Vivos Therapeutics, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Vivos Therapeutics is a revenue-stage 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 business model centers on training and supporting dentists through the Vivos Integrated Practice program.
This unaudited Form 10-Q covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020. The company is a non-accelerated filer, smaller reporting company, and emerging growth company. Its common stock trades on Nasdaq under the symbol VVOS.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $3.45 million | $3.20 million | +$0.25 million, 8% |
| Product revenue | $1.39 million | $1.49 million | -$0.11 million |
| Service revenue | $2.06 million | $1.70 million | +$0.36 million |
| Gross profit | $2.69 million | $2.42 million | +$0.27 million |
| Gross margin | 78% | 76% | +2 percentage points |
| Operating loss | $3.41 million | $2.56 million | Loss increased $0.85 million |
| Net loss | $3.40 million | $2.58 million | Loss increased $0.82 million |
| Net loss per share | $0.19 | $0.23 | Improved on higher share count |
| Cash used in operating activities | $3.86 million | $0.44 million | Use increased $3.42 million |
Service revenue growth was driven primarily by VIP enrollments, Billing Intelligence Services, management fees from the new Medical Integration Division, and other services. The company enrolled 53 VIPs in Q1 2021 compared with 32 in Q1 2020. It sold 2,570 oral appliance arches compared with 2,099, although reported product revenue declined because of lower center revenue and revenue mix.
General and administrative expense increased to $5.06 million from $4.23 million, reflecting increased personnel, compensation, benefits, and public-company costs. Sales and marketing expense increased to $0.86 million from $0.56 million. Stock-based compensation was $0.43 million versus $0.35 million.
Cash and cash equivalents were $14.06 million at March 31, 2021, compared with $18.21 million at December 31, 2020 and $0.11 million at March 31, 2020. Total current assets were $16.74 million, versus $20.39 million at year-end 2020. Total liabilities were $7.61 million, including $1.27 million of debt and $2.80 million of contract liabilities. Stockholders’ equity was $14.34 million, compared with $16.92 million at December 31, 2020.
Investing cash use was $0.26 million, primarily for property and equipment. Financing cash use was $0.03 million for debt principal payments. The company had no significant interest expense in Q1 2021.
Material changes versus the prior comparable period
- Total revenue increased 8%, with service revenue up approximately 21% and product revenue down approximately 7%.
- Gross margin improved from 76% to 78% because of the higher proportion of high-margin service revenue.
- Operating and net losses increased as operating expenses grew faster than revenue.
- Operating cash usage increased substantially, partly because the company paid down accounts payable and incurred higher net losses.
- Headcount increased from approximately 70 employees at March 31, 2020 to more than 110 employees at March 31, 2021.
- The company began building out its Institute for Craniofacial Medicine facility in Denver, with estimated costs of approximately $1.3 million.
- In March 2021, the company acquired certain MyoCorrect assets and issued warrants to purchase up to 200,000 shares, with 25,000 initially vested and the remainder subject to performance conditions.
- Outstanding options increased to 2.45 million and outstanding warrants increased to 2.26 million at March 31, 2021, creating potential future dilution.
Liquidity, outlook, risks, and unusual items
Management stated that cash resources following the May 11, 2021 follow-on offering are expected to fund planned operations for at least 24 months, assuming no unexpected events, costs, or contingencies. The offering issued 4.6 million shares at $6.00 per share and generated approximately $25.2 million of net proceeds. The company reported negative operating cash flow and has incurred losses since inception, so additional financing may be required if operating cash generation does not improve.
The company’s $1.27 million PPP loan was classified as debt. Management applied for forgiveness in January 2021 and believes the full balance is eligible, but forgiveness is subject to lender and SBA review and is not assured.
COVID-19 continued to create uncertainty, although management stated that its impact had begun to diminish as businesses reopened. Key business risks include adoption of the Vivos System by dentists and healthcare providers, recruitment and retention of VIPs, regulatory compliance and FDA oversight, market acceptance, intellectual property viability, execution of sales and marketing initiatives, continued losses, future financing needs, and the ability to generate positive cash flow.
The company disclosed a previously reported material weakness in internal control over financial reporting. Disclosure controls and procedures were still deemed ineffective at March 31, 2021. Management was implementing remediation measures, including additional accounting personnel, improved segregation of duties, added review procedures, and technology enhancements.
The Washington State Department of Financial Institutions issued a letter and subpoena in April 2021 concerning certain pre-IPO common stock sales by a former employee and independent contractor. The company is cooperating with the investigation, which had not concluded as of the filing.
The company is involved in litigation with Ortho-Tain, Inc. relating to alleged false advertising, defamation, business interference, and related claims. Management believes the claims lack merit and does not expect a material impact, but the proceedings remain unresolved.
Subsequent to quarter-end, the company agreed to acquire medical billing and practice management assets for $225,000 in cash plus warrants. It also completed the $25.2 million follow-on offering described above.
Important facts for investors to verify
- Whether service revenue and VIP enrollment growth can offset rising general and administrative and sales and marketing expenses.
- The pace at which negative operating cash flow declines and whether the May 2021 offering provides the stated 24 months of liquidity.
- The status and ultimate forgiveness of the $1.27 million PPP loan.
- Progress and final cost of the approximately $1.3 million Denver facility buildout and other capital requirements.
- Remediation and eventual resolution of the material weakness in internal control over financial reporting.
- Potential dilution from 2.26 million warrants, 2.45 million options, and additional equity awards.
- Outcomes of the Washington securities investigation, FDA communications, and Ortho-Tain litigation.
- Regulatory acceptance, clinical adoption, and commercial reimbursement of the Vivos System and related services.