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. The discussion includes our financial results for the year ended
December 31, 2022 compared to the year ended December 31, 2021. Some of the
numbers included herein have been rounded for the convenience of presentation.

In addition to historical financial information, the following discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. 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

Vapotherm is a global medical technology company primarily focused on the care
of patients of all ages suffering from respiratory distress, whether associated
with complex lung diseases such as chronic obstructive pulmonary disease
("COPD"), congestive heart failure ("CHF"), pneumonia, asthma and COVID-19 or
other systemic conditions. Our mission is to improve the lives of patients
suffering from complex lung disease and other forms of respiratory distress
while reducing the cost of their care through integrated device and digital
solutions. Our device solutions are focused on High Velocity Nasal Insufflation
("HVNI", or "High Velocity Therapy"), which delivers non-invasive ventilatory
support to patients by providing heated, humidified, oxygenated air at high
velocities through a small-bore nasal interface, and on closed loop control
systems such as our Oxygen Assist Module ("OAM"), designed to automatically
maintain a patient's pulse oxygen saturation ("SpO2") levels within a specified
range for a defined period of time. Our digital solutions are focused on remote
patient monitoring, using proprietary algorithms to predict impending
respiratory episodes before they occur and coordinate timely intervention,
obviating the need for costly hospital admissions and minimizing patient
distress. Although we recently decided to exit our standalone remote patient
monitoring business, we are using the underlying technology to develop digital
capabilities for our devices. While these device and digital solutions function
independently, we believe leveraging the two together can create a unique
healthcare ecosystem, focused on delivering high quality, efficient respiratory
care in a variety of settings.

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 patients
suffering from respiratory distress, including Type 1 hypoxic respiratory
distress, like that experienced by patients with pneumonia or COVID-19, or Type
2 hypercapnic respiratory distress, like that experienced by patients with COPD.
Our HVT 2.0 and Precision Flow systems (together, "High Velocity Therapy
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. Our next
generation High Velocity Therapy system, known as HVT 2.0, received initial 510k
clearance from the Food and Drug Administration ("FDA") in 2021, transitioned to
full market release in August 2022, and received clearance for expanded
respiratory distress indications in December 2022. The HVT 2.0 platform is
cleared for therapy in multiple settings of care, including the home, although
it is presently being marketed primarily for hospital use. As of December 31,
2022, more than 3.8 million patients have been treated with our High Velocity
Therapy systems, and we have a global installed base of over 36,700 units, an
increase of 4.4% compared to December 31, 2021.

The COVID-19 pandemic transformed our business significantly and contributed in
at least two primary ways: first, it resulted in increased awareness of the
unique efficacy of our High Velocity Therapy for the treatment of COVID-19
patients, and generally, resulting in high global demand at that time for our
technology and the concomitant rapid growth of our installed base. Today, our
brand is a recognized and respected name in an ever-increasing number of
hospitals around the world. Second, many respiratory distress patients who
require ventilatory support are initially treated in a hospital's emergency
department with the goal of stabilizing these patients with a non-invasive
ventilation therapy so their underlying condition can be treated. Our 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 the long-term in expanded
use of our products to treat all forms of respiratory distress in a variety of
settings.

We sell our High Velocity Therapy systems to hospitals through a direct sales
organization in the United States, the United Kingdom, Germany, Belgium and
Spain and through distributors in other select countries outside of those
countries. In certain countries outside the United States, we currently offer
our OAM, which launched in the United Kingdom, select European markets, and
Israel in late 2020. The OAM can be used with most versions of our Precision
Flow system and OAM

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capability has been built into the HVT 2.0 for future use. The OAM helps
clinicians maintain a patient's 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,
particularly in neonates where these risks include visual or developmental
impairment or death. Our OAM is sold through a direct sales organization in the
United Kingdom, Germany, Belgium and Spain and through distributors in Europe
and the Middle East. We are in the process of seeking FDA approval to market the
OAM in the United States, and are currently enrolling in an Investigational
Device Exemption clinical study to support the regulatory filing. In addition,
we employ field-based clinical managers 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 emergency departments
and adult, pediatric and neonatal intensive care units. Our relationship with
these clinicians is particularly important, as it enables our products to follow
patients through the care continuum. As of December 31, 2022, we have sold our
High Velocity Therapy systems to over 2,400 hospitals across the United States,
and in over 50 countries outside of the United States. Although presently our
revenues are derived principally from sales of High Velocity Therapy systems and
sales of the single-use disposable vapor transfer cartridges these systems
require, we also derive revenues from ancillary products and services related to
our High Velocity Therapy systems.

In the beginning of the year ended December 31, 2022, there was a significant
slowdown in demand for our products that was driven primarily by a decrease in
patient acuity from COVID-19 infections as COVID-19 variants transitioned from a
lower respiratory disease to an upper respiratory disease. This resulted in
lower than anticipated revenue as well as an unsustainable cost and inventory
structure in our business. Our revenues decreased to $66.8 million for the year
ended December 31, 2022 from $113.3 million for the year ended December 31, 2021
primarily due to lower hospitalizations from COVID-19 and decreased demand in
disposables from our customers, as the Delta-related COVID-19 surge in the last
half of 2021 drove significant worldwide demand for our products at that time
and did not repeat itself during 2022. Revenue from single-use disposables
represented approximately 69.4% and 58.8% of our total revenues for the years
ended December 31, 2022 and 2021, respectively, and decreased 30.4% on a year
over year basis. For the years ended December 31, 2022 and 2021, we incurred net
losses of $113.3 million and $59.8 million, respectively.

Due to the inherent uncertainty in predicting future revenues and certain
variable costs, we have considered our ability to reduce our cash flow deficits.
In connection with the release of our first quarter 2022 financial results, we
announced our long-term "path to profitability" goals, which include:

Drive 20% revenue growth;
•
Improve our gross margins to 60%+;
•
Normalize our cost structure; and
•
Improve our financial flexibility.

