,502)
2019
Year
48,104
26,793
21,311
13,376
37,689
18,410
69,475
(48,164)
(3,041)
(51,205)
(146)
(51,059)
* During the fourth quarter of 2020, the Company recorded a $4.2 million loss on extinguishment of debt which is included in other expense, net.
F-33
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.9
Vapotherm, Inc. (the “Company”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”).
Description of Capital Stock
The following description of the Company’s capital stock is a summary and does not purport to be complete. It is subject to and
qualified in its entirety by reference to the Company’s Tenth Amended and Restated Certificate of Incorporation, as amended (the “Certificate
of Incorporation”), and Amended and Restated Bylaws (the “Bylaws”), each of which is incorporated by reference as an exhibit to the
Company’s most recent Annual Report on Form 10-K. The Company encourages you to read the Certificate of Incorporation, the Bylaws and
the applicable provisions of the Delaware General Corporation Law (“DGCL”) for additional information.
Authorized Capital Shares
The Certificate of Incorporation authorizes the issuance of 175,000,000 shares of common stock, $0.001 par value per share
(“Common Stock”), and 25,000,000 shares of preferred stock, $0.001 par value per share (“Preferred Stock”).
Voting Rights
Holders of the Company’s Common Stock are entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. All matters other than the election of directors shall be determined by a majority of the
votes cast on the matter affirmatively or negatively. A nominee for director shall be elected to the Company’s board of directors if the votes
properly cast for such nominee’s election exceed the votes properly cast against such nominee’s election; provided, however, that directors
shall be elected by a plurality of the votes properly cast at any meeting of stockholders at which there is a contested election of directors.
Dividend Rights
Holders of Common Stock are entitled to receive proportionately any dividends as may be declared by the Company’s board of
directors, subject to any preferential dividend rights of any series of Preferred Stock that we may designate and issue in the future.
Liquidation Rights
In the event of the Company’s liquidation or dissolution, the holders of Common Stock are entitled to receive proportionately the
Company’s net assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior
rights of any outstanding Preferred Stock.
Other Rights and Preferences
The Common Stock has no redemption provisions or preemptive, conversion or exchange rights. No shares of any class of the
Company’s capital stock are subject to any sinking fund provisions, restrictions on the alienability of securities to be registered, calls,
assessments by or liabilities of the Company.
Certain Provisions of the Certificate of Incorporation, Bylaws and the DGCL
Certain provisions of the Certificate of Incorporation, Bylaws and the DGCL may be deemed to have an anti-takeover effect and
may prevent, delay or defer a tender offer or takeover attempt, including:
Section 203 of the DGCL
The Company is subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this
stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business
combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested
stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to
the determination of interested stockholder status, 15% or more of the corporation’s voting stock.
Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one
of the following conditions: before the stockholder became interested, the corporation’s board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an interested stockholder; upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding, for purposes of determining the voting stock outstanding, shares
owned by persons who are directors and also officers and employee stock plans, in some instances; or at or after the time the stockholder
became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special
meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested
stockholder.
A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or
an express provision in its certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of
the outstanding voting shares. The Company has not opted out of these provisions. As a result, mergers or other takeover or change in control
attempts of the Company may be discouraged or prevented.
Anti-Takeover Effects of the Company’s Certificate of Incorporation and Bylaws
The Company’s Certificate of Incorporation and Bylaws contain certain provisions that are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors but which may have the effect of delaying, deferring or preventing a
future takeover or change in control of the Company unless such takeover or change in control is approved by the board of directors.
These provisions include:
Classified board. The Company’s Certificate of Incorporation provides that the Company’s board of directors be divided into three
classes of directors, with the classes as nearly equal in number as possible. As a result, approximately one-third of the board of directors will
be elected each year. The classification of directors has the effect of making it more difficult for stockholders to change the composition of
the Company’s board of directors. The Company’s Certificate of Incorporation also provides that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances, the number of directors will be fixed exclusively pursuant to a resolution
adopted by the board of directors.
Action by written consent; special meetings of stockholders. The Company’s Certificate of Incorporation provides that stockholder
action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. The
Company’s Certificate of Incorporation also provides that, except as otherwise required by law, special meetings of the stockholders can only
be called pursuant to a resolution adopted by a majority of the board of directors. Except as described above, stockholders are not permitted to
call a special meeting or to require the Company’s board of directors to call a special meeting.
