Vivos Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Vivos Therapeutics is a medical technology company that develops and commercializes customized oral appliances and related protocols, marketed as the Vivos System, for sleep-disordered breathing, including mild-to-moderate obstructive sleep apnea. Its primary business model is the Vivos Integrated Practice (VIP) program, which trains dentists and provides related services. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
The company reported 23,012,119 common shares outstanding as of November 15, 2021. Management stated that its products had been used by more than 22,000 patients and that more than 1,350 dentists had been trained worldwide.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $4.5 million, up 38% | $12.5 million, up 28% |
| Product revenue | $1.7 million | $4.8 million |
| Service revenue | $2.8 million | $7.6 million |
| Gross profit | $3.2 million | $9.5 million |
| Gross margin | 70%, versus 78% | 76%, versus 79% |
| Operating loss | $5.5 million | $13.0 million |
| Net loss | $5.5 million, or $0.26 per share | $12.9 million, or $0.62 per share |
Revenue growth reflected higher appliance volumes, VIP enrollment revenue, center revenue, Billing Intelligence Services, and newly introduced management, medical integration, and orofacial myofunctional therapy services. The company sold 2,996 oral appliance arches in the quarter and 8,648 during the nine-month period.
Operating expenses increased to $8.7 million for the quarter and $22.5 million for the nine months. General and administrative expense rose primarily from higher compensation, headcount, public-company costs, professional fees, insurance, travel, and bad-debt expense. Sales and marketing expense increased due to marketing campaigns, VivoScore home sleep apnea test deployments, conferences, website and materials development, and sales commissions.
Cash and cash equivalents were $28.5 million at September 30, 2021, compared with $18.2 million at December 31, 2020 and $1.5 million at September 30, 2020. Net cash used in operating activities was $11.6 million for the nine months, compared with $2.1 million in the prior-year period. Net cash used in investing activities was $2.2 million, primarily for the Vivos Institute buildout and a business acquisition. Financing activities provided $24.2 million, principally from the May 2021 follow-on offering.
Total debt was $1.3 million, consisting primarily of the Paycheck Protection Program loan, which matured in May 2022. The company had submitted an application for forgiveness but stated that forgiveness was not assured. Current liabilities were $8.2 million, including $3.7 million of contract liabilities and $1.3 million of current debt.
Material changes versus the prior comparable period
- Revenue increased $1.3 million, or 38%, in the quarter and $2.7 million, or 28%, for the nine months.
- Gross profit increased, but gross margin declined by approximately 8 percentage points in the quarter and 3 percentage points for the nine months, primarily because of higher VIP enrollment costs, including VivoScore deployments.
- Operating loss widened by $3.7 million in the quarter and $7.2 million for the nine months as operating expenses grew faster than gross profit.
- Net loss increased from $1.8 million to $5.5 million in the quarter and from $5.8 million to $12.9 million for the nine months.
- Operating cash burn increased by approximately $9.6 million year over year.
- The company completed a May 2021 follow-on offering of 4.6 million shares at $6.00 per share, generating approximately $25.4 million of net proceeds. Common shares outstanding increased from 18.2 million at December 31, 2020 to 23.0 million at September 30, 2021.
- Headcount increased from approximately 92 employees at September 30, 2020 to approximately 147 employees at September 30, 2021.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal revenue or earnings guidance. It stated that cash resources following the May 2021 offering were expected to fund planned operations for at least 24 months from the offering, subject to unexpected events, costs, contingencies, and the pace of cash consumption. The company continues to incur losses and negative operating cash flow and may require additional equity, debt, warrant or option proceeds, or strategic transactions if operating cash flow is insufficient.
- Management expects inflationary pressures to require appliance price increases beginning in January 2022; the effect on demand and sales was not yet determinable.
- COVID-19 had not materially affected third-quarter results overall, but Delta-related restrictions delayed training and case starts for some Canadian VIPs. Future variants and local restrictions remain uncertain.
- Growth depends on recruiting and retaining VIP dentists, increasing the number of active VIPs and case starts, and achieving marketplace acceptance of the Vivos System and related services. Approximately 30% of VIPs accounted for all new case starts during the quarter.
- The company identified supply-chain risks, although it reported no significant appliance supply disruption. A Suez Canal blockage delayed some VivoScore shipments earlier in 2021.
- The company continues to report a material weakness in internal control over financial reporting. Remediation efforts include additional accounting personnel, improved segregation of duties, review controls, and technology enhancements; the company stated that the weakness had not yet been remediated.
- Founder and Chief Medical Officer Dr. G. Dave Singh began a 12-month sabbatical effective September 1, 2021, retained his title and compensation, and resigned from the board on September 22, 2021.
- The Washington State Department of Financial Institutions was investigating certain pre-IPO common-stock sales by a former employee and independent contractor. The company reported no known developments during or after the quarter.
- Vivos and Ortho-Tain are involved in related litigation. The company’s Colorado action survived a motion to dismiss, while a related Illinois case against Vivos and others remained stayed pending resolution of the Colorado matter. The filing does not provide a quantified potential loss.
- Outstanding options and warrants totaled approximately 2.9 million and 2.6 million, respectively, at September 30, 2021, and were excluded from diluted loss per share because they were antidilutive.
Important facts for investors to verify
- Whether revenue growth and appliance case starts can accelerate sufficiently to offset rising operating expenses and restore gross margins.
- The company’s actual cash runway in light of approximately $11.6 million of nine-month operating cash burn and continuing net losses.
- The status and ultimate forgiveness of the $1.3 million PPP loan.
- Progress toward remediation of the material weakness in internal control over financial reporting.
- The effect of planned January 2022 price increases, inflation, supply-chain conditions, and COVID-19 restrictions on demand and margins.
- The outcome and potential financial exposure from the Washington investigation and Ortho-Tain litigation.
- The dilution implications of outstanding options, warrants, and future financing requirements.