As part of this strategy, we announced our plan to move substantially all of our
manufacturing operations from New Hampshire to Mexico. During the year ended
December 31, 2022, we immediately began delivering on key milestones, including
entering into a lease agreement for our new manufacturing facility in Tijuana,
Mexico, completing construction of leasehold improvements, and relocating our
manufacturing machinery and equipment from New Hampshire to Mexico to prepare
for commencement of our manufacturing operations in early 2023. In January 2023,
we received our facility certifications and validations were completed on our
production lines. In connection with this relocation, in December 2022, we
vacated most of our leased space in our Exeter, New Hampshire facility and are
in the process of marketing the space for a sublease or subleases through the
remaining term of the operating lease. As we are no longer using the designated
sublease space ("Domain Sublease") in substantially the same manner as before
and the carrying value of the Domain Sublease asset group was not recoverable,
we recognized an impairment charge of $1.5 million related to the write down of
the impacted right-of-use assets and leasehold improvements to their estimated
fair value during the year ended December 31, 2022. In addition, during 2022, we
established a Technology Center in Singapore to bring most research and
development projects in-house to help reduce the cost of external design firms
and access local government grant funding. We also took meaningful steps towards
right sizing our commercial organization, including exiting our Vapotherm Access
standalone remote patient monitoring reporting unit and making reductions to our
field teams in the United States and internationally. Actions completed during
the year ended December 31, 2022 under our restructuring plans and their impacts
on our consolidated financial statements are further described below and in Note
12 "Restructuring" to our consolidated financial statements included in this
Annual Report on Form 10-K.

In August 2022, we made a strategic decision to cease future commercial
investment in our Vapotherm Access standalone remote patient monitoring
reporting unit, which included Vapotherm Access, formerly "HGE Healthcare
Solutions, LLC
" or "HGE," and Pulmonary Care Innovations, PLLC d/b/a RespirCare.
We undertook the Vapotherm Access acquisition

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in late 2020 to expand our capabilities by providing a remote monitoring
platform designed to empower respiratory patients with COPD, as well as payors
and providers, to manage day-to-day symptoms, prevent exacerbations, lower costs
and improve patient quality of life. In mid-2021, we re-branded HGE as Vapotherm
Access and launched "Vapotherm Access - Post Care" and "Vapotherm Access - 365"
to hospitals, providers and payors to reduce readmissions of recently discharged
COPD patients. In late 2021, we became affiliated with RespirCare, a leading
pulmonology practice in Tulsa, Oklahoma, that provided in-person and virtual
care to COPD and other respiratory distress patients in Oklahoma. The decision
to cease future commercial investment came as we were unable to scale the
Vapotherm Access platform due to leadership changes at Vapotherm Access, loss of
key customers, low patient enrollment and continued operating losses. In
connection with this decision, we announced a reduction in force at Vapotherm
Access and on August 29, 2022, PCI Management Group LLC, now known as Vapotherm
Access Management Services LLC ("PCI"), provided RespirCare with a six-month
without cause contract termination notice of its Master Service Agreement
("MSA") with the clinic. The termination notice was subsequently amended and the
MSA terminated effective October 31, 2022, resulting in the deconsolidation of
RespirCare from our consolidated financial statements included in this Annual
Report on Form 10-K.

As a result of the factors discussed in the preceding paragraph, we recognized
impairment charges of $14.7 million, $4.0 million, and $2.1 million related to
the write down of goodwill of the Vapotherm Access reporting unit, HGE customer
relationships and developed technology intangible assets, and Vapotherm Access
and RespirCare long-lived assets, respectively, in each case to their estimated
fair value during the year ended December 31, 2022. Although we have ceased
future investments in these two businesses, we have redirected our digital
strategy towards the development of a remote patient monitoring platform that
will be integrated into our devices.

On September 27, 2022, we received notice from the New York Stock Exchange, Inc.
(the "NYSE") that we are not in compliance with the continued listing standards
set forth in Section 802.01B of the NYSE Listed Company Manual. Such
noncompliance of Section 802.01B of the NYSE Listed Company Manual is based on
our average global market capitalization for the prior 30 trading-day period
being below $50 million at the same time as our stockholders' equity is less
than $50 million. We timely submitted a plan to cure the deficiency on November
11, 2022 that was accepted by the NYSE and we intend to return to compliance
with the NYSE continued listing requirements by March 27, 2024 or earlier. In
addition, on November 30, 2022, we received notice from the NYSE that we were
not in compliance with the continued listing standards set forth in Section
802.01C of the NYSE Listed Company Manual because the average closing price of
our common stock was less than $1.00 over a consecutive 30 trading-day period.
On December 30, 2022, we regained compliance with the continued listing
standards set forth in Section 802.01C. No assurance can be provided, however,
that we will be able to regain compliance with the applicable NYSE listing
standards or otherwise maintain compliance with the other NYSE listing
standards.

Despite our near-term challenges, we still believe our anticipated long-term
growth will be driven by the following strengths:

Disruptive High Velocity Therapy technology supported by a compelling body of
clinical and economic evidence;
•
Expanded FDA indications we received for our next generation HVT 2.0 platform,
enabling use in multiple settings of care, and anticipated higher average
selling prices as a result;
•
Deep expertise in the area of closed loop control, the first example of which is
our OAM;
•
New FDA clearances and/or approvals for our product pipeline, including the OAM;
•
A recurring revenue model with historically high visibility on our disposables
utilization across a robust global installed base;
•
Dedicated respiratory sales forces in the United States, the United Kingdom,
Germany, Belgium and Spain, which we expect to extend to other growing
international markets;
•
Experienced international distributors;
•
A comprehensive approach to market development with established clinical and
digital marketing teams;
•
A robust and growing intellectual property portfolio; and
•
An experienced senior management team and board members with deep industry
practice.