Removal of directors. The Company’s Certificate of Incorporation provides that its directors may be removed only for cause by the
affirmative vote of at least 75% of the voting power of the outstanding shares of capital stock, voting together as a single class. This
requirement of a supermajority vote to remove directors could enable a minority of the Company’s stockholders to prevent a change in the
composition of the board of directors.
Advance notice procedures. The Company’s Bylaws have an advance notice procedure for stockholder proposals to be brought
before an annual meeting of its stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at
an annual meeting are only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the board of directors or by a stockholder of record who was a stockholder of record at the time of the giving of the
notice, is entitled to vote at the meeting and who has given the Company’s Secretary timely written notice, in proper form, of the
stockholder’s intention to bring that business before the meeting. Although the Bylaws do not give the Company’s board of directors the
power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or
annual meeting, the Bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not
followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company.
Supermajority approval requirements. The DGCL generally provides that the affirmative vote of a majority of the shares entitled to
vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless either a corporation’s certificate of
incorporation or bylaws requires a greater percentage. The Company’s Certificate of Incorporation and Bylaws provide that the affirmative
vote of holders of at least 75% of the total votes eligible to be cast in the election of directors will be required to alter, amend, repeal or adopt
certain provisions of the Certificate of Incorporation or to make, alter, amend or repeal the Bylaws. This requirement of a supermajority vote
to approve amendments to the Company’s Certificate of Incorporation and Bylaws could enable a minority of its stockholders to exercise veto
power over any such amendments.
Authorized but unissued shares. The Company’s authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but
unissued shares of Common Stock and Preferred Stock could render more difficult or discourage an attempt to obtain control of a majority of
the Company’s Common Stock by means of a proxy contest, tender offer, merger or otherwise.
Exclusive forum. The Company’s Certificate of Incorporation requires, to the fullest extent permitted by law, that derivative actions
brought in the name of the Company, actions against directors, officers and employees for breach of a fiduciary duty, actions asserting a claim
against the Company arising pursuant to any provision of the DGCL, the Certificate of Incorporation or the Bylaws, actions to interpret,
apply, enforce or determine the validity of the Certificate of Incorporation or the Bylaws and actions asserting a claim against the Company
governed by the internal affairs doctrine be brought only in
specified courts in the State of Delaware. The Company’s Certificate of Incorporation additionally requires that actions arising under the
Securities Act of 1933, as amended, be brought only in the federal district courts of the United States of America. Although the Company
believes these provisions beneficially provide increased consistency in the application of relevant law in the types of lawsuits to which it
applies, such provision may have the effect of discouraging lawsuits against the Company’s directors and officers.
Transfer Agent and Registrar
The transfer agent and registrar for the Company’s Common Stock is American Stock Transfer & Trust Company, LLC.
Listing
The Company’s Common Stock is listed on the New York Stock Exchange under the symbol “VAPO.”
1.
2.
Solus Medical Limited, incorporated in Scotland, a wholly owned subsidiary.
HGE Health Care Solutions, LLC, incorporated in the State of Delaware, a wholly owned subsidiary.
List of Vapotherm, Inc.’s Subsidiaries
Exhibit 21.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We have issued our reports dated February 24, 2021, with the respect to the consolidated financial statements and internal control over
financial reporting included in the Annual Report of Vapotherm, Inc. on Form 10-K for the year ended December 31, 2020. We consent to
the incorporation by reference of the said reports in the Registration Statement of Vapotherm, Inc. on Form S-3 (File No. 333-235657) and on
Form S-8 (File No. 333-236953 and File No. 333-229327).
/s/ GRANT THORNTON LLP
Boston, Massachusetts
February 24, 2021
CERTIFICATION
Exhibit 31.1
I, Joseph Army, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a.
b.
c.
d.
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;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
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 reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
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):
a.
b.
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.
Date:
February 24, 2021
By: /s/ JOSEPH ARMY
Joseph Army
President, Chief Executive Officer and Director
(principal executive officer)
CERTIFICATION
Exhibit 31.2
I, John Landry, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a.
b.
c.
d.
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;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
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 reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5.
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):
a.
b.
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.
Date:
February 24, 2021
By: /s/ JOHN LANDRY
John Landry
Chief Financial Officer
(principal financial officer and principal accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Vapotherm, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2020 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date:
February 24, 2021
By:
/s/ Joseph Army
Joseph Army
President, Chief Executive Officer and Director
(principal executive officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Vapotherm, Inc. (the "Company") on Form 10-K for the fiscal year ended December 31, 2020 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date:
February 24, 2021
By:
/s/ JOHN LANDRY
John Landry
Chief Financial Officer
(principal financial officer and principal accounting officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing.