VAPOTHERM, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements for the fiscal quarter endedJune 30, 2020 , included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the "Risk Factors" section of our 2019 Form 10-K filed with theSEC onMarch 4, 2020 , our Quarterly Report on Form 10-Q filed with theSEC onMay 5, 2020 , and this Quarterly Report on Form 10-Q.Vapotherm, Inc. is a global medical technology company 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 delivers non-invasive ventilatory support by providing heated, humidified and oxygenated air at a high velocity to patients through a comfortable small-bore nasal interface. Our Precision Flow systems, which use 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. As ofJune 30, 2020 , more than 2.3 million patients have been treated with our Precision Flow systems, and we have a global installed base of over 22,000 capital units. The efficacy ofVapotherm's products is supported by a significant body of clinical evidence across multiple patient populations suffering from respiratory distress. We have developed the only high velocity nasal insufflation device clinically validated as an alternative to non-invasive positive pressure ventilation ("NIPPV") while addressing many of its limitations, including through our sponsored 204 patient, multisite randomized controlled trial in the emergency department ("ED") which was published in theJuly 2018 issue of Annals of Emergency Medicine. Additionally, inApril 2020 Heart and Lung, theJournal 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. InMarch 2020 , theWorld Health Organization declared a global pandemic related to the novel coronavirus ("COVID-19").Vapotherm's high velocity therapy is a first-line therapy for treating respiratory distress, which is experienced by many COVID-19 patients. The Journal of theAmerican Medical Association published data from mainlandChina inApril 2020 suggesting that 19% of all COVID-19 patients experience respiratory distress and require some amount of respiratory support. Our hospital customers around the world are using our technology to treat the respiratory distress experienced by many COVID-19 patients so that they can triage their sickest patients to a limited number of ventilators. As a result, we have seen a significant increase in worldwide demand for our products from both new and existing accounts in the first six months of 2020. Our operations team, with support from our primarily domestic supply chain, has increased our production capacity to more than twenty times our pre-COVID-19 production capacity, including adding additional shifts and production lines. Looking ahead, our focus is on managing our production levels and supply chain to meet customer demand during this pandemic. The recent increase in demand for our products has been accompanied by gross profit headwinds, such as increases in air freight costs and expediting fees for components, a higher mix of capital equipment and international revenue, and many related risks to our business. The full extent of the impact of the COVID-19 pandemic will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to treat or contain COVID-19 or to otherwise limit its impact, among others. We currently offer four versions of our Precision Flow systems: Precision Flow Hi-VNI, Precision Flow Plus, Precision Flow Classic and Precision Flow Heliox. We also initiated a limited release of our Oxygen Assist Module to certainUnited Kingdom neonatal intensive care unit accounts in the first quarter of 2020 and to certain adult intensive care unit accounts inGermany andAustria in the second quarter of 2020 for adult hypoxic patients, and we may expand those limited releases to additionalUnited Kingdom and European accounts. The Oxygen Assist Module is designed to be used with all versions of our Precision Flow systems except for the Precision Flow Heliox. Our Oxygen Assist Module is designed to help clinicians maintain the pulse oxygen saturation ("SpO2") within the target SpO2 range over a significantly greater proportion of time while requiring significantly fewer manual adjustments to the equipment. Maintenance of the prescribed oxygen saturation range may reduce the health risks associated with dosing too much, or too little, oxygen. We intend to fully launch the Oxygen Assist Module commercially throughout theUnited Kingdom andEurope by the end of 2020, at which time we believe we will begin generating revenue from the product. Inthe United States , the Oxygen Assist Module was granted Breakthrough Device Designation by theUnited States Food and Drug Administration ("FDA") onApril 2, 2020 for the following indication: The Oxygen Assist Module (OAM) 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 blood oxygen saturation. OAM is intended to treat pediatric patients (neonates and infants ?1000g) in monitored clinical environments (e.g., NICU). We are continuing to work on an Investigational Device Exemption and, if authorized, plan to initiate a neonate study by the end of the year. 27 -------------------------------------------------------------------------------- We generate revenue from sales of our Precision Flow systems and the related disposable products utilized with our Precision Flow systems. To a lesser extent, we generate revenue from sales of the Precision Flow system's companion products, which include the Vapotherm Transfer Unit 2.0, the Q50 compressor and various adaptors. 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 the financed purchase of Precision Flow capital units, to bundled discounts involving the placement of Precision Flow capital units for use by the customer at no upfront charge in connection with the customer's ongoing purchase of disposable products. We sell our Precision Flow systems to hospitals through a direct sales organization inthe United States and in theUnited Kingdom and through distributors in other select countries outside ofthe United States andUnited Kingdom . We intend to fully launch our Oxygen Assist Module commercially throughout theUnited Kingdom andEurope by the end of 2020 through a direct sales organization in theUnited Kingdom and through distributors in other select countries inEurope . In addition, we have clinical educatorswho are experienced users of high velocity therapy andwho focus on our medical education efforts to facilitate adoption and increase utilization. We focus on physicians, respiratory therapists and nurseswho work in acute hospital settings, including the ED and adult, pediatric and neonatal ICUs. Our relationship with these clinicians is particularly important, as it enables our products to follow patients through the care continuum. We have sold our Precision Flow systems to over 1,600 hospitals acrossthe United States , where they have been primarily deployed in the ICU setting. We assemble our Precision Flow systems in our facility inNew Hampshire and we rely on third-party suppliers for a majority of the components of our products, including many single source suppliers. Historically, we maintained higher levels of inventory to protect ourselves from supply interruptions, and, as a result, we were subject to the risk of inventory obsolescence and expiration, which could lead to inventory impairment charges. Currently, however, as we seek to fulfill increased demand in connection with the COVID-19 pandemic, there have been times where we were not able to carry higher levels of inventory, and as a result, we have experienced and may in the future experience supply interruptions. We currently ship our Precision Flow systems from our facility inNew Hampshire directly to ourUnited States customers and many of our international distributors on a purchase order basis. Warehousing and shipping operations for some of our international distributors are handled by a third-party vendor with facilities located inthe 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 throughoutthe 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 public offerings of our common stock, private placements of our convertible preferred stock, sales of our Precision Flow systems and amounts borrowed under our credit facilities. We have devoted the majority of our resources to research and development activities related to our Precision Flow systems including regulatory initiatives and sales and marketing activities. We have invested heavily in our sales and marketing function by increasing the number of sales representatives and clinical educators to facilitate adoption and increase utilization of our high velocity therapy products and expanded our digital marketing initiatives and medical education programs. For the second quarter of 2020, we generated revenue of$35.2 million and had a net loss of$8.0 million compared to revenue of$12.0 million and a net loss of$12.9 million for the second quarter of 2019. Our accumulated deficit as ofJune 30, 2020 was$287.3 million . In the second quarter of 2020, 73.1% of our revenue was derived inthe United States and 26.9% was derived outsidethe United States . No single customer accounted for more than 10% of our revenue. We intend to continue to make significant investments in our sales and marketing organization by increasing the number ofU.S. sales representatives, expanding our international marketing programs and expanding direct to clinician digital marketing efforts to help facilitate further adoption among existing hospital accounts as well as broaden awareness of our products to new hospitals. We also expect to continue to make investments in research and development, regulatory affairs and clinical studies to develop future generations of our 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 and explore further expansion thereof to satisfy COVID-19 related demand, we expect to continue to make investments in our production capabilities. Because of these and other factors, we expect to continue to incur net losses for the next several years and we may require additional funding, which may include future equity, including sales under our at-the-market sales agreement withJefferies LLC datedDecember 20, 2019 under which we may offer and sell from time to time our common stock having aggregate sales proceeds of up to$50.0 million , and debt financings. During the first six months of 2020, the Company sold 511,648 shares of its common stock through its at-the-market stock offering program. The sales generated net proceeds of approximately$9.8 million , net of sales commissions and offering expenses. As ofJune 30, 2020 , there was approximately$39.7 million in remaining capacity under the at-the-market stock offering program. 28 -------------------------------------------------------------------------------- Results of Operations Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in thousands) Net revenue$ 35,152 $ 11,986 $ 54,267 $ 24,285 Cost of revenue 17,544 6,527 27,442 13,647 Gross profit 17,608 5,459 26,825 10,638 Operating expenses Research and development 3,895 3,167 7,257 6,440 Sales and marketing 14,858 9,432 28,175 18,593 General and administrative 5,627 4,532 10,878 9,411 Total operating expenses 24,380 17,131 46,310 34,444 Loss from operations (6,772 ) (11,672 ) (19,485 ) (23,806 ) Other expense, net (1,260 ) (1,208 ) (2,391 ) (2,038 ) Net loss$ (8,032 ) $ (12,880 ) $ (21,876 ) $ (25,844 ) Revenue Three Months Ended June 30, 2020 2019 Change (in thousands, except percentages) Amount % of Revenue Amount % of Revenue $ % Product Revenue: Capital Equipment$ 19,305 54.9 %$ 2,645 22.0 %$ 16,660 629.9 % Disposable 13,163 37.5 % 8,530 71.2 % 4,633 54.3 % Subtotal Product Revenue 32,468 92.4 % 11,175 93.2 % 21,293 190.5 % Lease Revenue Capital Equipment$ 1,634 4.6 %$ 284 2.4 %$ 1,350 475.35 % Other 511 1.5 % - - 511 100.0 % Service and Other Revenue 539 1.5 % 527 4.4 % 12 2.3 % Total Revenue$ 35,152 100.0 %$ 11,986 100.0 %$ 23,166 193.3 % Revenue increased$23.2 million , or 193.3%, to$35.2 million for the second quarter of 2020 compared to$12.0 million for the second quarter of 2019. The increase in revenue was primarily attributable to a$16.7 million and$4.6 million increase in capital equipment and disposable revenue, respectively. Capital equipment revenue increased 629.9% in the second quarter of 2020 primarily 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 boththe United States and International markets. Disposable revenue increased 54.3% in the second quarter of 2020 primarily driven by an increase in the worldwide installed base of Precision Flow units and increased 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:
Three Months Ended June 30,
2020 2019 Change
(in thousands, except percentages)
Amount % of Revenue Amount % of Revenue $ %
United States $ 25,682 73.1 % $ 8,678 72.4 % $ 17,004 195.9 %
International 9,470 26.9 % 3,308 27.6 % 6,162 186.3 %
Total Revenue $ 35,152 100.0 % $ 11,986 100.0 % $ 23,166 193.3 %
29
-------------------------------------------------------------------------------- Revenue generated inthe United States increased$17.0 million , or 195.9%, to$25.7 million for the second quarter of 2020, compared to$8.7 million for the second quarter of 2019. Revenue generated in our International markets increased$6.2 million , or 186.3%, to$9.5 million for the second quarter of 2020, compared to$3.3 million for the second quarter of 2019. BothUnited 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, an increase in single-use disposable sales due to higher installed bases of Precision Flow units, and increased average selling prices. Six Months Ended June 30, 2020 2019 Change (in thousands, except percentages) Amount % of Revenue Amount % of Revenue $ % Product Revenue: Capital$ 24,303 44.8 %$ 4,660 19.2 %$ 19,643 421.5 % Disposable 25,593 47.1 % 17,549 72.3 % 8,044 45.8 % Subtotal Product Revenue 49,896 91.9 % 22,209 91.5 % 27,687 124.7 % Lease Revenue Capital Equipment 2,278 4.2 % 947 3.9 % 1,331 140.5 % Other 903 1.7 % - - 903 100.0 % Service and Other Revenue 1,190 2.2 % 1,129 4.6 % 61 5.4 % Total Revenue$ 54,267 100.0 %$ 24,285 100.0 %$ 29,982 123.5 % Revenue increased$30.0 million , or 123.5%, to$54.3 million for the first six months of 2020 compared to$24.3 million for the first six months of 2019. The increase in revenue was primarily attributable to a$19.6 million and$8.0 million increase in capital equipment and disposable revenue, respectively. Capital equipment revenue increased 421.5% in the first six months of 2020 primarily 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. Disposable revenue increased 45.8% in the first six months of 2020 primarily driven by an increase in the worldwide installed base of Precision Flow units 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:
Six Months Ended June 30,
2020 2019 Change
(in thousands, except percentages)
Amount % of Revenue Amount % of Revenue $ %
United States $ 40,023 73.8 % $ 18,727 77.1 % $ 21,296 113.7 %
International 14,244 26.2 % 5,558 22.9 % 8,686 156.3 %
Total Revenue $ 54,267 100.0 % $ 24,285 100.0 % $ 29,982 123.5 %
Revenue generated in the United States increased $21.3 million , or 113.7%, to
$40.0 million for the first six months of 2020, compared to $18.7 million for
the first six months of 2019. Revenue generated in our International markets
increased $8.7 million , or 156.3%, to $14.2 million for the first six months of
2020, compared to $5.6 million for the first six months of 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 COVID-19 as well
as an increase in single-use disposable sales due to higher installed bases of
Precision Flow units.
Cost of Revenue and Gross Profit
Cost of revenue increased$11.0 million , or 168.8%, to$17.5 million in the second quarter of 2020 compared to$6.5 million in the second quarter of 2019. Cost of revenue increased$13.8 million , or 101.1%, to$27.4 million in the first six months of 2020 compared to$13.6 million in the first six months of 2019. These increases were primarily due to higher materials 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. 30 -------------------------------------------------------------------------------- Gross profit increased to 50.1% in the second quarter of 2020 compared to 45.5% in the second quarter of 2019. Gross profit increased to 49.4% in the first six months of 2020 compared to 43.8% in the first six months of 2019. Gross profit was positively impacted by improved overhead absorption due to higher production throughput. Partially offsetting these positive factors were higher labor costs and increased supplier freight and expediting fees to meet the rapid increase in production capacity, and to a lesser extent a higher mix of Precision Flow systems. Gross profit was also positively impacted by higher average selling prices of capital equipment inthe United States and International markets, partially offset by lower average selling prices of disposables in International markets.
Research and Development Expenses
Research and development expenses increased$0.7 million , or 23.0%, to$3.9 million in the second quarter of 2020 compared to$3.2 million in the second quarter of 2019. As a percentage of revenue, research and development expenses decreased to 11.1% in the second quarter of 2020 compared to 26.4% in the second quarter of 2019. Research and development expenses increased$0.8 million , or 12.7%, to$7.3 million in the first six months of 2020 compared to$6.4 million in the first six months of 2019. As a percentage of revenue, research and development expenses decreased to 13.4% in the first six months of 2020 compared to 26.5% in the first six months of 2019. The increase in research and development expenses in both comparison periods was due to increased employee-related expenses and stock-based compensation. Additionally, the increase in research and development expenses during the first six months of 2020 was related to increased product development and prototype costs.
Sales and Marketing Expenses
Sales and marketing expenses increased$5.4 million , or 57.5%, to$14.9 million in the second quarter of 2020 compared to$9.4 million in the second quarter of 2019. As a percentage of revenue, sales and marketing expenses decreased to 42.3% in the second quarter of 2020 compared to 78.7% in the second quarter of 2019.
Sales and marketing expenses increased
The increase in sales and marketing expenses in both comparison periods 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. The increase in sales and marketing expenses in both comparison periods was partially offset by a reduction in travel expenses due to COVID-19. Additionally, the increase in sales and marketing expenses during the first six months of 2020 was also partially offset by a reduction in marketing initiatives and training costs.