During the year ended December 31, 2022, we leveraged the decreased respiratory
censuses in hospitals to give our sales force full access to our customers and
execute on our One Hospital One Day, or 1H1D, strategy. Through 1H1D, we educate
our customers on the full capabilities of our technology to help patients
through all four care areas of the hospital that we serve today, regardless of
whether patients are hypoxic, hypercapnic, or otherwise suffering respiratory
distress. We believe our 1H1D strategy will allow us to return our disposable
utilization, or turn, rates to their pre-COVID-19 historical levels over

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time as we go deeper and wider in our largest accounts. The turn rate is the
average number of disposables purchased per month per capital unit from a
customer account. We also plan to extend our 1H1D strategy in 2023 to increase
awareness of the efficacy of our devices in addressing the Type 4 respiratory
failure, or shock, which has an approximate 2.7 million annual patient
population in the U.S. We continue to focus on our long-term product roadmap,
under which we plan to introduce additional high growth products to our
respiratory care offerings, which we expect to drive higher capital and
disposable average selling prices as we introduce new higher-value products and
services. Presently, we are also working on several initiatives to drive down
our inventory balance and return our inventory turnover to pre-COVID-19
historical levels, which we expect will return approximately $17 million of cash
to our consolidated balance sheet, however, the exact timing of the conversion
of inventory into cash is not easy to predict.

Despite our current cost savings initiatives, we 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
which historically have driven higher average sale prices of our products,
support regulatory submissions, and demonstrate the clinical efficacy of our new
products. While these and other actions put pressure on our margins and
adversely affected our financial results during the year ended December 31,
2022, we anticipate long-term benefits of these past and anticipated future
actions, including lower cost products to be built in our new Mexico facility to
drive gross margin improvements. Because of these and other factors, we expect
to continue to incur net losses for the next several years and may require
additional funding, which could include equity and/or debt financings. On
February 7, 2023, we entered into a securities purchase agreement with a select
group of institutional and accredited investors through a private placement
financing for gross proceeds of approximately $23.0 million, before deducting
fees to the placement agent and other offering expenses. We intend to use the
net proceeds from the offering primarily for sales and marketing, working
capital, and other general corporate purposes.

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, United Kingdom, Germany, Belgium and Spain 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, Q50
compressor, HVT 2.0 and the Oxygen Assist Module. Capital equipment sales
include a one-year warranty. We offer different options to our hospital
customers for acquiring capital units, including direct purchase with payment in
full at the time of purchase, rentals, and placements for use by the customer at
no upfront charge in connection with the customer's ongoing purchase of
disposable products. Capital revenue is presented net of capital related rebates
and fees payable to GPOs, IDNs and distributor partners.

Disposables Revenue - Our disposables revenue is derived from the sale of
single-use disposables, nasal interfaces, or cannulas, and adaptors used in
conjunction with the High Velocity Therapy capital units. Disposables revenue is
presented net of disposables related rebates and fees payable to GPOs, IDNs and
distributor partners.

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 is 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 lease 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 lease
revenue on a straight-line basis over the lease term.

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Service and Other Revenue


Our service and other revenue includes service, component part and freight
revenue offset by service related rebates and fees payable to GPOs, IDNs and
distributor partners, as well as 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.

Our revenue has fluctuated, and we expect it to continue to fluctuate, from year
to year and quarter to quarter due to a variety of factors. The decrease in
revenues during 2022 compared 2021 was driven by surges of the COVID-19 pandemic
in 2021 that did not repeat in 2022. Prior to COVID-19, we historically
experienced seasonality in our first quarter due to the impact of the influenza
("flu") and respiratory syncytial virus ("RSV") 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. We expect
COVID-19 to be a permanent part of the respiratory landscape similar to the flu
or RSV. While COVID-19 surges are unpredictable, we believe that these surges
will be aligned to changes in seasons when individuals spend more time inside.
Thus, we believe that COVID-19 will most likely impact our revenue in the first
and fourth quarters of the year. Our capital revenue typically fluctuates based
on hospital capital equipment budgets, which have been adversely affected
following the end of the COVID-19 pandemic, and may be adversely affected by the
introduction of competitor products. 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, our OAM, and our digital product
offerings; favorable clinical data and outcomes using our products and services;
introduction of new products; and continued international expansion. In
addition, we are focusing on our sales and marketing capabilities and
educational infrastructure to help us drive and support revenue growth.

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, inventory obsolescence costs, and seasonality. Sales mix also impacts
our gross margins as our average selling prices in the United States are
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. Because of the lack of capital equipment dollars
in hospitals following the COVID-19 pandemic, we have offered increased
discounts and buy-backs, which adversely affect our gross margins. Our gross
margin may increase over the long-term to the extent our production volumes
increase and as we launch new products and continue to experience cost savings
derived from supply chain and manufacturing efficiencies.

Operating Expenses

Research and Development


Research and development expenses consist primarily of product development,
engineering, regulatory expenses, testing, laboratory supplies, consulting
services, facility costs for our Technology Center in Singapore and other costs
associated with future generations of products using our High Velocity Therapy
technology and companion products. 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, and facilities-related expenses. 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.

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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, clinical studies and distribution facility costs. In the near
term, we expect sales and marketing expenses to fluctuate with revenues in
absolute dollars as we adapt our sales and marketing organization to both drive
and support our future growth initiatives. 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, change in estimated fair value of contingent consideration, and general
corporate expenses including facilities-related expenses. We expect our general
and administrative expenses will increase in absolute dollars as we expand
globally to support our planned future growth. 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 loss on the
extinguishment of debt and foreign currency losses arising from transactions
denominated in foreign currencies.

