Vivos Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. The unaudited filing was signed December 20, 2022. Vivos develops and commercializes oral appliances, treatment protocols, training, and related services for dental practices treating dentofacial abnormalities and mild-to-moderate obstructive sleep apnea and snoring.
Financial performance and position
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $4.184 million | $4.497 million | $7.828 million | $7.945 million |
| Product revenue | $2.293 million | $1.737 million | $4.342 million | $3.124 million |
| Service revenue | $1.891 million | $2.760 million | $3.486 million | $4.821 million |
| Gross profit | $2.588 million | $3.624 million | $5.139 million | $6.314 million |
| Gross margin | 62% | 81% | 66% | 79% |
| Operating loss | $(6.964) million | $(4.061) million | $(13.561) million | $(7.468) million |
| Net loss | $(6.992) million | $(4.043) million | $(12.322) million | $(7.442) million |
| Net loss per share | $(0.33) | $(0.19) | $(0.58) | $(0.38) |
- Six-month operating expenses were $18.700 million, including $15.497 million of general and administrative expense and $2.879 million of sales and marketing expense.
- Cash and cash equivalents were $12.661 million at June 30, 2022, compared with $24.030 million at December 31, 2021. Total assets were $24.375 million and total liabilities were $9.536 million.
- Net cash used in operating activities was $10.745 million for the six months ended June 30, 2022, versus $7.555 million in the prior-year period. Investing cash use was $0.624 million, primarily for software and other property and equipment. There was no financing cash flow during the period.
- The company had no remaining debt after the approximately $1.3 million PPP loan was forgiven in January 2022. Operating lease liabilities totaled $2.908 million, including current and long-term portions.
- Accumulated deficit increased to $67.946 million from $55.623 million at December 31, 2021. Stockholders’ equity declined to $14.839 million.
Material changes versus the prior comparable period
- Second-quarter revenue declined 7% and first-half revenue declined 1%. Product revenue increased 32% in the quarter and 39% in the first half, while service revenue declined 31% and 28%, respectively.
- Vivos sold 3,321 oral appliance arches in the second quarter and 6,286 in the first half, compared with 3,082 and 5,652, respectively, in the prior-year periods.
- VIP enrollment revenue declined materially. The company enrolled 58 VIPs in the second quarter and 90 in the first half, compared with 73 and 126 in the respective prior-year periods.
- Revenue recognition for VIP enrollment contracts changed under ASC 606. The company separately identified performance obligations and recognized revenue as those obligations were satisfied or over estimated customer lives. The change contributed to reported declines and included a cumulative prior-year adjustment of approximately $0.4 million decrease in VIP revenue, partly offset by a $0.1 million increase related to billing intelligence services.
- Gross margin contracted substantially because of higher raw-material and appliance costs, added VIP enrollment incentives, and costs associated with the SleepImage program.
- General and administrative expense rose 26% in the quarter and 39% in the first half, primarily due to increased headcount, compensation, consulting and professional fees, travel, information technology, and public-company costs. Employees increased from 133 at June 30, 2021 to 180 at June 30, 2022.
- The first half included $1.287 million of non-cash income from PPP loan forgiveness, but this benefit did not recur in the second quarter.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that available cash may not be sufficient to fund operations and strategic objectives for the twelve months following issuance of the financial statements. The company expects to require additional equity or debt financing, but there is no assurance that financing will be available on acceptable terms or at all.
- Internal controls: Disclosure controls and procedures were deemed ineffective because of previously reported material weaknesses and an additional material weakness related to revenue recognition. Remediation efforts include third-party consultants, additional accounting personnel, enhanced review procedures, new controls, and technology improvements.
- Operating concentration: Approximately 36% of VIPs accounted for all new treatment case starts during the quarter, indicating reliance on a relatively concentrated group of active providers. The Airway Alliance Program did not contribute meaningfully to second-quarter revenue.
- Market and operating risks: COVID-19-related workforce shortages and patient precautions continued to affect dental practices and revenue. Inflation increased appliance input costs, prompting pricing changes effective May 1, 2022. Supply-chain constraints, the war in Ukraine, recession risk, capital-market volatility, seasonal demand, bad debts, and regulatory or FDA compliance requirements may adversely affect results.
- Revenue recognition judgments: Revenue depends on estimates of VIP customer lives, breakage, discounts, performance obligations, and collectability. These estimates could materially affect future results.
- Legal matters: The company reported ongoing litigation involving Ortho-Tain, a Washington State Department of Financial Institutions investigation concerning historical stock sales, and claims relating to a former chief medical officer. In November 2022, Vivos initiated arbitration against the former officer. The filing does not provide a clear quantified exposure for these matters.
- Subsequent business development: In December 2022, Vivos announced an agreement with Nexus Dental Systems to offer complementary billing solutions, with potential additional revenue opportunities in 2023 and beyond.
- The company reported no material off-balance-sheet arrangements and no material changes to previously disclosed legal proceedings, other than the matters described above.
Key facts investors should verify
- Whether additional financing was obtained after June 30, 2022 and whether liquidity concerns and the going-concern uncertainty were subsequently resolved.
- Progress and effectiveness of remediation for the material weaknesses in revenue recognition and internal controls.
- Underlying VIP enrollment trends, retention, customer activation, case starts, and the concentration of revenue among active VIPs.
- Whether the lower service revenue and substantially reduced gross margins are temporary or reflect a sustained change in the business model and cost structure.
- The effect of May 2022 pricing changes, inflation, supply-chain costs, and COVID-19-related labor constraints on demand and margins.
- Potential dilution from 3.173 million outstanding stock options and 2.766 million outstanding warrants as of June 30, 2022.
- Developments and potential financial exposure in the Ortho-Tain matters, the WSDFI investigation, and the arbitration involving the former chief medical officer.