General and Administrative Expenses
General and administrative expenses increased$1.1 million , or 24.2%, to$5.6 million in the second quarter of 2020 compared to$4.5 million in the second quarter of 2019. As a percentage of revenue, general and administrative expenses decreased to 16.0% in the second quarter of 2020 compared to 37.8% in the second quarter of 2019. General and administrative expenses increased$1.5 million , or 15.6%, to$10.9 million in the first six months of 2020 compared to$9.4 million in the first six months of 2019. As a percentage of revenue, general and administrative expenses decreased to 20.0% in the first six months of 2020 compared to 38.8% in the first six months of 2019. The increase in general and administrative expenses in both comparison periods was primarily due to increases in employee-related expenses, insurance and reserves for bad debt offset by reductions in travel expenses and legal costs. Additionally, the increase in general and administrative expenses during the second quarter of 2020 was related to increased stock-based compensation. 31 --------------------------------------------------------------------------------
Other Expense, Net
Other expense, net increased$0.1 million , or 4.3%, to$1.3 million in the second quarter of 2020 compared to$1.2 million in the second quarter of 2019. Other expense, net increased$0.4 million , or 17.3%, to$2.4 million in the first six months of 2020 compared to$2.0 million in the first six months of 2019. The increase in other expense, net in the second quarter of 2020 was due to decreased interest income primarily due to lower interest rates on invested balances, partially offset by a decrease in interest expense primarily due to lower interest rates on outstanding borrowings. The increase in other expense, net in the first six months of 2020 was due to a decreased interest income primarily due to lower interest rates on invested balances partially offset by an increase in interest expense primarily related to additional borrowings under our credit facilities.
Liquidity and Capital Resources
As ofJune 30, 2020 , we had cash, cash equivalents and restricted cash of$150.2 million and an accumulated deficit of$287.3 million . Our primary sources of capital to date have been from public offerings of our common stock, private placements of our convertible preferred stock, sales of our Precision Flow systems and amounts borrowed under credit facilities. Since inception, we have raised a total of$162.6 million in net proceeds from private placements of our convertible preferred stock. OnNovember 16, 2018 , we completed an initial public offering of 4,600,000 shares of common stock at a price of$14.00 per share, which raised net proceeds of$57.4 million . InAugust 2019 , we completed a public offering of 3,570,750 shares of common stock, which included the full exercise by the underwriters of their option to purchase 465,750 shares of common stock, at a price of$14.50 per share, which raised net proceeds of$48.3 million after deducting the underwriting discount of$3.1 million and offering expenses of$0.4 million . OnDecember 20, 2019 , the Company entered into an Open Market Sales Agreement (the "ATM Agreement") withJefferies 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. DuringApril 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. InMay 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 .
As of
We believe that our existing cash resources and availability under our line of credit facility will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. If these sources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or make additional borrowings under our existing line of credit facility or enter new debt financing arrangements. If we raise additional funds by issuing equity securities, our stockholders would experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. Additional financing may not be available at all, or 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 flows for the periods
indicated:
Six Months Ended June 30,
2020 2019
(in thousands)
Net cash provided by (used in):
Operating activities $ (24,675 ) $ (18,886 )
Investing activities (3,839 ) (3,724 )
Financing activities 105,232 10,508
Effect of exchange rate changes on cash, cash
equivalents
and restricted cash (28 ) (13 )
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 76,690 $ (12,115 )
32
--------------------------------------------------------------------------------
Operating Activities
The net cash used in operating activities was$24.7 million in the first six months of 2020 and consisted primarily of a net loss of$21.9 million and an increase in operating assets of$7.9 million partially offset by$5.1 million in non-cash charges. Non-cash charges consisted primarily of stock-based compensation expense and depreciation and amortization expense. The net cash used in operating activities was$18.9 million in the first six months of 2019 and consisted primarily of a net loss of$25.8 million , partially offset by$4.9 million in non-cash charges and a decrease of$2.0 million in net operating assets. Non-cash charges consisted primarily of stock-based compensation expense, depreciation and amortization expense, and provision for inventories. Investing Activities Net cash used in investing activities for the first six months of 2020 and 2019 consisted of purchases of property and equipment of$3.8 million and$2.1 million , respectively. In addition, the net cash used in investing activities in the first six months of 2019 included$1.6 million to acquire Solus.