Provision (Benefit) for Income Taxes


The provision for income taxes represents a deferred tax liability for
differences in the book and tax basis of indefinite-lived assets, partially
offset by a benefit for net deferred income tax assets deemed more likely than
not to be realized by our foreign subsidiaries. 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 subsidiaries. We have not recorded any federal
or state income tax benefits related to domestic operating losses due to
uncertainty about future taxable income.

Results of Operations

                                                   Year Ended December 31,
                                                     2022             2021
Net revenue                                      $      66,801      $ 113,292
Cost of revenue                                         49,558         60,104
Gross profit                                            17,243         53,188
Operating expenses
Research and development                                20,802         18,410
Sales and marketing                                     46,091         60,140
General and administrative                              27,796         31,375
Impairment of goodwill                                  14,701              -
Impairment of long-lived and intangible assets           7,676            

323

Loss on disposal of property and equipment                 568            105
Total operating expenses                               117,634        110,353
Loss from operations                                  (100,391 )      (57,165 )
Other expense, net                                     (12,857 )       (2,711 )
Net loss before income taxes                          (113,248 )      (59,876 )
Provision (benefit) for income taxes                        11            (76 )
Net loss                                         $    (113,259 )    $ (59,800 )




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Years Ended December 31, 2022 and 2021

Net Revenue

                                                   Year Ended December 31,
                                             2022                           2021                        Change
                                                           (in thousands, except percentages)
                                   Amount      % of Revenue       Amount       % of Revenue          $            %
Product revenue:
Capital equipment                 $  8,984              13.4 %   $  33,666              29.7 %   $ (24,682 )     (73.3 )%
Disposables                         46,368              69.4 %      66,631              58.8 %     (20,263 )     (30.4 )%
Subtotal product revenue            55,352              82.8 %     100,297              88.5 %     (44,945 )     (44.8 )%
Lease revenue
Capital equipment                      882               1.3 %       4,321               3.8 %      (3,439 )     (79.6 )%
Other                                1,784               2.7 %       2,109               1.9 %        (325 )     (15.4 )%
Service and other revenue            8,783              13.2 %       6,565               5.8 %       2,218        33.8 %
Total net revenue                 $ 66,801             100.0 %   $ 113,292             100.0 %   $ (46,491 )     (41.0 )%


Net revenue decreased $46.5 million, or 41.0%, to $66.8 million for the year
ended December 31, 2022 compared to $113.3 million for the year ended December
31, 2021. The decrease in net revenue was primarily attributable to decreases of
$24.7 million, $20.3 million and $3.4 million in capital equipment, disposables
and capital equipment lease revenues, respectively, partially offset by a $2.2
million increase in service and other revenues. Capital equipment and
disposables revenues decreased 73.3% and 30.4%, respectively, during the year
ended December 31, 2022 primarily due to decreases in volume of sales of capital
equipment and decreases in the number of disposables sold. The decrease in
demand for our products was driven by a decrease in patient acuity from COVID-19
infections as COVID-19 variants transitioned from a lower respiratory disease to
an upper respiratory disease. Capital equipment lease revenue decreased 79.6%
during the year ended December 31, 2022 due to a decrease in demand and rental
arrangements. The increase in service and other revenue during the year ended
December 31, 2022 was primarily the result of lower customer rebates and the
acquisition of PCI and RespirCare in the fourth quarter of 2021.

Revenue information by geography is summarized as follows:

                                                   Year Ended December 31,
                                             2022                           2021                        Change
                                                           (in thousands, except percentages)
                                   Amount      % of Revenue       Amount       % of Revenue          $            %
United States                     $ 52,591              78.7 %   $  84,147              74.3 %   $ (31,556 )     (37.5 )%
International                       14,210              21.3 %      29,145              25.7 %     (14,935 )     (51.2 )%
Total net revenue                 $ 66,801             100.0 %   $ 113,292             100.0 %   $ (46,491 )     (41.0 )%


Net revenue generated in the United States decreased $31.6 million, or 37.5%, to
$52.6 million for the year ended December 31, 2022, compared to $84.1 million
for the year ended December 31, 2021. Net revenue generated in our International
markets decreased $14.9 million, or 51.2%, to $14.2 million for the year ended
December 31, 2022, compared to $29.1 million for the year ended December 31,
2021. The decreases in United States and international net revenue were
primarily due to decreases in volume of sales of capital equipment and decreases
in the number of disposables sold. The decrease in demand for our products was
driven by a decrease in patient acuity from COVID-19 infections as COVID-19
variants transitioned from a lower respiratory disease to an upper respiratory
disease.

Cost of Revenue and Gross Margin


Cost of revenue decreased $10.5 million, or 17.5%, to $49.6 million for the year
ended December 31, 2022 compared to $60.1 million for the year ended December
31, 2021. The decrease was primarily due to a decrease in sales volumes of our
capital equipment and disposables, partially offset by non-recurring charges
related to the transfer of certain activities to our contract manufacturer and
our manufacturing facility in Mexico, increases in our reserves for excess and
obsolete inventory, increased termination costs and under-absorption of labor
and overhead costs due to lower production levels.

Gross profit as a percent of revenue decreased to 25.8% for the year ended
December 31, 2022 compared to 46.9% for the year ended December 31, 2021. Gross
profit as a percent of revenue was negatively impacted by lower revenue and

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production levels, non-recurring charges related to the transfer of certain
activities to our contract manufacturer and our manufacturing facility in
Mexico, increased reserves for excess and obsolete inventory, and increased
termination costs.

