Vivos Therapeutics, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Vivos Therapeutics is a medical technology company commercializing the Vivos System, customized oral appliances and related protocols for sleep-disordered breathing, including mild-to-moderate obstructive sleep apnea. Its primary business model trains and supports dentists through the Vivos Integrated Practice program.
The filing covers the three and six months ended June 30, 2021, with comparative periods ended June 30, 2020. The interim financial statements are unaudited. As of June 30, 2021, the company had 22,812,119 common shares outstanding.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $4.50 million | $3.27 million | $7.94 million | $6.47 million |
| Product revenue | $1.74 million | $0.65 million | $3.12 million | $2.14 million |
| Service revenue | $2.76 million | $2.62 million | $4.82 million | $4.33 million |
| Gross profit | $3.62 million | $2.73 million | $6.31 million | $5.14 million |
| Gross margin | 81% | 83% | 79% | 79% |
| Operating loss | $4.06 million | $1.42 million | $7.47 million | $3.98 million |
| Net loss | $4.04 million | $1.41 million | $7.44 million | $3.99 million |
| Net loss per share | $0.19 | $0.13 | $0.38 | $0.36 |
- Revenue increased 37% year over year in the second quarter and 23% for the six-month period. Product revenue increased principally due to higher appliance volume.
- The company sold 3,082 oral appliance arches in the second quarter and 5,652 in the first six months, compared with 1,266 and 3,365, respectively, in the comparable 2020 periods.
- VIP enrollments were 73 in the second quarter and 126 year to date, compared with 101 and 133, respectively, in the prior-year periods.
- Operating expenses increased substantially, driven by higher headcount, compensation and stock-based compensation, public-company costs, sales commissions, marketing, professional fees and travel.
- Net cash used in operating activities was $7.55 million for the six months ended June 30, 2021, compared with $1.39 million in the prior-year period. Investing cash use was $1.79 million, including capital expenditures and an acquisition.
- Cash and cash equivalents were $34.20 million at June 30, 2021, compared with $18.21 million at December 31, 2020 and $0.41 million at June 30, 2020.
- Total debt was $1.27 million, consisting of the PPP loan, classified as current and maturing May 5, 2022. The company had no long-term debt at June 30, 2021.
- Contract liabilities increased to $4.11 million from $2.94 million at December 31, 2020, representing customer payments for services not yet performed.
Material changes versus the prior comparable period
- Appliance sales increased to $1.62 million in the second quarter from $0.63 million, while service revenue increased modestly to $2.76 million from $2.62 million.
- Second-quarter gross profit increased $0.90 million, but gross margin declined to 81% from 83%, primarily because of higher costs associated with VIP enrollments.
- Second-quarter general and administrative expense increased approximately 76% to $6.1 million; sales and marketing expense increased approximately 178% to $1.4 million.
- The company completed a May 2021 follow-on offering of 4.6 million common shares at $6.00 per share, generating approximately $25.4 million of net proceeds after offering costs.
- Property and equipment increased to $2.29 million from $0.87 million at December 31, 2020, primarily reflecting construction of the Vivos Institute facility.
- The company acquired Lyon Management and Consulting and affiliates for $225,000 in cash plus warrants to purchase 25,000 common shares. The acquisition expands billing practice services.
- New or expanded offerings generated revenue during 2021, including Medical Integration Division management services, billing intelligence services and orofacial myofunctional therapy.
Guidance, outlook, commentary, risks and unusual items
- Management stated that cash resources following the May 2021 offering were expected to fund planned operations for at least 24 months, assuming no unexpected events, costs or contingencies. The company continues to incur losses and negative operating cash flow and may require additional financing if cash is consumed faster than expected.
- The Vivos Institute opened in early August 2021. The filing estimated total buildout costs of approximately $1.5 million.
- COVID-19 effects had begun to diminish as dental offices reopened, but management continued to identify variants and local outbreaks as risks that could adversely affect operations and financial performance.
- The company’s ability to scale depends on recruiting and training dentists, market acceptance of the Vivos System, product effectiveness, regulatory compliance, intellectual property protection, employee retention and the ability to achieve profitability.
- The company submitted an application for forgiveness of the $1.27 million PPP loan but stated that forgiveness was not assured. Any unforgiven amount remains a debt obligation.
- The Washington State Department of Financial Institutions issued a document request and subpoena concerning certain pre-IPO common-stock sales by a former employee and independent contractor. The investigation had not concluded as of the filing.
- The company is involved in litigation with Ortho-Tain involving alleged false advertising, defamation, interference and related claims. The Illinois action had been stayed pending resolution of the Colorado action. Management believes the claims lack merit, but the ultimate outcome is uncertain.
- Disclosure controls and procedures were not effective because of a previously reported material weakness in internal control over financial reporting. Remediation was ongoing, and the departure of the corporate Controller in July 2021 complicated the remediation effort.
- Stock-based compensation expense was $1.08 million for the first six months of 2021, with approximately $4.58 million of unrecognized compensation expense remaining as of June 30, 2021.
Important facts for investors to verify
- Confirm the company’s ability to reduce operating cash burn and progress toward profitability, given the $7.55 million first-half operating cash outflow and increased expense base.
- Monitor cash usage, capital spending, Vivos Institute economics and whether additional equity or debt financing becomes necessary.
- Verify the status and ultimate forgiveness of the PPP loan.
- Assess whether appliance volumes and VIP enrollment growth can offset slower service-revenue growth and the decline in second-quarter gross margin.
- Follow developments in the Washington State investigation and the Ortho-Tain litigation, including potential financial, regulatory or reputational effects.
- Track remediation of the material weakness in internal control, including finance and accounting staffing changes.
- Consider potential dilution from 2.56 million outstanding warrants and 2.73 million outstanding stock options at June 30, 2021, in addition to subsequent option grants.
- Reconcile the filing’s MD&A operating-loss table with the financial statements: MD&A presents a six-month operating loss of approximately $7.65 million, while the condensed statements report $7.47 million.