Financing Activities
Net cash provided by financing activities was$105.2 million in the first six months of 2020 and consisted of proceeds from the issuance of common stock in connection with public and at-the-market offerings of$94.2 and$9.9 million , respectively, borrowings of$1.0 million under our short-term line of credit, and proceeds from common stock issuances in connection with our ESPP and stock option exercises of$0.4 and$0.3 million , respectively, partially offset by common stock offering costs of$0.5 million . Net cash provided by financing activities was$10.5 million in the first six months of 2019 and primarily consisted of borrowings of$10.5 million under our credit facilities. Indebtedness Revolving Line of Credit InNovember 2016 , we entered into the Revolver Agreement withWestern Alliance Bank , which provided for$7.0 million of available borrowings. Availability under the Revolving Facility is calculated based upon 80% of the eligible receivables (net of pre-paid deposits, pre-billed invoices, other offsets, and contras related to each specific account debtor).
Interest is paid monthly on the average outstanding balance at the Wall Street
Journal Prime Rate plus 1.75%, floating, subject to a floor of 3.5%. The
interest rate was 5.25% at
OnApril 6, 2018 , we amended and restated the Revolving Facility (the "Amended Revolver Agreement") to extend the maturity date fromSeptember 30, 2018 toSeptember 30, 2020 and increase the revolving line of credit to$7.5 million . OnMarch 22, 2019 , we amended and restated the Amended Revolver Agreement (the "2019 Amended Revolver Agreement"), which increased the allowable permitted indebtedness under the 2019 Amended Revolver Agreement in connection with our credit card program from$0.3 million to$0.5 million . OnJuly 7, 2020 , we entered into a second amendment to the Amended Revolver Agreement (as amended, the "2020 Amended Revolver Agreement"), which, under certain circumstances, reduces the amount of funds required to be held on deposit withWestern Alliance Bank .
The outstanding balance under the 2020 Amended Revolver Agreement was
Term Debt
OnApril 6, 2018 , we entered into the Credit Agreement and Guaranty with Perceptive. The Credit Agreement and Guaranty initially provided for a term loan facility in the amount of$42.5 million , available in three tranches, of which the first tranche of$20.0 million was drawn upon closing. This first tranche paid off the borrowings under a former loan arrangement. A second tranche of$10.0 million was drawn onJuly 20, 2018 . The availability of the final tranche of$12.5 million was dependent upon the Company achieving a minimum of$43.2 million in revenue in 2018. OnSeptember 27, 2018 , the Credit Agreement and Guaranty was amended to remove this revenue requirement and extend the final draw down date toMarch 31, 2019 . We borrowed$2.0 million from this third tranche onSeptember 27, 2018 . OnMarch 22, 2019 , we drew the remaining$10.5 million under the Amended Credit Agreement and Guaranty increasing the total outstanding balance to$42.5 million . We also entered into a second amendment to the Amended Credit Agreement and Guaranty increasing the allowable permitted indebtedness in connection with our credit card program from$0.3 million to$0.5 million . OnJune 16, 2020 , we entered into a third amendment to the Amended Credit Agreement and Guaranty (the "2020 Amended Credit Agreement and Guaranty"), which amended the prepayment premium by clarifying the methodology for calculating Perceptive's annualized internal rate of return under the term loan. 33
-------------------------------------------------------------------------------- The outstanding principal amount of the 2020 Amended Credit Agreement and Guaranty accrues interest at an annual rate equal to the applicable margin of 9.06% plus the greater of (a) one-month LIBOR and (b) 1.75% per year. The term loan is secured by substantially all our personal property including intellectual property. All unpaid and accrued unpaid interest with respect to each such term loan is due and payable in full on the maturity date atApril 6, 2023 . On the maturity date, in addition to the payment principal and accrued interest, we will be required to make a payment of 0.5% of the total amount borrowed under the 2020 Amended Credit Agreement and Guaranty, unless we have already made such payment in connection with an acceleration or prepayment of borrowings under the term loan. In the event we prepay all or part of this term loan facility prior to the maturity date, we may be subject to additional prepayment fees which decrease as the time to maturity decreases. We issued warrants to Perceptive to purchase 37,693, 