Research and Development Expenses


Research and development expenses increased $2.4 million, or 13.0%, to $20.8
million for the year ended December 31, 2022 compared to $18.4 million for the
year ended December 31, 2021. As a percentage of revenue, research and
development expenses increased to 31.1% in 2022 compared to 16.3% in 2021. The
increase in research and development expenses was primarily due to increases in
employee-related expenses, including termination costs and stock-based
compensation, and product development costs associated with the development of
our future generation High Velocity Therapy systems, partially offset by
decreased third party development costs and patent-related costs. The increase
in research and development expenses as a percentage of revenue was primarily
due to a decrease in revenues during 2022 compared 2021.

Sales and Marketing Expenses


Sales and marketing expenses decreased $14.0 million, or 23.4%, to $46.1 million
for the year ended December 31, 2022 compared to $60.1 million for the year
ended December 31, 2021. As a percentage of revenue, sales and marketing
expenses increased to 69.0% in 2022 compared to 53.1% in 2021. The decrease in
sales and marketing expenses was primarily due to decreased headcount resulting
in decreased sales commission expenses, and employee-related expenses, partially
offset by increased termination costs, travel expenses and stock-based
compensation. The increase in sales and marketing expenses as a percentage of
revenue was primarily due to a decrease in revenues during 2022 compared 2021.

General and Administrative Expenses


General and administrative expenses decreased $3.6 million, or 11.4%, to $27.8
million for the year ended December 31, 2022 compared to $31.4 million for the
year ended December 31, 2021. As a percentage of revenue, general and
administrative expenses increased to 41.6% in 2022 compared to 27.7% in 2021.
The decrease in general and administrative expenses was primarily due to
decreased legal and consulting expenses, favorable changes in value of
contingent consideration, and lower employee-related expenses. The increase in
general and administrative expenses as a percentage of revenue was primarily due
to a decrease in revenues during 2022 compared 2021.

Impairment of Goodwill


We recorded a goodwill impairment charge of $14.7 million related to the write
down of goodwill of the Vapotherm Access reporting unit to its estimated fair
value during the year ended December 31, 2022. There were no goodwill impairment
charges recorded for the year ended December 31, 2021.

Impairment of Long-Lived and Intangible Assets


Impairment of long-lived and intangible assets totaled $7.7 million for the year
ended December 31, 2022. The impairment charges related to the write down of
Vapotherm Access intangible assets, operating lease right-of-use assets and
property and equipment no longer deemed to be recoverable, and the write down of
the Domain Sublease operating lease right-of-use assets and leasehold
improvements no longer deemed to be recoverable, in each case to their estimated
fair value during the year ended December 31, 2022.

Impairment of long-lived and intangible assets totaled $0.3 million during the
year ended December 31, 2021 and related to the write off of trade names and
trademarks no longer in use.

Loss on Disposal of Property and Equipment

We recorded a loss on disposal of certain property and equipment totaling $0.6
million
and $0.1 million for the years ended December 31, 2022 and 2021,
respectively.

Other Expense, Net


Other expense, net increased $10.1 million, or 374.3%, to $12.9 million for the
year ended December 31, 2022 compared to $2.7 million for the year ended
December 31, 2021. The increase in other expense, net was primarily due to an
increase in interest expense due to higher average interest rates on higher
average outstanding borrowings during 2022

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compared to 2021, and, to a lesser extent, the recognition of a loss on
extinguishment related to our prior financing arrangement recorded in 2022.

Provision (Benefit) for Income Taxes


The provision for income taxes for the year ended December 31, 2022 totaled less
than $0.1 million and related to deferred tax liabilities for differences in the
book and tax basis of indefinite-lived assets and current foreign taxes,
partially offset by a benefit for net deferred income tax assets deemed more
likely than not to be realized by our foreign subsidiaries. The benefit for
income taxes for the year ended December 31, 2021 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 subsidiaries. We have not recorded any federal
or state income tax benefits related to domestic operating losses due to
uncertainty about future taxable income.

Seasonality


Historically, we have experienced seasonality in our first and fourth quarters,
and we expect this trend to continue. We did not experience this seasonality
during 2021 primarily due to demand for our High Velocity Therapy technology
during the COVID-19 pandemic. In addition, 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 High Velocity Therapy systems. In the
first quarter of each year, we have historically 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. We expect COVID-19 to be a
permanent part of the respiratory landscape similar to the flu or RSV. While
COVID-19 surges are unpredictable, we believe that these surges will be aligned
to changes in seasons when individuals spend more time inside. Thus, we believe
that COVID-19 will most likely impact our revenues during the first and fourth
quarters of the year.

Liquidity and Capital Resources


As of December 31, 2022, we had cash, cash equivalents and restricted cash of
$16.8 million, working capital of $40.3 million and an accumulated deficit of
$490.0 million. Our primary sources of capital to date have been from sales of
our equity securities, sales of our High Velocity Therapy systems and their
associated disposables and amounts borrowed under credit facilities. Since
inception, we have raised a total of $373.0 million in net proceeds from sales
of our equity securities.

On February 10, 2023, we issued in a private placement an aggregate of
17,502,244 shares of common stock, and in the case of certain investors, in lieu
of shares of common stock, pre-funded warrants to purchase an aggregate of
4,402,508 shares of common stock, and, in each case, accompanying warrants to
purchase an aggregate of up to 21,904,752 shares of common stock at a purchase
price of $1.05 per unit for aggregate gross proceeds to us of approximately
$23.0 million, before deducting fees to the placement agent and other estimated
offering expenses payable by us. The warrants and pre-funded warrants have
exercise prices of $1.17 and $0.001 per share and expire in five years and 30
years, respectively. We intend to use the net proceeds from the offering
primarily for sales and marketing, working capital, and other general corporate
purposes.

Our Form 10-Q for the period ended September 30, 2022 included a going concern
paragraph stating that there was substantial doubt about our ability to continue
as a going concern within one year after the date that those condensed
consolidated financial statements were issued. As of February 23, 2023, we
believe that the substantial doubt about our ability to continue as a going
concern has been resolved following the completion of our restructuring
activities further described in Note 12 "Restructuring" to our consolidated
financial statements included in this Annual Report on Form 10-K and the closing
of a private placement financing for gross proceeds of approximately $23.0
million, before deducting fees to the placement agent and other offering
expenses, on February 10, 2023.