18,846 and 3,769 shares of our Series D convertible preferred stock at an exercise price of$15.92 per share inApril 2018 ,July 2018 andSeptember 2018 , respectively. In connection with our initial public offering inNovember 2018 these warrants converted to common stock warrants at an exercise price of$15.92 . Each of the warrants has a term of 10 years. In connection with the draw down onMarch 22, 2019 , we granted warrants to purchase 19,789 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 would have expired byMarch 2029 . OnJune 10, 2020 , Perceptive exercised all of its outstanding warrants in a cashless exercise transaction resulting in the issuance of 41,066 shares of common stock to Perceptive.
We were in compliance with all debt covenants under both the 2020 Amended
Revolver Agreement and 2020 Amended Credit Agreement and Guaranty at
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable
regulations of the
Critical Accounting Policies and Estimates
This management's discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. For further information regarding our critical accounting policies, see Note 2 "Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements and our critical accounting policies within the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Form 10-K. There have been no changes in our accounting policies except for certain new policies or enhanced policy descriptions, which are discussed below related to self-insurance, other lease revenues, and stock compensation expense related to our 2018 Employee Stock Purchase Program (ESPP"). Insurance EffectiveJanuary 1, 2020 , we are self-insured for certain obligations related to health insurance. We also purchase stop-loss insurance to protect us 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. Our estimates consider expected claim experience and other factors. Receivables for insurance recoveries are recorded as assets, on an undiscounted basis. Our liabilities are based on estimates, and, while we believe that our accruals are adequate, the ultimate liability may be significantly different from the amounts recorded. Changes in claims experience, our ability to settle claims or other estimates and judgments used by us could have a material impact on the amount and timing of expense for any period. 34 --------------------------------------------------------------------------------
Lease Revenue
We enter into agreements to lease our capital equipment. For such sales, we account for revenue under ASC 840, Leases, 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 in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. Equipment included in arrangements including transfer of title are accounted for as sales-type leases and we recognize the total value of the lease payments due over the lease term to revenue at the inception of the lease. We record the current value of future lease payments under prepaid expenses and other current assets in the condensed consolidated balance sheets and these amounts totaled$1.8 and$0.9 million atJune 30, 2020 andDecember 31, 2019 , respectively. Equipment included in arrangements that do not include the transfer of title, nor any of the capital lease criteria, are accounted for as operating leases and revenue is recognized on a straight-line basis as it becomes receivable monthly over the term of the lease. We also enter 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.
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 condensed 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 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 onU.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 not 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 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. Expected volatility, dividend yield and forfeiture rates are estimated in a manner similar to option grants described above.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. JOBS Act As a company with (i) less than$1.07 billion in revenue during our last fiscal year (ii) a market value of our common stock of less than$700.0 million as of our most recently completed second quarter and (iii) less than$1.0 billion of non-convertible debt over a three-year period, we qualify as an "emerging growth company," as defined in the JOBS Act, as of the date of our last annual evaluation which occurred onDecember 31, 2019 . An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. We expect we will no longer qualify as an emerging growth company as ofDecember 31, 2020 and, at that time, will begin to adopt accounting pronouncements at dates applicable to public companies. 35
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