If these sources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or enter into new or restructure
existing debt financing arrangements. If we raise additional funds by issuing
equity securities, our stockholders would experience dilution. Additional debt
financing, if available, may involve additional covenants restricting our
operations or our ability to incur additional debt. Any additional debt or
equity financing 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 products and services.

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Cash Flows


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

                                                           Year Ended December 31,
                                                           2022                2021
                                                                (in thousands)
Net cash provided by (used in):
Operating activities                                   $     (80,157 )     $    (55,371 )
Investing activities                                         (11,610 )           (7,199 )
Financing activities                                          51,324              4,370
Effect of exchange rate on cash, cash equivalents
and
  restricted cash                                                (34 )              (12 )
Net decrease in cash, cash equivalents and
restricted cash                                        $     (40,477 )     $    (58,212 )


Operating Activities

The net cash used in operating activities was $80.2 million in 2022 and
consisted primarily of a net loss of $113.3 million and an increase of $10.0
million in net operating assets, partially offset by $43.1 million in non-cash
charges. Non-cash charges consisted primarily of impairment of goodwill,
stock-based compensation expense, impairment of long-lived and intangible
assets, depreciation and amortization expense, a provision for inventory
valuation, and non-cash lease expense, partially offset by a favorable change in
fair value of contingent consideration.

The net cash used in operating activities was $55.4 million in 2021 and
consisted primarily of a net loss of $59.8 million and an increase of $11.5
million
in net operating assets, partially offset by $15.9 million in non-cash
charges. Non-cash charges consisted primarily of stock-based compensation
expense, depreciation and amortization and non-cash lease expense.

Investing Activities


Net cash used in investing activities for 2022 and 2021 consisted of purchases
of property and equipment of $11.6 million and $5.9 million, respectively. Net
cash used in investing activities in 2021 also included $1.3 million to acquire
PCI.

Financing Activities

Net cash provided by financing activities was $51.3 million in 2022 and
consisted primarily of net proceeds under our credit facilities of $52.5
million, net proceeds under our at-the-market offering program of $1.1 million,
purchases under our employee stock purchase plan of $0.2 million and proceeds
received from the exercise of stock options of $0.1 million, partially offset by
payments of debt issuance costs of $1.6 million, debt extinguishment costs of
$0.8 million, and contingent consideration payments of $0.1 million.

Net cash provided by financing activities was $4.4 million in 2021 and consisted
of proceeds from net borrowings under our credit facility of $1.7 million and
proceeds from common stock issuances from stock option exercises and purchases
under our employee stock purchase plan of $1.5 million and $1.2 million,
respectively.

Credit Facilities


On February 18, 2022 (the "Effective Date"), we entered into the SLR Loan
Agreement with SLR which provides for a term A loan facility of $100.0 million
(the "SLR Term A Loan Facility") and a term B loan facility of $25.0 million
(the "SLR Term B Loan Facility"). The SLR Term A Loan Facility was funded to us
on the Effective Date. In connection with this funding, we granted SLR warrants
to purchase 107,373 shares of our common stock. On the Effective Date the
warrants had an exercise price of $13.97 per share, were fully vested upon
issuance, are exercisable at the option of the holder, in whole or in part, and
expire in February 2032. The SLR Term B Loan Facility was available to us upon
achievement of a certain minimum revenue level as more fully described in the
SLR Loan Agreement. The proceeds of the SLR Term A Loan Facility were used to
repay all indebtedness under our prior loan agreement with Canadian Imperial
Bank of Commerce Innovation Banking ("CIBC"), as described below.

On August 1, 2022, we entered into an Amendment No. 1 to the SLR Loan Agreement
(the "First Amendment," together with the SLR Loan Agreement, as amended, the
"Amended SLR Loan Agreement") with SLR. Pursuant to the First Amendment, we were
provided with a one-month extension of our covenant-free period through August
31, 2022.

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On September 30, 2022, we entered into an Amendment No. 2 to the SLR Loan
Agreement (the "Second Amendment," together with the Amended SLR Loan Agreement,
as amended, the "Second Amended SLR Loan Agreement"), with SLR. Pursuant to the
Second Amendment:

our minimum net product revenue covenant was modified for the remainder of 2022;

a minimum liquidity covenant of $20.0 million was added;

the London Interbank Offered Rate was replaced with the Secured Overnight
Financing Rate (the "SOFR");

the exit fee was increased from 6.95% to 7.45% of the aggregate principal amount
of the Second Amended SLR Loan Agreement; and

the SLR Term B Loan Facility and related facility fee were eliminated.

Concurrently with the closing of the Second Amendment, we amended and restated
SLR's warrants to purchase 107,373 shares of our common stock to reset the
exercise price to $1.63 per share.


On November 22, 2022 (the "Third Amendment Effective Date"), we entered into an
Amendment No. 3 to the SLR Loan Agreement (the "Third Amendment," together with
the Second Amended SLR Loan Agreement, as amended, the "Third Amended SLR Loan
Agreement"), with SLR. Pursuant to the Third Amendment;

our minimum net product revenue covenant was modified for 2023;

the minimum liquidity covenant was reduced to $5 million from $20 million (the
"Amended Liquidity Covenant"); and

an option was added, at our sole discretion, to pay up to 8% of the interest
under the Third Amended Loan and Security Agreement in-kind (rather than solely
in cash as provided for prior to the Third Amendment Effective Date) during 2023
(the "PIK Interest"), subject to payment of a fee equal to 10% of the PIK
Interest, and the issuance of additional warrants to the lenders equal to 5% of
the PIK Interest.

In addition, the Third Amendment provided that if we raised $15 million of net
cash equity proceeds (the "Equity Raise") prior to July 1, 2023, the 2023
Minimum Revenue Covenant would be waived and we need only demonstrate net
product revenue of at least $25 million (measured on trailing six-month basis
for the period ending September 30, 2023) for the fiscal year ending December
31, 2023. Upon satisfaction of the Equity Raise, our PIK Interest option would
be reduced to up to 4% of the interest rate under the Third Amended Loan and
Security Agreement. Concurrently with the closing of the Third Amendment, we
amended and restated SLR's warrants to purchase 107,373 shares of our common
stock to reset the exercise price to $0.48 per share.

Pursuant to the Third Amended SLR Loan Agreement, advances under the Third
Amended SLR Loan Agreement bear interest at a floating rate per annum equal to
(a) the greater of (i) 1.00% or (ii) the one-month SOFR, plus (b) 8.30%. At
December 31, 2022, the interest rate was 12.58%. The outstanding balance was
$100.0 million at December 31, 2022. The Third Amended SLR Loan Agreement
provides for interest-only payments for the first 48 months following the
Effective Date. Thereafter, principal payments on the Third Amended SLR Loan
Agreement are due monthly in 12 equal installments; provided that we have the
option to extend the interest-only period for an additional 12 months upon
achievement of a certain minimum revenue level as more fully described in the
Third Amended SLR Loan Agreement. The Third Amended SLR Loan Agreement will
mature on February 1, 2027 (the "Maturity Date"). The Third Amended SLR Loan
Agreement may be prepaid in full, subject to a prepayment charge of (i) 3.0%, if
such prepayment occurs on or prior to February 17, 2023, (ii) 2.0%, if such
prepayment occurs after February 18, 2023 but on or prior to February 17, 2024,
and (iii) 1.0%, if such prepayment occurs after February 18, 2024 but prior to
the Maturity Date (the "Prepayment Penalty"). In addition to the payment of
principal and accrued interest, we will be required to make a payment of 7.45%
of the aggregate principal amount of the Third Amended SLR Loan Agreement funded
(the "Facility Exit Fee"), which is payable on the earliest to occur of (i) the
Maturity Date, (ii) the acceleration of the Third Amended SLR Loan Agreement
prior to the Maturity Date, and (iii) the prepayment date of the Third Amended
SLR Loan Agreement prior to the Maturity Date. The Facility Exit Fee of $7.5
million is considered fully earned by SLR as of the Effective Date and is being
accrued to interest expense over the term of the Third Amended SLR Loan
Agreement. In connection with the Third Amended SLR Loan Agreement, we incurred
direct financing costs related to fees and non-cash consideration paid to SLR,
and fees paid to third parties of $2.1 million and $1.6 million, respectively,
as of December 31, 2022. The Third Amended SLR Loan Agreement is secured by a
lien on substantially all of our assets, including intellectual property.

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The Third Amended SLR Loan Agreement contains customary covenants and
representations, including, without limitation, a minimum revenue covenant equal
to a percentage of each month's forecasted net product revenue as defined in the
Third Amended SLR Loan Agreement (tested on a trailing six month basis at the
end of each fiscal month, commencing with the six month period ending on August
31, 2022), the Amended Liquidity Covenant, 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. As of
December 31, 2022, we were in compliance with all financial covenants under the
Third Amended SLR Loan Agreement.

The events of default under the Third Amended SLR Loan Agreement include,
without limitation, and subject to customary grace periods, (1) our failure to
make any payments of principal or interest under the Third Amended SLR Loan
Agreement or any other loan documents, (2) our breach or default in the
performance of any covenant under the Third Amended SLR Loan Agreement, (3) the
occurrence of a material adverse effect or an event that is reasonably likely to
result in a material adverse effect, (4) the existence of an attachment or levy
on a material portion of our funds or of our subsidiaries, (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, SLR is entitled to take enforcement action, including an incremental 5%
interest rate increase or acceleration of amounts due under the Third Amended
SLR Loan Agreement (the "Mandatory Prepayment Option"). We determined the
Mandatory Prepayment Option to be an embedded derivative that is required to be
bifurcated from the Third Amended SLR Loan Agreement. We determined the combined
probability of an event of default and SLR exercising the Mandatory Prepayment
Option to be remote and deemed its fair value to be immaterial as of December
31, 2022. We re-evaluate the fair value of the Mandatory Prepayment Option at
the end of each reporting period, as applicable.

The Third Amended SLR Loan Agreement also contains other customary provisions,
such as expense reimbursement and confidentiality. SLR has indemnification
rights and the right to assign the Third Amended SLR Loan Agreement, subject to
customary restrictions.

On February 18, 2022, we used $47.4 million of the SLR Term A Loan Facility to
pay off all obligations owing under, and to terminate, our prior Loan and
Security Agreement (the "CIBC Loan Agreement") with CIBC which provided for a
revolving loan facility of $12.0 million (the "CIBC Revolving Facility") and a
term loan facility of $40.0. million (the "CIBC Term Facility" and, together
with the Revolving Facility, the "CIBC Facilities"). As a result of the
termination of the CIBC Loan Agreement, we recorded a loss on extinguishment of
debt of $1.1 million, which included the prepayment penalty, write-off of the
remaining unamortized deferred financing costs, and legal fees during the first
quarter of 2022.

On February 10, 2023 (the "Fourth Amendment Effective Date"), we entered into an
Amendment No. 4 to Loan and Security Agreement with SLR, and the lenders party
thereto (the "Fourth Amendment," together with the Third Amended Loan and
Security Agreement, the "Fourth Amended Loan and Security Agreement"). The
Fourth Amendment includes the option for us to pay up to 9% of the interest
in-kind (rather than up to 8% as provided for prior to the Fourth Amendment
Effective Date) during 2023 (the "PIK Interest"). Under the Fourth Amendment,
the PIK Interest option is reduced to 4% of the interest if we raise $25 million
of net cash equity proceeds prior to July 1, 2023 and is further reduced to 0%
of the interest if we raise $30 million of net cash equity proceeds prior to
January 1, 2024.

Additionally, if we elect PIK Interest of 9% the amount of Warrants to be
granted increases to be 5% times the amount of PIK Interest for the first 4% of
the PIK Interest selected and 12.20% times on the next 5% of the amount of PIK
Interest selected to provide for a weighted average of 9%, and our monthly
interest expense increases by 1% for the month in which such PIK Interest is
selected. The Fourth Amendment also provides for a reset of the Strike Price of
the Warrants issued in connection with our election of PIK Interest equal to the
lower of our closing stock price for (a) the 10-day trailing average closing
price ending on the day before the interest payment date, (b) the day before the
interest payment date, or (c) $1.17 per share.

At-the-Market Agreement


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
our common stock having aggregate sales proceeds of up to $50.0 million from
time to time through Jefferies as our sales agent. During the year ended
December 31, 2022, we sold 1,741,514 shares of our common stock for net proceeds
of approximately $1.1 million. As of December 31, 2022, the registration
statement under which this program was registered has expired.

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Contractual Obligations

In the normal course of business, we enter into contracts and commitments that
obligate us to make payments in the future. Information regarding our
obligations under contingent consideration, debt, lease and purchase
arrangements are provided in the Notes 4, 10 and 11 to our consolidated
financial statements included in this Annual Report on Form 10-K.

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 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 financial statements. Actual results could differ from
these estimates.

Critical accounting policies are defined as those that are reflective of
significant judgements and uncertainties, the most important and pervasive
accounting policies used and areas most sensitive to material changes from
external factors. The critical accounting policies that we believe affect our
more significant judgements and estimates used in the preparation of our
consolidated financial statements presented in this Annual Report on Form 10-K
are described in the Notes to our consolidated financial statements.

The following critical accounting estimates have had a material impact on our
consolidated financial statements during the years ended December 31, 2022 and
2021, however, they no longer involve a significant level of uncertainty at
December 31, 2022.

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, discount rates
consistent with the level of risk of achievement, and volatility rates. 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. The contingent consideration had no remaining fair
value at December 31, 2022 and totaled $9.1 million at December 31, 2021. The
change in fair value of contingent consideration, recorded within general and
administrative expenses in the consolidated statement of comprehensive loss, for
the year ended December 31, 2022 totaled $3.4 million and was a reduction in
fair value and, therefore, a reduction in operating expenses.

Goodwill Impairment


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 in a business combination. Goodwill is not
amortized but reviewed for impairment. Goodwill is reviewed annually, as of
October 1, and whenever events or changes in circumstances indicate that the
carrying value of the goodwill may not be recoverable. We test goodwill for
impairment at the reporting unit level. A reporting unit is a segment or one
level below an operating segment (referred to as a component) to which goodwill
is assigned when initially recorded. Under U.S. GAAP, we have the option to
first assess qualitative factors to determine whether the existence of current
events or circumstances would lead to a determination that it is more likely
than not that the fair value of one of our reporting units is greater than its
carrying value. If we determine it is more likely than not that the fair value
of a reporting unit is greater than its carrying value, no further testing is
necessary. However, if we conclude otherwise, then we are required to perform a
quantitative impairment test by calculating the fair value of the reporting unit
and comparing the fair value with the carrying value of the reporting unit. If
the fair value of the reporting unit is less than its carrying value, a non-cash
impairment charge is recorded in an amount equal to that difference with the
loss not to exceed the total amount of goodwill allocated to the reporting unit.
We have the option to bypass the qualitative assessment for any reporting unit
and proceed directly to performing the quantitative goodwill impairment test.
For reporting units where we perform the quantitative test, we determine the
fair value using the income approach or a combination of the income approach and
the market approach as appropriate. For a company such as ours, the income and
market approaches will generally provide the most reliable indications of fair
value because the value of such companies is dependent on their ability to
generate

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earnings. In the income approach, we utilize a discounted cash flow analysis,
which involves estimating the expected after-tax cash flows that will be
generated by each reporting unit and then discounting those cash flows to
present value, reflecting the relevant risks associated with each reporting unit
and the time value of money. This approach requires the use of significant
estimates and assumptions, including forecasted revenue growth rates, forecasted
earnings before interest, taxes, depreciation and amortization ("EBITDA")
margins, and discount rates. Our forecasts are based on historical experience,
current backlog, expected market demand, and other industry information. In the
market approach, we utilize the guideline company method, which involves
calculating revenue and EBITDA multiples based on operating data from guideline
publicly traded companies. Multiples derived from guideline companies provide an
indication of how much a knowledgeable investor in the marketplace would be
willing to pay for a company. These multiples are evaluated and adjusted based
on specific characteristics of the reporting units relative to the selected
guideline companies and applied to the reporting units' operating data to arrive
at an indication of value. Changes in key assumptions utilized in our assessment
could significantly impact our fair value calculations which could result in
goodwill impairments in future periods.

During the second quarter of 2022, a substantial decline in our stock price and
actual and forecasted revenues, and other factors such as leadership changes in
the Vapotherm Access reporting unit, represented indicators of impairment which
triggered an interim impairment assessment. As a result, during the second
quarter of 2022, we recognized an impairment charge of $14.7 million to write
down the goodwill of the Vapotherm Access reporting unit to its estimated fair
value. We compared the fair value of our reporting units to their carrying
values as of October 1, 2022 and 2021, noting no additional impairments of
goodwill during 2022 or 2021.

Recent Accounting Pronouncements


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

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